The following segment was excerpted from this fund letter.
PAR Technology (NYSE:PAR)
PAR Technology ended 2022 with over $100M in cash on the balance sheet and no significant debt maturities until 2026. The company continues its march toward profitability, which is an important precursor to long-term survival. During the first quarter, PAR reiterated its commitment to hold expenses flat in its software business while continuing to grow revenues. By my estimates, PAR should grow annual recurring revenue (ARR) by +/- 30% for the foreseeable future. This revenue should drop to the bottom line, making the overall company profitable by the end of this year and the software business itself profitable by early next year.
PAR benefits from a low single-digit churn on their core point of sale (POS) offering, which is important for longer-term growth since the bottom of their proverbial bucket is not leaking. Their competitive landscape is also favorable: their primary competitors are legacy systems from NCR (NCR) and Oracle (ORCL), for both of which POS systems are tertiary products. While there will be increasing competition from the likes of Toast (TOST) and Square (SQ), developing and selling products for enterprise restaurants is different, and I believe PAR should be able to continue managing the landscape adeptly.
There are three future sources of growth for PAR that, when paired with the low churn of their existing customers, bode well for future growth. This quarter, PAR announced the signing of a 900-location chicken wing restaurant for their new table service product. Moving into table service restaurants greatly expands their market, and these installations will start rolling out this year. A second leg of growth will come from an online ordering offering from MENU, a company they acquired in 2022. The third leg of growth will be the continued rollout of PAR’s payments product across its installed base. Interestingly, PAR has begun talking about an opportunity with the largest fast-food chains, which historically have built and maintained POS systems in-house. As the need to integrate with multiple delivery services, maintain online ordering, support a robust loyalty program, and feed data into analytics platforms has intensified, the cost/benefit of developing in-house is not as clear cut even for the large players. PAR currently has approximately 20,000 POS locations. There are 12,000+ Burger Kings. Winning a Burger King-size customer would be material and those types of opportunities may very well start to materialize. There are several paths to sustained growth and profitability.
When CEO Savneet Singh took over at PAR, the company had a single POS product with angry customers who were locked in. There has been a multi-year effort to stabilize the core product, make acquisitions, and now develop new products. PAR is committed to making all the disparate technologies required to run a restaurant work together seamlessly under the umbrella of Unified Commerce. They are designing their products such that they work on a standalone basis but are even more valuable to the end-user when used in conjunction with other PAR products, taking advantage of shared data and expanded functionality. For example, PAR’s payment offering is better when paired with POS as it greatly simplifies troubleshooting and reduces costs. Payments also improve the loyalty product as it feeds additional data into the platform. The goal when using PAR products together is for this improved functionality to reduce churn and increase cross-selling. Each step in the product evolution, from stabilization to Unified Commerce, is a step towards greater resiliency and durability of the overall company.
To summarize, PAR has multiple sources of growth with its existing business. The new table service offering, MENU acquisition, burgeoning payments offering, and potential migration of the largest operators to third-party software are just a few of the opportunities ahead. We can argue about the timing of adoption, magnitude of the opportunity, and appropriate multiple, but in my mind, this is a business that has been in the gym training for the last four years and has now begun to quietly kick ass.
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