PAR - Earnings Call - Q1 2020

Transcript

Speaker 5

Good afternoon. My name is Diana, and I will be your conference operator today. At this time, I would like to welcome everyone to the FY 2020 first quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I would like to turn the conference over to Mr. Chris Burns. You may begin, sir.

Speaker 0

Thank you, Diana, and good afternoon, everyone. I hope during these crazy days that everyone is safe, healthy, along with their families. I'd like to take this opportunity to welcome you today also to the call for PAR's 2020 first quarter results review. Complete disclosure of our results today can be found in our press release issued this afternoon, as well as in our related Form 8-K filed to the SEC. To access the press release and the financial result details, please see the investor relations and news section of our website at www.partech.com. At this time, I'd like to take care of certain details in regards to the call today. 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 World Wide Web, so please be advised 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 that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties, especially during these times. For example, statements relating to our business and financial condition and to our expectations are subject to the uncertainties about the future impact of the COVID-19 pandemic, and there can be no assurance that the COVID-19 pandemic will not have a material or adverse effect on our business.

The information on this conference call related to projections or other forward-looking statements may be relied upon and subject to the safe harbor statement included in the earnings release this afternoon and in our annual and quarterly filings with the SEC. Joining me on the call today is PAR 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.

Speaker 3

Thank you, Chris, and good afternoon, everyone. Thank you for joining our call today. I hope that all of you and your families are staying healthy and safe. These are unprecedented times, so we will be taking somewhat of a different approach to our call commentary today. On today's call, we'll not only review our business performance and financial results for the first quarter, but we'll also share with you the impact that the coronavirus pandemic has had on our business, what we are doing to address the associated challenges, and how the strength of our business model positions us for long-term success.

To begin and to review our Q1 performance, our total revenues grew 22.4% to $54.7 million and reported a GAAP net loss of $10.9 million and a loss per share of $0.61 as compared to a net loss of $2.7 million and a loss per share of $0.17 in the same period last year. On an adjusted basis, the non-GAAP net loss for the quarter was $5.1 million and a loss per share of $0.28 versus a net loss of $1.5 million and a loss per share of $0.09 in Q1 2019. Details on the GAAP to non-GAAP adjustments are included in today's press release. Bryan will give additional color on the numbers for the quarter.

Now, to address the current business environment, our company is addressing the challenges associated with COVID-19 with the same seriousness, intellectual rigor, and fact-based analysis that we've employed for over 50 years since PAR was founded. We are focused on three things: the health and safety of our team members, demonstrating leadership by continuing to solve our customers' most pressing issues, and building long-term value to shareholders. Our unique capabilities include an adaptable business model and a robust client base that have shaped PAR's leading market position. Despite the expected near-term headwinds for restaurants, we are serving thousands of essential businesses and their customers as they continue to operate to serve the general public. Our brand promise is to deliver solutions that connect people to the restaurants, meals, and moments they love. We're doing our best to hold true to that promise in 2020.

Our customer base has been extremely resilient in this difficult time. Most of our customers are quick service or fast casual restaurants, and a high number, approximately 85%, have been able to remain open and maintain their operations through drive-through, counter service, and delivery, even while in-store dining rooms are closed. While the initial impact of the COVID-19 restrictions, our customers' same-store sales have been impacted by as much as 40% versus the prior year. However, over the last four weeks, we are seeing a rebound in sales for our customers as they streamline their operations and drive efficiencies with drive-through pickup and delivery, along with limited menus, reduced operating hours, and maximizing staff levels. Every day, we are seeing closed stores start to reopen. PAR entered this crisis in a position of great strength.

We ended the quarter with $60 million in cash and cash equivalents and short-term investments. We feel very comfortable with our cash position. In addition, we initiated a cost savings plan totaling more than $10 million in savings against our annual plan, designed to protect our liquidity flexibility and enable us to increase investment and growth areas of our business. Most of our employees have been working from home since the initiation of shelter-in-place orders in mid-March, with the exception of our operations team that have valiantly continued to work on-site to continue delivering hardware platforms to our global customers. New York State has deemed PAR as an essential business due to the strategic and critical services we provide to restaurants. For over 40 years, PAR has served restaurant clients across the globe in times of crisis.

We have long demonstrated our ability to pivot quickly to address our clients' most compelling issues, and we are demonstrating that agility amid the coronavirus once again. Now, I'd like to turn the call over to our Chief Financial Officer, Bryan Menar, for a review of the quarter's financials. Bryan?

Speaker 2

Thank you, Savneet, and good afternoon, everyone. I would now like to take this opportunity to provide some additional details surrounding our first quarter results. As Savneet previously stated, we reported revenues of $54.7 million for the quarter, up 22.4% from $44.7 million reported for Q1 2019. Our net loss was $10.9 million, or $0.61 per diluted share for the quarter, versus a net loss of $2.7 million, or $0.17 loss per diluted share for Q1 2019. Unfavorable year-over-year results from operations were primarily driven by corporate financing charges, including an $8.1 million loss on a single stream of debt related to the partial repurchase of the 2024 notes and an additional $1.8 million of interest expense related to the 2024 notes and the 2026 notes.

Operating segment revenue for the three months ended March 31, 2020, were $37.4 million for the restaurant retail segment, an increase of 27% from $29.6 million reported for Q1 2019, and $17.3 million for the government reporting segment, an increase of 15% from the $15.1 million reported for Q1 2019. Restaurant retail revenue for Q1 2020 by business line consisted of $19.9 million for Core, which included $3.5 million for Drive-Thru, $17.5 million for Brink, which included $2.2 million for Restaurant Magic. Restaurant retail revenue for Q1 2019 by business line was $18.7 million for Core, $9.5 million for Brink, and $1.4 million for Shirt Check.

Government revenue for Q1 2020 by business line consisted of $8.1 million for ISR, $8.5 million for Mission Systems, and $1.1 million for product sales, compared to Q1 2019 revenue by business line of $6.3 million for ISR, $8.5 million for Mission Systems, and $0.3 million for product sales. Product revenue for the quarter was $18.6 million, up $3.1 million, or 20% compared to Q1 2019. Our hardware sales in the restaurant retail reporting segment were up versus prior year, primarily driven by Brink and also hardware sales from our new drive-through product line. Product revenue related to Brink for the quarter ended March 31, 2020, was $6.7 million, an increase of 49% from $4.5 million recorded for the quarter ended March 31, 2019. Drive-through product revenue for the quarter ended March 31, 2020, was $3.4 million.

Service revenue for the quarter was $18.8 million, up $4.8 million, or 34% compared to Q1 2019. The increase was primarily due to growth in recurring software and hardware installation revenues. Service revenue associated with Brink includes recurring software revenues of $5.2 million, an increase of 40% from $3.7 million recorded for the quarter ended March 31, 2019. Restaurant Magic service revenue includes recurring software revenue of $2 million. Contract revenue from our government operating segment was $17.3 million, up $2.2 million, or 15% as compared to Q1 2019. This increase was driven by contracts entered into during the first quarter of 2020 relating to ISR. The contract backlog totaled $136 million as of March 31, 2020, and a trailing 12-month book to bill of $1X. In regards to GAAP margin performance for the quarter, product margin for the quarter was 20% compared to 27.6% for Q1 2019.

The reduction in product margin was primarily due to unfavorable product mix shift and increases in freight and reserve costs. Service margin for the quarter was 32.6% compared to 26.9% in Q1 2019. The improvement in service margin was primarily due to the continued shift in revenue mix to SaaS revenue with Brink and Restaurant Magic, partially offset by a $0.6 million increase in amortization expense of acquired developed technology costs resulting from the recent Restaurant Magic acquisition. Government contract margin for the quarter was 6.9% compared to 9.7% in Q1 2019. The decrease in margin was primarily due to lower product service and business line revenue and increased investment in product services. Now to operating expenses. GAAP SG&A was $11.4 million, up $2.8 million versus Q1 2019.

The increase was primarily driven by an additional $0.7 million of Brink sales and marketing expense, an additional $0.8 million in stock-based compensation, and the inclusion of $0.7 million of SG&A expense from the recently acquired Restaurant Magic. Non-GAAP SG&A was $10.3 million, up $2.5 million versus Q1 2019. Non-GAAP SG&A adjustments for Q1 2020 included $1.1 million for stock-based compensation as compared to $0.2 million in Q1 2019. Q1 2019 also included $0.3 million of severance costs and $0.2 million related to the internal investigation of conduct in our China and Singapore offices. Restaurant development expenses were $4.9 million, up $1.8 million versus Q1 2019, driven by increased investment in Brink development of $1.8 million, inclusion of Restaurant Magic R&D of $0.3 million, offset by R&D no longer invested for with the disposition of assets of Shirt Check.

Now to provide information on the company's cash flow and balance sheet position for the three months ended March 31, 2020. Cash used in operations was $15.7 million, primarily driven by an increase in net working capital needs due to increases in inventory and prepaid assets and payment for annual variable compensation. Inventory levels were strategically increased to support the rollouts of projects for Brink and to mitigate risk of supply chain disruption due to the COVID-19 pandemic. This compares the cash used in operating activities to $3.2 million for the three months ended March 31, 2019. Cash used in investing activities was $2 million for the three months ended March 31, 2020, versus cash used of $1.9 million for the three months ended March 31, 2019.

During the three months ended March 31, 2020, we capitalized $1.9 million of costs associated with investments in our restaurant retail segment software platforms compared to $1 million for the same period in 2019. Non-software CapEx costs were $0.2 million for the three months ended March 31, 2020, down $0.7 million versus 2019 due to a decrease in costs associated with IT infrastructure. Cash provided by financing activities from continuing operations was $49.4 million for the three months ended March 31, 2020, versus $5.8 million for the same period in 2019. Increase was primarily driven by proceeds of $115.9 million from the 2026 notes net of issuance costs, offset by the $66.3 million partial repurchase of the 2024 notes. As of March 31, 2020, the inventory balance was $23.3 million, an increase of $4 million from December 31, 2019.

Inventory turns were four times for both our domestic and international operations. Cash receivable of $41.4 million increased $0.4 million compared to December 31, 2019. The receivable balance was broken down between the government segment of $9.1 million and the restaurant retail segment of $33.7 million. I would now like to turn the call back over to Savneet.

Speaker 3

Thanks, Brian. Now to complete review our segment performance for the first quarter. Annual recurring revenue for Brink at the end of Q1 was $22.2 million, an increase of $6.6 million, and a 42% increase from a year ago, and a $3 million increase from the sequential fourth quarter. This ARR number was built off restaurants being invoiced as of March 15th, 2020. In the quarter, we completed the installation of 970 new stores with Brink. New bookings in the quarter totaled 725 sites, and our open order backlog now stands at 1,180 stores. This lower bookings number is directly related to the initial spread of COVID-19. As the spread intensified, we saw a meaningful amount of new business postponed and purchase decisions put on hold for the time being.

Unfortunately, a significant number of these deployments have been delayed due to new safety guidelines instituted by restaurants to limit who is physically allowed inside their stores. We believe this situation is temporary, and we are proactively working with our customers to deploy solutions as safely as possible. Regarding churn, we ended the quarter on a positive note with an annualized rate of 4.9% for the quarter. We are proud that the work we completed in 2019 continues to result in low churn. We will continue to invest aggressively in R&D for Brink in 2020 as we make the necessary move to an agile development environment, which will allow us for faster releases of new versions and a much more seamless experience for our customers. Now shifting to Restaurant Magic's performance in the quarter.

ARR for Restaurant Magic at the end of March was $8.6 million, a 28% increase from Q1 2019. In the quarter, we implemented 507 new store sites and now have 5,408 active restaurants utilizing Restaurant Magic. Bookings in Q1 totaled 596 stores. I am pleased at the continued momentum of Restaurant Magic since we closed in December. In the quarter, the Restaurant Magic team has signed three new MSA deals alongside Brink and have initiated a significant pilot with a Tier 1 customer. Our core business that sells hardware and services to Tier 1 restaurant organizations performed well in Q1 as we expanded distribution channels and we deployed new terminals to our largest customers in anticipation of refreshes being driven by the end-of-life window seven by Microsoft. Unfortunately, this part of our business is being most impacted by COVID-19 restrictions and the overall downturn in the economic landscape.

All major customers have paused most projects, new construction, and scheduled deployments. We are confident these are not lost opportunities but being pushed into the second half of this year depending on a specific concept and the timing restrictions being reduced. We are seeing some renewed business interest in specific international regions that are ahead of the U.S. on the infection curve. Now to review our government segment. Our government business delivered a solid quarter evidenced by the 15% increase in revenues compared to Q1 2019. Our backlog at the end of Q1 was $136 million. Our intel solutions business was a driving force behind the growth in the quarter as ISR revenues increased 39.5% from last year's Q1.

We continue to seek out contract opportunities where we can leverage our decade-long experience and performance excellence, specifically in value-added revenue contracts that include more direct labor and high-tech contract work within our intel solutions business line. In summary, we are in the midst of a shift in the way restaurant organizations evaluate, purchase, and implement restaurant technology. I believe that while our business will no doubt feel a substantial impact from COVID-19, the crisis will accelerate the underlying secular trends propelling Brink today, the flexibility of a modern restaurant platform that has been proven out to an extreme degree. We believe we can not only withstand this crisis but grow share during this time. PAR's market of customers has historically been and likely will continue to be heavily weighted to the QSR and fast casual market.

This market generally performs better in slowing economies as customers tend to shift towards these concepts. In addition, these franchise-based businesses tend to withstand crisis better as their business models tend to be more mature and enjoy brand recognition. Second, there is a potential that the virus has spread and is accelerating the need for digital and drive-through spend. As restaurants experience closed table service traffic, we are seeing off-premise dining, online ordering, and delivery become the most important priorities, all of which require a modern restaurant platform. Third, we are seeing valuations of potential M&A targets become more attractive in this market. As venture funding has paused and growth stopped for many, we're seeing an increasing number of companies look towards an exit. This, combined with the fact that many of our competitors are pulling back, could provide an entry point for PAR as a consolidative.

It is in PAR's DNA to help our customers solve some of their most complicated operational challenges. These challenges have only intensified during this COVID-19 period. We know that this pandemic has made life challenging for everyone, for both our customers and our employees for the past few weeks and months. A reminder that we're all in this together. All of us are empowered by the dedication of our employees, particularly their willingness to go above and beyond for our customers in this unprecedented time. This experience has challenged us to get better, pushed us to work harder, and developed a deep desire to serve our customers. It will have lasting implications on our business and industry, but in many ways, it's elevated our culture and mission.

With the value we continue to provide our customers and the trust they place in us, I'm fully confident that we can emerge from this stronger than ever. We'll now open up the call to question and answer.

Speaker 1

Diana, we're ready for Q&A now.

Speaker 5

At this time, I would like to remind everyone, if you would like to ask a question, please press Star, then the number one on your telephone keypad. Once again, that's Star, followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Adam Wyden of ADW Capital.

Speaker 1

Hey, guys. Wow, really remarkable. You know, thank you for taking my questions. A lot going on in the restaurant industry. Can you talk a little bit about the competitive environment in enterprise? I mean, obviously, work from home and quarantine has hurt your customers, given most of them are focusing on SMB, and the lion's share of their revenues are from merchant processing. We've heard that your largest competitor, I guess, has laid off their entire enterprise sales team. I'd imagine there would be some positive implications for pricing as well, since they were kind of giving away SaaS in exchange for merchant processing and, obviously, the availability of talent. I mean, can you provide some color on some of this?

Speaker 3

Sure. I will not talk about individual competitor, but do it categorically. I would say that we feel, relative to competition, we are probably in the strongest suit, in that our base of customers are larger than enterprise, and they are still open. That has led to the opportunity for us to acquire talent faster and potentially better than we could have historically. It, in many ways, proves out our model of our focus on sort of high-quality, high-enterprise customers as a secure place to be. We have seen a number of competitors pull out of our what's called the enterprise market. We think that market has actually expanded for us during this time.

At the same time, I do believe that our ability to win will still be tied to our ability to deliver on the solutions that we've talked about for the last couple of quarters. I feel we're sort of hitting an interesting point where we're getting through the big technology development we need to to really accelerate and be agile. At the same time, we do see competition retreating, which has led to sort of the opportunities that are growing and our available talent for growing as well.

Speaker 1

Great. Yeah, no, it's super, super exciting. That was helpful. It's kind of our understanding that you guys signed up to kind of four-figure unit chains with payments. Obviously, I'm not expecting you to confirm that, but was hoping you might be able to give us some color on payments, the progress you've made thus far on payments, and kind of the opportunity going forward.

Speaker 3

Sure. I can't provide too much color on this, but I can say we are excited at the opportunity to expand our payment business. I think part of our challenge in the payment business will be that the table service market in 2020 will be, I think, relatively small, which was a big part of our payment plan. That said, we've been encouraged that a couple of our larger organizations are interested in taking or looking at our payment products. I'd say we feel encouraged out of our existing base picking up the product and maybe expanding it further than at least I had expected. The balance of that is that the table service market probably won't be here in 2020 with COVID-19. We feel encouraged by where we are. We've got a lot of work to do before we can really get it out there.

From a customer adoption perspective, I think all of us feel like there's a really, really big opportunity here.

Speaker 1

All right. I have two more questions. You've talked a lot about your microservices, kind of replatforming, which has kind of been the bottleneck to basically rolling out more units per quarter. Obviously, your bottleneck now is actually being able to get into the restaurant. Can you talk a little bit about kind of the progress you've made on microservices and kind of your ability to kind of replatform and how that kind of will be manifested in terms of rolling out more units once kind of the restaurants open up?

Speaker 3

Sure. I think we are incredibly happy where we are on the transition to being agile to microservices and, honestly, just a more modern infrastructure. We've got an amazing leader at Brink who's really driven this from the top, and it's spread throughout the ethos of the organization. We're probably still a quarter or so away from really running, maybe a quarter and a half, but we're already seeing great progress. You can see it in our numbers. You can see it in the quality of talent that we've attracted. I think that's I hate to say that this crisis is good for anything, but in many ways, we as a firm sort of live on this idea that our goal is not to survive. It's to thrive during this time. We are taking this time to continue to push very, very hard on our R&D spend.

We did not cut one dollar of R&D spend related to the microservices project. We'll continue to get that right because, as you suggested, it's been the only reason we haven't grown the business faster. It's the only reason. We are deep into that work today, and I think we're still a quarter or so away from truly being up the jog, maybe, but there are real signs of progress.

Speaker 1

I mean, look, I've been obviously, you guys with me on this call for a few years now. I mean, it's super exciting now that we have basically an intersection of your ability to take on these customers and now, I guess, these QSR customers realizing that they actually need that product. I think it kind of leads me to my next question, which is I look at your customers and I say to myself, "Wow, they're super well-capitalized. Popeye's comp 30%. Jack in the Box has 93% off-premise." On some level, just talking to some of these QSRs that we talked to, COVID/the pandemic, on some level, should accelerate the adoption of Brink because it allows to get the loyalty and the online ordering and, obviously, the drive-through.

I think on some level, people might have been dragging their feet before, and it seems like not having it is kind of at a risk to your sales in this kind of world. Super exciting on that front and things that kind of the intersection of the microservices and now these guys realizing that they need this. I think the growth will be explosive once they're letting you out into the restaurants. I want to ask about something else. The company has not really ever broken out Brink from Core. We saw in the proxy that finally you broke out Core in terms of hardware and service. I was pretty stunned, actually, that you guys generated $11 million in operating profit, and that wasn't really with your drive-through consumables business, which is, I'm sure, just kicking the brand.

If I put those two together, that's like a $15 million operating profit business and a lot of that service and consumables. I mean, that's got to be worth at least $120 million. Government's ramping back up. I put $100 million on that. That's $220 million. Assuming Brink and Restaurant Magic, I mean, Brink and Restaurant Magic exit Q1 was about $31 million. Assuming we're in our houses for the rest of our lives, you guys only get to $35 million or $40 million at the end of this year. I mean, at today's share price, I mean, Brink effectively is the cheapest enterprise SaaS company that's actually growing in the market today. Your closest comp, Lightspeed, with almost 100% SMB exposure is trading for 15 times ARR. I guess my question to you is, what do you think people are missing?

I mean, some of the disruptors like Wayfair or Chegg are skyrocketing because people think their competitors will go out of business. I mean, clearly, coming out of the pandemic, we should be in that bucket. I mean, why do you think PAR isn't in that bucket? I mean, what are we doing to kind of solve this valuation disconnect?

Speaker 3

Sure. I'd say, listen, I think we, as a business, got sort of thrown out with restaurants, right? I think there was just something that everything tied to the restaurant would struggle to reach. I think what investors or all of us were missing is the fact that we have a very, very resilient client base. These are the best-placed organizations in the world. In many ways, we can actually accelerate these organizations. We have certain organizations that depend on us for their mobile apps, for their online ordering. I think what was lost was that we were just considered another restaurant-type company without maybe the rigor around who do we actually service. I think that's what happened. How do we sort of rectify a valuation gap if there is one? Listen, I think we need to execute, right?

We installed more stores this quarter in quite some time. We'll continue to push to growth during this time. We'll start telling our story. I think I can't stress to you what a shock the COVID experience was to see our customers' sales drop so precipitously. Now we've seen it rally back. I think we ourselves are coming to terms with we've got to keep winning in this environment. We've got to be aggressors. I think that will help bridge this valuation gap. It is part us executing and part us telling the story.

Speaker 1

I mean, high level, just to summarize, I mean, your peers who are merchant processors, they have exposure table service. Their ARR is down, yet they trade at 15 times ARR. And you trade at three or whatever the number is, and you're resilient. Are you confident that the market will eventually see the valuation disconnect? I mean, is that what you're saying? Obviously, I know $10 where we were last quarter is a little bit different than we are up here. But, I mean, are you confident that the market is going to be able to see the valuation disconnect? I mean, obviously, as you continue to execute and get bigger?

Speaker 3

I think so. I do think markets eventually get relatively efficient, and it's just a function of how soon we can bridge that gap. I'd say the fact that we as a management team as a company are cognizant of that also puts more focus on it.

Speaker 1

Good. Look, I mean, I got to imagine that you spoke to M&A on a couple of occasions. I'm sure there's probably some really interesting assets out there, both domestically and internationally. Getting your cost of capital to a point where you can execute on another Restaurant Magic, I got to imagine is a priority for you.

Speaker 3

We definitely see the M&A landscape expanding. I think I said this on other calls, but the number one reason we don't go forward with M&A has been price historically. I think, and maybe that was my own arrogance or luck, but I would assume that we have a higher quality business model than others and that we service this enterprise customer base. We are truly enterprise software where I think many were getting multiple servicing small businesses and not realizing that that business will have to turn in any type of recession and, obviously, of course, the pandemic recession. We are looking to be opportunistic when and if the opportunity comes, but we're going to stay very disciplined. I would say we are product people. We are not going to sort of acquire something just to acquire something.

We need a product that works, a culture that meshes with us, and one that we truly believe we can scale. If we see that, we will be incredibly aggressive.

Speaker 1

Yeah. Look, it's super exciting having been an investor and bystander, just looking back to where we were in early 2018, I mean, where the company is and where it's going. I'm very happy and pleased that I've been able to be part of the journey. I hope that you guys figure out a way to get your cost of capital up because I think there's probably a lot of M&A to do. Congratulations on a wonderful job, and I look forward to seeing more.

Speaker 3

Thank you.

Speaker 5

Your next question comes from the line of Andrew Scutt of Roth Capital.

Speaker 1

Hey, guys. Thanks for taking my questions. I just want to say congrats in the quarter. You guys were executing really well until COVID popped up. Great to see that. My first question for you guys is just revolving around Brink. As far as the installs go, do you guys have any idea of what the kind of the rate of the rebound is going to be once everything starts opening up? Secondly, do you kind of see the activation run rate kind of normalizing to what you guys had in the quarter moving forward?

Speaker 3

On your first question, I think it's really hard. We don't have good visibility on where things are to when things are going to open up. I'd say a couple of our largest rollouts are on pause, not because the customer actually wants it on pause. It's just there's a mandate that we can't actually enter stores yet and help them install and roll out. There's a bit of a limitation, some tied to, call it regulatory compliance, and some of it tied to customers. We don't have great visibility yet. I would expect that as states reopen, we will see some rebound. I think that rebound can come for two reasons.

The first is it's no doubt in my mind that customers that have Brink have clearly seen those stores outperform versus their stores that didn't have Brink, whether it be for online ordering, mobile app access, so on and so forth. Second, as I mentioned, the chains that we service have really fought back. We have a number of chains that have, I'm sure, are doing better this year than last year. I'm guessing there, but I think we've seen real progress in these organizations. I think if your sales are back or close to where they were, you want to push forward on these technology initiatives because this crisis has only heightened the need for what we offer, not slowed it down. I think you'd see some accelerated pull forward of demand.

Now, that's all tempered by the ability for us to enter stores for states to reopen and for the restaurant organizations themselves to feel confident on their own businesses going forward. We are there. To your second question, if things are to reopen, of course, I think we'll get back to where we were, and I think we'll do better, right? We missed the last two weeks of last quarter, which is generally the biggest weeks of the quarter. I hope we can get back there provided that the country gets back there.

Speaker 1

Great. Thanks. Just another quick question. Really healthy backlog on Brink once again. Just are you able to give a breakdown between new and existing customers or just a rough estimate there?

Speaker 3

We can't do that now. I would say most of the backlog, though, it's still probably existing logos we've signed. We don't put something in backlog until we have a purchase order. So it's real backlog. It's not sort of something that we can't tie to an individual store. It's predominantly existing logos that we're signing individual franchisees.

Speaker 1

Great. Thanks. That's all for me.

Speaker 5

Your next question comes from the line of Esha Farouk.

Speaker 4

Hi. Good afternoon, guys. Congrats on a good quarter. A couple of questions for me. I apologize in advance because I missed the first few minutes of the call. Can you give a sense for what your outlook for the second quarter is? I know your Q1 numbers are terrific, but your Q2 numbers, especially for Brink bookings, can you give a sense for that?

Speaker 3

Yeah. It's going to be the last answer, which is we don't really know. April will be, obviously, I think just like almost every business, it'll probably be one of our slowest on record. Like I said, we're seeing a rebound every single day. It's a little bit hard to kind of guide to our stores. We're able to book stores; it's hard to install them. I won't really have good visibility for another three or four weeks on how the curve is shaping up. Right now, I'd say it's very slow. It's very tepid. Everyone's on pause or close to pause. The green shoots of it are that we're having real conversations with customers around when they want to restart the rollout that we have planned.

Speaker 1

Yeah. Why would it?

Speaker 4

Yep. Right.

Speaker 1

Why would that?

Speaker 4

Is that from our standpoint, what's helped Brink also in the attachment that we have in the hardware that we've seen over, actually, in the past, call it four quarters, that's one thing as the rollout, depending on the phase and when that comes back in, that's where our risk is, right, on the revenue top side. We are happy to see how our customers have fared over the past, call it four to six weeks. As I needed to mention earlier, that we're approximately 85% of them still open. From a servicing standpoint, we feel a little bit better than we are from the product standpoint going forward in Q2. Yep. Sophie, like you mentioned, you guys are able to do bookings, right? You already have a pretty sizable backlog, right?

As Q2 progresses, right, and you add more bookings, right, how fast do you think your team will be able to get those bookings activated as soon as possible? Can you give a sense for maybe the run rate on a monthly basis, maybe?

Speaker 3

We feel we've cleared most of the bottlenecks and been able to get stores out the door quickly. Our service team has really been revamping and has great leadership and pushing forward. This is honestly going to be more tied to states opening up and then in our customers opening up than it is something tied to us. We have a number of chains. We have many bookstores that they want rolled out. We want rolled out. They have a moratorium on new stores right now. We need to sort of work with them to figure out how they want to restart. Once things get back to any form of normal, we should be able to install at least what we did the last quarter and hopefully a lot more.

It is now more tied to all of these states reopening than it is anything that we can do.

Speaker 4

Got it. Thank you, guys.

Speaker 5

Your next question comes from the line of Kevin Seek of Slingshot Capital.

Speaker 6

Hey, Tony. I just want to find out from you guys about the Brink POS. Is it a self-service product? Or just to clarify, can a customer deploy Brink without having any formal training?

Speaker 3

Hey, Kevin. Thanks for joining. It can be a self-service product. Today, most of our terminals are installed by an installer, but we are working very hard to make it as self-service as possible. Most large chains do have an install because that install generally encompasses more than just Brink. It is a terminal. There are peripherals. There is other stuff that they are rolling out. It has not been historically like this. There is no doubt that COVID has dramatically accelerated our own focus on how do we make this as seamless as possible. It can be installed by an individual. We have had people do that. I would say most of our installs are still very much tied to someone coming into the store.

Speaker 6

All right. Thank you. Just want to finalize as well. I missed the earlier part of this earnings call. I think since more QSR team executives are actually staying at home these days, do you find it easier to reach out to them to discuss whether Brink could help them during this period or even post-COVID-19?

Speaker 3

I would say during the COVID experience, it's not the best time to go pitch to these CIOs and CEOs right now as they're going from seeing sales drop 40%, 50%, 60% in some cases overnight. What we've become is a resource for our existing customers and the ones that we sort of had near the finish line on helping them provide services to them. We've created a program called Park It, which is a virtual drive-through. It's pickup, and we're giving this to our customers to help them survive. I think what we've found is that this experience has, in many ways, bound us not physically, but emotionally to our customers and the pains that they've gone through and ourselves. We are trying to stand by them, I guess, in a virtual sense, help them deal with this crisis.

I think they'll see that our intent is sincere and our product has worked, and we'll convert them going forward. For those potential customers that are not our existing customers, I think for them, it's much more of a I'm sure some of them are saying, "Gosh, I wish I installed this or pushed this out in 2019, 2018," because they would have been limited in some of the opportunities to fight back during COVID, whether it be online ordering, third-party delivery, so on and so forth. My hope is that the way that we've carried ourselves, the character that our team has pushed forward, the empathy we've shown has come through to our customers and our potential customers, and then our solutions have delivered the value that they have.

Speaker 6

All right. Thank you very much. Just one last question. Obviously, I'm just figuring out for the restaurants in terms of the unit economy. Obviously, QSRs care a lot about protecting their bottom line and, of course, the sales as well. Just by installing Brink, could you talk about maybe some form of cost savings or how fast would they get ROI on installing Brink?

Speaker 3

It is not something we disclose. I would say Brink, in general, I think buying a point of sale has changed a lot. I think point of sale is going to be a message of the past. It is going to sort of be we are moving to a world of a platform, right? I think historically, when you would install a point of sale system, it was the world of the CTO and the CIO. Today, that decision is very much the CEO, CIO, the whole team. The ROI is significant in that, A, I think it has been proven that a modern technology-enabled restaurant outperforms one that is not sort of up to date. I think you can look at all the great organizations that we service and others and see their sales growth versus those that have not sort of adapted to change.

I think that ROI is self-explanatory now. At the same time, there are endless reasons on the cost-saving side, including the data integrity issues of having multiple point of sale systems, the ability to actually have data to go push out promotions, save money on the back office. I guess we do not have, I guess, the equation to say, "Hey, you're going to pay us X amount per year, and you'll make this much," because, again, it is very chain-dependent. I think the conversation is not so much tied anymore to ROI. It is about why we are the right solution for something else we are looking at. Does that answer your question?

Speaker 6

Yeah. Excellent. Yeah. I think really great results this quarter, and I look forward to the rest of the year. Thank you very much.

Speaker 3

Thanks, Kevin.

Speaker 5

Your next question comes from the line of Adam Wyden of ADW Capital.

Speaker 1

Sorry, guys. I didn't mean to, I forgot. There was one last question I didn't ask. I mean, obviously, you spoke about getting the baby out with the bathwater and restaurants. This is a stock that's been the target of a lot of short sellers. I think it might be helpful for you guys to talk about kind of what the investment that is required on behalf of a restaurant to actually adopt Brink. I think in your conversations, you mentioned that actually a base hardware for QSR is only a few thousand dollars. I think from our research, it also seems like some of the larger chains are effectively soft dollaring the investment and basically providing the money upfront or over a 10-year period to finance the hardware.

I think it might be helpful for you to kind of talk about the capital investment required to do Brink because I think a lot of guys are walking around saying, "Well, the restaurant isn't making any money. They can't take Brink." It might be helpful to kind of outline how much dollars and what the franchisors are doing to basically subsidize that and also what initiatives you guys are doing to basically defray that cost such that once you're open and microservices are going, we can do 2,000, 3,000 a quarter.

Speaker 3

Sure. Today, I'd say to get Brink launched in organizations, you sign up for, obviously, our software product. Historically, it's about $2,000 a year, depending on how many terminals you have. The actual cost of a physical terminal isn't terribly expensive. It's not too different than a computer. You're anywhere from $700 to a few thousand bucks. Depending on how many terminals, whether you add a kitchen system, for the quick service and fast casual customers that we serve, it's maybe $5,000-$10,000 if you're really doing a lot. In many cases, it's a relatively small CapEx. Now, in today's world, you may say, "Hey, I don't want to do any CapEx.

I don't want to upgrade my terminal." I think what we've realized at Brink is, A, we can install Brink on pretty much anything, any Windows device, and you don't necessarily need to make the hardware purchase. B, as I suggested, the customers now say, "Hey, I need all this technology to grow my revenue potentially." I think the customer's mind is much more focused, obviously focused on cost. They don't want to sort of spend the CapEx, but how fast they can get paid back given all the stuff that they can launch. What we're seeing from the concept level is a lot of focus on trying to push out one standardized platform because it provides an immense value to them. We'll see certain concepts put out through financial incentives to convince customers, sorry, their franchisees, to move to our products faster.

We've also seen what's called instead of the carrot and the stick, we've seen others say, "Listen, if you don't roll out the modern point of sale system, we're not going to give you the new loyalty app." The commitment from the concepts is significant, and that's because they're getting real value from it. I think the upfront cost isn't nearly as high as many people think. I think the push from the concept level is significant given the value they get from it.

Speaker 1

Right. It sounds like also with the balance sheet, some of the things that your competitors were doing vis-à-vis, giving the hardware for free in exchange for payment, I mean, you've got a—I mean, you've got a really big balance sheet now. I mean, presumably, if the restaurant does not want to make the investment or the franchisor is not giving the hardware for free like one of your big QSR chains, you guys are in a position to work with these customers to defray the upfront cost as well, right?

Speaker 3

Correct. I think I speak from a high level. Yeah, of course. I think we are looking for ways to make these solutions oriented for our customers. We'll find ways to do that. Of course, we are, I think, very excited that competition has become more rational. I used to say that if competitors are irrational, it's still our reality. Today, I think that a rational customer, we could be the ones sort of pushing the envelope here.

Speaker 1

Great. Great. Great. This is super exciting. All right. That's it for me.

Speaker 5

Your next question comes from the line of Samad Samanna of Jefferies.

Speaker 7

Hi. Thank you. This is Ryan Bresseron for Samad here. Just a couple of questions here, if I may. First, you talked a little bit earlier about the broader environment. If I could just maybe follow up on that, how are your customers thinking about store reopenings in the context of the broader consumer behavior in terms of demand recovery out of this? What's the thought there?

Speaker 3

I think our customers are still figuring it out. I don't think there's anyone that says this is our true go-forward plan. There's still a lot of wait and see. I think that wait and see is honestly just tied to see how do consumers react when states reopen. We've got our first couple of states. We'll see how that data goes. We'll see how the restaurants respond after that. Right now, unfortunately, we just don't have enough information to answer that intelligently. I think what we have seen that might be encouraging is that our larger organizations that we're rolling out, we're in active dialogue with them about when do we restart, how do we restart, how do we do it safely.

I don't think they've said this is the date yet, but I think the plans that they're hopefully in active planning with us to figure out when that may be.

Speaker 7

Okay. Thank you. Helpful. Just secondly, can you give some more color on how efforts to cross-sell Restaurant Magic have been going? Also, in your comments about Park It earlier, how do you view this particular opportunity and drive-through evolving after COVID, and how's that playing out?

Speaker 3

Yeah. Good question. On the Restaurant Magic side, I'm very encouraged. I'll say this, we're still extremely early. We closed on Restaurant Magic at the end of December, and I think we barely scratched the surface of building up the team and the efforts there. We've signed three customers together already. As I mentioned, we have in pilot in one of our largest logos that they were not in before. That partnership, I think, will continue to get better. We're very, very, very early stage right now, and it's still very, very early. Obviously, with COVID, the focus has not been so much on trying to partner up and stuff right now. As it relates to Park It, I think call it traditional drive-through after we had this crisis will no doubt see more acceleration.

We got into the drive-through because we truly believed it was where we're going to see everyone from coffee shops to pizza chains start to expand into. I think this crisis will make that go faster. On Park It and some of the, call it the virtual drive-through or virtual pickup, I would be shocked if you were an organization that had any decent size of quantity of stores if you didn't have something like this by the end of the year. I think there's no CEO or CIO who's not going to build some sort of product in the fear that this may happen again. I think we'll see a lot of interest here. Us and our competitors are all working on solutions to sort of make this as easy as possible for them.

Speaker 7

Okay. Thank you. Maybe just finally, on M&A, are there any verticals in particular you've seen opportunity evolving in, and how would you proceed there?

Speaker 3

Unfortunately, I can't share exactly what we're looking for, but we've sort of created, always sort of started at a high level, which is we'll only buy something where we truly believe there's a value to the end customer. So it's not just to consolidate. The consolidate is if we brought that product in, can we add more value to our customer? Then we look at and say, if we brought that product in, does it actually integrate into Brink and Restaurant Magic? Does it actually create more—can we create a better product? If you kind of look through that lens, there's a ton of stuff that we think is interesting today, right? At a very, very high level, all the off-premise dining areas, the place we want to be a part of, will continue to grow even after the world hopefully goes back to normal.

We're looking at stuff like that. At the same time, I think it's not lost on us that having more scale in point of sale may make sense as well. I think our M&A efforts are across the board.

Speaker 7

Okay. Thank you. Appreciate your time.

Speaker 3

Of course.

Speaker 5

There are no further questions from the phone line.

Thank you, everyone, for joining this afternoon. We will be certainly available in the coming days and weeks for callbacks and follow-up. Please stay healthy to you and your families. Again, thank you for your time today.

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