PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

Okay. So welcome to the Sidoti September Small-Cap Conference. The second day we're kicking it off with Par Technology Solutions, ticker, PAR. I'm Anja Soderstrom, the senior equity analyst here at Sidoti covering the company. It's my pleasure to have Savneet Singh, the President and CEO with us here. This is going to be conducted as a fireside chat. [Operator Instructions] And with that, I want to wish you welcome, Savneet.

And maybe you can start with giving a quick overview of what PAR is for those who are new to the story.

Sure. PAR provides enterprise software for hospitality organizations in the United States. The way you'll find us is either as the point-of-sale system, online ordering system, loyalty system or back-office system in your traditional large quick service or fast casual restaurant. We've been around for 50 years, but the company has sort of been reinvented in the last 4, 5 years under the vision of something called Unified Commerce. And it's the idea that as software is eating a restaurant, our goal as PAR is to connect all of these disparate systems that a restaurant may use into one unified system, allowing them to kind of take control back of their operations. And I think the foundational thesis is that software continues to eat more and more of the manual workflow of a restaurant. And much of that workflow plugs into a point-of-sale system. And that's really the crux of what we do. So we are -- we sell points -- excuse me, we sell software, cargo and services, all to the end enterprise restaurant end market.

So you mentioned fast casual and enterprise restaurants. Maybe you can explain for the audience what those are and who else you serve and how they tend to fit in this kind of economic environment.

Sure. So our core market historically has been the QSR, quick service restaurants and fast casual. These are things like fast food out to things like Cava Grill or Sweetgreen. They are restaurants that had more locations, historically very efficient operations, usually franchise organizations. The alternative would be what we call casual dining or table service restaurants, which would be like your family meeting at an olive garden or a more traditional sort of in-room dining experience. In our market, which is quick service and fast casual, although we're growing into the table service market, it's an incredible end market because it's really, really durable. We sell to restaurant organizations that have been around for decades. We sell the franchisee groups who never intend to sell their businesses. And they tend to do really well in times of economic duress. When you've got -- people watching their paychecks or people watching their bank accounts, they tend to trade down for food. And just like you see a change from -- in a grocery store from fresh produce to canned or frozen, in restaurants, you see that change from the casual dining down to quick service. So instead of going to olive garden, you might decide to pick up something at your local McDonald's. And so these businesses are durable, I think, during all economic climates, but they're extremely durable during recessionary type climates. And we've seen that in our business. We've seen how resilient the customer base has been, which we've been a nice benefactor with ourselves.

And you also mentioned Unified Commerce platform. What does that mean for the enterprise restaurants?

So in the last 5 or 6 years, restaurants have started to adopt software very quickly. They've upgraded their point-of-sale systems. They've added online ordering systems, loyalty systems. They probably added an AI tool. They've added a back-office system. They just all of a sudden had so many different things to plug into their restaurant. And every time they add a new system, it creates another point of -- potential point of failure where you're creating an integration into a point-of-sale system, and those are 2 companies that probably never vision working together at some point, but then built an integration to service their customer. And when you have 2 or 3 or 4 products that's doable, when you've got 15, it gets harder and harder, particularly when there's a problem and something breaks. So think about the average restaurant, they'll have a menu for their in-store dining, They'll have a menu for their online orders and menu for their loyalty orders, then they've got a menu on DoorDash and Uber reads. They may have a special menu. And then they've got different menus in different locations. And so it becomes a really, really challenging place to manage all of that infrastructure. And so the idea of the Unified Commerce is that, hey, it's great that you adopt that all of the software. It's great that you bought all the products, but it's really to help connect them together so that the restaurant can have a better view of what's actually going on. And my way of kind of convincing investors or even our customers about this is really when you talk to restaurant CIOs, they'll tell you that their budgets have grown meaningfully from now to, call it, 5 years ago. They'll tell you the teams have grown, they'll tell you the amount of software they acquire is more. But they'll also tell you their lives are like 10x harder now because they're managing dozens and dozens of vendors and they can't focus on actually delivering a great guest experience anymore. And so we're -- Unified Commerce is this idea of connecting those systems so that there's one source of treat for data. There's one menu. There's one workflow that everyone works through. And it creates real ROI back to the end customer.

And who do you compete against mainly? And how do you win?

In the enterprise segment where we play, it's primarily NCR, Oracle, who each have very, very large market share, over 100,000 restaurants, respectively, each. And I think that we've got a bunch of other disparate players. There was a long tail of legacy players, a couple of upstarts. But I would say those are the 2 that we play in those. We win -- we're in the enterprise software business. So my view that is product wins. In the end, when you're going through year-long sales cycle, convincing a large enterprise to change their point-of-sales system. It's almost like changing your ERP system. It's a huge [Technical Difficulty] they do that, we can have the best sales team in this marketing, but they're really picking the product. And in the end, our product is, we believe, the best product for this enterprise market. We have the -- we now have the feature of functions, we have the integrations. And I think we have a road map for -- to build the future for them. So in the end, it's kind of using our product versus the alternatives, it's a product that sort of wins the day with our customers. And generally, that's either a combination of we have the features, functions that they need. We have the integrations that they need or our road map better online to the road map that they see their own journey going on. Generally, when we lose, it's only to incumbency. And those losses stink, but they're also the ones that come back later when they realize that they have to make a change. And so it's -- we're not in a market where we're competing against Silicon Valley every single day trying to disrupt. We're competing against what I call Silicon Valley 1.0.

Okay. And I have a few questions here from the audience. One is, has the increasing minimum wage restaurants to adopt automation such as ordering and paying from chairs at the tables.

Yes, it's -- yes, plus plus. So it's the wage inflation, it's the food inflation, it's the energy cost, all of that has put a lot of pressure on restaurants to be more efficient. That has led to, we think a growth in back office software. Back-office software is sort of a category that includes your COGS and your labor. And so it's led to, yes, some automation, but also I think the first wave is not so much automation, it's the optimization of what you have today. How are you organizing your labor staff? How are you -- or how efficient are you on your COGS? There's a lot of focus on optimizing. And I think without question, it's going to push us into things like AI and robotics and things like that.

Okay. And another question here is Chipotle, a long-term partner with you on the hardware side, recently modernized their POS system with DITO. What would it take for you to convert this type of customer to the Brink POS platform?

Yes. I would say DITO was more of an endpoint tool. It will deliver faster WiFi and connectivity. So it's not so much modernizing the point-of-sale system as it is the network infrastructure of the actual stores. I think for us to win an organization like a Chick-fil-A, it's continue to demonstrate that we work well than their peers. This is a market that is very much looks around to see whatever else is doing. And if we can do a good job winning their peers, delivering the ROI, I think we'll find our way into these mega chains. And I think that's happening. We continue to see our pipeline grow. We continue to see organizations that we thought would be 2 or 3 years from being a part customer, become a part customer now. So we're really excited about that opportunity. But to be honest, I think for us to win that chains -- these types of chains, I don't want to talk about any one specific chain, it's exactly what we're doing now, which is continue to win in business, continue to win in industry that we're in an open ecosystem. And then really, really, really continue to get proof points of ROI in other organizations.

Okay. And payments is starting to become a meaningful contributor to your revenue. What value proposition to offer your customers in terms of payments? And when do you anticipate to see some meaningful contribution?

Payments, yes, I'll go first. We expect this year, we'll have payments AR north of $10 million, we said $10 million to $15 million. And so I think it's becoming meaningful quickly. The value we add to our payments -- our customers with payments is a fewfold. The first is, we are simplicity. When our customers buy payment, it's a really complicated process. The average restaurant cannot actually tell you how much they spend on payments. When we go bunch of payments customers, oftentimes say, "Here's my statements for the last 2 months, help me figure out what I'm paying." It is really complex. And so what we offer is, "Hey, we're going to not come in and rip you off as everybody else has done on payments, we're going to provide tremendous simplicity for you in infrastructure." The second thing we do is we say, "Hey, we'll take your payment data. We'll combine it with the POS data, so that you have complete transparency in what you have -- what's in your organization." So what does that mean? That means that we can tie together loyalty orders, non-loyalty orders, we can help you figure out who your non-loyalty sign ups are. The third thing we can do is price, which is generally PAR is in -- Brink is in 23-ish restaurants, we can get a better price than most restaurants can on their own because we are in more restaurants than they can. And so that allows us to bring down their price. And then I think the last part of that is this idea of Unified Commerce, which is, gosh, it is really frustrating to have a different POS vendor, a different payment gateway vendor, a different payment processing vendor and a different device vendor for the actual devices that use for payments. That's really complicated. And if you can make that one, it's -- you're calling the same support line, you're dealing with the same people. And so it's also, I think, the opportunity to improve your SLAs, improve your quality service.

And in terms of the other services, you have mentioned on your last earnings call that Punchh is recovering while other products are accelerating. Can you talk about the puts and takes for the different demand for your platform?

Sure. So we break our reporting into 3 segments. Operator solutions, which is Brink and Payments, guest engagement, which is Punchh in our newly acquired MENU and online order product that is very tiny today and then our back office. Operator solutions, Brink and back office are growing really nicely this year. Both -- I think operator solutions are up 37% or 38% year-over-year and back office is up, I think, around 24%, 25%. And then guest engagement was up around, I want to say, 8% or 10%. And we expect that to kind of continue as we go. It's been -- really nice to see the stabilization and some acceleration of Punchh earlier than we expected. And that is really, I think, a testament to the quality of the Punchh product, us building out the pipeline. But also, it's really a testament about the stability of restaurants. In the beginning of the year, really to end up in Q4, the Punchh pipeline started to slow down meaningfully because I think restaurants, while they were doing okay, there was insecurity about the future. And when you choose Punchh to be your loyalty program, while it's a spend item, it's really more of a commitment from a restaurant to redo their long-term plans. When you launch a loyalty program, everybody from your franchisee to your district manager, all the way up to the CEO, have to get behind that and say, okay, now we're doing this big loyalty program. We're going to do ad campaigns. We're going to do stuff and so things slow down a little bit. But we feel like we've kind of -- we found ourselves on some good footing now and starting to see some nice uptick there. On the other parts of our business, we kind of talk about back office because of the pressure on inflation is doing really well. And then on the point-of-sale side and payment side, we just continue to take share. We're growing really fast. We expect to continue to hopefully keep that pace up. And that's just a lot of the work within the last couple of years to build out Brink, we're getting the benefits up today.

Okay. And in terms of cross-sell and upsell opportunity, can you walk us through that and where your ARPU is now where you can see it potentially ahead?

Sure. So we -- if you think of our 3 segments, we've got a ton of wide space amongst them. The way I'd like to think about it is Punchh is in something like 70,000 sites, Brink is in 23,000 sites and back office is in, call it, 7,000 or 8,000 sites. And so there's -- while there's overlap, there's a ton of wide space. Where we will see the most opportunity to cross-sell and upsell will be in payments and will be in our online ordering business, which is getting started. And so I think that our pipeline online ordering as an example, is really robust. And almost every single customer in that pipeline is existing Punchh or Brink customers. So we're finding a way to monetize our acquisitions by selling them into their base. In a similar way, when we acquired Punchh 2 -- call it, 2.5 years ago, we were able to bring in Punchh to a lot of the Brink customers who didn't have Punchh. And so our playbook is generally to use the Brink base and then push our products into that base going forward. And so we think there's a lot of opportunity to cross-sell and upsell. I would suspect that historically, almost all of our revenue has been net new customers. I think as we get more and more penetration within Brink in particular, that will move from 100 to 0 to 75, 25 to help with 50-50 at some point.

And another question here from the audience is among the largest restaurant enterprises, how far along are they in digitizing their in-store and above-store operations? And how big is the green space?

So the biggest customers -- the biggest restaurant companies are also the oldest restaurant companies. They have the largest footprint of stores, but they also have the most complicated in all these infrastructures. We are beginning to see the tipping point. We're starting to see the biggest of brands do everything from running RP to, hey, I'm starting to take meetings with the new vendors that exist, including ourselves. So you're starting to see them move. They're really, really early in that transformation. Among the top 5, 10 biggest restaurant chains in the country, maybe one of them is on a cloud POS solution, maybe 2, max, if that. And so you still have a lot of green space in the megabrands. And I think we'll start to see that tipping point come in the near future. The chains, below that, which are still very large organizations are moving much faster. And I think they're doing that because they don't have large IT infrastructures. They don't have the ability to make the investments that these mega chains do. And so they do need us to make that future come forward with them.

Okay. And since you joined, you have been pretty active on the acquisition front and you -- can talk about your most recent acquisition, the MENU digital ordering, and we'll talk more about future acquisitions maybe after that.

Sure. MENU is an online ordering platform that we acquired out of Switzerland. It really has kind of 3 key products underneath it. One is online ordering. Think of online ordering as the e-commerce or the e-commercialization of your brands. So it's like the website, but it's so much more, it's connecting that website into the MENU into the point-of-sale system, so on and so forth. The second part of the product is called MENU Link, where we take in third-party delivery orders from things like Uber Eats and DoorDash and wrapping and everything else and inject that into the point-of-sale system and help you run those restaurants. And then third element is dispatch, which is really kind of helping you deploy your orders via all the channels of delivery that exists out there. The business was built originally primarily to serve the European customer base. And we discovered it because a number of our large U.S. brands started stumbling across the company for their international stores. And for a long time, the U.S. market has been dominated by legacy online order providers that were started 15, 20 years ago. And we're always sort of curious of what's going to happen next. Why has there been innovation. And so for us, why we're so excited is MENU is the modern version of online ordering. It's a beautiful system, which allows the brand to really own the UI/UX where historically they've had to depend on these templated websites. But it's also got a back end that gives, again, the brand more control over their future. But what we think is more important or equally important is that the MENU is natively integrated into Brink into punchh. And what that means is that in order -- in any one of those systems is an order in all of those systems. And so you're not trying to reconcile different menu items, different taxes, different guests. It's a beautifully flows through all of our products. And that integration is their product. Now we don't force to use the product at all. But we're really confident that once you use our products together, you will find far more ROI than you did when you're doing your own. So we're really excited. We brought the business to the United States, I think, somewhere in end of Q1 or middle of Q1. And in a really short period of time, we've seen a ton of pipeline buildup. We've won a number of customers. We starting out those customers right now. And we started rolling out these customers in September. We'll have more rollouts -- a lot more rollouts in Q4. And so you'll start to see the revenue trickling this quarter, Q4 and going forward next year. So we're really excited because it will be a nice revenue ramp, and we've been winning some really exciting deals.

And how are you thinking about future acquisitions? Can we expect you to make more positions? Are you developing more in-house?

We'll certainly be active in M&A side. M&A has done PAR really well and it doesn't mean it always will do that, but I think we feel really confident today. We are almost always in an M&A conversation. The distinction is now we have the opportunity to be the buyer of choice but also we can flex our muscle a bit. More historically, we were chasing companies that had multiple offers. Today, a company can always find an alternative, but I don't think they can find an alternative by PAR where we can continue to build their product vision, hopefully retain a lot of the team and then accelerate the growth. And we are really a benefactor of that money leaving venture market, enormous benefactor of, I think, private capital, realizing that when you're selling into restaurant technology, buying a single verticalized product is a Tosco, owning the platform is what you want to be, and we are one of those platforms you can hit your lag into. So we will absolutely be active M&A and we'll always have been, but today, we can sort of hopefully be more aggressive.

Okay. And your churn is quite low. Why is that? And to the extent you lost a customer, why is that?

Our churn is low, I think, for 2 reasons. One is the end market. I think fundamentally, when you sell it into a good end market, you're going to have low return. It's not like we're selling into businesses that go ahead business all the time. These are big enterprise restaurants. It's not a local restaurant that opens. The average -- I think, the average restraint United States is open for 2.5 years. The average enterprise restaurant is a decade or 2. And so you've got a good end market. The second part is, I think our products are good, and we have a good product, customers churn less. So even though we've been able to take price meaningfully over the last couple of years, even though we've had our hiccups, our customers have stuck with us, and I think that's because of the quality of the products or the quality of the service. And so the churn, I think, will always -- I think by anybody in our sector now, the churn will be relatively low because it's the end market is good, but I think the quality of the product. The last thing I'd say is we also focus on the stickiest products in the ecosystem. So we're not building or acquiring products in the areas where I think we see high churn. We really obsess over a product that has low churn once it's integrated to our products, we can even bring down that churn further. The #1 reason for churn at PAR is a customer closing the store. It is not really going to a competitive of ours. It's generally a customer leaving us because they've gone out of business or the brands decided to rightsize. If they're turning because they're going to an alternative product, it's usually because of a specific feature functionality we don't do. We had a customer in the loyalty space churn at the beginning of the year, which we both -- we and the customer felt the right move because they run wanted to run a type of loyalty program that we didn't support, i.e., we hadn't built out and so made no assessment to stick with us. And that was a business decision that was -- I look at it is not so much, hey, they hate us or they hate our products. We just didn't have the right product set that they needed. So it's usually a specific feature or function that causes the churn.

Okay. And how should you -- let's just think about the margins going forward on profitability?

We're working really hard to try to get to profitability. The best lever we have is really a commitment to keep our OpEx as flat as possible, which we've done for the last 4 quarters and then continuing to grow the top line in this 20% plus. And I think, in doing that, we will stumble our way quickly into profitability. The other part that I think is exciting today is that -- is the M&A lever that you mentioned earlier, which is we're excited about what we're seeing, not just because we're seeing good products, but we're also finding good profitable businesses that will enhance our profitability faster. And all the while, we're still making a big commitment to invest. As we talked about in our last quarterly call, we're in some big, big RFP processes that require a massive amount of investment, particularly MENU because men you didn't have a U.S. infrastructure, it didn't have U.S. employees. We had to make a meaningful amount of investment in that space. And that's allowed us to go after and potentially win these larger deals. So we are really, really excited by that opportunity. And so there's always that balance, but we -- as an organization, we're very, very committed to getting there quickly.

And when you came on board, you improved the balance sheet and finances for the company. Can you touch on that in your capital allocation priorities?

Yes. I mean this is different to when we took over the company, we had less than single-digit dollars, millions of liquidity. We were in a really challenged time. I think there was a real going concern both from an accounting perspective, also from a management board perspective, we work to show that up because we believe we had a good product that had the opportunity to scale with potentially managed. It was managed in a different way and invested. Our capital allocation policy is pretty simple. We look to deploy where we can get the highest return. Today, what does that mean? I think we just have 3 or 4 options to always deploy our capital. We continue to manage our existing operations. And as I mentioned, that amount of reinvestment is focused on continuing R&D in our products, while not really growing our OpEx. And so it's more of the micro decisions of do we invest there or there within the fixed budget of OpEx that we have today. The second opportunity is M&A. And when we look at an M&A deal, we look at -- if we deploy capital there, no matter what form that capital comes in, will that achieve a higher return than an extra investment in internal operations with a huge margin of safety because we assume that whatever we buy, we will not be able to turn over every rock or stone in the 30- to 60-day diligence process. There will be a lot of stuff that goes wrong. And so we need a huge market stage that we're going to screw it up. And if it still clears that hurdle, then we'll look at M&A. The third option you have is to sort of look at buying back our shares. And so we sort of say, okay, we bought back our shares versus the other 2 options. And then the fourth option, I think, would be we have converts outstanding that are very attractive, whatever makes sense to monetize that. That generally is the least attractive because I think that's sort of like single digit or maybe low double-digit returns versus the other ones that we think are much higher return. But we look at it all the time. And today, I would say most of that focus is on the M&A, where we see real opportunities to buy stuff very accretively and then build out synergies once those organizations are rolled into PAR.

We have another question here from the audience, and we'll see if that's the last question because I know you have to wrap up a little bit sooner. But you almost completed your first 5 years in PAR here. How do you see PAR evolving in the next 5 years? And are you still on track to becoming the #1 food service transaction platform in the world like 2030?

Absolutely. I think we are absolutely committed to the idea. I think we feel really good about our chances. We had a meeting earlier this week and selling some members of our Board and our team, it's always been the vision that we wanted to be #1, but now it feels like it's ours for the taking. I think in the past, I would have said, well, that company has got a bigger installed base. That company is growing faster. That company has got these widgets. Today, I think it's on our -- it's -- the bet is on our execution, not on hoping a bunch of other things happen. And that's about what we want to take all the time. So we feel really excited about that vision really excited about potentially that being our path. And we try to stay pragmatic. We try not to get believe any of the excitement and stay rooted and that everything is going to go wrong. And if everything goes wrong, how do we still find a way to win. But from where we sit today, we are making tremendous progress. And I think you'll see that kind of come through in not only these enterprise wins that we're hopefully not participating in, but you also see that in the way we're proceeding the market. And then hopefully, that will lead to this 5 year, better talent coming to PAR, more wins and so on and so forth.

Okay. Thank you so much, Savneet. And thank you, everyone, who participated. We -- if you have -- there's a lot of other questions from the audience that we didn't touch on. If you want to touch base with the management team, you can reach out directly to them or us at Sidoti will put you in touch with them. I'm sure they're happy to talk to you off the record here. And with that, I'm going to let you go, Savneet, to the next meeting. I'm just going to hand it over to you for some closing remarks first.

Thanks, everybody. As Anja said, feel free to ping me or Chris from our team if there's any questions, we'd love to follow up.

Thank you.