Chit Chat Stocks - PAR Technology (PAR) | Fundamental Analysis

Episode Date: November 1, 2020

Your hosts, Ryan and Brett, evaluate PAR Technology Corporation. PAR is a 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. Listen in as Ryan describes the business (1:42) and Brett covers the current valuation (5:15). Remember, as always, enjoy the episode! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Watch this episode on YouTube: https://youtu.be/Ye5r0o2WfHw Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett. https://www.chitchatmoney.com --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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Restrictions apply. Welcome to Chit Chat Money. On this show, hosts 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. first month for only seven dollars and it's a great service it is well worth the value there that's uh that's quite the sales pitch maybe we're gonna have to switch alternate on and off to see who gives the best pitch who gives the best pitch we'll have to judge each other we have partnered with them so if you're interested in signing up use our code because you get money off and if you're and if you're confused just message us and we will get that all figured out for you yeah and par technologies now though we gotta talk par um so i got a call today from a guy named david polanski and he works for an investment manager out in boston they're one of the top 20 shareholders

roughly for par technologies so he kind of broke down the business for me and it was really fascinating to hear him say it so i'm going to reiterate it to you guys par technologies is recognized as one of the largest suppliers if not the largest supplier of point of sale systems to the global quick service restaurant business so i think like fast food essentially and they have three divisions in their business they have their hardware point of sale solution which has been around for a long time then they have a government contracting business which seems weird it's like this thing that doesn't really grow and it's a lot of classified information so they can't disclose it but i'm it i'm pretty sure it's just this random contracting job that they have taken

from the government okay and they generate like eight million in free cash flow from it and invest it into the rest of their business apparently that's nice but the third part of their business is brink which is their cloud-based point of sale software they made the acquisition of brink in 2014 the point of sale system for a restaurant is basically the focal point of the business so it's sort of the hub that makes the whole restaurant run and so brink is basically running all the software behind the hardware and it's really powering the restaurant they have a bunch of different services so uh online ordering royalty programs future date ordering surveys menu customization kitchen video systems like basically anything you need in order to run a

restaurant software wise they offer it um so that's sort of that's a lot of the bull that's sort of the crux of the bull thesis four par technologies um history starting with their first product back in 1978 par technologies has been running restaurant point of sale systems for over 40 years they were they were the first one mcdonald's used way back in the day and you can go onto their website and look up their first point of sale system and it looks so ancient yeah it looks like a typewriter yeah it's weird but um yeah they've been around for a long long time so they sort of have some credibility in the industry some of the most notable restaurants that use par hardware include mcdonald's subway taco bell a bunch of those and then par also has 13

customers sorry brink which is a part of par has 13 customers with more than 200 units so that's sort of like the bigger businesses if you will and that's those include uh arby's carl's jr mod pizza there's sweet green sweet green there's a bunch of other ones um par went public in january of 2011 the founder is john w salmon um he founded the company and he's still on the board of directors but he's 80 years old so he's not the chairman he retired that role he's not the ceo he passed that off to his daughter um and yeah he's old but he's still on the board still gets paid he owns 11 and a half percent of the company still so old man's getting paid i guess yeah um But his daughter was CEO I think until 2016, 2017, and she did make the Brink acquisition, which ended up being a great acquisition.

So that was sort of her notable role. That was her achievement. And they've always been sort of a family-run business until 2018 when they hired the now CEO, Savneet Singh. I'm not sure where he came from. I think he had founded his own tech company, but he's only like 38 years old and he's running the company now. That seems so. Yeah, red flag always with the nepotism there.

It works both ways. It's not necessarily a bad thing, but it can be constricting when you're trying to move into a new direction with the business valuation. I'll get into that. Enterprise value is under a billion dollars at $846 million, depending on what day it's trading at. I know there's a lot of market volatility right now,

so that might change a lot. The ticker is PAR, and the price from when I looked it up is $36.88, so it's around there. EV to sales is about 4.34 PE of 43.6, although with the COVID year and their big investments into Brink, which is their software as a service offering for restaurants, they're losing a little bit of money up front to make those investments, so they're in a little bit of a transitional period. Margin adjusted EV to sales is $165, and that is because the gross margins are very low and their revenue growth currently is not very strong. And we think, or at least most investors probably think, that revenue growth will not be as slow as it is during the COVID pandemic because, well, restaurants are hit pretty hard with

that, and it's kind of a tough business to be in right now. They have no dividend yield and shares outstanding have been very steady over the past decade, and they have about $90 million in working capital and $100 million in long-term debt. So not a fantastic balance sheet, but no big red flags on the balance sheet whatsoever. I'll get into the earnings then. $198.7 million in trailing 12-month revenue. That was up 9% year over year. They had 21% gross margins versus 19% the year prior. And so, yeah, that is low gross margins and that's leading to part of one of the basically deficiencies of our own in-house metric. But remember, gross margins are not stuck. They can move. As the business changes, the margin profile can change as well.

And so I think that's a little bit of what we're seeing here because Brink is more software based as opposed to their traditional hardware nature. And I think the government contracting job is really low margin as well. But anyways, they had negative 15 million in levered free cash flow for the last 12 months, $31 million in net losses. They had $58.8 million in cash and cash equivalents, but they just did an equity offering. So they raised a bunch of cash. I think it was upwards of $100 million in cash. Don't quote me on that though. And then they had 10,280 active sites that use Brink as of the second quarter. They had 465 new store activations for Brink and their uh, annual recurring revenue for Brink grew 30% year over year, uh, to around 21 million.

So it's been that, and that was one of the performance metrics on the proxy statement. So the CEOs get paid based on annual recurring revenue for Brink, which is strong. I think that's a good, yeah, because that's part of the business that they're trying to grow. And so I think they met sort of their target range. Um, um, so they, they'll get paid for that, but, uh, yeah, it's good to see them hitting their metrics for that yeah and then the store activations is a very important number for brink because they've shown historically that they can grow their average revenue per user which is arpu uh quite significantly once they land that customer to use the brink service just because it has a lot more value and it's a lot more integrated instead

of just the hardware for the point of sale all right welcome back next up is digging trenches what do you think zero to three on their moat here so if i were looking at this before like really digging in i would have said much lower because it feels like just you hear a point of sales system and it feels like a commodity product now but there is a lot of credibility being that they provide the point of sale systems for all the big quick service restaurants so mcdonald's subway when it's like the chicken and the egg thing so if you're a new startup and you're like all right i think we can deploy this point of sale system to a company with 500 locations they're going to say have you done it before they're like no but i think we can do it well

they don't want to be the first one so they sort of have the validation of prior customers and so that gives them a little bit more of a moat but still it's not something huge because it is an area that's constantly being disrupted so i'd say maybe one and a half yeah i'd say i'd go like two, but it's not definitely not super insurance because they're a lot smaller and they're competing against at least maybe even just adjacently. There's a lot of general point of sale solutions out there that are quite a bit larger, but with that focus they have, it could be an advantage. All right. Future growth opportunities. What do you have? Yeah. So they just recently rolled out their payments processing solution with Brink. So

So Brink, prior to this, was basically just those software services that are required to run a restaurant, and you would subscribe to those. Now they are rolling out their payments processing part, and they just did it recently this year. And so basically they can facilitate the customer payments, and I think they basically get around 30 to 40 basis points on that. They charge a higher take rate, but obviously a lot of it goes to the card provider and the processing banks and all that stuff. But I just think if I'm a restaurant and I'm paying someone the same take rate, I would rather have it – if I already had Brink, I'd probably like to have it all on one bill just because, I don't know, you don't want to be scrounging around for papers to find where that bill went and all that stuff. But if there's like a high switching cost, I don't know, then it might be a little tough for them to sell that payments processing solution. Yeah, it seems strange that they're just coming out with this. I would have thought that they would have done it 10 years ago.

That's a little bit of a concern to me that they're behind the ball on that because everyone knows there's Square, Shopify, Stripe, PayPal. They've all been dominating this type of market, although sometimes that's just not directly competing with Par. But they should have probably been able to see that. it's a little bit of a concern but it's good i guess eventually that they're rolling it out now they may have a little bit more friction to get you know people to switch and it should drive higher arpu or average revenue per restaurant um for par yeah definitely all right mine is the zuppler integration with brink uh this is an online and on-premise ordering solution so some of the things that they do mobile menu syncing and endpoint um endpoint to endpoint excuse me

order monitoring that's a tough thing to say uh so this isn't a huge thing but i wanted to highlight that as brink has the ecosystem as they call it of apps so the apps can work with brink i'm assuming brink just gets a small cut of what zeppeler is doing just like a standard app store procedure but the thing is what par has is thousands of thousands of restaurants they can add this to so they're in that little store that the restaurants want and they don't have to create all this technology in-house, all the developers and the teams that make these smaller businesses, yeah, Parc can maybe acquire some of them, but it's nice that they can all have these options if you're on the Brink platform. It makes the value proposition just incrementally higher.

Yeah. And to touch on basically what you're saying there, they essentially have this economy of scale, which kind of plays into the digging trenches part. They are so well built out among franchises all across the world that they sort of have the infrastructure laid and that takes a lot of time to do so that kind of leads to an advantage uh highlights and lowlights what do you have okay so qsr which is the quick serve restaurants at fast casual are the types of restaurants doing fine during this pandemic so you know mainly because they have par um par technologies and they were able to you know go to online ordering really quickly um they're able to do drive through very quickly it's all integrated everything is you know in the cloud which people

like so end of july only six percent of brink customers were closed they have a backlog of 1500 stores that need to get integrated with either brink or par i believe it is brink which is you know quite high that's at least a few quarters of backlog there low lights for me though they've been slow to bring out products like i just mentioned it feels like they're a bit behind the curve between Square, Stripe, and Shopify, who are giant, very successful competitors. I know that they're not directly competing with these guys, at least most of the time, and that may be an advantage, but it is concerning that their competition has such a history of, one, staying ahead of the curve, being right, and growing rather quickly, eating up all

this market share. Yeah, and I think that might have, or traditionally, it seems like they have been slower to innovate. And I think that might have come down to them being a family business and they have rolled out the payments processing a year after the new CEO took over. So I think that might help as well. Highlights for me though, they were really built for the enterprise. I like that. It's sort of, I guess it's a niche in the point of sale system universe, but I don't know. I don't like the companies. It felt like Lightspeed, it was very broad and it didn't have much of a moat or it wasn't defensible at all i think par technologies does have some sort of defensibility there they have very stable revenue churn is churn is really low under under five

percent yeah and i with if you're including restaurants that go under i if you sorry if you exclude restaurants that go out of business that churns even lower yeah they well they had a yeah they had a covet bump so they adjusted it a bit which i think it makes sense for the last two quarters, but historically it's been under 5%. Yeah. It doesn't seem like a lot of franchises are actually switching systems. And then my lowlights, this really is, you get a pick, okay, you're an investor, you get a thousand pitches, you don't have to swing in any of them. This is still an outside or an outbound sales company. So they go to conferences, they have to make sales pitches to reps from headquarters of franchises, and they have to

switch the entire system, which is kind of costly. And then they also have customer support, which is good, but at the same time, it is costly as well. And so there's just, you're not getting this high demand inbound sales. It's all costly. Employ a sales team, go out, get some long lifetime value customer, but make it really costly in the process. So I mean, the strategy in general of the business isn't something i'm usually drawn to well there's a yeah there's a give and take there um but i do agree that there is a lot of friction to get people on board it reminds me of black line that we just talked about yeah where they're going off of the niche of a large market with entrenched um businesses in there or you know larger competitors but

they're going to be able to you know since they're focused they're going to be able to hopefully, you know, have a better product for these specific customers. It lowers your TAM, which really isn't something that people should get too hung up on. But then on the other side, the revenue growth is not going to be able to accelerate quickly just because some product goes viral or, you know, there's just more demand. It's going to be slow. But hopefully, if you're an investor in part, you think it is sustainable growth. Right. Are you more or less interested today? Definitely more interested. I think over the last month, this may be the company

when you look at the valuation um 4.3 times sales it's probably lower now since the market has had a tough week although we're recording on wednesday so thursday and friday could have been up days it's probably a little lower than that and it seems reasonable for something like this and if you think that the gross margins can expand upwards of 30 plus right now their brink is at about 26 gross margins so maybe you know at scale it could be a lot higher um i like it a lot i think there's a lot of defense here and it's definitely a company i'm going to research and more like yeah i do like the business as well my only concern would be the business model leverage or the operating leverage how i mean the cost scale with the business it's not like

you're some of them some of them some of them but right it's a it's a costly sales process and you have a lot of customer support that doesn't mean it can't be profitable and that doesn't mean it can't return the stock can't return greater than market returns because it is pretty cheap especially when you compare it to some of the other point of sales companies like especially light speed yeah like it's much better than light speed and it's out of trading at basically a discount to that valuation yeah it's it's very intriguing just you know there's some there are some little negatives to the business yeah so that churn number with that is important and it's probably something people need to look out for if that's changing, getting better or getting worse.

Or just pay attention to the big customers because restaurants will default. Restaurants will go out of business. But if you see them actually losing franchises, that's a bigger red flag. Yeah, exactly. All right. That's going to do it for this episode. As always, this is another thing we have at the end now. Use our CCM promo code for 7investing and get $10 off your first month. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Give us suggestions for any show on Twitter at Chit Chat Money. Just DM us or email us at chitchatmoneypodcast.gmail.com if you are not on Twitter. Thank you all for listening. We'll see you on our next episode.

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