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PAR Technology Corporation (NYSE:PAR), like many businesses, has had to endure a couple of painful years, as it has dropped from $90.00 per share on March 1, 2021, to a 52-week low of $20.96 on November 7, 2022.
After its earnings report on November 9, 2022, the market apparently liked what it heard, and bid up the price of the stock $27.72 before it pulled to a little under $26.00 per share as I write.
The basic premise of the earnings report is PAR is not going to increase R&D or sales and marketing spend in 2023, instead, allocating capital resources to the introduction and launch of new products.
What the company hopes to accomplish with its new strategy is to drop the expected increase in gross profits directly to the bottom line.
In this article we’ll look at some of numbers in its earnings report, how segments performed in the quarter, and more details concerning the implications of its primary focus over the next year or so.
Recent numbers
PAR Technology Corporation (PAR) Q3 2022 Earnings Call Transcript:
The third quarter produced mixed results for PAR, with revenue jumping to $92.8 million, up 19.1 percent year-over-year from the $78 million in revenue generated in the third quarter of 2021, beating by $9.79 million. The increase in revenue came mostly from government and restaurant retail segments.
Net loss in the quarter was $21.3 million or $0.79 per share, an improvement over the net loss of $31.9 million or $1.23 loss per share in the third quarter of 2021. Adjusted net loss in the quarter was $11.9 million or $0.44 per share, missing by $0.03. Last year in the same reporting period adjusted net loss was $9.3 million or $0.36 per share.
SG&A in the reporting period was $26.5 million, down $4.9 million from the $21.7 million spent last year in the third quarter. Net R&D spend was $12.8 million, up $2.7 million from the $10.1 million spent on R&D year-over-year.
SG&A and R&D are of particular importance for investors to consider because of the company saying spend there has peaked and shouldn’t increase in 2023 when measured against the exit rate of 2022, as the company reallocates capital to product launches.
The value of that strategy if it is effectively executed is every new dollar in gross profit should flow to the bottom line going forward. Management said the results of that should be readily apparent in the results of the fourth quarter.
If the company is correct in its strategy, it could be a nice tailwind to its performance, depending on the level of improvement, assuming it plays out that way.
One key thing to watch there is the impact some of its new products have on both the top and bottom lines. After all, it takes more sales in order to boost gross profit beyond its past performance.
As for cash and cash equivalents, the PAR had $90 million at the end of the quarter, and long-term debt of $389 million. Contract backlog at the end of the third quarter was $345 million, an historic high from PAR, up 80 percent compared to the $192 million in backlog at the end of the third quarter of 2021. Of that, total funding backlog was $95 million, up 150 percent from the $38 million backlog it has last year in the same quarter.
If PAR can increase sales in its higher margin product and services it sells to the government, it could result in wider margins than historically expected. It did so in the third quarter with government contract margins at 10.4 percent.
The company’s new focus and strategy
The question may have arisen when mentioning capping R&D and SG&A revenue in 2023, when the company is preparing to release new products during that time. What happens if it requires more service to meet the growing sales?
Based upon reading its earnings report, it appears the company bolstered some of its R&D by adding new employees in India in particular, in anticipation of implementing its strategy for 2023. In other words, the spend is already baked into presumed growth in sales.
So, while the company may have endured some short-term downward pressure on its bottom line, with its focus on introducing new products that are already in its pipeline, it can extract that value over the next year or so without additional spend.
Much of this was done to deal with what is probably going to be a tough economic year for businesses. Essentially, the company spent before the hard times hit, and now should reap the benefits of that on its top and bottom lines going forward.
The unknown factor here is whether or not it’ll retain much of its existing business while it introduces its new products and services. What has yet to be determined is whether or not there will be an increase in attrition in some of the segments it competes in, which could offset the expected increase in revenue and earnings from the new products.
Even if that’s how it was to play out in the worst-case scenario, the company would still do better than it would have if it hadn’t taken these steps.
Conclusion
I like the new strategy and thoughtful timing in when to implement it. It’s easy to see how it has a lot of potential to significantly improve the performance of PAR over the next year, and probably longer if the company can execute well.
If it can, my thought is it would probably prepare it to increase spend in 2024, based upon the level of success it has in 2023. By that time there’ll further clarity on how its new products and services do, and it can respond by allocating capital to the best performers to get the best results.
The obvious elephant in the room is the recession and how deep and long it’ll be, and how that will have an impact on spending decisions of the companies and government entities it does business with.
With the government spending billions on new projects, PAR is likely to have more of its contract backlog funded and combined with expected growth in some of its private business, it could surprise a lot of investors to the upside.
There’s no guarantee the company can successfully execute its new strategy, but I do see clearly how if it does, it’ll be a strong tailwind, assuming it can maintain most of its existing business as it releases its new product pipeline in the near future.
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