PAR Technology (PAR) Has Risen 71% in Last One Year, Outperforms Market

PAR Technology (PAR) Has Risen 71% in Last One Year, Outperforms Market

“PAR – PAR Technology is a company I have been intrigued with for a while now. When shares fell after the company announced a capital raise via a convertible debt offering in early April, I thought it was worth taking a closer look. Thinking of just the person to chat with about this one, I immediately reached out to my friend Jeff Brock, restaurant guru and founder of Hargett Hunter Capital, a restaurant-focused private equity shop here in Raleigh. I asked him about Brink, the company’s cloud-based Point of Sale (POS) offering. When Jeff told me that one of the first things he did after he acquired young concepts Bellagreen and ChopShop was to rip out their old POS systems and replace them with the Brink product, I knew we were on to something interesting.

So what is PAR? Founded in 1968 by John Sammon, PAR which stands for Pattern Analysis and Recognition, was originally focused on providing outsourced research services to corporations and particularly the U.S. government. As a result of a perhaps unfocused but opportunistic corporate history, this sleepy company is currently organized into three corporate segments.

The first segment, government contracting, is the business around which the company was originally built. It is a contracting business where PAR provides IT services and solutions to the department of defense, military, etc. This segment is a completely standalone business that has been a reliable generator of cash which the company has typically used to fund projects in other segments.

In the 1980s, PAR added its second segment: Restaurant Point-of-Sale computer systems. In this segment, PAR sells two things: a physical POS terminal that they assemble in their upstate New York warehouse and an on-premise software package called PixelPoint. In addition to McDonalds, the legacy segment customer list also includes Taco Bell, Subway, Jack-in-the-Box, Hardees and Pizza Hut.

Finally, Par’s third and most interesting business segment is Brink. This unit started in 2014 when PAR acquired Brink Software, a small entrepreneurial operation out of San Diego. The Brink offering accomplishes many of the same POS functions as the legacy hardware business, but the software component is delivered via the cloud and accordingly offers a few critical advantages. For one thing, updating software is seamless with an off-premise offering as it can be initiated from the cloud and updated onsite without any further physical software or hardware add-ons. Additionally, customers get to convert their large and lumpy and sometimes difficult to forecast hardware capex spend to small ongoing monthly payments that are highly forecastable. This business has already turned into a fantastic acquisition, with sales up 25-fold since it was acquired. But we think Brink may be just hitting its stride.

Today Brink has around 8,000 installed restaurants and an impressive customer list. This list includes new customer wins in growing concepts like Sweetgreen, Mod Pizza and Cava but also established concepts like Arby’s and Five Guys. Focusing on the U.S. market first, there are a little over 300,000 quick serve and fast casual restaurants. Brink is currently focused on the Tier 1 and Tier 2 segments, which total ~170,000 locations as their core competency and differentiation comes from not only their ability to serve these multi-location customers successfully, but also their ability to handle these large-scale integrations seamlessly. We note our research indicates Brink is the only cloud POS provider who has successfully completed a 1,000+ store rollout, of which Brink has two to its claim. Given existing relationships with customers with a total restaurant count near 35,000 restaurants today, they appear well positioned to continue to convert both existing and new customers alike to the Brink solution.

Looking out over the next year or two, we think it’s conceivable that Brink could sign up at least 20,000 restaurants. Beyond this, we see upside potential to this number from wins in the tier three category, and looking further out, international expansion. In addition to restaurant growth, we also think Brink could grow their monthly recurring revenue (MRR) per customer. Currently they earn just under ~$200/month from their cloud customers, or around $2,000 in average revenue per user (ARPU). Given the POS offering is typically regarded by restauranteurs as the brain or control center of the restaurant, we believe other add-on functions like food temperature monitoring, delivery optimization or inventory management features could be added into the Brink software package driving MRR higher. And the company is currently planning on introducing a payments solution which would be further additive to MRR.

So, the opportunity is immense. And the company appears well positioned to capitalize on it based on their well-regarded Brink offering and existing customer relationships. Importantly, we have also come to develop a favorable view of management as CEO Savneet Singh appears to be doing all the right things since becoming full time CEO in December 2018. In his short time there thus far, he has instituted an organization-wide focus on return on invested capital and has taken important steps to improve corporate communication by providing greater transparency to investors. Notably, he has the company focused squarely on the Brink offering.

Given the multiple business segments, we believe it’s best to look at PAR as a sum-of-the-parts story. The government business throws off around $8M in free cash flow per year. We think a 9x multiple on free cash flow is reasonable, implying a valuation of $72M. The restaurant business excluding the Brink software component generated ~$125M in revenue last year. Assuming a .7x multiple of revenues on this business which has an approximate two thirds to one third weighting of hardware to recurring revenues, we see value of ~$88M in this segment.

But the real promise lies with the cloud-based Brink software business. The market is currently putting a great deal of value on these types of high growth SAAS revenue streams, in some cases with exorbitant sales multiples of 15x or higher. With Brink, however, we think an elevated multiple of sales is justified due to the growth and market penetration. Looking out to the end of 2020, we see an opportunity for Brink to be in 20,000 restaurants with their software offering. Assuming MRRs of $200 to $250 and a 10x sales multiple, an elevated but seemingly prudent level for a business early in its infancy with sales growth likely continuing to double on an annual basis, we see a business with $480-$600M of value. We note we exclude any incremental lift in MRR from a payments business the company expects to launch later this year, even though we believe it’s possible this could one day become the largest revenue driver for the company in a blue sky scenario.

Adding up all the pieces and accounting for a recent convertible debt offering, we see a credible path to a valuation around $36 to $43 next year. With a cost basis in the low $20s on a position initiated shortly after the convertible offering, we look forward to seeing management execute on what looks to be a truly unique opportunity in front of them.”

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