Par Technology Corp Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the PAR Technology 2020 Fourth Quarter and Year-End Financial Results Review Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today’s conference call is being recorded. I would now like to turn the conference to your host, Mr. Chris Byrnes, Vice President of Business Development. Sir, you may begin.

Thank you, everyone, and good afternoon to everyone. I'd also like to welcome you today to the call for PAR's 2020 fourth quarter and year-end financial results review. The complete disclosure of our results can be found in our press release issued this afternoon, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please visit the Investor Relations and News section of our website. I also want to ensure that all participants today have access to our earnings presentation and business review slide deck that we'll use later in the call to better communicate the momentum in our software business. Participants on the call should be aware that we're recording the call this afternoon and it will be available for playback. Also, we are broadcasting the conference call via the worldwide web. If you ask a question, it will be included in both our live conference and any future use of the recording. I’d also like to remind participants that this conference call includes forward-looking statements reflecting management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. Joining me on the call today is PAR's CEO and President, Savneet Singh; and Bryan Menar, PAR's Chief Financial Officer. I'd now like to turn the call over to Savneet for the formal remarks portion of the call, which will be followed by general Q&A. Savneet?

Thank you, Chris, and good afternoon to everyone on the call today. I hope you and your families are well and healthy during these challenging times. As I communicated to you last quarter, 2020 presented incredible challenges for our company and the global economy, and we send our thoughts to all those impacted by the global pandemic. Looking back on 2020, I feel humbled at how hard our team worked to not only deliver our plan but to serve our customers. Our focus on long-term returns, customer obsession, and product development helped us end the year on a high note. We ended 2020 with the best bookings quarter in the company's history, continuing strong momentum from Q3. We enter the year with the largest backlog in our history, which should set the foundation for a very strong 2021. This rapid growth has encouraged us to continue to invest heavily into our product, and for the first time in my tenure, make investments in sales and marketing. While the year presented a myriad of challenges, we view many of these as creating opportunities that PAR is well-positioned to take advantage of. Our financial position is stronger than it was a year ago with more than $180 million in cash on our balance sheet at year-end. As many of you know, capital allocation is a discipline at PAR owned by all. During the crisis, we radically changed our spending and decided to focus almost all of our investment into our software product growth. This drove our results later in the year. Despite the early struggles of the pandemic and the almost full shutdown of our business for seven weeks, our continued investment into R&D and software, our reported EBITDA came in at around a loss of $13 million. This is a remarkable feat when you realize that 2020 represented the most difficult operating period for the restaurant industry in history. Our client base is large and diverse, with thousands of restaurants around the globe using PAR products and services. That customer base represents our greatest asset for both future sales opportunities and the dependable revenue stream that currently produces. Restaurants are living through a dramatic change in their operating and business models. Technology will be at the center of that change. We are building at PAR the platform to lean into this change. There's no question that the volume of software purchased by restaurants will grow tremendously over the next decade. In Q4, we reported revenues of $58.5 million, an increase of 10.6% compared to Q4 2019. We saw revenue growth across all of our segments. Today, we also reported a GAAP net loss of $13 million or $0.60 per share, compared to a GAAP net loss of $5.8 million or $0.35 per share in the same period in 2019. On an adjusted basis, the non-GAAP net loss for the fourth quarter of 2020 was $8 million or $0.37 per share, compared to a GAAP net loss of $3.8 million or $0.23 per share in the same period in 2019. Now, moving to our business performance, if you jump to Slide 3 of the presentation, you’ll see a snapshot of Brink’s performance in Q4. I'm very pleased to report that we had a record 1,525 new store bookings in the quarter, a 67% improvement from Q4 in 2019 and a 29% increase from sequential Q3. I think this metric more than any other truly demonstrates the momentum and velocity of our cloud point of sale software offering. Q4 Brink Bookings were the highest number of signed orders in a quarter in our history and highlight the dramatic demand for the Brink product. As the slide shows, we reported ARR of $24.7 million, a 29% increase from the same quarter last year. As the pandemic continues to slow down, we expect to see an acceleration in our activations as stores begin to open and normalize to our traditional activation pace. Said differently, as stores open our ARR should accelerate alongside our bookings. If you advance to Slide 4, you can see that we now have 11,722 active stores and our reported backlog at the end of Q4 was 2,546 stores yet to be installed entering 2021, with over 2,500 stores in signed backlog to set the foundation for a very strong year. Again, as our customers begin to open, we’ll see an acceleration in activations that should help bring this backlog down. We installed 885 new Brink stores in Q4, a 42% increase from Q4 2019, which is a remarkable accomplishment during the pandemic. We’ll continue to work with our customers regarding implementation schedules, along with the enhanced in-store safety protocols to ensure our book-to-bill sequence is as seamless as possible. I’m proud of our consistently annualized low churn rate of 5% in Q4, which is our fifth consecutive quarter at or below 5% and is a testament to the stickiness of our software offerings and the strength of our enterprise customers. To date, we have yet to lose a customer exceeding 50 stores. These metrics are very positive signs for our business. Slide 7 shows Restaurant Magic being impacted in the quarter, due to the pandemic and the spike of infections in Q4. Bookings reported in the quarter were 146, and ARR was reported at $8.8 million. Combined ARR with Brink and Restaurant Magic is now $33.5 million at the end of Q4. Slide 8 gives a current side count for Restaurant Magic with installed stores now totaling 5,900. On Slide 9, we reported an approximate $1.5 million increase in Brink-related hardware revenues from the end of Q4 last year, a 22% increase. We continue to see robust demand for the complete PAR solution of software, hardware, and services and the capability it provides our customers. We are encouraged by our continued strong performance and look to expand our market share consistently. Now, to quickly review our product and hardware business in the quarter, that is our point-of-sale platform and drive-through communications business. Product revenues in the quarter increased by 8% from Q4 2019. As I briefly mentioned earlier, our integrator offerings and complete solution continues to be adopted by customers. I’m pleased to see the performance in product sales from our Q4 number and to deliver this performance in a very challenged capital-spend environment is nothing short of remarkable. Now to review our government segment, our government business delivered a solid quarter, evidenced by the 6.5% increase in revenues compared to Q4 2019. Our contract backlog at the end of Q4 was $151 million as of December 31, 2020. Our Intel Solutions business was the driving force behind the growth in the quarter as ISR revenues increased 12% from last year's Q4. We continue to seek out contract opportunities where we can leverage our decade-long experience and our performance excellence, specifically in value-added revenue contracts that include more direct labor and high-tech contract work within our ISR business line. Now, some takeaways on our company coming out of 2020. Restaurants are looking for a platform to handle the rapid growth in digital transformation. Today, restaurants suffer from dozens of different and disparate products, siloed and lacking the modularity to make the solution work. We are building that connected platform. PAR Payment Services, our new all-in-one payment processing solution continues to be introduced in the marketplace. Although we are very early in this initiative, I'm confident over time this will be a long-term driver of revenue growth for our company. PAR Payment Services will give our operators the opportunity to take advantage of fantastic rates, a streamlined process, and the ability to offset harbor costs. With our strengthened balance sheet, we intend to be active in the M&A space as we continue to build out our software platform. All our focus is on adding additional software products that are feature and function-rich and will allow us to increase our subscription rates and make us stickier with the customer. In an average month, the Brink API is called almost 500 million times. This extensive data set gives PAR a unique angle to evaluate partners and future acquisitions. To recap, the last two years have been a consistent period of change for PAR. Our team, our business, our products, and most importantly our culture have changed dramatically. We have withstood a global pandemic, acquired new businesses, invested in our products, and have pushed our boundaries further than ever before. We’ve added hundreds of talented employees, which has created an energized environment and built on our storied history. I now feel strongly our company is ready to set the stage and define what the restaurant of the future will look, sound, and feel like. For too long technology has been a zero-sum game for restaurants, creating a wedge between them and their guests. We're confident the changes we've made at PAR set the foundation to bridge that gap. As always, I’d like to thank our PAR employees, partners, and customers for their commitment to our business and hard work in helping us achieve such extraordinary success during these challenging times of the pandemic. And with that, I'll turn the call over to Bryan for more details on our Q4 numbers and then take your questions. Bryan?

Thank you, Savneet, and good afternoon, everyone. Product revenue in the quarter was $21.8 million, an increase of $1.6 million or 8% from the $20.2 million reported in the prior year. During the quarter, the increase in product revenue was primarily driven by a $2.4 million increase in drive-through hardware sales. Additionally, the hardware associated with the deployments of Brink POS increased approximately $1.5 million or 28% versus the prior year fourth quarter. Offsetting these increases were decreases associated with our traditional Tier 1 hardware customers. Service revenue, which includes revenue streams from our subscription software, was reported at $18.3 million, an increase of $2.9 million or 19% from the $15.5 million reported in the prior year fourth quarter. The company continues to expand our recurring revenue base, which includes both software-related services and hardware support contracts. In total, the recurring software revenue streams contributed $3.1 million of the increase in service revenue. The company continues to gain momentum in its deployment of Brink POS and Restaurant Magic, noting a $3.2 million or 85% increase in software as a service revenues, as compared to the prior year, including $2.2 million related to the Restaurant Magic acquisition. Of the $18.3 million of service revenue reported in Q4 2020, $14.7 million or 80% is comprised of recurrent revenue contracts, as compared to $10.9 million or 71% of service revenue in Q4 of 2019. Contract revenue from our government business was $18.4 million, an increase of $1.1 million or 6% from the $17.3 million reported in the fourth quarter of 2019, resulting from an increase in value-add ISR contracts and subcontract revenues. Contract backlog continues to be significant, noting a total backlog of over $151 million as of December 31. Now, turning to margins. Product margins for the quarter were 17.4% versus 19.5% in Q4 2019. The 2.2% decline in profitability was a result of the disposal of inventory related to the acquisition of assets of the Drive Thru Communications product line. We reported unusually low service gross margins during Q4 2020. This decline was primarily driven by $1.5 million in service inventory adjustments, $0.4 million in disposals of inventory related to the acquisition of assets of the Drive Thru Communications product line, $0.6 million in service level credits, and $0.3 million for increased investments in our call center. Service margin for the quarter was 13% compared to 32% reported in the fourth quarter of last year. Excluding the charges expressed above, the service margins would have been more in-line with our historical service margins. Government contract margins were 8.3%, as compared to 9.9% for the fourth quarter of 2019. This decrease was driven by our Mission Systems line of business, impacted by contract rate adjustments and loss reserves. GAAP SG&A was $13.6 million, an increase of $3.5 million from the $10.1 million reported in Q4 2019. The increase was due to a $1.2 million increase in variable compensation, $0.8 million of expenses for recently acquired Restaurant Magic, $0.6 million for an increase in corporate support services, and $0.8 million increase in investments for restaurant sales, marketing, and management. Net R&D was $5.6 million, up $1.5 million or 36% from the $4.1 million reported in Q4 2019. The majority of this increase is due to software investments made with the acceleration of Brink and Restaurant Magic product lines and hardware investments primarily in our Drive Thru product line. During the fourth quarter of 2020, the company also reported a reduction of $1.4 million to the consideration liability related to the Restaurant Magic acquisition. Now, to provide information on the company's cash flow and balance sheet position. For the year ended 2020, cash used in operating activities was $20.2 million versus $16.1 million for 2019, primarily due to increased net income loss. Cash used in investing activities was $9 million for the year ended 2020 versus $24 million for 2019. In 2020, capital expenditures were $1.3 million versus $2.5 million for the prior year, with capitalized software associated with the investments for various hospitality software platforms for the year-ended 2020 totaling $7.9 million, versus $4.1 million for 2019. In 2018, we used $20 million of cash for the Restaurant Magic and Drive Thru acquisitions and received $2.5 million in proceeds from the sale of a structured product line. Cash provided by financing activities was $180.7 million for the year ended 2020 versus cash provided of $65.6 million for 2019. During the year ended 2020, we received net proceeds of $131.4 million from a public stock offering in the fourth quarter, and in the first quarter of 2020, we received net proceeds of $115.9 million from our sale of 2026 notes, of which approximately $66.3 million was used to repurchase a portion of the 2024 notes. Inventory increased from December 31, 2019, by $2.3 million, but it is important to note we reduced inventory by $5 million sequentially from the quarter ended September 30, 2020. Accounts receivable increased $1.2 million compared to December 31, 2019, primarily due to increased revenue in the restaurant segment. Days outstanding improved within the restaurant and retail segment from 77 days at 12/31/2019 to 74 days at 12/31/2020. Days outstanding improved within government from 58 days at 12/31/2019 to 51 days at 12/31/2020. This concludes my formal remarks, and I would like to turn the call back to the operator for questions.

Thank you. Our first question comes from Samad Samana of Jefferies. Your line is open.

Hi, good afternoon, and thanks for taking my question. So, maybe want to dive in a little bit just the acceleration comment for ARR really stuck out to me. Can you help frame that a little bit better?

Sure. So, we've had tremendous growth in bookings over the last two quarters. Remember at PAR, bookings refer to signed orders, which are real commitments from customers. Those bookings generally have a six to eight week book-to-bill cycle. Historically, we've been able to turn a booking into revenue within six to eight weeks. During the pandemic, that timeframe has elongated as we’ve had to navigate not just our own requirements but those of our customers to get into stores. Consequently, we've seen a significant backlog of nearly 2,500 signed orders waiting to be installed. As the pandemic wanes, our ability to access these stores should improve, and we’re already seeing some of that happening now. You will see this backlog burn down and ARR increase very aggressively as a result.

Great. Can you help us think about the nature of these bookings? Was it more driven by larger QSRs?

It's a fantastic question. In Q4, we saw growth across all segments, but we saw more accelerated growth in our mid-market segment, those with hundreds of stores, as opposed to thousands. These mid-market wins have been emerging for us and provide balance, and we had a couple of wins with multi-hundred store chains. In terms of pipeline, we saw most growth among large chains of 1,000 stores or more, which sets a strong foundation for 2021.

One last question for me on Brink, how is payment volume shaping up?

As the end of Q4, our payment product was in a beta phase. We're learning valuable things from this beta, such as competitive rates for customers and the large total addressable market available here. We've discovered that our payment services can significantly offset customer's hardware costs, a powerful benefit. Based on early numbers, we're estimating our average customer will see their annual revenue per user increase significantly with the payments model. While we aim for big wins, our average store with Brink today generates around $2,100, and we believe adding payment services could yield another $2,100 to $2,500. This model is structured as a fixed fee per transaction, differing from down-market approaches, and translates roughly to 25-30 basis points when we back into it.

Thanks, guys, for taking my questions and congrats on the strong bookings.

Our next question comes from Stephen Sheldon, William Blair. Your line is open.

I was curious, specifically for the larger 1,000-plus site wins. Can you frame the adoption of Brink within their sites?

When we sign a large customer, we typically begin activating their corporate-owned stores quickly, often within a quarter. Franchise stores usually take about two to three years to activate fully. However, the pandemic has changed this dynamic, allowing us faster activation than before. It's become apparent that these larger customers now recognize the need for quick, efficient implementation.

What’s the integration status between Brink and Restaurant Magic?

On the sales and marketing side, we are integrated – the teams are now one, which helps streamline the customer experience. On the product side, we are moving toward a more modern infrastructure, where we expect more seamless connectivity between the products, enabling single sign-on capabilities and actionable insights from both systems.

Thanks for that information.

Our next question comes from George Sutton of Craig-Hallum. Your line is open.

Savneet, can you talk about how your technology addresses new formats like Drive-Thru and delivery?

I believe this shift is a significant contributor to the growth in our bookings. CIOs and CEOs are under pressure to upgrade technologies that enable online ordering and effective payment solutions. Many recognize they need a modern infrastructure to remain competitive as the industry evolves. We've seen that our bookings are accelerating as restaurants realize they can no longer afford to delay.

Can you quantify how competing with incumbency is affecting your growth?

We're primarily competing against established providers tied to legacy systems, which often hinder innovation. This environment allows us to capture interest from customers seeking to modernize their technology. The pandemic has only accelerated this shift, revealing many shortcomings in legacy systems and increasing demand for our offerings.

Our next question comes from an unidentified analyst. Your line is open.

Congrats on a good quarter. I'm curious about how ARR relates to the 11,700 using Brink. In terms of urgency among restaurants opting for your tech solutions, how is that evolving?

Currently, our ARR is relatively stable across our stores. We're actively pursuing opportunities to expand this foundation as adoption of our solutions rises. We anticipate some of our existing stores will return to more typical operating conditions soon, which can enhance our revenues significantly.

What's the potential for upselling to this customer base?

Historically, we haven't focused on upselling. However, with our partners in Restaurant Magic and as we build our payment services, we expect significant potential for future upsells as we integrate more products into the Brink platform.

Final question, what's the trajectory for gross margins in your service offerings?

Our service margins will continue to improve as software-related revenues take a larger share. Over time, service margins will align closer to industry standards while maintaining efficiency as we grow the software segment of our business.

I’m showing no further questions at this time. I’d like to turn the call back over to Mr. Savneet Singh for any closing remarks.

Thanks, everybody, for joining. I look forward to welcoming you on future calls.

Thank you. This concludes today's conference. Thank you all for participating. You may all disconnect. Have a great day.