PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

All right. We'll get started. I'm Neil Dalal, Managing Director in our Tech Investment Banking Group here at JPMorgan. I'm honored to be joined by Savneet Singh, President and CEO of PAR Technology for the first time at our conference. We're thrilled to have you guys.

So I'll start, can you just give a quick overview for the audience on what PAR is, what you guys do, especially for the folks who are needed the company?

Sure. So PAR simplistically is a platform to run your restaurant. We run a suite of products that effectively allow you to connect all your data across all your different products within the restaurant organization. So we are a point-of-sale software system, which is our core product, it's our heritage, what we're known for. We run a back office product, which manages your inventory, your COGS and labor. And then in the front of house, we manage, we have a largest loyalty product in restaurants and nominal ordering business. And so together, we call it a unified commerce offering. But reality, we're a platform to run your restaurant. I think simplistically, it's the easiest way to get your hands around it. And the core tenet of that is we focus on large restaurant organizations or fast-growing ones. So you won't find us in most single-store concepts, but you'll see us in Arby's, Five Guys or somebody like Cava Grill or Sweetgreen. So enterprise are very fast growth.

Got it. And actually, just it's a good segue. So when you talk about the type of restaurants you target, you said enterprise, you said larger, question in the market is where is the cutoff? Like what's the sweet spot for a PAR restaurant versus some of the other players in the space?

So from a size perspective, we are, I think, 50 units and above, our sweet spot's hundreds and thousands. We service someone like a Dairy Queen, which is 5,000 stores, and we service smaller chains that are like a Bluestone Lane that's like 25 stores that has ambitions to be multiple hundreds. And so the way we define it is sort of 50 units above is kind of our sweet spot. But if you were one of these high-growth organizations, like a MOD Pizza, I think we've had since 2 stores and today, there's 600 or 700, we're the right, I think, set up for you. The other distinction is that we're really, really strong in QSR, Quick Service Restaurants and fast casual. And we're now emerging in what we call table service, which is sit down restaurants. But our core base today is historically QSR and fast casual.

Got it. Okay. So you talk a lot about just pivot to your platform for a second, your unified commerce platform and how that's differentiated for your clients. Just talk about what the unified commerce platform means and how you've built it over time.

Yes. So I think it's interesting. Restaurants have gone through this rapid forced innovation. An illustrative example is McDonald's, which many would argue, is the most advanced technology restaurant -- technological restaurant. Started their loyalty program in 2021, like there wasn't an app before 2021. And so do you think that's late to the game. But in restaurants, you're like, wow, if the leading innovator, that's where they were. You can think about where restaurants are in general. And what the pandemic did, but this is sort of happening before, was that I think restaurants were just starting to get -- come to terms so that software was eating the restaurant. And it took them a long time to get there because they didn't need to for a long time. You could continue running your restaurant with disparate products, candidly, a lot of manual labor. But what the pandemic really force was an aggressive adoption of a disparate set of products that didn't speak to each other. So as an example, you went from a restaurant that had a point-of-sale system and a drive-through to now saying, I've got a point-of-sale system in my store and I've got a drive-through, but now I have Uber Eats and DoorDash. I have an online ordering system. I've got a mobile app. I've got a loyalty program. Oh, by the way, I've got to have artificial intelligence. I've got to have supply chain software, inventory software. All these products kind of like grew like crazy. And many of you probably have the experience when you go to a restaurant, you see like the 15 tablets all over the place, a couple for DoorDash [indiscernible] a couple for the back office. And so the sprint to buy product created a bunch of disjointed connections. And what we sort of thought about at PAR is like that's probably not going to be the way that the restaurant wins. In the end, this has all got to be unified. So when you have an order on an online ordering website, it should be literally the same schema as an order in your store or your drive-through so you can understand who's that customer, what's the product they bought, does it match our inventory system. And a funny thing I oftentimes do with the CIOs or CEOs of big restaurant chains and they'll say, "Oh, we've adopted Braze and Snowflake." And I'm like, "Oh, that's amazing. Have you got any value from it?" Because in reality, the POS system, which is still 80%, 90% of your orders, is sending data up in a very different format than your online ordering system, than your loyalty product. And so I think the big Aha for us was saying, this is only going to work if it's unified. Because then, in many ways, you can change that experience of the customer. And so the good way to think about it is, today, I feel like CIOs of restaurants are vendor managers. They're literally managing a different vendor for every single part of their workflow. And I think they've lost the ability to focus on their customer and create a great experience. And so our goal is to unify all of this, make the data exactly the same and then give them control so they can kind of think more about the guests all over again instead of kind of dealing with 12, 15, 20 different products.

Super helpful. And actually, to play off that for a second. So when you make this pitch of unified commerce to the enterprise restaurants, what holds them back from using someone like you? Why would they want to keep things disparate?

So historically, restaurants have been best-of-breed buyers. And I think that came out of two broad thesis. The first was there were not a lot of products that you absolutely needed to run your restaurant. Like I said, you didn't really need a loyalty product. You didn't need an online ordering product. You didn't need all the software. And so you didn't need to have -- you didn't need to have a large staff to manage. And so you could actually be best-of-breed. Hey, I want the best POS. I want the best back office so on and so forth. That -- I think that paradigm has definitely sort of shifted. But it's -- that heritage is sort of still the way they operate. The other part is some restaurants, I think, for years and years, got value by building some of the stuff themselves. They invested, they hired dozens, sometimes hundreds of people to build their own POS, build their own connected software through their infrastructure. And they could actually argue that, that created ROI. And I would say it did create ROI. Those that -- some of the best-performing restaurant chains in the world, whether it be a McDonald's or Chipotle so and so forth, they have tons of software developers. I think both of those reasons are starting to whither. On the first part, there's just so many products now. The average restaurant company is actually still a really small company. If you're a 1,000-store restaurant chain that's heavily franchised, you might have 100, 120 total employees, 10 of them work in IT. And so there's not a lot of staff. But the point on building yourself, which is, I think, in the other holdback of people adopting our products, I think it's hard to argue in today's world that restaurants themselves will build better software than software companies. I think it's hard to argue that the great software developers that graduate college and want to work for a restaurant company or a software company. And that's just a shift that's happened in our culture, where 15 years ago, if you're a great developer, you would go to Procter & Gamble. But today, you want to go over a Google or a software company. And so I think both of those things are changing, and the pace of maybe underneath all of this is just the pace of innovation is so fast. And so if you think about your IT staff having to manage 3x the number of products you had 3 years ago. At some point, you need help, and I think these are all kind of the way that I think is starting to change. But those are historically the hold back, which is, hey, we kind of build all the stuff. We have all these people. Do we fire them? Do we not? And then this historical view of being best-of-breed, which is also starting to change.

Let's pivot a little bit of competition, which you touched on slightly in your response. Who do you guys compete with generally? And then how do you guys win?

So our biggest competitor still to this day are NCR and Oracle, who have very, very much dominated the restaurant industry. Each of them even having lost thousands and thousands of sites, still operate. We estimate each around 100,000-plus restaurants, which is very meaningful when you think about North America or just some people say in the United States is 750,000, some say 1 million, still meaningful market share. So they really do dominate the space. And it's one of the things we enjoy, because I think those are both obviously esteemed companies, but I don't think somebody would call them the most innovative companies nor the ones that are most focused on R&D and product. And obviously, our small, small divisions runs very, very large conglomerates. And so the focus isn't there. The big -- I think -- and so as I said, this is a big guess. I think the other parts of your competitive are everyone you hear about Square, Toast, Lightspeed, these are amazing companies. But one of the benefits that we've drafted off of is that most of that focus is down market, where it's the single-store restaurant. It's the fine dining, it's the coffee shop. And those firms, I think, want to eventually come up into our market, but we haven't seen a ton of that yet. It will inevitably happen. But we see them, but we don't see them nearly as much as you think. And as you sort of referenced, there is a really big difference between running a small restaurant and a big restaurant. When you're a small restaurant, the CEO, the CMO, the CIO, CCO is almost always the same person. When you're selling to Arby's, you're dealing with huge corporate staff, you're dealing with massive needs for integration into everything. As an example, for our large customers, our data is oftentimes going into SAP. It's going into Workday, it's going to whatever, maybe. When we're selling to a small restaurant, it might be going to QuickBooks, like maybe. And so there's just such a big distinction that I think that has created real product moat for us.

And actually, to play off that, a question we get a lot from the market is, what is the tangible difference between serving the enterprise market versus serving the SMB or single unit restaurants? Can you expand on that?

Yes. So first is product, which is when you're a small restaurant, you need a very simplified product kind of does it all for you. And so you can buy a POS system that has a reservation system built in, that has a little bit of loyalty built in, that's got a little bit of back office built in, and it's there. When you're running a large restaurant, I think that the most critical element that's different is that, that product has to be extensible because there are dozens and dozens of products that need to pull data out of that or push data into that. So when you're running a huge restaurant organization, your POS system is your lifeblood. And so that data has got to go into your ERP system, your HR system, your financial software systems. It's got to go in your back office, it's got to go to tax authorities. I mean, it's an enormous amount of extensibility. And then you as a large organization have probably made investments into marketing automation software, supply chain automation software, all sorts of stuff that just like pulling in every different direction. The other part is, I think, the dynamic -- the difference in the market is at least is when you sell down market, it's a really great business, like it is juicy. I mean you can tell a small business owner, a POS system, a loyalty system and online ordering system, a back office at the time -- at the point you're literally making that first sale. And so you get a ton of revenue for that period of time. But as you all probably know, most small restaurants don't have a very long lifespan. And so you've got to maximize revenue in a very short period of time. What I love about the enterprise is that while we can't bundle 1,000 products at the moment, we're selling them our first product, you have almost decades of time to monetize that relationship and build a great partnership, because these are incredibly durable businesses. I always joke that if you go to a franchisee convention, they don't measure their longevity in years, they measure it in decades. That's how long these businesses, find a McDonald's franchise, find an Arby's franchise, that's usually been in families for decades. And so immense durability. And I think over time, you have a larger TAM because the need for product is so much higher in the enterprise. Every enterprise restaurant needs some form of marketing automation. I mean additional they will continue to need more product. And so those are two things which is one is product, which you just need different stuff. But two, it's the way you sell is completely different.

Yes. So how does the cross-sell and upsell motion work with an enterprise, given that it's harder to do it at the initial sell?

So it's evolving. Historically, our goal was planned point-of-sale, bringing back office, bringing payments and bringing loyalty. And that works fine. And again, once you win the point-of-sale business, you have undue influence on the customer. And not in any sort of like nefarious way, but when you are the POS, the customer said, we trust you with our most important product. So if your POS system goes down in any restaurant like literally any restaurant, everything is down. Your loyalty is down, your online ordering is down, your recent DoorDash breaks. I mean, everything breaks. And so once they said, like hey, we're going to give you this thing. You have an incredibly tight partnership with that customer that allows you to influence the other buying decisions that they have. And as I said in the beginning, what's changing though is they're saying, it's not like we trust you, it's like it makes sense, like why would I buy another online ordering product if the menus are different, the products are different, the pricing is different, the data is different? Like why would I go to the household if it's just there? And so we're starting to see that. And so what we've noticed is that 80-plus percent of our customers now adopt payments at the time we do a deal. Our biggest driver of our back office product is now pulling pull through the point-of-sale system. And so you're seeing this shift happen. But generally, it's a plan point-of-sale and grow, but it is changing just because the customers are also realizing why would I go buy from 3 different vendors if they all have different -- I'm going to spend all this time in taking the data from different vendors, putting together myself, trying to get something out of Snowflake or Braze or whatever, it doesn't really make sense anymore.

Yes. You alluded to payments. So let's spend a moment on that. Talk about the evolution of your philosophy towards payments, how you guys launched that piece of your business and where you see it going over time.

It's interesting. Payments -- parts that really winding an interesting corporate story. But when we originally started running the business, we really played down the opportunity in payments. And it was kind of the thing we had hoped for, but I used to always say, I don't know if it's going to be 10% to 20% of our customers or 80% of our customers. And the reason was that it was our belief that enterprise restaurants could get great payment rates direct from processors. And what I think kind of completely shifted was that were like some enterprise restaurants can do that. But oftentimes, the reason that they'll buy payments from us as you heard 80-plus percent of our customers buy payments from us now when we -- our new customers, excuse me, is that it's not just that we can get them a great rate, which we really can do an awesome job, it's again the simplification of their workflow. So if you go to any restaurant, literally any restaurant, and you ask them what their charge for payments, like none of them can tell you. All they'll say is, I just know I'm going to get ripped off. I don't know how. And when it's integrated into the point-of-sale system, you have complete transparency of exactly how much per transaction we are making, that is a lot of value to the customer. And then over time, I think what everyone has realized is that the idea of embedded payments is obviously a great rate, simplification, transparency, one vendor, but it's what can you do with all that data? And that's why I think it gets really exciting, where we can say, hey, if we're your point-of-sale system, if we're your loyalty system, and we have your payment data, we can now give you a complete data on every single customer you have, and that is super valuable. And so what we've seen is an excitement from our customers to bundle payments with us. And that's why it's been growing very quickly. Now we'll see if we can crack the huge, huge restaurant chains over time. But I think we feel pretty confident that on average, our customers will adopt payments, probably because of price, but I think over time because of product.

Got it. Let's pivot a little bit to Punchh, a business you bought a few years ago. So talk about the thesis when you bought the business and then a lot of focus more recently on the performance and a little bit of slowdown. So talk about that and where that's going.

Sure. So we acquired Punchh in April of '21, is an incredible deal for us at the time to put it in perspective. Punchh was the same size as our entire software business growing faster, below or churn, but we spent like 1/3 of our -- less than 1/3 of our market cap on it. So it was a great trade for us. At that time, I think we were -- we leverage our stock well. And it's been by far our biggest grower. So the business doubled within 20 months of our ownership. We figured out the go-to-market really well. We could take customers live, so on and so forth. What Punchh does is loyalty software. So if you have a loyalty -- a restaurant loyalty app on your phone, it's -- if it's a top 100 U.S. restaurant, more than half the time it's us. So we really do have the dominant position of loyalty products. And the reason we acquired it at the time is that we were -- at the time we did point-of-sale and back office, but we never knew what the customer was. And if our vision was to unify all this technology, you cannot even know what the front of house and the customer was. And so it made a lot of sense to kind of connect those. The other reason was relatively simple. We did a survey of our customers, and we said, "What is your one or 2 most important digital need?" And I was expecting to be like robots and AI and whatever it may be. And they're like we want a better integration between the point-of-sale system and the loyalty system. We want a better integration between the point of sale system and online ordering system. And I was like, wow, the bar is low, and we can effectuate one of those things. And so that's why we bought it. So thesis played out great. The business has grown way faster than we expected, the integration with PAR, the talent we acquired was fantastic. Today, the business is slowing, and we've been really transparent about it, and I think it's coming from a few parts. The biggest part is that when a restaurant adopts a new loyalty system, it is a big commitment. It's not just you're spending 7 figures with us, but you're also training all of your restaurants on your franchisees say, "Hey, here's why you should pay for this. This is why we're going to pay for this thing, which is really your money we're spending. Here's all the training you need for all of your staff to explain, here's how the loyalty app works, here's how you redeem, blah, blah, blah. And then you got to educate all your customers. So it's like a big commitment. And when there's this sort of a little bit of fear around the macro, like things definitely slowed down, things get pushed out, and that's kind of what we've observed on this product line for a bit. I think the other part is, it was us. I think we could have executed better and build more pipeline in 2022. But we feel pretty confident where we are given the position that we hold with our customers. And I think, again, over time, I suspect our customers will also buy Punchh because of the integration to the other products. And I think that's where I get excited over time, which is the durability of our business increases with every product we add.

Great. So let's stay on the theme of innovation. We've seen folks like Toast, Square and others really innovate in the SMB space. As you cited earlier, we've seen less innovation in the enterprise space. Why do you think that is?

I think it's probably analogous to most industries where you don't have infrastructure and decades of history, it's easier to innovate. And I think that we forget that as I said, if you're the point-of-sale system of a gigantic restaurant chain and you screw up and you go down, it's like your pacemaker is stopping, like you never forget. I still remember when I became I the CEO, I did a tour of our customers. And I literally never got scream like that in my life. Like it was the most interesting experience because I was like, wow, we're just like a software company like they're like, they want to murder me. I mean just the anger. And I realize it's because you're so critical to their day-to-day. And so I think that, like sort of way of thinking is just there. But inevitably what's going to happen, and I think is happening, is that the ROI on automating your workflow has just gotten too high. When we install our back-office software as an example, like we can literally tell them within like 2 to 5 months, you paid it off, like it's so high that ROI. And so I think they're all coming to terms it's going to happen. And I think I have a sort of like a contrary view here, but I think over time, the enterprise will be more innovative than the down market where we've seen that innovation. I think down market of innovation, because the vendors could push it as opposed to the customers pushing it. But I think over time, enterprise customers will actually demand more innovation because they need to, and they're seeing what's happening. And so as an example, today, I suspect if we were selling small restaurants and we were going to leverage artificial intelligence, we, as a vendor, will be using it in our own business. But I think if you talk to enterprise customers, like how is AI going to fix their business and what do we need to push our vendors? So I think over time, you'll see the enterprise. But I think in short, just it's a little bit of a risk of risk market. And remember, restaurant CEOs, while they serve you the end customer, they're really serving their franchisees who generally are -- I historically found them relatively risk-averse on technology investments.

Got it. So let's pivot to M&A. You've been an acquisitive company historically. You talked about Punchh. Your most recent acquisition was MENU. Talk about MENU, how you found that deal and what it does for you?