PAR - Greenhaven Road Capital - PAR Technology: Three Optimistic Developments

Summary

• Our largest holding is PAR Technology, which provides technology to quick service restaurants or QSRs.
• QSRs typically do quite well in a recession as consumers “trade down” to less expensive offerings.
• PAR's improving financial profile is a source of optimism.
• I believe PAR will inflect to profitability next year even with some recessionary headwinds.

The following segment was excerpted from this fund letter .

PAR Technology ( PAR )

Our largest holding is PAR Technology ( PAR ), which provides technology to quick service restaurants (QSRs). QSRs typically do quite well in a recession as consumers “trade down” to less expensive offerings.

At a June conference held by small and micro cap broker Sidoti, CEO Savneet Singh referenced the underlying strength of their customer base when he said that their restaurant customers had just had their best week ever as measured by revenue recorded on the POS system. Restaurant owners are forced buyers of their POS system, and PAR’s core POS business is stable and well-positioned even during a recession. Not immune, but well-positioned.

There are three other developments at PAR that provide sources of optimism, despite what the declining share price and compressing multiple might otherwise indicate. The first is the success of their payments business, which launched less than a year ago. In approximate numbers, locations that adopt the solution increase PAR’s revenue per location by 70% and nearly double PAR’s gross profit.

At that same Sidoti conference, the CEO indicated that, if not for current supply chain obstacles tied to procuring third-party certified hardware (card scanners), the payments business would be doing $10M in revenue this year and growing. He said, “historically, I have been really conservative on this business but I have really turned to saying this is going way better than expected…. Way more pickup… if not for limitations on supply chain we would be jumping up and down as this would be blowing out projections.” If a payments customer wants to accept credit cards, PAR is contractually guaranteed to get paid with every single swipe or tap.

The second source of our optimism at PAR is the evolution of their products into a “Unified Commerce Platform.” What started as a standalone POS system has been enhanced by the addition of software to manage loyalty programs for QSR restaurants (Punchh), software to manage the “back office” such as inventory and labor (Data Central), and payments. Punchh and Data Central were acquired. As the Unified Commerce Platform continues to roll out, each of the modules offers a better value proposition when used in conjunction with the others.

As a simple example, the loyalty program becomes a more robust offering when tied into the POS and payments – there are fewer data integrity issues, and a clearer customer profile emerges. Over time, this should result in opportunities to cross-sell into the existing customer base as well as higher attachment rates of additional modules for new POS customers. As PAR’s products are getting better and stronger, their differentiation from the large legacy enterprise POS systems (Micros and Aloha) is getting bigger: the moat is growing.

The company’s improving financial profile is our third source of optimism about PAR. Gross margins on POS software have risen from the 40% percent range to above 70%, and I believe should continue to rise with better structured contracts and price increases. The aforementioned payments business has even higher margins. This is coupled with overall software revenues growing 30%+ and corporate expenses being held nearly flat. If we back out the legacy defense business (which they have indicated will be sold) and hardware business, we are paying a mid-single-digit multiple for this year’s ending contracted recurring revenue.

While some investors have been concerned about PAR’s cash flows and path to profitability, this is a company with over $150M in cash on the balance sheet, and I believe it will inflect to profitability next year even with some recessionary headwinds. Yes, the multiple has compressed. In my opinion, the share price decline in the first half of the year is not at all reflective of PAR’s progress or future prospects. Clearly, the shares can trade lower, but, over time, I believe they will trade significantly higher. Without any multiple re-expansion, we still see a clear path to compounding at 30%+ from here, and with any multiple expansion, our models start to look almost silly.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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