The US tech name with a mission-critical product (that you’ve likely never heard of)

Imagine a company that sells a sticky, mission-critical product into a durable, low-churn customer base. Without that product, those customers can’t even make sales. Now imagine that this mission-critical product comprises a miniscule part of the customer’s overall costs. Despite this, the company has historically not pushed through material price increases, creating latent pricing power. That company is PAR Technology Corporation (NYSE: PAR), a $2.8 billion market cap company that we believe has strong compounding potential. 

PAR sells hardware and software products to enterprise restaurant chains. These are some of the largest, most well-known restaurant concepts that include Burger King, Five Guys, and Arby’s, among others. In fact, PAR’s products are in 50 of the top 100 restaurants in America. The company’s software products include point-of-sale (POS), loyalty, online ordering, and a range of other solutions. So, what makes PAR special? It isn’t just offering a point solution; it is offering a platform whereby these modules are tightly integrated and work in concert to help drive better outcomes for its restaurant customers (e.g., improving the operational efficiency of the restaurant, as well as driving sales via more targeted loyalty program promotions).

So, what got us interested in PAR? We learned that PAR was awarded the Burger King POS contract, one of the largest RFPs to come to market in years, and one where PAR was competing against every major foodservice technology vendor. PAR’s competitor, Oracle, actually offered Burger King a lower price, yet Burger King still ended up awarding the contract to PAR. PAR is out-executing its competitors with a best-of-breed product, and we expect more Tier 1 contract wins to be announced over the coming quarters.

Despite providing immense value to its customers (i.e., these restaurants literally can’t operate if PAR’s software was taken offline), PAR charges its customers peanuts. If we think about a restaurant unit that’s doing $2 million in sales, that restaurant is paying PAR in the vicinity of $3,000 per year for PAR’s core POS product. That equates to around 0.2% of the restaurant’s annual sales. We are seeing evidence of new contract wins landing as multi-product deals, speaking to the company’s cross-selling strategy getting traction as a means of increasing the average revenue per customer (ARPU).

In fact, for customers that adopt multiple PAR modules, there is a 4x uplift in the ARPU. PAR gave some additional details around this ARPU uplift opportunity at its recent Investor Day, showing how a typical $2,500 per year customer moves up to more than $10,000 per year in spend if they adopt PAR’s full product suite. 

Let’s drill into that $10,000 full suite ARPU. A restaurant site paying PAR $10,000 per year is an incredibly small figure. If we assume that the restaurant store is open every day of the year, it equates to that store paying PAR just $27 per day. And if the store is open for 10 hours per day it amounts to PAR receiving just $2.74 per hour. So, for a mission-critical piece of software, even with the restaurant adopting PAR’s full suite of products, PAR is still only receiving a fraction of the U.S. minimum wage from each store on an hourly basis. We think there is an enormous opportunity for PAR to both sell restaurants more modules and to significantly raise prices over time, and there’s likely potential for this ARPU to expand by multiples.

We mentioned that PAR won the Burger King contract, which is worth c.$23 million in ARR to PAR. This ramps up over the next year and a half, and is obviously meaningful given PAR is currently generating $248 million of ARR. However, we believe Burger King will adopt additional PAR products such as Data Central. There is further optionality given that Burger King is a part of Restaurant Brands International, a major restaurant group that has c.31,000 restaurants globally.

If PAR is able to win the North American units across RBI’s Tim Hortons, Popeyes, and Firehouse Subs brands, this represents an incremental c.9,200 restaurants. If they can come in at say $3,000 ARR per site, then this an additional $27.6 million of ARR that’s potentially in play. This means that there’s scope to add 11% of the current ARR base from one restaurant group alone.

At a $2.8 billion market capitalisation, PAR might look expensive. However, we believe the company is capable of growing its ARR at 30% per annum, and potentially even faster to the extent that it secures additional marquee restaurant customer contracts. The incremental margins on these additional revenues are also very high (we estimate that they’re in excess of 50%), meaning that incremental ARR dollars carry attractive unit economics that underpin a high end-state margin profile (and notably much higher than what the market is anticipating). Tying all this together, we believe that the company will be able to produce $240 million of adjusted EBITDA in FY28, which allows us to back into a 23% IRR.