The Exchanges

Q Okay, so what is that? That's like 40% of the total business.

A Oh, it was huge, yeah. And from profits, it was all of our, well, you know, we were losing money, right? So it's, it was 200% of our profits. And so, um, you know, when we got there, everyone said, well, go sell the government business. Like, why are you, if you're trying to build a software company, why are you trying to hire a government business? I was like, we could do that. But then when I disclosed to market that the government business is printing ten million bucks, They're gonna see that our software business is on fire, and that our customer NPS is -60. Our CSAT was -99. We didn't have one, one customer that was green on our, on our, our CSM scores, right? And so, um, it was meant in many ways to kind of let, give us time, candidly, two years to rebuild our products, so that we could then say, alright, now we don't need this government thing to keep us going. So that's why we kept it for a long time. We sold it, and immediately deployed it back in this acquisition you showed. And so, you know, our capital allocation philosophy has sort of been, We don't want to sit on your cache as a public company, we want to deploy it, and you've got nowhere to put it, we'll give it back to you.

AI assessment note: “Oh, it was huge, yeah. And from profits, it was all of our... 200%”

Q By the way, both of these were announced just two weeks ago, so you guys are getting it fresh off the presses. How'd this happen?

A Yeah, so we, um, are, as I mentioned, restaurants are growing really fast within convenience stores and fuel stores. Um, you know, there's a Great example, there's a, a chain called Casey's. Casey's is a large public company, sells convenience stores all across the country. They're also the fourth largest pizza company in the world. Um, and so these C-stores wanted loyalty software. They wanted you to come in and say, hey, I got points for my, my, my order. I want you to stay loyal to my C-store. And so our, our, our loyalty, we have the largest loyalty product in restaurants. We're in 48 of the top hundred restaurants in the world. So if you have the Taco Bell app, that's us. Uh, and so those, that was kind of happening with C-stores. And so they started pulling us into the C-store market. We got in there and realized, holy crap, we have no idea what we're doing. Convenience stores have gas, they have EV charging, car washes, like, just everything is different, and we're trying to bastardize our product for this market, and it was working. Like, we were winning tons of business here. But we realized that if we, we had to make a decision, which is, do we want to go all in on this market, or do we want to get out of it? And so I went to our leader of this business and I said, you've got three options. You can shut this business down and say, I'm just going to focus on restaurant…

AI assessment note: “And so we went and found Stuzo, who's by far the best in this market.”

Q So to repeat the question, would it have been easier to do the transformation if Saab took the company private first and then did all the changes?

A So I thought about that a lot, and I actually think the answer would be no, and I'll tell you why. The operational changes were extreme. We replaced almost the entire management team, you know, we shipped a bunch of jobs offshore, did a lot of crazy stuff, but, um, the capital markets allowed us to finance it in a really aggressive way that would be very hard privately. To give you an example, you know, the market cap of the company when we took over was a couple hundred million dollars. Our first financing was eighty million dollars. That's very hard to do privately in a convert, Um, and so that allowed us to make these huge, you know, the product we took over, you know, I mentioned that the customer NPS was -60, because there's a lot, there was a stability issue. We were a software company that had 40 versions, so it's like we were cloud, but we weren't really cloud. We, we, you know, our gross margins on the SAS was 40%, because we had, DevOps costs have gone out of control, because you have 40 versions, it's hard to deploy. All that stuff. And so we need to do a massive rebuild of the product. Um, it would have been easier to do the operational work privately, but to finance it, I don't know how we would have I think, yes and no. And then later, I think a lot of our success was sort of buying these, these businesses, integrating them quickly, um, and, uh, you know, so there…

AI assessment note: “I actually think the answer would be no, and I'll tell you why.”

Q Wait, sorry, can you give a context? When you joined, how much

A Oh, so the business, I think, was a 180 hundred million of revenue, but only five million of software revenue, so it was, it was really a hardware and services business that was growing, trying to become a software business, and so I joined the board, and within, you know, two months-ish, it, it, it was very clear the company was challenged, um, so it had this software product, which was point of sale software for enterprise restaurants, so you go to Sweetgreen, you go to Arby's, five guys, you'd see this product, and that business was growing really fast, 50, 75% a year, um, and so that was the idea, which was like, oh, you're a SaaS guy, join our board, you'll teach us how to do SaaS, and we'll figure it out, and so I was like, okay, that sounds easy. But, you know, I got there, and, um, you know, within a few weeks, you know, we had two activist hedge funds come in, demand to sell the company, say a lot of nasty stuff. You can still Google it. It's pretty nasty. Uh, we had, um, a bunch of financial proprietories, so we were under investigation by the SEC, the DOJ, uh, and, and I, the moment I joined the board, I got all these angry emails from customers, and I was like, well, that's weird. I'm not even, like, running the company. So I went to the board and said, hey, I know I'm the, you know, the thirty-year-old. Can I go meet the management team and understand what's happen…

AI assessment note: “the business, I think, was a 180 hundred million of revenue, but only five”

Q Yep, yep. I mean, so this is, is this still actively how you're thinking about product? We don't have any big M&A on the, on the horizon?

A We're taking a breather on M&A because we, you know, we've, um, M&A's work categorically well for us. You know, when we announced these deals, our stock was 39 bucks today. You know, 50 plus. Um, but more importantly, when we look at M&A, we go in, before we close the deal, with a financial plan, an organizational design plan, like who reports to who, and a cultural plan, which is how we're going to integrate these cultures. And, um, you know, if you, the rigor I think we do up front allows these deals to work, because I would tell you, if you asked people at our leadership team, uh, you know, did this company, Stusa, we bought work, we'd be like, holy crap, not only did the deal, is the deal a home run, like, it changed us for the better. And so we do a ton of work up front. Now the challenge is, That it creates a lot of change inside, right? You've got a bigger product order, you've got a bigger sales order, you've got different people who now are like, hey, I've got a different opinion, and so I think you need a little time to digest these deals and, and make them swim on the, on the same song sheet. So literally yesterday I just announced our, uh, you know, an updated set of values across our company that incorporates the two new companies we acquired, so they feel engendered as part of the company. Um, but, um, short answer is we are, you know, deeply focused on Owning the…

AI assessment note: “We're taking a breather on M&A”

Q Can you talk to us more as we wrap up here a little bit more on why you choose to pull this specific graph out in your public calls?

A Yeah, and I think for all of you to think about it this way too, which is ARR is not a tool for fundraising. ARR is a tool because it's a future proxy of cash flow. The reason why ARR became a metric in software is that in hypergrowth for software, investors back in the day didn't understand that when you signed a deal that revenue was going to be there for Two years, five years, 10 years, 20 years. And so they created this metric of ARR. But the reason why it's important is that investors will say, okay, under every dollar of ARR, there is 10 cents, 15 cents, 20 cents of future free cash flow. And that's actually what they're underwriting. They're not underwriting your revenue. They're underwriting your future free cash flow. And so when we were a money losing company for a long time, I wanted a way to go to the market and say, well, how can I tell you, I know we're going to be crazy profitable, and I'm going to explain that to you, but are we more efficient or less efficient? And so what we disclosed was we said for, for every share of par you own, you, underneath that dollar, that, that share, one share that you own is way more recurring revenue than when you had before, which means way more future free cash flow. And so as you guys grow your businesses over time, you should be thinking about if I've, you know, your, your, your number of shares on the bottom and your ARR on …

AI assessment note: “when we were a money losing company for a long time, I wanted a way”

Q The next thing I want to talk about is something that I want to try and get you to give the private company equivalent. You talk a ton about ARR per share. It's gone from like nothing to six dollars of ARR per share, and you say the reason you do this is because there's real cash flow under every dollar of ARR. What's the equivalent for a private company?

A Um, well, I, I think the, the question you need to think about is, for every dollar you invest in the company, how much AR is being driven by that? And the reason I, I say AR is a proxy for, for, for cash flow is, historically, when, when, sort of, venture capital first started investing in software businesses, there was no earnings. Uh, gross margins might have been depressed because you were still building out the infrastructure to scale. And so, you had to make a bet of, like, I think this business will have this terminal, um, value of cash flow. This might be a 20% margin, a 10% margin. And so ARR was your way of saying, okay, if I think this is going to be a 20% margin business, and I invest this at, you know, five times, I'm effectively buying in at 25 times cash flow. Um, so you, you know, you're sort of trying to back into that. And so what we realized was, well, while we were making, and we shouldn't talk about this, but PAR was a real mess. We had to completely rebuild our product. We were spending a hundred percent of our revenue on R&D. It was crazy. We needed a measure of, like, are we making progress? And so the way we figured out was, hey, we think we're going to be a 25% cash flow margin, maybe a 30% cash flow margin business in one day. So if we assume That we're, we're, we have six dollars of ARR per share. Well, that means we have this much cash flow per shar…

AI assessment note: “for every dollar you raise, how much ARR are you generating from that?”

Q Because when you look at the top line, something special happened. How do you go from burning a bunch to cash, you know, profiting?

A Yeah, so we're, it's crazy. We're now making money, which is, which is crazy, but, you know, when we, the, the, the chart kind of five or six slides ago of our revenue from 204 hundred was kind of hiding something. When we took over the company, the revenues were about one 71 80, and they were, um, five million dollars of software revenue, 165 of hardware and services. Where today will be, you know, whatever, four 50 of revenue, but two 52 60 will be software. The software's sort of grown, you know, um, you know, 40, 50 X during that period of time. And, um, part of that, though, was our core product, our point of sale product was broken. So, you all work in software, but we were the, the, the first SaaS product in restaurants, um, but we were shipping product once a year.

AI assessment note: “five million dollars of software revenue, 165 of hardware and services”

Q eighty million bucks of top line revenue and over twenty million bucks of profits. So twenty million of profits into four hundred million, you guys can do that. That's a 20 x ebitda multiple. There's some sass founders that are like, I'm not going to sell unless it's a 20 x top line revenue number. EBITDA number. So break down the first acquisition. How did you get a task done?

A Yeah, and listen, I think just on the valuation thing, I think it's important for everyone to remember that, you know, software is not software. It's not software. Not every software company is going to say multiple. So you can have two different companies with the exact same metrics, and they shouldn't trade the same. Um, you know, and so you've got to be very specific about what you're acquiring and what you're buying. You know, you can see software companies growing at a hundred percent that trade it three times, and you can see software companies growing 20% that will trade it 10 times. And, you know, you have to be very discerning about how you think about that. And, you know, the stuff that we look at at PAR is we obsess over, A, what's, how, how sticky is that end market? You know, in the end, you, you can't outgrow the, the, the churn of your end market. So if you're selling to an end market that is churning, you can pretend you have high net retention, but in the end, your, your cost of capital will, will be very expensive because that end market is churning super fast. So, uh, you know, if you're selling software to Uber drivers, like, that's gonna suck because those guys churn over a lot. If you're selling software to McDonald's, like, that's a great business because McDonald's is probably not going out of business anytime soon. So we, we acquired a business called T…

AI assessment note: “we acquired a business called Task. It's based out in Sydney, Australia.”

Q company now in terms of growth, in terms of product strategy, etc. So my question to you is, because a lot of software founders, I think, mess this up and wonder why they don't have this success, is sequencing. You have to do the right things in the right order. You can't just do the right thing. So how do you decide how to do stadiums, for example, before hotels?

A You gotta listen to your customers. Um, I mean, I think, you know, business is a bunch of logical decisions oftentimes, and you've gotta have, particularly enterprise software is different. You know, if you're, you're, you're Apple and you're Steve Jobs, you gotta predict the future and tell people where they're going, but enterprise software, there's a little bit of that, but it's a lot more of listening to the needs of your customers. You know, I joke, if I went to the, our, our customers at PAR today, and said, hey, um, instead of me telling you your normal QBR about our product roadmap, I'm gonna tell you about the future of AI, like, they kicked me out the room. Because they're gonna say, like, no, no, no, that's really cool, but like, how are you solving my problems today? And so in enterprise software, I think, you know, one of the biggest mistakes CEOs do is you get really big, you get farther and farther from your customers. You create org charts that are completely functional, where you have one CRO, one CPO, so on and so forth. And you get, the decision makers get farther and farther and farther from the customer. And so what I work really aggressively is how do we constantly redo our org charts so that the leaders are closer and closer to customers. And so that's kind of how we got there. And it's really simple. Restaurants are, are no longer growing in the United S…

AI assessment note: “the growth of the units of restaurants is now in stadiums.”

Q So you love a founder that's raised less than their ARR?

A Over time. Oh, for sure. I mean, you kind of have to be, right? Because I think if you're, because you, you, implicitly you're going to say my churn is like zero, but that's like, that's a total lie, right? And, and so I'm as an investor going to go and even with these businesses, like these businesses, these are both businesses, like the last best company, Suzo, has never ever lost a customer. But when we're building our model, we're going to assume they're going to lose a customer, um, right? And so you've got to always underwrite to conservatism. And so my view is, you know, if you raise a hundred million dollars, you should be able to generate a hundred million dollars of error off of that platform over time to pay back for the time that it takes to get to that hundred million dollars.

AI assessment note: “Over time. Oh, for sure. I mean, you kind of have to be”

Q Can you just describe that real quick? So, Arby's already pays for the hardware. What's the software that Arby's is paying for?

A So, in, in a restaurant, the point of sale is the, in the, the software that's actually inside that device, or the cashier's typing on, but it actually powers the entire restaurant. So, every online order comes into the point of sale system. And then it kicks the orchestration to the kitchen. The taxation, the payroll, the finance, like the credit card, everything goes in that. And so it's the most critical part. And one of the insights I had, um, which is only a second, was that it's also the product that companies hate the most. And there's a little known fact, but I, I'll, I'll spill it here, which is, um, VCs love to find companies that have high NPS scores. Your customers are happy. It makes sense. You should invest. But, um, I've always told investors just, you know, you'd be better off buying a basket of stocks that have the lowest NPS of all, and they'll outperform the companies that have the best NPS. And, and you'll be like, well, it doesn't make sense, but think about the companies that have compounded the best over a long period of time. It's ADP. It's the cable companies. All the companies you hate actually perform better in the stock market in long, over long periods of time. And the reason why is the mission criticality of that product makes it the stuff that gets you the most pissed. If, you know, and so your cable company goes down, your Wi-Fi goes down, you're…

AI assessment note: “the point of sale is the, in the, the software that's actually inside that device”

Q When you said that on the call, I didn't believe that, because I'm going, well, all the McDonald's in, obviously, Russia have now shut down. The U.S. economy is killing it. Why is McDonald's not growing faster than the U.S.?

A Because the footprint's already been built out. And by the way, McDonald's is the only one that's growing in the U.S. again. They've sort of made a commitment to redo their, their store footprint, but the vast majority, like Popeyes, super fast growing chain, You know, they've got 900 store openings, 800 international. And the Burger King's the same thing. It's just because the, you know, we are over-restaurated here, and so the growth is international, and so we wanted to kind of follow our customers. And the challenge was as, you know, when we started the company, our ARR, sorry, when we took over the company, our ARR was less than ten million bucks. You know, three months ago we won a deal that was twenty-three million dollars of ARR with one customer a year. And so, as we've gotten to these bigger and bigger customers, we, we, we realize that we can't just be like, oh, we're just going to service in the U.S. and find something else international. And so this is super synergistic from a product strategy perspective. You know, we bought the business for, you know, less than, uh, you know, call it four times, um, ARR for a business that's been growing 30% a year with a hundred percent, almost a hundred percent, well over a hundred percent net retention, gross retention at 96, 97. I mean, these, it's just really hard to find assets like this. And the reason we convinced them is…

AI assessment note: “Because the footprint's already been built out. And by the way, McDonald's is the only”

Q Well, and they pivoted, you've pivoted fairly quickly from going, we want to be the VC firm, so, you know, we really like debt much more. What was the, what was the turning point there?

A You know, so, so the code was originally founded by my partner, Ali, who kind of figured out this sort of, he wanted to be a VC. He's got an amazing story. He, uh, his senior year of college, he started a 350,000 dollar venture capital fund, and he's like, can you be my mentor? And I said, no. Um, but I was like, who are your investors? And it was like, you know, a bunch of the board of trustees at Cornell, and I was like, well, this guy's got like a sales talent. Like, that's pretty amazing. And I hated his investing. I always joke, like, I thought he was a terrible investor, and I hated all the deals, but then he started sending me these, these, these lending businesses, and I, I was a very lucky early investor in some of the first wave of online lending, and I kept saying to my friends, you know, the problem with FinTech is that it's just taking all the stuff we do now and putting a consumer acquisition engine on it. You know, you get a loan from Lending Club, it's like the same loan, just someone else is funding it, or I did it online, or I buy an insurance product on my phone. I said, what would be really cool is if we could use all this data to create new products. So as an example, um, you know, if you want to get life insurance and you have diabetes, it's, it's terrible. It's a terrible experience, but like, Most people can survive with diabetes provided, and so like, p…

AI assessment note: “but then he started sending me these, these, these lending businesses”

Q What did that thing even do? How much revenue did it represent? Why did you sell it?

A So when you're public, you don't have necessarily the beauty of, ah, when you're private, you can do whatever the hell you want. And so, you know, when we were, it's, I hate to take a lot of time on this, but PAR was founded 50 or 60 years ago as a defense contracting company. In 1978, we invented the point of sale terminal, so the device you check out on. And then we went public in 82. And pretty much since that point, we sucked. We were when we stepped in to run the company in 2018, the market cap of the company, which is the value of the company, was lower than when we went public in 1982. So for 40 years, we had no shareholder value creation. If you had just taken all the money apart at the time of the IPO and invested in the S&P 500, you'd be worth fifteen billion dollars. And so an incredible story of shareholder value destruction. And so What we kind of realized was that we couldn't keep doing the same thing, and so we had to do a crazy, uh, you know, dramatic shift, and so what I think we learned along the way was that, and I know this is not your question at all, but I think probably helpful for you all is, is that being, um, getting in software sounds like a better business model, but more often than not, it is not big enough to be a scalable public company or to be a venture-backed business, and when I took over the business, I wasn't sure if the product we had was, …

AI assessment note: “and I know this is not your question at all”