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The following segment was excerpted from this fund letter.
PAR Technology (NYSE:PAR)
PAR provides technology to quick serve restaurants (QSRs) such as Dairy Queen. Unlike the “mom and pop” restaurant on the corner, QSR customer volumes are very stable, and this type of restaurant generally benefits as consumers “trade down” in a recession. PAR’s core point of sale system (Brink) has a 4% churn rate, meaning that 96% of customers renew every year. It also has a backlog of contracted revenue equal to more than 15% of current recurring revenue, which provides an additional cushion to an already very stable revenue base.
On the product front, PAR is introducing a payments product that has an 80% attach rate amongst new customers. The plan is to roll this out to a significant portion of their base as customers’ contracts with existing payment processing providers roll off. PAR has also indicated that they will be rolling out multiple new products next year and recently acquired an online ordering company, MENU, which is also rolling out to a pipeline of enterprise customers in 2023.
PAR’s product development strategy is to make each of their modules even more valuable when used in conjunction with other PAR products in order to facilitate cross-selling and take advantage of the large customer base. The net effect is that the product line-up is getting better and better and the base to cross-sell into is getting larger and larger. This product cycle provides significant opportunities, which are layered on top of PAR’s stable customer base and a contracted backlog.
In any economic scenario where restaurants remain open, I believe it is highly likely that revenues grow in 2023. Might the growth rate be lower than the 30%+ the company is projecting currently? Yes, but there is a lot of momentum and opportunity, and, in my mind, it is a question of not if there is growth, but how much. They should exit a recession stronger; the question is, how much stronger?
PAR benefits from secular tailwinds more modestly than some of our other holdings do, but their end customers (QSRs) are eager to find ways to reduce labor costs and consolidate technology vendors, simplifying their overall operations and getting a clearer and more accurate picture of their business. Using PAR’s products – and especially using them in combination – can provide a clear path to improving and simplifying operations, therefore yielding a very high ROI for restaurant chains that choose to adopt them.
PAR is projected to reach profitability by the end of next year. Under existing management, they have grown software revenue more than 8X (acquisitions included) while growing employees 2X.
I believe the company should be able to grow revenue far faster than overhead and new product development, leading to profitability, and can likely end 2023 as a Rule of 40 company, which typically would be afforded a higher multiple. (In such a company, growth rate + profit margin > 40%.) PAR has also dramatically improved gross margins on their software products as they have invested in their legacy products, adding 3,000 basis points of gross margin over the last four years.
The runway is long, the customer base is sticky, and the trajectory to profitability is clear. If the growth is as durable as I believe it to be, the recent multiple compression will matter less and less over time as the power of compounding works.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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