PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

Good morning, and welcome to the 2021 Annual Meeting of PAR Technology Corporation Stockholders. I am Savneet Singh, Chief Executive Officer and President of PAR Technology Corporation, and I will be presiding as the Chair of this meeting. It's 10:00 a.m., and I call the annual meeting to order. I would now like to introduce Chris Byrnes, the company's Vice President of Business Development, to provide you with the information about the annual meeting process and to conduct the business of the meeting.

Thank you, Savneet. Before turning to the procedural matters this morning, I'd like to introduce the members of the PAR Board at today's meeting. Directors, John Sammon; James Stoffel; Douglas Rauch, Cynthia Russo and Keith Pascal. Also, at the virtual meeting are Narinder Singh, PAR's new Director Nominee; Bryan Menar, the company's Financial Officer; Thomas Tehan, representative from Deloitte & Touche LLP. Tom will be available during the question-and-answer session after the meeting to respond to appropriate questions. Also, at the meeting this morning is Cathy King, the company's Secretary and General Counsel. The Board of Directors has appointed Cathy to act as Inspector of Elections, and she has previously taken her oath to serve in such capacity. Cathy will also act as Secretary of this meeting. We will now begin by attending to the formal business of the meeting. After the formal meeting is adjourned, Savneet Singh, PAR's Chief Executive Officer and President; and Bryan Menar, PAR's Chief Financial Officer, will provide brief presentations on our business. Following that, we will hold a question-and-answer session. Now to begin. Our Board of Directors fixed April 9, 2021, as the record date for determining stockholders entitled to vote at this meeting. Stockholders of record as of that date and attending the meeting can vote their shares online from now through the closing of the polls by using the proxy ballot on the virtual shareholder meeting website. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed, and no further action is required. Currently, we are in receipt of an affidavit of mailing establishing that notice of this meeting was duly given on or about April 19, 2021, to all stockholders of record as of the record date and a copy of the notice of the meeting together with the Affidavit will be incorporated into the minutes of this meeting. The stockholder list shows that as of the record date, there were 25,163,803 shares of common stock outstanding and entitled to vote at this meeting. The Inspector of Elections has confirmed that there are more than a majority of those shares represented in person or by proxy at this meeting. And since the presence at this meeting of at least a majority of our common stock outstanding and entitled to vote on April 9, 2021, constitutes a quorum, the business of the meeting can proceed. There are 6 items of business before the meeting today: First, the election of 6 directors to serve until the 2022 annual meeting of stockholders and until their successors are elected and qualified. The Director nominees are: Savneet Singh, Keith E. Pascal, Douglas G. Rauch, Cynthia A. Russo, Narinder Singh and James C. Stoffel. Secondly, a nonbinding advisory vote to approve the compensation of the company's named executive officers. Third, approval of the company's 2021 employee stock purchase plan. Four, approval of the issuance of up to 253,233 shares of the company's common stock upon exercise of assumed unvested options in connection of the acquisition of Punch Inc. Approval of the issuance of up to 280,428 shares of the company's common stock upon exercise of the warrant issued to PAR ACT III LLC; and finally, ratification of the appointment of Deloitte & Touche LLP as the company's independent auditors. Because no further business is on the agenda to come before the meeting, we will move on to voting. Again, as a reminder, stockholders of record as of April 9, 2021, attending the meeting can vote their shares online from now through the closing of the polls by using the proxy ballot on the virtual meeting website. We will now wait a few moments to allow you to conclude your voting. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed, and no further action is required. [Voting]

I now declare the polls closed at 10:08 a.m. today, June 4, 2021, and ask the Inspector of Elections to report the results of the stockholder votes.

Thank you, Chris. The 6 Director nominees have been elected. The compensation of the company's named executive officers has been approved. The company's 2021 employee stock purchase plan has been approved. The issuance of up to 253,233 shares of the company's common stock upon exercise of assumed unvested options has been approved. The issuance of up to 280,420 shares of the comp's to these common stock upon exercise of the warrant has been approved. The appointment of Deloitte & Touche LLP as the company's independent auditors for the 2021 -- for 2021 has been ratified.

Thank you for attending today's meeting. The meeting is adjourned. Bryan Menar, our CFO, and I will now provide a brief presentation on the company's business. Following this, we'll have a brief question-and-answer period. Before I begin, I'd first like to thank Dr. John Sammon, our long-time CEO, founder for his commitment to PAR. Today marks his last day on the Board of PAR, and we wish him well on his future endeavors. Chris, can we move to the next slide? Before we start, I'd like to start -- give a grounding of who we are at PAR. Early in our time, we defined 3 values that we think set the stage for the foundation of our employee growth. These are speed, ownership and impact. To us, these 3 values act as not only guiding principles on how we hire, but the foundation of how we interact with each other. We like to say, we look for people who don't wait for the elevator. We look for people who are owners and not renters at PAR. And while we care about the impact of results, not necessarily the output of those results. And we believe if we act this way, we can run in an agile manner, run very decentralized and allow our teams to own their decisions as opposed to senior management and be incredibly data-driven. Through these sets of values and these behaviors, we think we can push PAR forward and reach our 2030 BHAG. At PAR, we coined the phrase, food, people, nothing in between. We think this creates not only a tagline, but oftentimes a purpose for us at PAR. Technology is often acted as not a disruptor, but a disintermediary for customers at the restaurant, where technology has become more of a wedge than a facilitator and a connection between the brand and its customers. We look at PAR's goal as bringing customers closer to their brand. If we flip to the next slide, we can see where PAR stands today. The company has gone through an incredible transformation in just a couple of years, where we now stand at almost $70 million of live ARR in thousands of sites across the country and world. Recently, upon our acquisition of Punch, we've moved to now understand not only transaction data and payment data and back-office data, but the front of house, i.e., the customer. As we move forward, we'll quickly see how synergistic the Punch acquisition is alongside our existing products at Brink, Data Central and Drive-Thru. To quickly review 2020, our QSR and Fast Casual segment performed incredibly well. These businesses were resilient in the face of the pandemic and oftentimes formed a bridge to a community desperate in need. By luck and maybe by fortune, PAR was a -- PAR's heavy focus on this market allowed us to succeed when others struggled. We're able to continue our investment in our next-generation platforms and complete 2 strategic financing transactions to give us a strong balance sheet, which allowed us to eventually push forward on our transaction for Punch. Looking at 2020, we had continued same-store -- continued store growth across the Brink platform. Brink is the foundational product at PAR and the key to our future success. Our footprint continues to grow, and by all means, we believe our market share as well. As we exited 2020, we ended with our largest backlog of all time, and that's continued in 2021. This strong backlog provides a strong foundation for PAR to move forward with accelerated ARR growth in the coming years. With this accelerated growth, we've also been able to maintain a relatively low churn rate, which should create, again, the foundation for future upsell to our customers. Brink's focus is on serving the QSR space. And as we've talked about, it's incredibly resilient. Across the United States, there are about 700,000 restaurants, and we believe that we are applicable to about half of those restaurants. At the same time, that market is expanding tremendously because products sold into this market are at the beginning of a very, very long transformation. At PAR, we like to say that 5 years from now, the amount of software sold in a restaurant will be multiples of what it is today. As software and workflow moves to the cloud, our customers will need more product to manage that workflow to allow for more efficient and streamlined operations. Flipping to the next slide is our pipeline. One of the unique things about the Brink business is that our model of MSA and then future bookings gives us great visibility into our future. Today, as we disclosed at the end of Q1, we are active in 12,100 sites. However, our pipeline of existing signed MSAs is well over 10,000 additional stores. Essentially, we could stop all new enterprise sales and mine our existing base-assigned contracts for our future growth. We, of course, wouldn't do this, but I think it highlights how much ARR is still to come just from the execution of our existing customers. The chart at the bottom looks at how many of our customers where they fit in Crossing the Chasm across -- excuse me, how they fit across Crossing the Chasm from the famous Jeffrey Moore book. And I think what we've observed is that as Brink accelerates across the platform, that acceleration never stops because once a restaurant tastes the technology of the future, it's very hard for them to go back. And as we look at our pipeline, we are spread pretty evenly across this chart. We have some customers that are now in the late majority, some in the laggards. But most -- we have a number of them that are still just in the beginning of this adoption. And again, we think this provides a great foundation for our future. At the end of Q1, Brink ARPU stood around $2,100 annually per store. Our ARR was $25.6 million, and our new installed base grew by 17% over the last 12 months. New customer signs in Q1 averaged $187 per month. Data Central, our back-office product, formerly referred to as Restaurant Magic, stood at ARPU of $1,490, our ARR was around $9 million, and the installed base grew by 282 new sites. As we talked about in our last call, we expect the -- as the pandemic subsides, data central to come back up to the historical growth rates that we observed prior to buying the business. Our hardware business builds on our long 40-year-plus history in the business. While our business is anchored towards software and our capital allocation focused on, our hardware business is still a key component of our future. This year -- excuse me, last year, we released our Helix terminal, a modern and fast terminal with modular compute. We believe it was purpose-built for our future house models and gives our customers far more flexibility than existing terminals. We've had strong customer reception so far. Moving to Punch. In April of this year, we announced the acquisition of Punch, what we believe to be the market-leading enterprise platform for guest engagement. Punch, similar to Brink, focus heavily on the enterprise customer base with penetration across most large restaurant chains in the United States. We paid around $500 million for the transaction, and Punch at the time of the acquisition had $32 million in ARR, growing at a very healthy clip. We believe that the acquisition of Punch builds out a key part of PAR's future-unified commerce platform. Combining Brink with Punch gave us what we believe to be the 2 leading cloud solutions of point of sale and guests, building upon our back-office solutions. We believe today that we are likely the only provider of a true cloud solution from end-to-end. The acquisition deepens our management -- our bench, our engineering bench and gives us domain AI, something we have not historically invested in dramatically, all while doubling our ARR and hopefully maintaining and accelerating our growth rate. Along with the transaction, we added 2 significant investors, Act III Holdings, Ron Shaich's investment vehicle; and T. Rowe Price. We're excited to have them join us on this journey. Flipping to the next slide is an overview of PAR's ARR profile. ARR has grown tremendously, and we think is the most important metric in evaluating PAR. While we've grown, we've been able to maintain low gross churn without having a traditional upsell model, which should lead to stronger net debt retention in the future. This SaaS growth will help us increase our margins as we move forward and become less reliant on hardware EBITDA. Looking to the next slide is the very beginnings of our unified commerce platform. Today, we provide customer information, payment information, menu and transaction information and operational information. The building of this platform gives our customers the ability to have truly unified commerce, end-to-end operations, and we believe help them deal with the challenging environment of massive technology expectations from customers, data integrity issues at the corporate office and a lack of insights across the platform. When we announced the Punch acquisition, we were excited to find that our customers were happy. In fact, many of them stood up and clapped. These same customers are the ones who not only understand the vision of unified commerce but are pushing PAR to get there faster. We look forward to delivering on these promises. The next slide gives us a bit about the challenges of the restaurant and hopefully, the foundation of the PAR platform. Restaurants today are flooded with dozens of software products running around disparate systems, oftentimes, products that were never meant to speak to each other. The PAR platform will be the platform that the enterprise restaurant builds its future on. We believe this platform will be configurable, modular and completely open, eliminating the need for best-of-breed solutions and significant point-to-point integration. Flipping to the next slide, is what we believe our investment thesis. The community that we serve today is incredibly underpenetrated in technology. The average restaurant organization spends 2% to 3% of total revenue on R&D, well below the 7% to 8% of the average U.S. industry. As we mentioned earlier, the amount of software purchased in the restaurant today is just beginning. Restaurants are starting to move to artificial intelligence, machine learning and making true insights of their data. We believe PAR is situated perfectly to capture that massive wave. Second is our unified commerce platform. This platform will be the foundation of our growth. Today, most cloud software sold to the restaurant is still based off the vestige of clients of per seat models, independent point-to-point integrations and very, very little partnership. We believe our platform puts us in the same boat as our customers. If we deliver value, we capture value. If we don't capture value, we don't take value. Third is our ARR at scale. PAR's ARR has grown in just 2 years from less than $14 million to over $70 million. This ARR growth is key to driving stronger margins, all while maintaining very low gross churn. We're excited to have this number continue to grow. Before we end, I'll flip quickly to our government business. Our government business continues to be a strong provider of EBITDA and cash flow for our business. Revenues of $71.3 million in 2020 and an increase of 11.5% from 2019. We've got a strong backlog of over $151 million, and our margins were 7.4% in 2020. Our team is committed to providing the excellent service they'd have since our founding almost 53 years ago, and we thank the team members for continuing to support PAR in this massive transition. I'll now turn over to our CFO, Bryan Menar.

Thank you, Savneet. Now I'll provide you with a brief summary on the 2020 performance. Can we move to the next slide, please?

So I'm having a little bit of a technical difficulty. Can you sub in there at Slide 25?

We're 26 at this point. Thank you. All right. As I said, provide a brief summary on the 2020 performance. 2020 revenue of $213.8 million was up 14%. The segment revenue mix was 67% for restaurant retail and 33% for government. On the next slide, all -- as you can see, all 3 -- wait for the next slide to move. Thank you. All 3 revenue streams experienced revenue growth, led by service, up 22%; product was up 11%; contract, up 10%. We can go to the next slide. The increase in adjusted gross margin was led by the growth in the service with Brink and Restaurant Magic software. And the increase in non-GAAP loss per share was due to increased investment in Brink and recently acquired Restaurant Magic and Drive-Thru. We move on to the next slide. From a balance sheet perspective [ as well as ] our financial position, the year-over-year change in the balance sheet was driven by the 2 capital raise transactions in 2020. In February 2020, we refinanced the majority of the 2024 notes with the issuance of the 2026 notes. We were able to push out duration 2 years, reduced the interest rate and net $50 million in cash with minimal additional debt service. And then in the fall in October 2020, we had the follow-on equity raise, which raised approximately $131 million. Both transactions strengthen the balance sheet and prepared PAR to continue to make strategic business initiatives. And then to the next slide. The first 2 bullets here, just kind of reiterate what I just mentioned there about in regards to the capital raises. In addition to where we're at, Brink hardware pull-through continues to see sales at 70% pull-through of our Brink rollouts. Brink ARPU was at $2,100 at the end of Q1 2021, and our ARR run rate totaled $34.6 million at the end of Q1 2021. As Savneet has mentioned earlier, with the Punch acquisition, we're able to double our ARR to $70 million on a pro forma basis as of Q1 2021. And I believe we now move on to the next segment.

Thanks, Bryan. [Operator Instructions] So we'll get started here. The first question is, Savneet, can you explain the importance of the point of sale going forward since new solutions offered by Olo and Xenial seem to be replacing the point of sale as the core platform for the restaurant?

Sure. I guess I'd challenge the premise. I don't think any external platform is yet challenging the point of sale. In fact, most of these products run through the point of sale. I don't know -- I believe almost -- I expect for almost every enterprise restaurant, every transaction is still running through the point of sale. Very little happens outside the point of sale because it is that transaction record, it is that master data set that every brand builds every data model on top of. So the point of sale is still vital to the foundation of every technology build in the restaurant. The key, and I think this is the impetus, or the spirit of the question is, how does that move forward? And I think for us at PAR, it's moving that transaction out of the point of sale system. It's making it accessible to all sorts of -- everyone outside of the restaurant. Today, restaurants are inundated by orders from third-party delivery companies, from online ordering systems, mobile apps. Tomorrow, it will be all those things times 2. And we need to make sure that we can build a transaction engine that services across every existing order channel, plus all the ones to come and provide the connectivity to the rest of the back -- excuse me, to the back of the restaurant. It's an end-to-end platform, again, that I think will provide real value to the restaurant because anybody can pump [ them lots of ] transactions. It's how do you service that transaction from the point of acquisition to fulfillment that very, very few can do. And I think that's where we see our place.

Next question, what does the opportunity currently look like to cross-sell across the client bases with our different cloud offerings?

We're just at the inception, but I think we've seen very strong receptivity to our Brink customers taking on data central, as an example. We combined the data central sales force in Q1 and have seen strong pickup so far. I think that will continue and provides a great foundation for our Brink -- excuse me, our restaurant and Punch teams to come together and push cross-sell. But the key, I think, for us is not so much are we cross-selling effectively, that I think we will. It's are we meant -- are we able to sort of combine the products to create values that could not get independent of each other. And that's where we are most excited. Again, the foundation of our M&A strategy is not then to acquire revenue or cross-sell, it's been acquiring product. And it's through that lens that I think we've been able to generate the excitement of our employees and our customers and hopefully, our shareholders to come.

Next question kind of along the same lines, what does the competitive environment look like for all of PAR's kind of front-end and back-end capabilities? And does the integrated platform give us a leg up on the competition?