PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

All right. Let's get started. I'm Neil Dalal, Managing Director in the Technology Investment Banking Team at JPMorgan. And I'm pleased to be joined by Savneet Singh, President and CEO at PAR. So, Savneet, just to kick off here. For those not familiar, can you give a quick overview of PAR?

Sure. PAR is a software platform targeted at the enterprise restaurant community. The way we like to think of ourselves is we are that infrastructure layer to large restaurant chains, from -- everything from online ordering and loyalty, all the way through point-of-sale and then back-office. So our goal is to kind of unify these core pieces of restaurant technology into one system that, if you're running a high growth or enterprise chain, we'd be your option of choice.

Awesome.

So you often describe PAR as a platform company and selling unified commerce, and that's relative to a lot of component solutions out there in the restaurant tech market. So talk about what it means to be a platform company and how it's an advantage as you go to market?

Yes. I think platform can take a couple of different connotations, but for us, restaurants are interesting. They are retail-like businesses that haven't yet adopted the digital side of the business that most retail businesses have adopted. So if you think back just a few years, most restaurant companies didn't have online ordering. They didn't have an integration to reach DoorDash, they didn't have a loyalty system. And the pandemic kind of ushered in all this technology all at once. And so restaurants are in this really challenged position where they now think that digital is out of the box. Like once you try DoorDash, you really kind of don't go back to going -- wanting to go back into the store. Once you use the mobile app, you're never really going to go back and say, "Okay, I just want to call in for an order." And so they're dealing with this underlying secular trend of, oh my God, I have to run an amazing restaurant experience where you the guest come in, have this great experience. And at the same time, they got to be on Amazon.com when they're selling off-premise. And that's really hard because the box of a restaurant hasn't really changed in 40 years. It's still the same 4 walls, the same set of employees, and relatively same setup. And so the way to bridge that gap is through technology. And the way they've solved that is by adding dozens of different software products to solve each micro need. They have a different vendor for online ordering, then for loyalty, then for third-party delivery aggregation, then for supply chain, and so on and so forth. They've kind of plugged all these things in, and they woke up 1 day and said, wow, we now are spending twice as much on software as we ever did before, but none of these products were integrated into each other. And so it's a pretty crappy and disjointed experience for us, but also for our customer. And so our vision of a platform is say, hey, instead of having so many disparate different products that have all these point-to-point integrations, what if we gave you a platform which then you can build on top of. And the key point is that we are still a very open platform, it's not closed. You can innovate. You can use all our products, you can use one of our products. But the idea of the platform was to kind of simplify for the end restaurant.

Got it. So as you think about that platform, you've expanded into loyalty, into payments just to pick 2 areas in recent history. So talk about those 2 expansions and how they've tracked over the last couple of years?

So we got into loyalty. In April of 2021, we acquired a product called Punchh. It was a really fantastic acquisition for us. We used -- we financed it really creatively, but I think what was critical is that we realized back then that for us to be -- sort of fulfill this vision of being a platform, we couldn't just be your in-store technology, which at the time was a point-of-sale system. We were really just a point-of-sale software company that had some back-office technology, but we couldn't say, hey, let's be your platform, without knowing who your guest was. And Punchh at the time was the -- and still is the largest and, I think, leading provider of loyalty to the enterprise restaurant community. We brought that into PAR. And I would say, it worked. We were able to grow the revenues. We doubled the revenues, I think, within 20 or 24 months, we were able to sort of integrate the team, the technology, the products into one place such that, if you came to PAR and bought our point-of-sale product, you could still buy a competitor's loyalty product, but it would make no sense because our product is not only best of breed, but having 2 products at PAR gives you this sort of nice impact of getting something you couldn't get elsewhere. And our pitch whether we build a product or whether we buy a product is that every additional product you add from our suite of products, you get something more. And so it's not a play on bundle of products and get something cheaper. It's actually bundle the products and get functionality you can't get without that. And so I think it's gone really, really well and opened up a bunch of new opportunities for us, including online ordering and payments. On the payment side, it was something we built. So payments, we didn't acquire. We built out a payments product. And when we started on this journey when we kind of took over PAR 5.5, 6 years ago, I don't think we envisioned payments being much of our revenue. We sort of looked at it as that's a really good place for Square and Toast and those amazing companies that sell down market, but upmarket we thought restaurants had direct relationships with processors, banks, so on and so forth, and we didn't think it was there. Fast forward a few years, we said, oh, wow, like not only can we be competitive both from a pricing and product perspective, but we can also be innovative here. And so we've not worked really hard to build a payments business that not only does processing, verification, gateway type services, but also has a unique -- a new twist to it. So as an example, in our loyalty products, we now have a product called Single Scan Flow, which would literally, one tap, what we call a single scan, you can pay for your transaction, earn points or whatever the unit of loyalty is, but also redeem whatever coupon you might have, all in one tap. And so you're not sort of going, here is my coupon, here's my credit card, here's my loyalty number. It's all in one tap. And why that's so valuable is that's a whole complete different set of payment rails than your credit card or your online ordering product. And so we've kind of gotten into payments by being, again, very product-focused and saying, let's just not go there and say, "Hey, we'll save you a penny on a transaction." Let's go there and say, "We'll find a way to create value to your business," which is really creating value to the end customer.

Very helpful. So let's transition to some of the recent contract wins. You announced wins with Burger King and Wendy's, among others recently. So when you're pitching these larger chains, and you touched on it a little bit just now, what is the key value prop that you think is helping you win the bigger wins?

I think above all, it's product. We're selling enterprise software. So a good Instagram ad doesn't really do much for that sales process. You've got to win on product prices. And the way we sort of tell our product teams is how do you know if you've got the best product, it's because you got to be the highest price. And if the customers are willing to pay, then you can actually define that you've got the best product. And so if someone comes and say, hey, we've got the best product and like, well, you better have the best price. And so we hold our teams at that high bar. And so we win those deals on product. We are in there. The product stacks up head to head, whether the brand is evaluating, consulting value, the product has to work. But I'd say underneath all of that is our culture. There was a great podcast by one of the CEOs of those companies when they asked, and somebody asked him, how did you decide to work with PAR? His comment was the product -- we think the product was the best. We tested out. But we also wanted to associate ourselves with a culture of PAR. And what he was sort of basically saying in that meeting was, you can text, whether you're texting the CEO or someone on the call center and it's 2:00 in the morning, you get a call back 1 minute later, and we will swarm and solve your problem. And that really does help us in these big brands because inevitably something is going to break. It's technology, it's enterprise software. It is messy, it's hard. And you want the partners who's going to pick up the phone, fly down if they need to, and solve that problem. And we're a little bit lucky in that we aren't competing primarily against Toast and these amazing businesses that are from Silicon Valley or like Silicon Valley. We're competing against more of the legacy suite of competitors, and they'll just never have that hustle and that DNA that really helps us in these big brands.

So to play on Burger King a little bit more, can you just talk about the status of the rollout and progress against the rollout?

We just started. We started in earnest in the beginning of April. So we're 6, 7 weeks in. I think on all observable metrics, things are going great, and all -- there'll be a ton of encouragement for them to accelerate the rollout, push more towards us. We feel really excited, kind of put our best foot forward. I think it's been a great partnership. And so, not only do I -- obviously, it's a huge revenue driver for us, our largest contract of all time, so on and so forth, but I think it'll be a great case study for other brands to see how smoothly this has gone and hopefully keep them as a reference customer for future businesses.

That's a good segue to talking about the pipeline. So one, just give us an update as to how the pipeline looks today, but also, have any of these wins, Burger King, Wendy's or any of the others helped you guys as you think about increasing your pipeline?

So our pipeline is as strong as it's ever been. In the 5.5 years since we've been here, it's never been better, and across all of our products, almost all of our products, it's never been close to as good as it is now. And I don't know if it's directly a result of those wins or is it something else that's driving it. But I can certainly say we've never seen so much our fee activity, we've never seen so many pilots. We've never had so much interest in our products. And so I think it's kind of a combination of a few things, which is a lot of brands have held out moving to the cloud, pushing and making these investments today. And I think they're at the point like, man, like I know I've kind of made it work to now with all this old stuff, but like it's going to break some time. And I should make that investment now and push that forward. And again, think about today how different your ordering experience was just 5 years ago. You weren't ordering on Uber Eats and DoorDash. You weren't ordering on your phone. McDonald's rolled out its loyalty program in 2021, and they're the most sophisticated, best chain in the world, like 2021. And so your -- no one was thinking about, oh, I need to place an order through TikTok, nobody was thinking about these orders in the Metaverse and stuff like that. But it's all happening now. And so I think they also, they're like, I got to do this eventually. I think a part of it probably was some of these big whales coming in and sort of saying, proving out what we believed for so long, which is we've got the best product, we have the best X, Y and Z, and I think that validation helps us too. So I think it's a combination. But without question, I think it is the healthiest pipeline we've ever seen across our business.

So let's switch gears to M&A. You recently announced 2 large acquisitions, one of which you closed, Stuzo and TASK. Talk us through the vision for each of those 2 deals.

Sure. So going first. So TASK is a deal targeting to close sometime in Q3. The simplest way to think about TASK is it's PAR but international. They do everything from point-of-sale, back-office to loyalty and online ordering. It's an impressive company. We've tracked them for many years. I've tried to acquire the company for 3 years. They are really well-known for being McDonald's loyalty provider outside the United States. They've got a great business there. Any of you that use the McDonald's app in Europe, you'll sort of see it's a really awesome app, and I'd argue it's better than the U.S. app. That's the core of their business. And then they've got customers like Starbucks in different international markets. And so they've done a really good job of trying to be what PAR wants to be internationally. And the thesis behind this is pretty simple. We wanted an international business. And thinks because in the United States, there's not a lot of net new growth of big legacy restaurant company stores. You're not going to see a bunch of new locations for any of the top 20, 30 brands outside of the few that we all know like Chick-fil-A. Most of these brands are kind of saturated in the markets they want. And so the growth that they have is in 2 markets, it's in nontraditional food outlets, which would be airports, stadiums, mall, convenience stores, fuel, stuff like that, and you've probably seen a lot of that happening. But it's international. And so if you think of the amazing like Popeyes and these fast-growing brands, they have way more growth outside the United States than in the United States. And we have been turning down this business, oh, if we win a big brand, and they'll say, hey, like, who should be international? And we're like, here's a bunch of people to use. And so I think like, gosh, we're giving away a lot of money to third parties that we could bring in-house. But also, it was defensive in the sense that the decision makers of these brands, if the growth markets are outside of the United States, decision-makers will eventually move outside of the United States. And I think we wanted to make sure we were in those markets because, God forbid, the next CIO of a chain we work with is now working out of Asia and not the United States, we better have a relationship with that person such that we can win -- keep our U.S. business. And so it was part defensive that way. But a great product, we've done a long time, and it's awesome, the founders are rolling their -- the CEO, family rolling the money into PAR, so it's nice, synergistic that way. TASK -- sorry, Stuzo was the other acquisition we did, great business, great financials. We acquired it for a great price. That business does effectively what Punchh does, but does it in the convenience store and nontraditional restaurant market. This is a business we've been in for some time, about -- we're approaching sort of 10% of our revenues in that market are coming from C stores and what we call fuel stops. And it was getting to the point now where, gosh, we're growing pretty fast here, and we are not taking it serious. It's kind of off the side of our desk. And then our POS company started winning deals in that space. And then our back-office company started winning deals in that space. And we sort of made this call, which is either we're going to take this really serious and become super serious about this category or pull out of it. And we went through a bunch of debate. And I think what we realized is what's the best way to take it serious is to have some scale, have a team that's focused on it. And so Stuzo is the premier loyalty and offers platform for the convenience store market. They service everything from major fuel retailers like Chevron, down to smaller convenience stores. It's an amazing business, very, very high margin, good growth, great culture. And it's taken over the PAR c-store business. So it's been really fine to see that kind of work its way and I would say it's the first acquisition we've done at PAR where everything we thought before the deal, we still hold after the deal, and think higher of it than we did before we bought it.

Talk a little bit about the convenience store market, how it compares to the restaurant market, some of the key differences.

So I think the -- there are about 150,000 stores called that are within the TAM of c-stores that are relevant to us. That's less than probably the 400,000 or more restaurants that we could potentially serve their products. However, what we love about this business is that it is way less competitive. There are not -- literally there are 10,000 restaurant technology start-ups. There's not a fraction of that in this market. And so there's a lot less distraction. And what is neat about this market is convenience stores are amazing businesses. They're some of the greatest compounders we've had over the last 30 to 40 years. There's a reason why Warren Buffett owns them and great investors have bought these things. But they're generally family controlled, long-term thinking, long-term oriented. And so their partnership mentality is really fantastic. So on the average convenience store chain, we make 2 to 2.5x what we make in restaurants. And so even though it's a less quantity of stores, the revenue potential is pretty close to what it is in restaurants. Given the lower barrier to entry -- sorry, the lesser competition, we feel like, wow, we can innovate faster. We don't have to deal with a bunch of start-ups nipping at our heels. And then I think importantly, it's the ability to sell more PAR stuff that we have today into that market, which was, again, we were kind of falling into it, but it gives us a great opportunity to cross-sell into that market.

And then on the TASK and international side, so post TASK closing, is the strategy to have product and platform parity domestically and internationally? Will be a different platform internationally? How do you think about it?

We want parity. So I think we don't want multiple products across PAR. So our loyalty will be one, our back office one, so on and so forth. The only way -- place that may be different is in the international side. And the short answer is, we're going to figure that out. I think if you look at history, the vast majority of ERP systems or restaurant point of sales systems have had separate international from U.S. businesses for lots of different technical and nontechnical reasons. And so that seems to be the way to go. But our first sort of responsibility as the 2 companies combined is, from a product perspective to say, hey, how do we take the best of both products, build microservices such that we can create one platform for everybody? But if there's not an ROI to doing that, we're not going to do it. And so unless we actually think we can get slimmer, faster and more efficient, we won't do that. But I think we'll figure that out.

And is the idea going to be focused on chains that have U.S. presence and then expand out with them? Or would you go international go-to-market motion? Like how do you think about that balance?

So certainly, from the PAR side, we will be pushing our U.S. brands over to that market. Now they've got a pipeline of customers all across the world that they'll continue. But I think we'll be able to flood their pipeline with primarily the big U.S. brands. And for the most part, even in -- outside of the United States, most of the big restaurant conglomerates are still U.S.-based brands. We're the best on healthy food.

Got it. Let's shift to financials for a second. So just remind us, I think there's some opacity in the financials at PAR. So just cut through it, how do you think about your ARR, segment your ARR?

So in reality, our P&L has sort of got 3 core lines to it. There's one line called contract, which is a government subsidiary that we are relatively vocal that will not be part of PAR for the long run, it's not relevant to our core business, and I wouldn't focus a ton on that. . Our second line is product, which is our hardware business. So when we sell point-of-sale software, generally we're attaching hardware, and we have a set of legacy customers that buy hardware only, the biggest one being McDonald's. So if you go to something like 30% or 40% of McDonald's stores in the United States, you'll see the PAR logo on the device the cashier is banging on. The third line is professional services, which is installs, implementations, but a lot of that is for us hardware servicing. So you break your terminal and you ship it back to us, we fix it, send it back to you. And the last line is subscription services, and that's the most important line of our P&L. That's our software business. It is all recurring. So ARR, subscription services are the same thing for us. And that's where obviously the value and the growth has been focused on. That business at the end of Q1, if you add the 2 acquisitions, it was around $225 million, a little north of that of total ARR, growing 25%. We think there's a really healthy margin profile underneath that. We feel super excited that business will kind of exit at a really nice rate, a lot of pipeline behind it. And that's really our core focus. 5.5 years ago when we took over the company, that subscription services line would have been $5 million or something. Today, it's all where it is now. And so I think that's the investment, that's the growth. And to me, the way that I sort of value and look at the company is there's an ascribed value of that software business, which is super high retention, high growth, soon to be high margin. And then I think I look at sort of the rest of the sum of the parts, which is there's value in hardware business, there's value in the government business, which I think you can break apart.

So let's stay on the theme of profitability. So when you say soon to be high margin, a question we often get is, what is the path from now to that high-margin state? And how do you get confidence around that?