As per Greenhaven Road Capital’s recently released Q1 2019 Investor Letter, the fund had a quarterly net return of 16%. If you are interested you can track down a copy of the letter here. Aside from disclosing its performance figures, the fund also analyzed a few companies in its portfolio, including a new position – PAR Technology Corporation (NYSE:PAR).
“NEW INVESTMENT –PAR TECHNOLOGY
I am very attuned to the power of a good storyteller.At night I read the Harry Potter series to my six-year-old daughter. We are currently on book six.J.K. Rowling has turned a story about an orphan boy into an all-encompassing world. It is not simply the twisting plot that has kept our attention; it is how she tells the story. There are not fights, there are epic battles. Characters are not simply good or bad, they are epically good or bad. There is a wizarding world with its own language, customs, and social structure. In my opinion, anybody who can keep a six-year-old’s attention for 2,500 pages and counting (without pictures!) deserves to be a billionaire.
In the stock market, it is often “the story” that can drive changes in share price. Sometimes there are companies (such as Enron or Theranos) that are all story and no product. These, of course,are dangerous investment set-ups.From an investment perspective, it can befar more attractive when companies are just starting to effectively tell their story.It is far easier and less capital intensive for a company withstrong products that resonate with customers to improve communications and positioning than it is to have strong communications but weak products. Often, with improved storytelling comes multiple expansion.For example, the PE ratio may go from 8 to 12, and even though the fundamentals of the company have not changed, the share price has increased 50%. Outsized returns come from revenue growth, margin expansion, and multiple expansion. A path to multiple expansion helps.I first became aware of PAR Technology (PAR) a few years ago when Travis Cocke of Voss Capital laid out the collection of company assets in great detail. (Full disclosure: the Greenhaven Road Partners Fund is invested in Voss.) He clearly had found a “50 cent dollar.” I just could not get comfortable with the management team. The founder’s daughter was the CEO, and, in my opinion,the management and execution risks outweighed the siren song of assets selling at a discount.PAR Technology was started more than 40 years ago and is a hodge podge of assets today. The original defense contracting business, near a military base in upstate New York, generates cash that has funded other businesses. There is also a technology hardware business that has been around since the 1970s when PAR’s founder, John Sammon, created point of sale (POS) hardware systems for McDonald’s. The company did a good job of growing its POS hardware business and has significant penetration in the largest fast food restaurants such as McDonald’s, KFC, Taco Bell, Subway,and Jack in the Box. Still, this type of hardware business is mediocre, as it is lower margin and “chunky” because there are long replacement cycles for the systems. If this was that the sum of PAR Technology, it is highly unlikely that we would invest.However, in 2014, the previously-mentioned founder’s daughter had the foresight to purchase a small California-based company called Brink that developed a cloud-based POS software system for restaurants.While POS hardware is a low margin, one-sale-every-few-years-type business, the cloud-based POS software business has high-margin recurring revenue.At the time of the acquisition, Brink had approximately 400 installed units. Fast forward to the end of 2018, and the company has compounded installs by more than 100% a year to 7,700 units. Notably, this growth came with minimal resources, zero logo churn, and without converting any of their legacy hardware customers to the cloud-based Brink software.Last year, at the urging of Adam Wyden of ADW Capital, I looked at PAR Technology again.(Full disclosure: the Partners Fund is also invested in ADW.) Again, I could not get there. It was almost as if the PAR was hiding the software business–there was no investor presentation mentioning Brink. At the product level, there was also untapped low-hanging fruit for the company to grab, such as incorporating payments (credit card processing) into the Brink System.While many POS systems such as Square, LightSpeed, or Toast actually make the majority of their revenue off of their payments business, PAR has none.There was an enormous amount of potential in the software business, but it was not clear whether PAR could or would realize it.The company was being led by a manager in his 70s with decades of experience in the defense industry but none in software. While competitors were financing their software companies with mounds of capital, PAR was restricted to the cash its defense business was generating. In summary, the company was under-resourced, had the wrong CEO, and a history of poor capital allocation decisions that hadeffectively led to zero investor returns since going public decades ago.In today’s stock market, the majority of shares are purchased by computers that scan press releases and use quantitative data. PAR’s earnings releases had no breakout of the software business. The only timethe company even discussed Brink was on the earnings calls where one could triangulate the unit’s installation and revenue growth. At a time when SAAS businesses are getting very attractive multiples of sales, PAR’s management was not breaking out any of the company’s metrics, failing to tell the story of their software business in the language of software investors. They were treating Brink more like an asbestos liability than the crown jewel. I was concerned that the opportunity would never be properly articulated and more importantly never executed on. I passed again.Fast forward a few more months when, at the urging of ADW Capital and others, PAR’s CEO retired and was replaced by interim CEO Savneet Singh. Savneet had recently joined the Board of Directors as an experienced software investor and an operator. The hiring of Savneet was the turning point.Savneet got to work very quickly. For the first time in years, PAR (Savneet) presented at an investor conference. In his first interaction with investors at the Needham Investors Conference, he touted Brink as the crown jewel of the company. He correctly stated that, historically,PAR had been run as a hardware business that happened to have a software asset,but going forward, the emphasis would be on building the software business. He also said they would launch a payments product in the second half of the year and laid out math that showed that payments could in fact be the biggest part of the business over time. The company laid off 8% of the corporate staff to free up dollars for Brink.Savneet was saying all the right things; however,at this time he was still in an interim role and faced significantly better-resourced competitors. Thus PAR joined our portfolio as a “starter” position. Near the end of the first quarter, Savneet was made the permanent CEO, and shortly thereafter the company announced a $60m convertible senior notes offering at attractive terms. The change in management and improved resources substantially de-risked the situation,and we increased our investment.So what have we bought? Brink Software can be used by almost any restaurant, but the company is focused on larger quick service and fast casual chains. In fact, Brink is the only proven enterprise cloud POS solution that has successfully integrated a large scale,multi-unit chain. The POS system is the spine of these larger chains, interfacing with inventory management, loyalty programs, accounting, payroll, and, increasingly, food delivery platforms such as UberEats and Seamless. For a large chain, building all of these connections is complex, time consuming, and important. Brink has been very successful penetrating and retaining such customers, including Five Guys, Arby’s, and Sweetgreen. The investor deck lays out a lot of the details (link halfway down page). There are opportunities to expand internationally and, to date, the large hardware customers still have yet to upgrade to cloud-based solutions. When these massive organizations do decide to upgrade, the only cloud-based system to ever sign up a 1,000 location+ restaurant will at least be in the conversation.So, what are we paying for Brink? What could it look like? Our cost basis is in the low $20s.There are 16M shares outstanding, a government business that is likely worth in excess of $100M and a hardware business that is worth something north of $50M, plus as a hodgepodge of other assets, which means we paid on the order of $200M for Brink Software.But what could it be worth? There were 7,700 software installations at the end of 2018 with average recurring revenue per location of $1,870. If you run the math, we paid a lot for Brink…call it 14X trailing recurring revenue. No,I did not put a decimal in the wrong place. However, given the stated backlog, recent customer wins including Dairy Queen (7,000 locations), and the forth coming introduction of the payments business, this is a forward-looking business. I believe there is a very tangible path to almost tripling locations to 20,000 by the end of 2020.There is also a straightforward path to substantially increasing ARPU (Average Revenue per User), led by the expected rollout of the new payments product. Channel checks have indicated that Dairy Queen locations will be paying a substantially higher per-user costs as well, so ARPU will rise as they are blended into the base. With a much larger base of stores and a higher ARPU, very rough math gets us to less than 4X next year’s revenue for Brink for a company that will still be growing 100% and have just increased ARPU 50%+. SAAS companies growing on the order of 100% per year with rising ARPU trade for much higher than 4X revenue. Lightspeed, which just recently completed its IPO in Canada, sports a valuation of roughly 30x run-rate revenue with inferior growth to Brink!Yes, there is execution risk here, but the product is built and the pipeline is built. Unfortunately, due to the lack of disclosures, the extraneous defense business,and other holdings, PAR Technology is not viewed as a software company today. I believe that Savneet will both simplify the corporate structure by selling or spinning off the defense business and explicitly lay out the Brink SAAS business. For those interested in learning more about Savneet’s background and getting a sense for how strong of a communicator he is–and how he is likely to approach the CEO role–Patrick O’Shaugnessey’s podcast (link) provides an excellent foundation, as does his presentation at the Roth conference.Over time, I think PAR’s business will be helped by the new products such as payments, increased investments in software, and reduced lead times for installation. Over time, I think the multiple will be helped by a communications strategy that includes spoon-feeding investors key metrics, allowing PAR to easily be compared to other more richly-valued software companies. Savneet may not be J.K.Rowling, but unlike his predecessors who were silent about their greatest asset, sometimes just talking is enough. “
At the end of the fourth quarter, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PAR over the last 14 quarters. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The biggest position in PAR at the end of 2018, held Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management. Its stake counted 556,799 shares, with a value of $12.11 million. Other hedge funds from our database with valuable positions in this company were Manoneet Singh’s Kavi Asset Management, Chuck Royce’s Royce & Associates, and Cliff Asness’ AQR Capital Management.
This article is originally published at Insider Monkey.