PAR technology (NYSE: BY) serves in the software and hardware solutions business for restaurants, while maintaining a somewhat independent government segment, providing technology solutions to defense and intelligence institutions. Integrating more recurring revenue into its overall sales mix, PAR shows strong growth prospects, mainly in the catering segment. In this analysis, the sales growth record and outlook are explored along with the key factors contributing to the expected expansion. In addition, a business breakdown, along with a valuation, stock price history, and financial health information are also offered.
PAR Technology Corporation, operates in two separate reporting segments, Restaurant/Retail and Government.
On the restaurant side, the company is a leading provider of software, hardware and services to the restaurant and retail industries, with more than 500 customers, across more than 50,000 active locations . The company seeks to develop solutions to help restaurant brands build lasting relationships with their customers. While many restaurants tend to use many different apps that perform different functions, PAR offers a cloud-based platform that offers a fully integrated suite to serve as a complete point-of-sale (POS) system. The platform offers 4 key features: increased customer engagement, end-to-end ordering and execution, optimized planning and operations, and sophisticated analytics and insights. The company’s popular Brink POS system can integrate with many partners in various product solutions, including Punchh, PAR’s cloud-based customer loyalty and engagement solution, and Data Central, a back-office solution. cloud provided by the company. PAR also offers point-of-sale hardware that syncs with its software solutions.
The Government segment of PAR provides technical expertise and the development of advanced systems and software solutions for the Department of Defense, intelligence organizations and other federal agencies. In addition, the company provides support services for satellite command and control functions at various DoD facilities around the world. Even though the company recently won a major contract in the government segment, growth in the long-term segment has been slow as the company focuses primarily on its restaurant business, which is also the focus of this analysis. The possibility of selling the government segment has also been on the table for some time, to help provide investors with a clear view of the company’s future as a software provider for the restaurant industry.
Fourth quarter results and recent developments
On March 1, 2022, the company announced its results for the fourth quarter and full fiscal year 2021. Revenue reached $81.6 million for the fourth quarter of 2021, an increase of 39.4% or $23.1M compared to $58.5M for the same period in 2020. PAR exceeded analysts’ estimates that were looking for $76M in revenue. For the full year, revenue was reported at $282.9 million, an increase of 32.3% or $69.1 million from $213.8 million for the same period in 2020. Brink POS annual recurring revenue at the end of Q4 2021 was $32.1 million. Net loss for the fourth quarter of 2021 was $25.6 million, or $0.95 per share, compared to a net loss of $13.0 million, or $0.60 per share, reported for the same period in 2020.
Just a few days ago, on March 25, 2022, PAR Technology announced the acquisition of Techknow, offering a multi-sensor drive-thru timer, to expand its drive-thru solutions into the technology space of Restoration. The multi-sensor synchronization solution will be offered to customers in conjunction with existing Brink in-dash and point-of-sale communication products. As a complete end-to-end solution, it will allow the company, through strategic pricing, to capture its potential for sales growth.
Recent stock price history
Throughout its 10-year trading history, PAR has come a long way, debuting in 2012 at a stock price of around $5. However, after an impressive post-Covid-19 rally, with the stock hitting $88, PAR saw a spike in volatility. After the first half of 2021, the stock got caught up in the broader market downturn, especially when tech stocks were factored in. Over the past six months, the stock has been in a bear market as its price has been halved. PAR is currently trading at $43 and a market cap of $1.08B, with no dividends paid.
Record growth and outlook
Although they are not significantly benefiting from the effects of the Covid-19 pandemic like other major software providers, recent growth numbers have been strong. Sales are accelerating, growing at a rate of 32% YoY, compared to a 3-year CAGR of 12%, implying that the company is now entering its primary growth phase. For the next few years, analysts predict revenue growth of 14% CAGR, with sales reaching $365 by the end of 2023.
In 2021, Brink POS had an installed base of 15,897 restaurants, compared to 11,722 restaurants as of December 31, 2020 (35% increase). A growing customer base will lead to faster growth, as the company allows customers to pay based on their order volume, instead of a lump sum payment when installing the system. While this allows for the creation of a steady stream of Annual Recurring Revenue (ARR), essential for margin expansion, it also delays the realization of sales growth. PAR’s impressive ARR growth record (85% CAGR between 2018 and 2021) is illustrated in the chart below, provided in the company’s latest investor presentation.
PAR’s subscription revenue is growing steadily, accounting for 30% of total restaurant/retail revenue in 2021, up from just 18% in 2018. As a result, margins are also growing, with the company reporting a adjusted gross margin of 70% on subscriptions in the fourth quarter of 2021 2021, compared to 44% in 2018. Subscription margins are on track to improve the overall profitability of the company, with recurring revenue taking an increasingly more important in the overall composition of the company’s income. ARR for the Brink POS system and the Punchh system increased by 30% and 47% respectively, compared to the fourth quarter of 2020.
PAR seeks to further penetrate a large Total Addressable Market (TAM), consisting of more than one million restaurants, in the United States alone, devoting 2-3% of their revenue to technology. According to the national restaurant association, industry revenue is expected to reach $900 billion in 2022, returning to pre-pandemic levels. A technology spend of 3% of total revenue would establish a MTR of approximately $27 billion. Considering the company is expected to generate $320 million in sales in 2022, it’s obvious there’s still plenty of room for expansion. According to additional research by Mordor Intelligence, the US restaurant market is expected to register a CAGR of 3.7% between 2016 and 2017, showing moderate growth prospects.
The company carries a long-term balance of $300 million which is not negligible given the size of the company and the lack of profitability. That said, PAR also maintains a large cash stash of around $190 million. Short term liquidity should not be an issue as the company is showing current and fast ratios of 4.7 and 3.9. Shareholder dilution, on the other hand, is of some concern, especially if profitability challenges persist, as PAR technology increased its number of shares from 15 million in 2015 to 25 million at the last fill.
Being still at an early stage of growth, it is difficult to assess PAR using traditional growth measures. That said, in the absence of profitability, the price-to-sales ratio is a good indicator of where the company is trading relative to historical levels and industry averages. Currently, PAR is trading at a forward turnover of 3.4x, a multiple that seems reasonable, especially for a software company. Although PAR has not benefited from the growth, gross margin generosity and awareness of other high-flying post-Covid-19 names (having suffered substantial losses recently), the company continues to build its platform and is in the process of acquiring more government contracts, as management argues that accelerated growth is ahead.
After all, PAR technology offers an attractive proposition, despite some flaws like a stagnant government segment, the business is likely to grow, and a lack of overall profitability. The lack of near-term earnings would need to be offset by the company outpacing revenue growth estimates, in order to spark any significant upward movement in stocks. Margin expansion should, in the long run, lead to profitability, increasing the company’s appeal to more conservative, value-oriented investors who still maintain reserves.