Chit Chat Stocks - David Polansky | Par Technology (PAR)

Episode Date: December 6, 2020

On the 6th day of Christmas David Polansky gives to you, Par Technology the point of sale (POS) system focusing on restaurants. By working primarily with restaurants, PAR is able to offer a few perks that other POS systems can't. Chit Chat Money and David discuss the future growth prospects of Par Technology. Visit our website: https://www.chitchatmoney.com/ Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to 25 Stocks of Christmas, presented by Chit Chat Money. Today we have David Polanski on, our friend, I guess we can call him our friend now. I just met him, but friend now. Yeah, but before we get to that, we have a word from our partners, Seven Investing. Whose turn is it for the sales? You can go first, but we are recording this on December 1st, which is the day, you're not going to be listening to it now, but that's the day that all their new picks come out. So it'll be a fresh set of picks for you to check out.

Yeah, I looked at them. Very exciting. Good mix. A lot of good things to check. Not yet. I haven't looked at them all yet. Okay. So, you know.

Okay. Well, our eagerness should show you how much you should go out and use our code CCM for $10 off, right? Exactly. Okay. $7. Look, for the first month, it's $7 for these seven picks from these great analysts. That's $1 per pick. That's a fantastic deal.

It's definitely worth it. Try it out. See if you like it. And, you know, you'll find out it's a great service. All right, here you go. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment.

As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now please enjoy this episode. Today, we are welcomed by David Polanski. David, we have not had you on the show before, so I'm going to let you sort of introduce yourself and what you do now.

Sure. Thank you. So, yeah, I'm a principal and analyst at Lowell Blake & Associates. We're a registered investment firm out of Boston. We primarily do separate account management, like a traditional RIA, except unlike most, We do individual fixed income and equity investing. So we don't use any products, no outside influence. We go straight to the source.

We buy stocks, buy bonds for client accounts. My role, I'm primarily in charge of sourcing new investment ideas, keeping on top of our current holdings. And I was originally the one that came across PAR Technology. Okay. And Par Technology is the company we're talking about today. So how did you come across Par? Yeah. So we came across it in mid to late 2017. We have been doing some work on third-party delivery. So Grubhub, Uber Eats, those sorts of things. And we're seeing this massive shift happen in restaurants broadly of, you know, different ways in which consumers interact with restaurants and different ways that restaurants can serve their customers. So we just happened to stumble upon a write-up on it from a large holder of PAR. At the time, it was, I think it was about $100 to $150 million market cap, very small, and we thought the opportunity was incredible, that there was a really large addressable market, that they had a good product, and that they could really do something really great with it.

Okay. Yeah, that's interesting. And what does PAR Technology do? I know they have a few different things. Restaurants is kind of their main thing, but can you explain to the listeners how the business works? Sure. Yeah. So yeah, they're a provider of restaurant technology and a supplier of software and hardware to the federal government for intelligence, recon and mission systems. The main focus of the company is the restaurant business within PAR Restaurant, which is called PAR Tech. They offer a full suite of hardware, software, and payments technology for the restaurant industry. So right now, there are two parts. There is the legacy hardware business, which where they've been selling point of sale terminals to sit down, find dining, fast food and fast casual restaurants for about 40 years. And they currently have point of sale terminals installed in about 100,000 restaurants globally. That's the legacy business. That's the hardware business. That's where they have all the relationships with the fast food and fast casual chains.

They also recently bought a drive-through technology business in September of 2019 for $7 million. So it's a relatively small purchase, but they got very lucky because now, of course, with everything going on with COVID, this business has really taken off. It is profitable, it's cash flowing for them, and it's already generated about $16 million in revenue in the time that they've owned it. So that's one side of the business, the hardware, the point of sale terminal, drive-through technology. But the real reason why this is exciting is because of the burgeoning cloud software business. so for many years like i said 40 years the company primarily just sold hardware and that comes with all of the limitations surrounding that business um it's lumpy uh it's lowish margin and it doesn't have the recurring revenue characteristic that a company is software product so old the old management team saw a shift happening in restaurants of the shift to cloud technology.

And in 2014, they purchased a cloud-based point-of-sale software called Brink. Brink is a industry-leading cloud-based enterprise restaurant point-of-sale system. It was purchased for about $17 million. At the time, it was doing less than a million dollars in revenue and only had about 400 locations. Since then, that business has grown to about 11,000 locations, and we think it's going to be doing about $25 million in annualized recurring revenue by the end of this year. So they went from 400 locations to 11,000 locations, and it went from less than a million in revenue to 25 million in revenue in about five years. So that's Brink. That's our cloud-based point of sale. Additionally, they also have a back office software product called Restaurant

Magic, which does about $10 million in annualized recurring revenue or ARR. And that was purchased in December of 2019. So those are the parts of the business. There's the restaurant side, which primarily consists of hardware, and then there's the software. And then there is a software business and staffing business for the federal government. That's really non-peripheral, or sorry, it's really peripheral to what the company is doing now, which is primarily focusing on its restaurant offerings. Okay. And do you want to talk about management a little bit? Because I know it's been, this is something that we've looked at before. We really like the current CEO and we know there's been some transitions there. So could you touch on that?

Yeah, so the company is now run by a guy named Savneet Singh. He's a software operator and investor. He previously founded a software company, I believe it was for transacting digitally in physical commodities like gold and silver. um and he founded that business grew it and sold it um so he operates in the space he invests in the space and when he he was appointed to the board of par in i believe it was oh man uh early 2018 maybe late 2017 and he was so he was on the board for about a year Then he was appointed to the CEO position at the end of 2018, early 2019. So he's been there for about two years. He is phenomenal. He really understands the value drivers of this business.

And the last management team, frankly, they starved the business of capital. um they weren't investing appropriately into their software offerings for the restaurant and sub need came in a he's basically ripped the whole thing down to the studs um from a capital allocation perspective from a culture perspective um from an operating perspective everything he's done has been to take what is a really good product that's growing really quickly with Brink. And he's kind of put the company back on the right track towards generating significant growth for the future. So he's great. He doesn't own as much stock as I'd like him to. He owns about $3 or $4 million worth. But there's always areas for

improvement. But I think he's phenomenal. I think he's doing all the right things. And he knows what to do. Yeah. And for any of the listeners that want to hear more about Savneet Singh, I know there's some transcripts of interviews that he's done, but he's also done an interview with Patrick O'Shaughnessy on Invest Like the Best. And he's also been on with Howard Linson, who's a friend of them. So you can get some personal, there's like two hours worth of interviews that you can listen to for free on podcast forums. Yeah. So David, for sort of the crux of your thesis, what, why do you like the business as a whole? I know you sort of described it, but what do you like about it as an investment from here? Well, so at a high level, the Brink

business, the software business has all of the attributes of a fantastic company. There are significant tailwinds, it's high margin, it's recurring revenue, it's incredibly sticky, and their great unit economics. So just to talk about the tailwinds really quick and to put some numbers around the market, I think that the average restaurant spends between $10,000 to $15,000 annually between payment processing, so swipe fees and software costs. So this includes point a sale, online ordering, loyalty, back office. There's a lot of technology that goes into running a restaurant that we as consumers don't really see. So that's about $10,000 to $15,000 annually on software and credit card spend. In the US, there's about 400,000 fast food and fast casual

restaurants. And there's another 350,000 casual dining locations. So if you put all those numbers together, that's about a $7.5 billion annual opportunity for PAR and for Brink. Now, in terms of what's really driving this shift, as I talked about initially, it's that technology is really coming into the restaurant, whether the restaurant operator wants it or not. you need online, you need third-party delivery, you need loyalty. And the legacy point-of-sale providers for large chains can't really do this well. These products are offered by large organizations without really a focus on restaurant point-of-sale. So Oracle owns Micros, They're a large provider, and NCR owns Aloha, which is another large provider in that space.

And they're kind of slow, and they can't really keep up with the demands of the modern restaurant. So today, it's more important than ever to have a kind of a modern, flexible solution like Brink. So that's been the theme for Brink over the last five years, and I think it could go on for another 5, 10, 15 years. of slowly taking share and whittling away at these incumbents where there's this massive opportunity. And now COVID has obviously accelerated that process. When we've spoken to industry participants and they talk about that typical sales funnel, that process has been accelerated by years. You know, when you sell software to a restaurant, especially an enterprise restaurant chain, it could take a long time to do it.

It could take one, two, three, four years. And now with COVID and their in-room dining being closed and everybody realizing, oh, my God, I need online delivery, I need a loyalty app, I need some way to drive customers into my store, to my chain, that's all just been accelerated rapidly. So, just back in March, Par's stock got hammered. It got caught up with the restaurant trade, everybody thinking that restaurants were going under. The stock went from $35, $34 to about $10. But the reality is, is they just accelerated what was already happening in the industry. And with Brink being at the cutting edge of that enterprise point of sale cloud-based service, it's really just accelerated the business. So on the margin front, the consolidated margins for PAR right now don't look very good on the surface, but the incrementals have been very good, especially over the last 12 months

It's probably generating 60% to 70% gross margin. It is a recurring revenue stream. Brink is offered as a SaaS product. It's very sticky. It's a mid to low single-digit churn. And within that churn figure, almost all of it is inorganic, meaning that when Brink loses a customer more often than not, it's because that restaurant location has closed,

Which you obviously, being in the restaurant business, you can't ignore, but it's a really good sign when effectively none of their churn comes from Brink actually losing the chain, where the whole chain switches from, say, Brink to Aloha or Brink to any of the other offerings out there. So it's a very sticky product. And the unit economics are really good. You know, if you if you do kind of that typical SAS LTV to cap calculation, I think it's well above five to one, five to one, six to one, seven to one. So it's a really good opportunity. So there's how do we make money on this thing, basically? So there are three ways. There's new units, ARPU, or average revenue per unit or per user, whatever you want to call it. And then there's the M&A side. So on the new unit side, we think that there's a huge opportunity to grow that 11,000 unit count. Just with in-existing customers. So in existing logos, there are 25,000 locations. So Brink only has about less than 50% penetration in existing logos. And that's primarily because a lot of the chains that they go in are franchised. So oftentimes it's not fully up to corporate whether or not they switch to Brink. The franchisee actually has to make that decision. But that is kind of what I consider a latent backlog just of the existing customer base. So they could basically double unit count just by penetrating those existing customers. um the other side of this is table service so brink just launched their table service offering

i think within the last um six months or so and brink was primarily made for qsr so fast food and fast casual so by offering table service into that mix you're basically doubling the tan of the business. So latent backlog, huge TAM. The other side of it too is that Subneet hasn't really done a lot of work towards building out the sales and marketing side of the business. So Subneet has actually said recently that the sales headcount within Brink is down over year to date or over the last 12 months or so. And they've continued to sign on new customers. So the Brink business This is growing 30% organically without really doing a lot of work. So what does that growth look like when they can get that sales

and marketing engine going again? So that's another side to the new unit story. Now ARPU, average revenue per unit, more modules, more plugins. So something like ParPay, which they've only really been selling since early 2019. ParPay is a middleware solution for payment acceptance. And in about a year and a half, two years, it's been installed in 1,300 stores, and it goes for $45 a month on a fast basis, sorry, on a recurring fee. So that's the way to drive ARPU.

The major way they're going to drive ARPU is through par payment services. This is their merchant services offering that's similar to kind of a toast or a square where they're taking a fee on each swipe at a terminal. I'm just putting some rough numbers around that. Their payment services offering could double more than double ARPU for units that choose to take it versus the base, a base brink unit. So there's a lot of ways to drive new units, a lot of ways to drive ARPU. And the last piece of it is M&A. The company recently did $130 million equity raise, and with $50 million in cash on hand at the end of Q3, it gives them about $180 million of dry powder. Additionally, the government business, which is kind of peripheral of what they're doing, that has a backlog. The government business has a backlog of $160 million, and those businesses transact at about one times book value. So if the backlog is $160 million, it could probably be sold for $160 million.

So between that, the equity raise, and the existing cash on hand, they have over $300 million in cash to work with. um and we think that whatever there could be in the market for a few deals right now but whatever they buy um it's going to be a creative i really trust that need to do the right thing and put that money to work in a high return manner so i know that was a lot basically from a high level huge tam great product good management team and a lot of opportunity to grow new units our crew and to bolt-on acquisitions here and there and we haven't put any uh we didn't put this in our little note sheet here but what does sort of the valuation look like i think last time right so yeah the market caps now over a billion dollars so it's done well from the 100 to 150 million dollar range

but what's you know what are some of the multiples at currently yeah so the way that i think about it So the base legacy hardware business on the restaurant side and the government business combined are probably worth about $400 to $500 million cumulatively. And that's based on kind of market multiples. So the hardware business is profitable. so that core of what they've been doing for the last 40 years that probably generates about 15 to 20 million a year in unconsolidated operating profit and then so you put whatever multiple you want on that and then the government business could probably go for 160 million so you're looking at probably about 400 to 500 million for the legacy business so if you kind

If you strip that out and you strip out the cash, the net cash on the balance sheet, you're probably looking at about $600 million, $500 to $600 million on this implied value for the software side. So it basically just depends how you want to look at that and how you want to look at that growth opportunity. So we think that the Brink Restaurant Magic, their software offer a million dollars in ARR. So that puts a value of about six times on exit 2023 ARR. And that doesn't include bolt-on M&A or we're really not giving any credit to the credit card payments for our payment services, which could obviously be a huge boost to ARPU. So it's, you know, we think the valuation is reasonable. I mean, you do a couple of deals, you ramp the payment businesses, and then you get the sales and marketing engine ramp for Brink. And, you know, we could double, triple ARPU pretty easily. I mean, you look at it now, you say, okay, it's a $30 to $40 million ARR business.

It's not that big. But when you really dig into the latent backlog, their new business wins, the ARPU opportunity, it's not unreasonable to see this business growing exponentially for the next three to five years. So that's how we think about valuation. So it's kind of taking a revised sum of the parts methodology. Okay, that's going to do it for the first half. We're going to try to poke some holes in your thesis here on the back half. But before we do that, we have a quick break. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices.

You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? All blocked. Thanks to advanced security.

Included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back in. Next, we have Devil's Advocate. For anyone that's listened to some of these shows before, we know how this works. But we have some counterpoints here for David. And it's David's job to sort of refute these.

So I'll go first. The first one is basically the competitive landscape. We know Square just launched their restaurant offering, and there's obviously tons of point of sales solutions out there. So how does PAR differentiate theirs? Are they going to be able to fend off some of the competitors and all the competition in the industry? so the way that we think about the market is that there's kind of the new vc backed offerings that are kind of are built on ios so they're built on android and then there's the other side of the spectrum which are the legacy enterprise offerings like in ncr like a micros um i would say on the vc side that's always kind of been that bear argument right i mean you know you get raised some money you throw it at generating a product and then you rank your

sales and marketing offering the thing i would say about that is it is really difficult to service an enterprise customer and just to give you an example of that um toast has raised about a billion dollars over the last five years, I believe. And that's basically equivalent to PAR's entire market cap. And Toast hasn't been able to win a single customer over a thousand units. And Brink has five. So it takes more than just throwing cash at this in order to win this business, because you're not just selling, you're not just selling a point of sale system. You're selling a service model. Many times you're selling hardware. So you need to be able to offer a scalable enterprise solution and you need to be able to service it. And you need to be able to offer anything that

they want really. And another example of that, you know, Square has been trying to enter enterprise for the last three or four years. And so far their largest customer, I think is Shake Shack, which has about 300 units. Like I said, Brink has a 5,000 plus unit chains, and they have about 20 chains between 100 and 1,000 units. So enterprise and dealing with these kind of new wave point of sale system, it's very difficult and it often doesn't mesh. It's a very different sales process, you know, SMB or small to medium sized businesses, think of, you know, your mom or pop coffee shop. It's easy. You're basically cutting and pasting the same out of the box solution a million times. And, you know, you can have a decent business there. And it's obviously

more palatable for a lot of investors and VCs because it's fast growth. Enterprise is a slow burn. It requires patient capital. Now, there's obviously different ways to take this. You could say, well, I have more visibility to Square's growth. They're doing it, it's working really well. But you're kind of giving up quality of customer. SMB is easy, but it's extremely high churn and the quality of your customer base is really low. The enterprise might take a while to win, but it's super sticky. It's really high quality. And Brink has been to low single-digit churn, which I think speaks really well to the unit economics of that business. So that's what I would say about the competition. On the legacy, so the incumbent side,

So that micros and the NCR that I mentioned a few times, they're just not really focusing on it. As far as I can tell, it's not a priority of theirs. I think if you go, you just, if you have FactSet or, you know, any of the transcript services, you can go and look and type in micros in any Oracle transcript. And I think they've mentioned it in a public forum like one time over the past six years. it's clearly it's just not a focus for them to compete um because you know oracle has different priorities and that's fine i mean maybe they don't want to compete but that just leaves it open for

brink to steal all their customers so that that's what i would say on the legacy size the last thing i would say on the smb on the kind of the vc backed new wave point of sale implement they They have a very hard time doing implementation. Brink has two of the largest smoothie chains in the US, and those initially went to another point of sale company, and they just couldn't execute. They couldn't do what they wanted. The system wasn't flexible enough. it was an out-of-the-box solution and they said hey we need a few custom pieces of software and they said nope can't do it so they lost the business so bring brings in a really really good spot um because it has that sort of that scaled service model um and the legacy reputation but it's a modern product okay that makes that's that's a good uh oh sorry we're gonna Do you have anything else, sir?

Nope. Nope. That's it. Okay. I'll hit my counterpoint here. This one's a little quicker. If you look up where PAR is located, it says New York and you probably assume, well, New York City, right? But in reality, they're actually in kind of a rural town. I forget the name. Will that keep them from acquiring some of the top talent, specifically, you know, software engineers, business analysts, et cetera? uh i think in the past it might have been an issue but i think if 2020 has shown us anything um it's that people can work remotely and talent shouldn't be limited to distance and borders even um but if you're worried about their you know kind of their brick and mortar presence or their wherever their offices are located most of the tech talent for the software is actually located in San Diego and Tampa, um, which are, you know, kind of better, better, um, better markets for talent maybe. And then they also have another office in Toronto, but you are right about the

headquarters. I, um, you know, I did actually go to their headquarters once. Um, it's about five hours outside of Boston and it is, uh, it is, it's cow country. It's very, it is very remote. So hopefully, though, with the existence of that San Diego and the Florida presence, I don't think it'll be an issue. And you know what? Talent should be able to work remotely. Maybe you come into the office a few times a month, but I don't think it's an issue for them at all. What would have to happen for you to sell our technology, you know, to sort of change your thesis on the company? They can't ramp the sales and marketing engine again.

um so if i could take a step back kind of almost towards the beginning of this podcast um old management was growing brink at about an 80 to 100 clip it was growing rapidly um but they weren't really paying attention to what was happening internally that and this is this is my interpretation of events so if you know you'll get multiple answers from multiple people maybe but they weren't really paying attention to keeping up the product um investing enough in r&d and investing enough in the people and they weren't raising they they didn't raise any capital to do this so when subne came in it was growing you know 80 100 and he said you know this we got to slow this down like i said we he said they got to strip it to the studs um and kind of get

this thing fixed um in order to grow it again so the brings growth over the last year year and a half two years hasn't really involved any additional sales and marketing effort um once they get that ramped again like i said before i think you know you could easily get it back to that 80% to 100% level. But to answer your question, if that can't happen within a reasonable timeframe, then that would cause me to rethink what the quality is of this business and what is really the demand for it. The other thing that would make me rethink this or potentially even sell it is that you can't buy, if they can't buy assets of a reasonable quality, because the M&A is going to be part of the story. So if they can't buy anything of reasonable quality at a

reasonable multiple, that would definitely put a dent in the thesis. And what are you sort of tracking for the sales and marketing sort of bump? Is it just S&M spend, or are you looking more at brink uh customer additions so it just to clarify you're asking is what am i looking at to make sure it's working yeah uh it would have to be an acceleration and growth right so you know brink has been churning out maybe five seven hundred um units a quarter um they need a they need to accelerate that. Last quarter was very positive because they posted their highest booking number in three years. So that was a very, very, very good sign. I think if they can continue to do that, if they can get those bookings towards that $2,000 a quarter, that would speak very highly,

I think, that they're able to ramp that sales and marketing effort again. So that's what I'm looking at, you know, installations, bookings, the backlog number, um, those sorts of things. Okay. And if you could, let's say par makes you, uh, gives you a hundred percent voting power for one day, you're kind of the king of par. Um, what is one change you would like to see them make? If you could, they have to add additional directors to the board. Uh, aside from sub neat i think only one other director has software experience this and it's a small board so they could they could definitely stand to add a couple of directors without you know kind of diluting that you know the small team synergy if you will so i think that's the main thing they they really have

to add additional members to the board and the board was pretty old right like i think i remember looking through it and it was a lot of maybe people that were linked to the old ceo who i think is like 80 now weren't a lot of the members of the board like older um are they older they are older i guess i i don't know if i should penalize them just because they are old but just associate associated with the uh the legacy business maybe they've been there working for the you know the government things back in the 80s and 90s yes i i do think they have ties to the to the family that founded the company um but in terms of how long they've been on the board they actually the the current members other than the founder um most of them have been on for less

than five years i think so yes in terms of age they are older um in terms of tenure on the board not not super long okay so it's not it's not just like a bunch of the old founders friends from early on these were people that were brought in recently oh i think they are i think they are friends of friends of the founder friends of the family and um they were appointed pre-savni okay um which you know it's that's how i guess how you could think of par as a company pre-sevneet post-sevneet yeah and i guess are you worried about uh i know sevneet has when i was looking at his bio he's hopped around to a few different places are you worried about him um i mean it's not like just because he's hopped around before means he's gonna leave

par soon um are you just worried about him not being tied to this business you know for a decade or so yeah of course i mean he's really talented i mean in a lot of ways this is kind of a jockey bit. I mean, he's made a lot of improvements, you know, not at kind of the sub right sub C-suite level. He's basically stripped out the entire management team for the software business. So there is a deeper bench now, I would say. But yeah, I do worry about it. And that's why I want more board members, because they need to know how to properly incentivize him, how to keep him engaged how to you know keep his eye on the ball and yeah i don't i think he is dedicated i mean he moved his entire family from new york city to upstate new york and i i know i think he has a

couple of kids and you know a wife and so he is dedicated um i don't think that's an issue um but obviously yeah i want him to stick around a long time so yeah i do worry about that yeah and it's not the other thing i was kind of looking at the optics of him joining it's not like he was in a spot where he needed a job or he needed a c-suite position he was running what was it like a software uh they were like trying to do a company yeah like a constellation well constellation software type deal and uh yeah i guess would you like to see them make sort of uh offer more stock to submit as sort of a way to tie him to the business for more stock to tie him to the business um i'm yes that would be nice uh i don't know i don't know with a guy like that who's super

smart motivated and likes to be challenged i don't know if just throwing stock at him um is going to be the best way to keep him interested and engaged but um i would like to see that yeah definitely okay well i i don't have any more questions brett do you i'm i'm good Okay. Well, David, thank you for joining. We had a blast. It was fun to talk par. We do want to remind our listeners that we are not financial advisors. Anything Brett or I, or I guess David says is not financial advice or recommendation. Thank you guys for listening. We'll see you next time. you