PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

Good morning, everyone. My name is Mayank Tandon. I'm the Fintech analyst at Needham. I'd like to welcome Savneet Singh, the CEO of PAR. Savneet, thank you for joining us.

Thanks for having me.

So Savneet, just to set the stage, there might be people new to their PAR story here. So can you just give us some background on the company and where you're positioned within the restaurant technology space. And then we'll dive into more details.

Sure. So we sell technology into the enterprise restaurant industry. Our customers are primarily restaurants that are 50 stores and above, although we've got some that are below that generally emerging enterprise chains. We'd like to fashion ourselves as a platform to run your enterprise restaurant. So that covers everything from the front of house, which would be your online ordering loyalty, all the way to your back of house and payments. The core of what we do is a point-of-sale product called Brink, which is our land and expand product, which is the modern version of modern cloud POS system, akin to something like whatever Toast would do to downmarket, we do that upmarket.

So maybe, Savneet again, go into more details. You've talked a lot about the unified platform. Could you just walk through -- you mentioned Brink, could you walk through each of the opportunity sets across the front, middle and back office, the way you breakdown your segmentation?

Yes. So we break it in 3 segments, which will soon be 2. But -- our first, we call guest engagement, which is our online ordering and loyalty. Guest engagement is like it sounds, the tools that restaurants use to engage their guests. So online ordering and loyalty. So if this goes -- if you -- examples would be something like the Taco Bell app. We're the loyalty engine underneath that. And so the products that I think that make it exciting is historically, when you would buy these products, there are 2 distinct products. And so you would have a different app vendor from an online ordering vendor from a loyalty engine, different payment vendors. It's a very confusing system. And when we go into these restaurants and say, "hey, now we have your front of house if front of house all in one. " And so we simplify that, make it simple, make the data simple, the customer identifies the same, the menus are the same, so on and so forth. And so we go to market in that area of guest engagement, those products selling incredibly synergistic. We just started selling MENU in 2023, really the second half of 2023, and we signed 11 customers there, 10 of them are from Punchh. So it's clearly showing the ability to -- that this unified idea is working really well in that area. Our second segment we call, Operator Solutions, which is our POS and payments business. This is very similar to some of the most POS and payments businesses. We are everything from really the device you see on the counter and everything that connects into it. This is the heartbeat of the restaurant. Everything you do in the restaurant really plugs into that device. It's the biggest piece of software. It's the most important piece of software. If it goes down, your restaurant goes down. And selling payments in there is a really relatively simple attach for most customers, given size. And that business grew 38% in Q3, and I think we feel really confident about that. And then our third segment is back office, which is COGS, inventory labor. Again, the back-of-house stuff in a restaurant that you may not see, but have -- they effectively are management of your COGS. And we're going to be moving that under our operator solutions because we realized that instead of selling that on its own, we're having a lot more success just bundling it into our point-of-sale product.

Great. So as you go to market, are you going to market as a bundled unified commerce platform? Or are you going to the market individually with different products and then trying to win and then land and expand over time. So what is the go-to-market strategy with these different platforms?

So generally today in the market, a customer is looking for a point solution. We go and say, "hey, you're looking for this point solution, let us show you why you need to look at it in a more holistic manner. " And it's now at a point where the customers are now coming to us and saying, hey, we're going to go to a point solution, but now like let's -- we've heard about this, let's talk about doing it this way. And so in 2023, I don't know if there's a single customer that just bought one product. And so we've been able to now convince the industry, which is, say, you want RFP look for this thing. Really what you need is this holistic solution. And so we go to market trying to say, "hey, well, we can answer your RFP for this one product, " but in reality, like look at the solution together. And this was manifested with -- we had a win in October, November with Burger King, where it was a point-of-sale RFP, we're able to start bring in point-of-sale in parts of online ordering. And so it's sort of us going out to the industry and say, hey, we think that solving these point solutions is actually a way to get yourself in more trouble than buying something more holistically and putting it together and the industry is starting to respond to that. I would say in 2024 we have our first set of RFPs that are going to be multiproduct based off of this idea of "hey, can you do it together" because now we have enough reference points to say, "hey, when you buy it together, there's a better together story."

So whether in terms of products or modules, is there a way to think about what the penetration today is in terms of average product or module per customer and what that number could be over time as an indication of the land and expand opportunity?

Yes. I mean I think the best way to look at it is actually penetration within our point-of-sale base. So our Punchh product, our online ordering product is in about 70,000 restaurants. Our POS products in about 23 -- as last reported just a while ago now, but call it, 23,000 restaurants. We think that over time, every single one of our customers should be having 3, 4, 5 of our products. I think we feel incredibly confident that every customer should have at least 3. If you have Brink, you will most likely have payments, you most likely a back office. If you have Punchh, you'll most likely end up moving to our online ordering product. What we're trying to figure out and say, how do we make -- take 2 or 3 and make that into 5 and 6 and 7 down the road. And I think we're beginning that motion. But we feel incredibly confident that if we get a logo in today, it will be buying 2 products.

So I'll get to numbers later, but to think about the growth levers, it would be a case of new logo wins and then driving more penetration within the installed base. And then I think with that comes the ARPU expansion opportunity as well.

That's right. Yes. And so if I think of like look at our 23,000 point-of-sale stores, 30% have 2 products right now, and I expect that number to go up meaningfully in the next couple of years.

Got it. Maybe since you mentioned the BK win, I wanted to touch on that. I think there was news yesterday where they bought out the largest franchisee operation. So again, just to set the stage for people who might not be familiar, how big is the BK opportunity? And the news yesterday, what does that mean? Does it have an incremental impact on the growth opportunity? Or is that part and parcel already of the story?

So the BK win for PAR is roughly $22 million a year for a very large contract in a duration perspective. And the deal starts rolling out in March 30 of this year, and then the rollout period goes for 2 years. It's transformed for us in the sense that it's a real whale of a deal. It's the largest deal we've ever won, but I think probably the largest deal in our industry and also highlights the large legacy brands adopting third-party technology, which is something I think they've been reticent to do primarily because the fear there wasn't a vendor to do that. And I mentioned this on our Q3 call, but since that time and lead up to that, we've just had this dramatic influx of real deal volume in our business that we've never seen before. And I think it was building, it was there, and I think Burger King also has now been like, hey, like, there's actually -- we can actually get this done. And so that -- it's been transformed not just because financially, it's an incredible deal for us. It's a well-priced deal. It's a large deal. It's so different to anything else we've done. It was a 2-product deal. It wasn't 1 product deal and a mega brand. So I think we'll hopefully have more of these to come. And obviously, they are owned by RBI, who have other restaurant brands that are underneath that, that we're looking to penetrate our products into. And then Burger King itself, there's opportunities for us to sell more products. We've got the best loyalty product in the business. We've got other online ordering modules. And so we think it could be a long and healthy relationship for both organizations and they have been just the most incredible partner to work with, like really, just really well-run organization. In terms of your -- the first part of your question, they announced a day or 2 ago the acquisition of their largest franchisee group. Burger King historically had encourage franchisees to be acquisitive and own large, large pools of their restaurants. We have -- I don't know anything inside baseball. I would -- my guess is it's probably a positive thing for PAR. Burger King, I think, thinks very highly of PAR. And has moved aggressively to get their corporate stores onto our products. And so the fact that there's more corporate-owned stores is probably a good thing for us.

So while we're on the Burger King opportunity, you mentioned $22 million per year. When does that start to rollout? And that's -- again, before you sell additional products into the client, right, the $22 million. When's the rollout expected?

Yes. The rollout starts on March 30 of this year. And -- so we have a 2-year rollout period. So it will take us 2 years to get to that -- roughly that number. And then it grows from there. But obviously, during that period, we're already financing, hey, what about this, what about this product? And so we've got to execute, but I think if you do a good job, there's no reason why they wouldn't want to consolidate more on the PAR.

And we'll talk cost and margins later, but just to touch on this. Are you having to absorb additional R&D additional expenses as part of this launch?

So -- it's a good question. So we are taking on a hiring spike in Q4 and Q1, which we've talked about. Now the beauty of it is we take on that cost but then we get reimbursed 6 months later. And so it's a short-term kind of pain long term, it nets out. And these are bodies that are temporary in nature. These are support service. These aren't bodies we're going to keep forever. We have a huge spike of growth as a come and then we're going to let it go. So there's a cost to it, but the net impact to us is -- it's negative for 2 quarters, but after that, it's really, really profitable.

Then not to put words in your mouth, but I think you imply that there's a halo effect from this win. Has that already started to play out? Or is that still something we're going to wait to see?

It is. I mean, it's -- you never know how these things work, but we have never had so much demand for our products. It's -- we have more RFPs in the first 4 months of '24 than we had it for all '23. And in our industry, RFP is like -- it's not like, oh, I'm just going to do RFP -- like it's a really meaningful cost to the customers we operate in. Because of the size of the brands we operate in, they usually have a consultant, they're spending hundreds of thousands of dollars to get just make an RFP and then to value an RFP. And so they'll -- when they go to RFP, they're like pretty seriously going to do something. And so to see how many we have in such a short period of time is like really interesting. Now I don't know if it's because they stop working and say we're going to do it too. I doubt it was that obvious. I suspect they were already doing it, and that may be accelerated it. We've never seen that there. Another good like anecdotes like -- CEOs get like anecdotes and then they try to pretend as they're like real, but salespeople, the ones that really can tell you, and we had our sales kickoff last week and -- you can always tell how a sales kickoff like how real the demand is. And so I always -- I was telling someone just last week that sales kick off like if the sales team is nervous about what's going to happen, you'll start to see sales kick off being like "Man, I just -- I love parts much, like, how do I increase my equity comp and like how do I get a bigger salary and not be so clean operated as a salesperson." And it's like, there's always a signals that are like, "Oh, s***, that guys really worried about like is pipeline like he's not going to make as his number." And there's like none of that. It was like let's go -- let's get more escalators in the commission structure. It was totally the like -- I was like, wow, like the team is rallying and excited. And so right now, it looks very positive. I live in fear like it's all going to fall apart. But yes, I don't know if it's working, I don't know if it was -- but there is just a secular shift, which is I think -- you asked at the beginning which is all these point solutions in many ways, have just broken the restaurant. Like when you go to a restaurant, you're paying with a QR code ordering thing at the table and you think that's cool and innovative and simple, it's a disaster for that restaurant. It's just a freaking disaster because it's running through a different payment rail, at the kitchen is like f***, it's [indiscernible] it is just a mess. And so all of that technology that came out of COVID, all those things they've just put so much stress on it. And so when we go to a restaurant company you're like, hey, like you know those 6 vendors you have, like now there's 1 like they're like, okay, please. And I know that we might be winning because of vendor consolidation. We might be winning because when we unify, we unified data, unified reporting. We're not doing -- you're not -- when you're unifying, we're also not giving it away on price. So you can see our ARPU has gone up meaningfully in '23. And so it sound like we gave it away on price. And so the point being that the value proposition is resonating to the customers to unify these things.

So just one point of clarification. I think maybe I misheard you, but you said the RFP activity in the first 4 months after the deal won?

First 4 months of '24. So the quantity of RFP dollars in the first 4 months of the year is higher than all of '23.

Okay, I think I understand. Let me ask you about the sales side. So are you having to invest aggressively in sales people, basically to keep up with this sort of pipeline potential. And just from a investment perspective, what should we think about that?

It's not really like the beauty of selling multiproducts is you can leverage the same salesperson to sell 2 products, right? And so we have upgraded. We just hired like the ringer in our industry, and that was a big like feather in our cap at PAR. Every industry has like a couple of people that the whole industry knows and we think we've got the 2 best POS salespeople. And there, where we are amping up our sales resources are on sales engineers. At the same sales kickoff, I mentioned, the #1 ask of our sales leaders was not new salespeople, not product, actually, which is really rare, it was more sales engineers to do demos. And so again, validating there's a lot of pipeline. Now we have to close that pipeline, these are -- have to be real, they can't be fishing expeditions like knows. But it's -- the resources we're adding are not net new salespeople there and the support staff to help the sales team execute.

Got it, great. And then also, just staying on the new logo activity. I saw this morning, you guys won Bob Evans on the Punchh side. I'm sure that's another indication of your success in the market. But could you give us any perspective on that? I know it just happened this morning, but any thoughts around that? How big could the opportunity be? And is that again an indication of more sort of these QSR wins that are coming down the pipe?

So I can't talk about the numbers on that one, unfortunately. But I would say, Punchh, our loyalty business, it's rocking and rolling again. We -- that's one of a number of wins we had in Q4 that's really hit our mojo there. Like at the end of the year, we signed a couple of very large deals, which we'll announce in the next quarter. And we've got our footing, and we're doing really well there. And so I think there, it's a little bit different on Brink, whereas on our POS side, it's just a second month of like I got to unified. This stuff is just there on our Punchh side, just really making sure it's execution. We have the best product in the market, and it's this ability to package it with our online ordering. So I think we see the rest of '24 looking pretty strong for the POI side of our business -- sorry, the loyalty side of our business in that combination with our online ordering. But size-out on that one, we can't -- the customers has given us a clearance, but we've got a few of these coming out, you'll see soon. That's just going to again, just show like Punchh had a very strong second half of '23.

I think in the press release, it said 437 locations, assuming that's all of it, right?

Yes. And like I said, that's the smaller of the large deals we won. So we're -- like there's just a lot of momentum there. And again, what is sort of happening is the enterprise side of restaurants, they're just -- isn't it Silicon Valley is rushing to solve like the QSR problem. We're competing against Silicon Valley 1.0. It's Oracle. It's NCR, it's the gold payments, these companies are great companies, amazing companies, cash flow profiles on [ NDS ], but they're also not the companies that are going to disintermediate our products. And they're not the companies that are going to out -- household our products. One of the great complements we get sometimes is they're like, "Oh, I love like you guys like founder-led sales" And I always laugh, I'm like, "I wasn't born when PAR was founded." Like -- but they feel this like intensity from us because we try to run more like a start-up. And that's really like helping us against these incumbent older companies. And so in the enterprise, if you're a big brand like Bob Evans and others, you can go with a start-up that is unproven, unscalable, untested. You can go to like one of the legacy guys, I know you're going to the same bad customer support you've had for 10 years or you can go to PAR. And I think like we are carving out that niche that fueling the enterprise, that's the place to go. And then -- by the way, we'll also take on your online ordering and this and that improve ROI for everything that you had here on out, we try to make it simple and easy.

And since we're talking about the Bob Evans win that happened recently, is MENU now fully integrated with Punchh? And are you able to go to the market now as a bundled solution? Or is it still being sold individually?

Both. I mean we do go bundle it aggressively. And so generally, we go into a package deal on net new logos and our customers like it. Now there's always sort of stuff. They may have an existing contract that hasn't been a year to go with their existing vendor and so you'll get 1 product in and have to wait for the second one. But it is incredibly clear. We won 11 deals with MENU since we've started. 10 of them were partnership with Punchh. And so it's very clear that like that's the stick that's working. . And I think both products help each other. But the one logo that was not Punchh was Burger King. And so it is proving how synergistic they are. And that's pretty exciting and we've talked about this, but we slowed it down. Like we've slowed down the MENU sales motion a little bit just to make sure we get the stuff out the door first.

And then just maybe to back up a little bit on the overall market opportunity, Savneet. How should we think about the number of potential restaurants given your focus on QSR, fast casual, I think you've also had a few wins in casual dining. So just trying to put it all together, how big is this market for you in terms of location size...

No, I'll give you the standard numbers. And I think if you looked at our peers, all our Toast, they have much larger numbers than we -- we're always the most conservative because just the way we operate and I would say I'm starting to move off of our numbers. I think they're a little bigger. But the -- according to like the data that we see in the United States and Canada, rather, they're about 1 million restaurants, half are viewed as enterprise. And we sort of think of that as our addressable market today. Now we have a bunch of business that is nonenterprise today. We were in [indiscernible]. We're in all these sort of emerging chains, but portending that existed, it's about half of the TAM is about, call it, 0.5 million restaurants. And -- what's interesting about that is that number is not going to grow, that's going to grow a few percent a year. Restaurants still are growing, which is amazing. It's like the over-retailing just never ends. But it's like the quantity of products per store that is really fascinating to us, which is when we started, we had 1 product, now we've got 4 or 5 products. And I think that's going to continue to grow over time. Now we will come as a bundled solution, but each module you add, I think, will grow over time. And so today, if you allow our products, it's probably $10,000, $12,000. 4 years ago, it was $2,000.

Okay. Understood. I was going to sort of ask you a question related to that. In terms of competition? Because, again, you said Toast and others out there with big numbers, but they're more SMB focused or more enterprise. Are you seeing a little bit of crossover now from the likes of Toast and other SMB-focused players? Then I'll have you answer the question about the bigger incumbents separately.

Not a lot. I mean, I would say we have tremendous admiration for Toast. I've always looked up to them. They're in every RFP, like, for sure, we don't see them...

Even in the QSR? I don't...

I think they put it for everything. But they're not in the final rounds, like it's not -- generally, the final rounds, it's a combination of us, Oracle and CR is usually the mix. Sometimes there's a firm casino which is on a gold payments. Sometimes it's Revel, there's a few that are around the mix. Where I suspect that they're going to be excellent and a real competitor for us is on the casual dining side, where they've got incredible product down market. But we started to win that market now. And so our thought is, let's expand our moat on the enterprise. Could we go downmarket and [indiscernible] Toast, probably, we've got a really good product that's, I think, clearly differentiated there. But I'd rather fend off and go aggressive into the enterprise side of casual dining and make that harder for them.

So when I think about the enterprise, that's where you are replacing a Micros, NCR [indiscernible], now after the spin correct? And then, of course, as you mentioned, you are seeing some potential competition from the SMB focused players, but they haven't really made a dent in the market. Is that a good assessment of sort of the competitive landscape today?