Description

Par is an enterprise software company that sells software to large restaurant chains. Par has a strong market position, attractive end-markets, a growing bundle of mission-critical cloud-based services, and a path to meaningfully grow gross margins, operating margins, and free cash flow through 2026. Enterprise restaurants will continue to spend more on technology in order to improve labor productivity, customer loyalty, optimize costs, and deliver better customer experiences. Today, Par’s enterprise SAAS business is masked by complex financials, and low profitability given investments in R&D and Sales and Marketing to grow the busines.

Par owns a government contracting business that is strategically and financially separate from the restaurant technology business. The company has alluded to selling this business in 2023. The net proceeds from selling the government business could be ~$200mm, which can be used to de-lever the business and/or fund acquisitions. More importantly the sale, will greatly simplify the business, creating a pure-play enterprise software business, which should attract a different investor base and make the company easier to analyze. There are many favorable possible outcomes from Par, including continued growth in an attractive end-market for many years as the industry consolidator or a sale to a larger strategic. By 2026, Par’s software business could generate $250mm in ARR, $80mm in profit and be valued at $2B, versus a value of ~$1B today (ex the government business). Longer-term, there is more upside if Par can successfully grow units and ARPU through cross-selling and M&A.

It is noteworthy that in 2021, the former CEO of Panera Ron Shaich, one of the great restaurant/retail CEOs of the last 20 years, made a sizable investment in Par through his private equity fund—Mr. Shaich had this to say:“I understand first-hand the struggles of trying to power a large enterprise by gluing together disparate technologies from multiple vendors. Those restaurant brands that can create a differentiated guest experience, aided by seamless omnichannel technology and a superior understanding of their guests’ preference and behaviors, will be best positioned to win.” In a subsequent interview: Mr. Shaich commented: “This is one of the most powerful opportunities that exist in restaurant technology.”

Par has three main products: Point-of-sale software (Brinks), loyalty software (Punchh), and back-of-house software (Data central). The POS software is the nervous center of the restaurant as every transaction and customer purchase runs through this system. Loyalty software is increasingly strategic as restaurant seek to deep their relationships with their most valuable customers. Par also has a legacy hardware business selling POS terminals. Par’s customers include Arby’s, Dairy Queen, Five Guy’s and Smooth Kings. Par has hardware or software in over 50,000 restaurants.

Like other industries, restaurants are likely to spend more on software over time as it provides a large productivity and cost benefit, especially in an inflationary environment. Among other tasks, software can help the restaurant improve order accuracy, speed, purchasing, customer loyalty and marketing. Crucially, Par’s customers are large restaurant chains---often with higher AUVs, and greater need for consistency in systems across the store. Churn is low (4%) and over time, ARPU can increase as restaurants with 1-$2mm in sales spend more on technology. $5000 in technology spend for a restaurant at $1mm is still less than 1% of revenue. Par captures a fraction of that and ARPU growth remains a large opportunity. Like other end-markets, there are benefits to selling a bundle of software to customers—rather than a patchwork of vendors, therefore disciplined M&A an accelerate market share gains and further entrench the business. Longer sales cycle, install base, and relationships all create barrier to entry.

CEO Savneet Singh has done a commendable job as CEO since assuming the role in 2018. He inherited a sub-scale, low-gross margin software business with technical debt and no defining culture. He has managed to grow ARR to $115mm, acquire a highly strategic asset in Punchh, and expand software gross margin to 73% in Q2 2022 from 53% in 2020. He also attracted shrewd strategic investors including Ron Shaich. He is a talented executive building a strong team.

Enterprise SAAS went from loved to hated, with multiples massively de-rating and a investors unwilling to underwrite future profitability. But in an inflationary environment, mission-critical, sticky productivity enhancing SAAS products can become more essential and more valuable. I believe that Par’s suite of software meets this test in an industry where labor shortage and retention and rising input costs are persistent, growing issues. Over the next few years, the sale of the government business, the simplification of the financials, and the expansion of the gross margins and operating margins should present a compelling story.  

Punchh

Punch has 62,00 sites and an increasingly advanced marketing cloud. The Punchh marketing cloud leverages AWS and the Amazon Relational Database Service (Amazon RDS). Punchh has three databases running in Amazon RDS at present. One database contains menu orders from each restaurant, to keep track of what food is ordered and when it was ordered. The second database stores data on food and drink combinations, likewise creating a record of where and when these combinations are asked for. The third database keeps a record of all push notifications to loyalty program members. Per leadership: “Amazon RDS allows us to manage the most important part of our application in the most efficient way possible. It scales automatically and has disaster recovery built in, replicating data across different AWS Availability Zones,” according to the company. Punchh also uses the Amazon Aurora service—to store receipts from point-of-sale (POS) terminals in each of the restaurants. “This database is essentially one large table with high amounts of writes because every POS is sending us data in real time,” according to management. Cloud-functionality has allowed a more flexible and nimble solution for customers and totally modernized the loyalty system. There are many benefits to a great loyalty program-but one metric that is especially powerful according to Punchh is that 73% of consumers are more willing to recommend a brand with a good loyalty program. Great loyalty programs are becoming table stakes for restaurants-Punchh, is a leader, the technology is becoming more advanced, and opportunity to expand outside of restaurants is growing (https://punchh.com/press/punchh-accelerates-expansion-into-convenience-stores-with-new-partners-innovations-and-continued-customer-success), and the cross-sell with Brink’s is an advantage. Punchh is also investing in machine learning---https://www.cspdailynews.com/technologyservices/punchh-activates-machine-learning

Brinks

As mentioned earlier, Brinks is the POS system. Brinks has an install base of ~20,000 restaurants. One of the reasons that Punchh leadership wanted to sell to Par is because the Punchh leadership realized that integration with the POS was going to be a growing strategic advantage—both in terms of how the product was sold, and eventually how it is designed.  During a MyStory interview from Feb 2022 (https://www.youtube.com/watch?v=sr1xfj1kpqI), at about minute 34 of the interview, the CEO of Punchh noted that Punchh received several offers for the company, including from one of the large delivery aggregators. The primary strategic rational to sell to Par was because point of the sale as the “most natural platform.” The primary POS competitors are legacy providers Oracle and NCR. Neither is known as an innovator in the space, both divisions are buried inside larger organizations, and Brink’s has been able to grow its market share, ARR, and brand recognition despite being much smaller company.

Valuation

I provided some a directional estimate of revenue growth, margins, and free cash flow because there are several unknowns that could change the trajectory, most likely for the better. $250mm in ARR by 2026, implies about 22% compound revenue growth in ARR, 80% gross margins, 40% SG&A, 20% tax rate--$80mm in earnings. The 25x multiple seems reasonable for what at that point is a sticky, recurring revenue vertical SAAS business with market leadership selling an essential services with a still very large market. A 20% compound return from here with what I believe is little downside given the value of the assets (paid ~$500mm for Punch—Brinks/ owned real estate/hardware assets could be worth 400-$500mm in a break-up).

I hope those estimates are conservative. Par Management has made very clear that it intends to pursue strategically accretive M&A that will make its offering stickier and more attractive. Par’s competitive position is stronger with a portfolio of 5-10 great modules----rather than four---it creates simplification and efficiency for the customer (easier to buy from one vendor---not five—and over the time—the services will be engineered to work better together). Par purchased Punchh in 2021, and just recently Menu, a mobile ordering platform based on Europe. Other acquisitions are likely to follow. The value that these deals can create will be determined by some combination of price paid, quality of the product acquired, the durability of the end market. To each point-there is reason to be optimistic.

Part of what makes Par unique in my view among software companies of this size is the combination of unit growth (add more restaurants) and ARPU growth—which is a function of cross-selling more services and pricing power. Collectively, Enterprise restaurants are still spending a very small fraction of revenue of technology—less than 5% of sales----that is probably among the lowest levels of tech spend among large enterprises (Tier 1 enterprise chains are enterprise segment). This is almost certain to be higher in five-ten years---and inflation may accelerate some this because the restaurant industry is undergoing a major technological revolution. 20 years ago, customers manly dined-in the restaurant, with the occasional carry-out order. Other than pizza and the local Chinese restaurant, delivery was rare. Drive-through was confined to fast food. Customers used landlines to make reservations and a lengthy car-ride was required to try out a new hot spot. Today, the world is different. Restaurants have become fulfillment centers; customers can dine-in, carry-out, drive-through, pick-up curbside, or get delivery from almost anywhere through third-party services such as Doordash and Uber Eats. Consumers may place orders from their mobile phone, their laptop, their Alexa, or their iPad. The seismic change in consumer behavior and expectations catalyzed by the changes in technology have created challenges for restaurants. Restaurants must now operate first-class websites, mobile apps and digital loyalty programs in order to market their brands and maintain strong customer relationships. Restaurants must process and fulfill orders from multiple channels. Restaurants must manage these tasks in an environment where it has become increasingly challenging to attract and retain workers. Par’s ambition is to provide a suite of technology solutions that simplify, automate, and scale the many operational and personnel challenges outlined above. The providers that can offer the most comprehensive suite of services will win the most market share. In success, Par can become the Salesforce of the enterprise restaurant segment. Par estimates that there may be 450,000 enterprise restaurants in the U.S. that it could eventually serve. If you assume $1mm sales per unit, and Par can get eventually get to $10,000 in ARPU by successfully executing the strategy of expanding distribution of its products suite through cross-selling into the install base adding M&A, it becomes a dominant vertical SAAS provider with 1% (and probably growing) of the software/tech spend in the end-market per customer.  At this point, that tech spend would be line-item for enterprise restaurants like rent/labor--- At 50,000-100,000 units, Par is a 500mm-$1B  vertical SAAS company----SAAS companies can generate 30% FCF margins at scale---thus, depending on Par’s size and state of maturity (which will impact S&M/R&D), Par could generate 150-$300mm of FCF on a much larger base of units with higher ARPU. Investors can choose their own multiples—but there is range of values much higher than the current market value.

Catalyst

1-sale of gov't

2-good M&A

3-acceleration enteprise restaurant spend on software