PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

Yes. So we're doing really well. Unfortunately, we're in a tough business where the customers don't always let you put out a press release upon winning a deal. So these things are lagging in nature. Burger King was super unique because it was a material event, and so we had to do it for SEC purposes. But we feel really good about what we'll hopefully announce out in the next year on that activity. And then I think where we have lost and we've lost one of those that I can think of. I don't think there's anything we could have done that would have won that business, meaning a competitor did something economically irrational that we just don't want to do. But in general, the pipeline is really strong. I think not just -- I think if you ask any of our peers who's winning the most in the Tier 1, they would say us. And so it's still very healthy.

Okay. So should we expect potential opportunities on the Tier 1 side in 2025? I know, again, the lead times on these deals can be very long, but is the pipeline still active where you could close on potential opportunities in terms of like big whales?

There's no doubt. I mean there's always -- when we went into '24, we had no idea that things change like, oh my gosh, all of a sudden, this chain is going faster than this chain, and it's a little bit hard to predict. And that is a core challenge of our business, which is the predictability of the RFPs are there, the predictability of rollouts is not. And so you have some volatility from quarter-to-quarter as it relates to revenue. But the upside of that is then you have a really long visibility of duration of revenue for the next 10 years, which I like a lot. So I'm okay with that upfront. And so we do have that. But I think we feel more excited of this year is our ability to attach more products into the base. And that's really the push that I have to our sales team is, I want Data Central on every single brand customer. How do we make that happen? And so we are doing all sorts of incentives and promotions to make that happen in a bigger way. How do we create that flywheel acceleration. And so we feel good about both of them right now.

Let's pivot to the M&A. So I'll first start with the -- I know you've relabeled it, but the Stuzo deal, which got you into the C-store space. I think there was a question about a potential cannibalization of the Punchh product within that area. So could you just update us on how the acquisition has gone? And has that actually had a negative effect? Or has it been more positive in terms of the impact?

Stuzo has been an incredible deal, and I don't like hyperbole, but like it's been just a game changer for us internally. So we were already in C-store. We had about 10% of our loyalty business already in convenience stores. We sort of saw Stuzo and said, that's kind of the company we want to be. And then we got them for a really great price, 12 or 13 or 14x EBITDA for a fast-growing, really profitable business. And when we did it, I think it was contrary. People, I remember, had some tough conversations with shareholders like what the hell are you doing? Why are you why are you changing your thesis? And the point I was sort of telling people like then was we weren't changing our thesis. It's just that our customers have expanded the footprint of where they're selling their foods. It happened to be that convenience stores are the fastest-growing foodservice market in the United States. Convenience stores, on average, sell -- or have CAGR-ed 15% foodservice growth in the last 3 years versus restaurants that are way below that. And the biggest competitor to McDonald's is no longer Burger King, it's 7-Eleven. It's your guests or it's your -- the gas station to go to. And this will only be compounded as EV charging becomes more common because you have more time now at these nontraditional restaurants. And so we took this contrarian bet. We had to sell our stock at a discount, all that stuff. I think fast forward, it is now like every article in our trade rags or our, say thesis, which is like, "Oh my God, the convenience stores and the new restaurants, convenience stores are taking share from restaurants." You can see that we were like -- I think we were really right on that. And that was luck. I mean I don't think we were geniuses, but that really proved out. What's exciting about that market is that we are the experts in that market because we go in and say, "Hey, we know what's going to happen. You're going to start with loyalty and then you're going to want this and then you're going to want this because we have done this for the last 5 years in restaurants." So we go in there and it's almost like the experts that they want to talk to. That is super exciting for us because we can have a lot of influence on the customer. The second part about this business is its economic profile and business model is very different than restaurants. We charge twice what we make, we charge for restaurants and -- than we can in the C-store market because it's less competitive, but also we do a lot -- the functionality is more. We promote everything from CPG goods to cigarettes and everything in between. And so we've got to integrate all that into a loyalty product. And so we can actually make it -- it's a much more profitable business because of the breadth of product. And then lastly, we have, I think, an undue influence on the customer to sell them a lot more. When we go to a customer because we've driven such tremendous ROI -- this is a great example. As I just mentioned, it's very hard for restaurants to ever go out and talk about, hey, we just launched a new tech provider. They don't want to put presses out. Conversely, if you look at C-stores, it's like the opposite. So Murphy's USA (sic) [ Murphy USA ], which has been one of the best compounding stocks over the last decade, it's a convenience store chain. Their CEO, Andrew Clyde, who's an incredible CEO, he's like always talking about PAR. And it's like the most amazing thing for us because he's sort of an icon in that industry, truly like an icon and he talks about our loyalty program being the key to his success. Casey's is another great performing organization. Their loyalty -- their pizza loyalty runs off of our platform. And so these brands really do count some of their success to PAR and driving that for them. And so what does that mean? Well, they trust us. They want to use us more. And so it will create a really great opportunity for us to sell more products because they really want more from us. As an example, if we had online ordering, if we had delivery management, if we had kiosk, if we had point of sale, like we would be -- this thing would be growing like bonkers. We don't have those products. We're building some of that stuff. But that has really proven to be, I think, a tremendous acquisition. And then the talent we brought in was really, really, really fantastic. And so you'll see a lot of that talent spread across PAR in other ways to make us a better business, give us more confidence in candidly who we are and what we can accomplish. So as you can tell, I am really pumped and it's a very fun market. And I'll just tell you one other anecdote. One of our large investors is always screaming at me, which is like we don't charge enough and gives me these crazy numbers that we should be charging 10x our price. And it's hard because in restaurants, it's an established market. But in convenience stores, we can go to a deal -- we just did a deal with this $13 billion organization, not a small organization, where they're buying our loyalty product. And the guy was like, listen, I need to do this. My competitors are all doing it, but I don't want to pay -- I want to figure out like a win-win. Like I just don't want to pay you the highest rate because like what, does it work? My tech team is really not the most advanced. I'm a new CEO, blah, blah, blah. And so we created a deal where we say, hey, you pay a little bit below our base fee. But if we hit these targets, that contract rate goes up meaningfully. And so this goes from a $2.5 million contract to -- if we hit the top of the targets, it's like a $9 million contract for us, which would be one of our -- that's more than Wendy's, right? And so -- and this is not a chain that any of you have probably heard of. And so we can be more creative in our deal making because they are -- this is a different industry. So we get kind of excited by our ability to create more value here. So that one has been just a home run, and we're going to put a lot of -- it's -- our R&D expense next year, it has the most investment of all of our products.

I can tell you're pumped. So that's good to hear. Moving on to the international side, TASK. I'm assuming there are a lot more challenges with going international. So if you could update us on how that acquisition has progressed and what you're seeing in the market there.

Yes. So way earlier than -- part of the reason I'm so bullish on Stuzo is we've owned it for almost a year, so I know it really well. I'm in the customer meetings and stuff like that. On TASK, the early goings have been great. I mean I think the -- similar to Stuzo, the customers that use TASK love TASK. In Australia, they're a big market. There's a company called Guzman y Gomez, which is like the Sweetgreen or Cava of Australia that just went public. And in their IPO roadshow video, they talked about TASK, which I've never seen a restaurant company say, here's this vendor has been a great partner for us. And so their customers really like them, which is an important part of our growth. So far, our priority has been 3 things: one, making sure we can take the customers live that they have signed up. They signed up a lot. They've put a ton of investment in the product. We got to get these customers live in Australia. Number two is bringing U.S. customers to their market. So we've had one really top brand, small amount of stores, but like come into Australia, come into Canada next. And so that is really, really exciting. And in fact, this is a really big brand that we don't have existing business with, but we have a really great relationship with. So that's going to be a cool opportunity for us to mine that. And that's sort of step 2, which we've talked about when we bought the company and so there. Now that will be a little bit slower, but not much slower because the -- we're launching so much in organic pipeline, we can't actually send every customer and say, go talk to them because it's a limited team. So that's the second part. And the third part of TASK was to figure out if we could take some of their functionality of other markets in the United States. And so we are going to do 2 tests in this market. TASK is in Australia, the largest ATM, POS provider. So if you guys go to the Australian Open to watch tennis, that runs off of TASK. If you go to the Melbourne Cup, which is like the biggest sporting event in Australia, I'm told, it's like the Kentucky Derby, that runs off of TASK. And so we're going to do some research to figure out can we bring that functionality over to the United States. Just to put in perspective, the volumes of those 2 events I mentioned plus others are more than the volumes of the vast majority of U.S. stadiums. So it's like the tech can handle it, obviously. And then we're exploring a little bit of work in the casino space, where TASK has won casinos internationally. And so these are things we're sort of testing to see does it create it. And if they don't, we'll shut them down really fast, a very low-cost experience. And then underneath all of this, as we've talked about with investors is there's a couple of call options within this business where they have relationships with 2 of the biggest brands, probably the 2 biggest brands in restaurant and beverage that we want to win over the next couple of years that if either of them hit, it will double the size of PAR. If they don't, we didn't pay anything for it, but now we really are focusing on it. So that's kind of plan on TASK is get the international business come, get the U.S. customers over and then explore these 2 verticals while we work on these things in the background.

That's a great update. And Savneet, you did touch on this, but you bought this company called Delegate recently. Again, could you give us a little bit more details on that?

I mentioned on those first 2 deals, one of the core -- M&A is messy, right? I should mention, I was an investment banker the first 2 years of my career, and I remember going to CEOs after like 9 or 10 times this stuff doesn't work. It's just like really good for the short run. And so people always come to me and say, hey you've done 1 M&A, like how do we do it? And I'm like, don't do it. It's like I usually advise not to do it. At PAR, I would argue it's been one of the most successful things we've done. And the reason why is we've always looked at it as product development, not making a financial transaction. The financials have to work, but it's always been a product development exercise for us. That makes our M&A a little bit slower because we can't just wave in deals all the time. And that is there. But where we have like, I think, over-indexed -- I say this a lot, so forgive me to hear this, but like if you go to talk to the big software private equity funds and say, "Hey, have you met this guy at PAR, they'll say, yes, because we write them all the time to take a look at PAR and tell us are we leaving money on the table or not. But they would tell you like our integration playbook, I think, is like near best-in-class. And what I mean by that is we really figure out like where are we going to connect the product so the customer gets a different outcome. And so that means that the super simple of are we just doing a single sign-on or the more complex of there's 2 databases, how do we make it to one database, which allows the customer to have one sort of truth. But then the second part is the integration of the organizations. And so on Stuzo, the business we bought almost a year ago now, we have literally lost 2 employees over 1 year. And one of them was a part-time consultant in HR, the other one -- they're both in HR, which was synergy, right? We don't need that. And so that's a company that sold for almost $200 million, many employees left with millions of dollars and every single one has stayed. And so I think that kind of is a core part of our success. The TASK acquisition, the founders made tens of millions of dollars. They stayed on. We've lost 6 or 7 people or something like that, minus the ones that were forced for synergy. And again, that's a 240-person company. And so we've been able to retain the talent, which is really hard to do. And why does that matter? Well, when you retain the talent, they bought into the broader ecosystem of the vision and mission of PAR so that collectively, we can build a lot more together. And same thing at Delegate, the company we just acquired, which you're going to ask me right now, but same thing. We've kept the management team sticking on, and they made plenty of money. None of these guys need to work anymore, and they've all signed on to kind of build the vision. And so what I love about it is that I do think it's -- if you lose 1/3 of the workforce within the first 6 months of an acquisition, which normally happens because you get your paycheck and it's hard to spend a lot of time trying to learn all the institutional knowledge that went out the door. But with us, you kind of hit the ground running and you're building right away. That has been a core part of our success. That's like the hard work. That's like the -- those are the hours that you really spend. Any deal looks good on paper. It's like what you do after that's like everything. And I think that's like the -- that has been a huge weapon for us, which is we have this playbook. And it's fun because now you have -- there are 3 entrepreneurs at PAR that have made a ton of money selling their business to PAR that are like giving me ideas and pushing really hard on, why don't you invest more in my business? Why don't you invest here, like why are we doing this? Why you're doing that? And they are meaningful shareholders of PAR, meaningful, meaningful shareholders of PAR. They have tens of millions of dollars of PAR stock and they all want the best for the outcome. And so that's been a really critical part of our success. And I think Delegate, sorry.

Yes. Any details you can share on that both financially and, of course, the motivation behind it?

Yes. So Delegate is a company we have known in the restaurant space for many years. They were spun out of a company called Border Foods a while ago. Border Foods was, at one point, a really -- still a really incredibly successful company, real estate and operating Taco Bells and other large franchises. So their founder was on the board of Taco Bell. I mean, really, really well run company. They built this analytics software for their own stores. And then when they realize that everybody else wanted it, they brought in a private equity partner to commercialize it and scale it. The business has 2 product lines. One is this analytics tool for the franchisees. When I say it's analytics tool, it's a lightweight version of Copilot, where it's prompting the store manager or the franchisee to make changes into how they manage their food, what they promote, their labor. It's a really slick tool that the franchisees really live off of. The product doesn't churn because you end up kind of like that's how you run your restaurant. And it's really complementary to what we do because we do the same thing, but at like the top store level, the brand level. And so they do it at the store level, right? And so combining that is pretty powerful. And so we have known them through that part of the business for many -- well before I got to PAR. They were very successful doing that. The second part of the business is loss prevention which we are branded recovery, which is creating an automated system for restaurants to collect back the overages and the refunds from DoorDash and Uber Eats and everybody else. A little known statistic is you'd be shocked how many orders that come in through DoorDash, Uber Eats have some form of -- the order injection was wrong. And so the -- you put an order on your DoorDash or whatever, the order that actually got kicked to the kitchen was slightly different than what you put in on the order. You get your order and you're like, what the hell, this is not what I ordered, and you get a refund. The DoorDash, Uber Eats will give you that money back. The restaurant will say, no, no, no, your order injection screwed that up, so we shouldn't be funding that loss as an example. Or a more common example is, hey, the customer complained that the food was soggy and cold by the time we got, they wanted a refund. And the restaurant will say, no, if you look at the KDS system, which obviously PAR provides, you'll say, we finished the food, your driver didn't come in time. And so you have to go through this process of like going back and getting all this money back from your stores. There are stores this is on the Delia website that makes $75,000 a year back. When you are a QSR restaurant, so make $75,000 back is the equivalent of sometimes of -- some of these guys is like 1/3 of their entire profits for the year. Now most of them, it's not $75,000, it's $25,000 to $30,000. That's still 10% of your free cash flow. That's a big, big, big nugget. And so they automate that recovery and then do all this analytics and integrate it into it. And so that space has been booming for the last few years. And it's an example I always tell people like where do you think PAR is going to be? I'm like, as these markets digitally disrupt, like I never thought this would be a thing that we would ever spend time on. But this loss prevention thing is wildly complicated because guess what happens. When you're doing that refund, you got to apply for like a sales tax rebate, right? Because you got to like, hey, I want my -- I got to pay that money back, right? I got to -- I mean there's just so many other things that it cascades to. You got to update all the inventory. It's a really complex product. Does that product make any sense standing on its own in the corner? No, it should be with your inventory product, which is what we have. It should be with your point-of-sale product. And so this is a module. It's not a stand-alone product, in my opinion. And so it fits really beautifully within our product line. And so we -- that's the product that I mentioned, which is we can make 1 plus 1 equal 3. As I mentioned, it was really cool to have the CIO of some of our biggest customers be like, great deal, super smart, like love that one. And -- because like by the way, sometimes I do stuff and it's like why the hell did you go do that? Like, but this was great that way. From the financial perspective, I think it will be very accretive. The business has grown well over 30% for 3 years in a row. It broke even in Q4. So it's got a very much working the path to Rule of 40 really fast. We think that under PAR, there's a tremendous amount of white space in our calculations. There's $84 million of white space if we were to cross-sell their products and our products across each other's base in just one of our products. So we think if we can sell Data Central, our back-office product in their base and they can sell their product in our base, it's about $84 million of white space. So we think there's just a cross-sell opportunity is quite significant. And what's going to be fun about this is we are literally going to sell it to the exact same salespeople. It's going to be branded PAR really quickly. There will be skinned PAR really quickly. It will be single sign-on really quickly. The end user is going to be like, man, that's awesome how fast that felt like it's all of a sudden became one PAR product. And so this is different from every acquisition we've done, I've always said it's created a swim lane for us. It is a -- we've always said we wanted the big parts of the restaurant, point of sale, back of house, loyalty, online ordering. This is a module. And so the bar to integrate the bar is much, much easier because this is something we can attach. It's a switch to the end customer. It's not a big install. So we're excited. We paid about 7x current revenue. If you assume 25% growth, which we think we can accelerate meaningfully, the forward multiple is accretive both on a current and a go forward. And on an EBITDA basis, it will be accretive to us as well. So I think the math will work out nicely. And I think it will create a bit of a road map for us to potentially do this again and again. And in the back office space of restaurants is a space nobody here has ever paid attention to or looked at. But it's kind of a sleepy category. There are 3 private equity funds that are rolling this category up really beautifully. And I can tell you, all 3 of them are sort of $100 million-plus businesses. And at least what we've been told, every single one of them runs at 35% to 40% free cash flow margin. And so it's a space we want to be in, we think it's really attractive. But I think it's because it's buying modules that you can bolt on as opposed to when you combine 2 competitive products. So it's an exciting product for us to bring on. And I think, again, really important part of it is management sticking around when they don't need to stick around. And that -- I should mention, that management team will now be running the combined back-office business of PAR. So we give them a bigger platform to test their skills and see if we can find another great leader at PAR.

That's great insight. I know Savneet, we only have a couple of minutes left. So 2 very quick questions from my side. One is you talked about the growth aspirations. What about EBITDA? You turned profitable. What are sort of the longer-term aspirations there? And secondly, I'll just throw this in there as well. Do you still have more sort of firepower to do M&A? Or do you have to do some type of capital raise to be able to actually keep that M&A machine going? So 2 quick questions there.

I think -- so we crossed EBITDA last quarter. We'll have growth again. I think I'm very -- I always -- I've never -- and I never meant this to be flippant. I never worried about the profitability. If you look at all software companies, our ACV, they all kind of end up in the same margin. We all do different things, but we've got a pretty high ACV. We should have decent margins over time. And what I think is I'm most proud about at PAR is, if you step back is like we -- I would argue, and I don't know and some of you experts will know better, but we might be one of the most efficient when it comes to R&D and sales and marketing expense. R&D expense is 25% of our revenues. Our sales and marketing expense is less than 15%. There are not a lot of enterprise software companies that are still growing 20-plus percent a year that can -- are anywhere close to that. So we're super efficient. Where we're inefficient is on the G&A side, and that is a little bit of this legacy hardware and services business that we have. And so to me, it's just a matter of scale for us to get to incredibly comfortable margins that we're all very proud of. I think if -- I would encourage everyone to look at our investor deck, just in the last 12 months, we've had organically a $17 million or $16 million growth in apples-over-apples operating margin improvement. But that $16 million came over $130 million ARR business, which means $115 million revenue business, right? And so we took off -- that much improvement is really hard to do. And so we're really, really focused on driving EBITDA. The biggest point I'll say is I think that 2026 will be a really huge jump in EBITDA for us. That's like the velocity there in our modeling is, I think, well above what everyone is expecting for us. And I think that's because this is still a really big growth year for us, right? We're expanding in C-store. We're launching more at Burger King. And I think that in '26, I'm just really -- the cash flow generation of PAR is going to be super exciting because we are at a scale and size where you get the benefits of the scale and the G&A costs that are -- there's operating leverage on G&A costs. And then...

So in 12 months when I host you here, I'll hold you accountable.

I feel very -- yes, you should. You should. And we hit everything we told you last year, I mean beyond that. And I think that's why I'm really excited. But I think in '24 -- sorry, '25, it will be really good EBITDA growth because we're starting from a low point. And we live that challenge of do you invest a little more here or there because now we've got more and more growth opportunities. But we will be a very profitable business. To your second point, M&A is a point in time. What is the best cost of capital and use of capital at that point in time. If we have a lot of cash on the balance sheet, we should always try to use that because it's not earning a ton of money. But if there's an opportunity for us to use stock accretively like we did with Delegate, we'd use that. We don't really want to use debt. I don't -- we had to use converts because it was the only tool available for us when we took over the company years ago. But really, it's a function of time, and we've done creative stuff like we were so passionate on this convenience store deal, and it's really turned out to be a home run. So we did a pipe, and we did a small discount, which sucked and it was really hard for me to swallow and -- but I think I'm glad our shareholders made money from it, and we made them money. But importantly, I think like it's a tool. And so it just -- you got to look at all -- it's a point in time. I say like, listen, if our stock trades all the way down to 4x ARR, but we can buy something at 1x, like that's more accretive than if our stock is at 15x and I'm buying at 10x. And so again, we don't hope for that or want that but we have to like kind of look at everything at a point in time. But the bar for M&A is really high. Like I can't stress this to you enough. We see dozens of deals a week and the product thing -- it starts with product. The product has to fit. If the product doesn't fit, it's just hard for us to make it work. But if you start us buying a bunch of stuff that doesn't make the product sense, that probably means we're trying to sell the company because now we're just juicing things up for someone else to fix it later.

Well, on that note, I think we're going to put a wrap on it. Savneet, thank you so much. Really appreciate your time. Thank you, everyone. Very insightful, Savneet.