PAR Technology Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 10 speakers on the call.

Operator

Afternoon and thank you for standing by. Welcome to PAR Technologies First Quarter 2023 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.

Operator

To withdraw your question, simply press star 11 again. As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host today, Chris Burns, Senior Vice President of Business Development. Go ahead, Chris.

Speaker 1

Thank you, Eric, and good afternoon, everyone, and thank you for joining us for Par Technologies' Q1 2023 financial results call. Following the close of trading this afternoon, we released our financial results. The earnings release is available on the Investor Relations page of our website at partec.com, where you can also find the Q1 financials presentation as well as in our related Form 8 ks furnished to the SEC. During our call today, we will reference non GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items along with a reconciliation of non GAAP measures to the most comparable GAAP measures can be found in our earnings release.

Speaker 1

I'd also remind participants that this conference call may include forward looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. 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 our earnings release this afternoon and in our annual and quarterly filings with the SEC. Finally, I'd like to remind everyone that the call is being recorded and it will be made available for replay via a link available on the Relations page of the website. Joining me on the call today is Par's CEO and President, Savneet Singh and Brian Menar, Par's Chief Financial Officer.

Speaker 1

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 and A. Savneet?

Speaker 2

Thanks, Chris, and good afternoon. PAR is off to a solid start in 2023 delivering strong results in our Q1. Restaurants of all types and at all stages are using PAR as their growth enabler, leveraging our unified commerce technology to solve their most challenging business obstacles. These restaurants range from emerging growth brands all the way to established enterprises. Today, I'd like to focus my comments on our recent quarter performance, a view of what our customers are looking at for their technology initiatives and then finally, I look forward to the rest of 2023 and beyond touching on the macro environment we're observing and our own internal initiatives.

Speaker 2

We continue to deploy our unified commerce platform to help restaurants of all sizes improve operations and enhance the restaurant guest experience. Unified Commerce drives our most important KPI, customer satisfaction, which leads to longer LTVs and a greater TAM over time. At the end of Q1, ARR reached $116,000,000 delivering a 23% year over year increase, demonstrating the continued growth and scaling of our subscription services engine and contracted ARR now stands at $131,000,000 Importantly, when adjusting for one time items such as severance, this growth came with no increased operating from Q4 2022. Operator Solutions ARR grew 27.4 percent to 45 $2,000,000 in Q1 when compared to the same period last year. During Q1, Operator Solutions added More than 1100 new store activations and new bookings total approximately 1200.

Speaker 2

Churn continues to be extremely low at 4% annualized for Brink in the quarter. With the recent wins in table service and significant strength in our new customer pipeline, Brink is positioned well to continue scaling. The table service momentum is real and the first two deals I mentioned on the Q4 call are gearing up for launches at the very end of this year and into 2024. While the ramp up to take these customers live is long, the AR contribution will be meaningful. In addition, we find ourselves the largest spring customer pipeline in our history, suggesting continued resiliency within our customer base.

Speaker 2

Payments continues to be an important part of our growth for operator solutions and unified commerce. Rolling out new payment customer sites was slower in Q1 than we expected, but we're recouping some of that delayed business in Q2. Progress is being made and we should see improvement through the remainder of this year. We are confident that as we cross sell and up sell payments to all new Brink deals and existing customers, We will continue to see significant customer wins in ARR acceleration. Combine this with a set of new payment offerings including 1Tap loyalty and improved gateway, this is a strong indication for continued momentum.

Speaker 2

Moving to guest engagement ARR that includes our leading customer engagement platform Punch and newly acquired menu. Guest engagement ARR grew 18% in Q1 when compared to Q1 2022 and totaled $59,400,000 As we talked about last quarter, Punch, while being the leader in loyalty for restaurants, is currently experiencing a slowdown in the marketplace as our marketing development funds have been impacted, in turn, delaying rollouts and slowing down new customer opportunities as RFPs are deferred for later in the year. We also recognized some expected churn in the quarter. This is well mapped out and we'd argue in the bucket of healthy churn for both us and the customer. Active store count on a year over year basis still increased by 16% and we believe business will improve as the year progresses.

Speaker 2

In the quarter, We signed some return customers, customers who for whatever reason had in previous year's churn and are now resigning with Punch as they've realized Punch is best in class. We are also having success upselling additional Punch modules to existing customers as they build out their loyalty and customer engagement priorities. New leadership in Punch has started to build a foundation that we can begin to leverage and take Punch to the next level. Now to update you on Menu. We've been impressed by the early response many of us received from prospective customers this year.

Speaker 2

We have signed nearly 500 locations to date in the United States And this was in advance of any real sales effort. We had previously planned to wait until the second half of this year to bring menu to the U. S, but it's clear starting earlier is the right decision. We have aggressively started tooling the business for the U. S.

Speaker 2

Domestic market and we expect revenue to start matriculating in Q3 for these deals. We feel more confident now than we did at the time of the acquisition that menu could grow into a dominant product line. The demand isn't the problem as the RFP environment is ripe as restaurants realize the operational benefits menu can bring to their off premise orders, while enhancing customer satisfaction in building real customer loyalty with a deep integration into Punch. We are very early in menu's introduction to the domestic U. S.

Speaker 2

Market, but the early response and reaction has been nothing but overwhelmingly positive. Our teams are focused on operationalizing the business in the U. S. That we can blitz the market later this year. Back office continues its turnaround.

Speaker 2

Reported ARR of $11,300,000 in Q1 was a 30% increase from last year's Q1. We had activations of 355 stores in the quarter and now have more than 7,000 active stores. New store bookings remain on a strong pace as we continue to penetrate large national a large national chicken QSR with new stores being signed in the quarter. In summary, PAR has seen continued market traction with the execution of Unified Commerce in Q1 with various net new enterprise customers purchasing multiple products across our software ecosphere and legacy customers opting to expand their footprint with PAR. Underpinning our unified commerce platform are 4 discrete requirements.

Speaker 2

1st, best in class standalone products. Our products must be able to stand on their own. 2nd, best in class integrations. 3rd, unique lighthouse functionality. And 4th, a truly open ecosystem that empowers restaurants to make choices that are best for their business.

Speaker 2

While the term unified commerce has become increasingly commoditized by our mostly single product competitors, our multi product offering gives PAR a strategic advantage. Innovation requires coordination and optimal coordination requires control. Unlike competitors, we are able to sync multi quarter roadmap between products, on all sides of an integration and thereby dictate quality and unlock operational efficiencies such as singular contracts, Singular account management, better SLAs and more. Ultimately, what we offer is seamlessness and a unified experience that is scalable. As a platform, revenue may not be linear in 2023 given the large given the number of large deals we are involved with And the rollout schedule is being worked with the customer, but the scale of our pipeline is expanding and notable.

Speaker 2

At our core, we are in the customer data business and Pars unified Commerce value for users is in the massive amount of real time transactional data captured via unified commerce for Brink, via customer identity data through Punch and business data including employees, inventory and menu items through data center. As an example, Par processed 4,700,000,000 transactions through Punch in 2020 We enriched this raw data based on machine learning to dedupe, standardize and transform it to make it more actionable. This includes tracking the activity of each guest from multiple channels of engagement and assigning them into the right segment for analytics, targeting and attribution purposes. PAR makes these analytical insights and data available to our customers in a variety of ways. Customers can perform self-service analytics right in the product itself, including campaign performance analytics, employee and business reporting and guest analytics.

Speaker 2

Customers can export this data on demand for their own self analysis and visualization. For advanced analytics, we also provide an automated ECL of raw data into their own environments through a data pipeline. This data culture sets up nicely for the wave of artificial intelligence entering our world. Most consistently, we hear that there are 3 distinct ways restaurants see AI as being beneficial to their business. AI can make restaurant visits more consistent and predictable, AI can improve the speed of service, and AI can improve order accuracy.

Speaker 2

It also minimizes human interaction and lets experts focus their time and skill on other tasks. AI can be a lot of things to a lot of different restaurants. For some, it may be utilizing voice recognizing kiosk or tools for cost cutting and reducing labor costs. For others, they are seeing conversational AI tech that improves order accuracy. While even others need tools to track employee performance and sales data along with inventory forecasting.

Speaker 2

The possibility of AI adoption is endless and restaurant across customer identity, transaction, menu and COGS. This allows PAR and our customers to create real value as we have complete internal data to match with external sources, thereby having a stronger foundation to build large models that lead to insights and automation. The real exciting part of this is that Para's unified commerce allows us to have these firsthand conversations with our enterprise customers, near time integration with technology partners in a very aggressive product roadmap that includes AI to enterprise restaurants we rely on Park to consistently deliver. Underlying all this though is that while our industry gets caught up in the excitement around the technology, we will never get lost that in the end we must deliver to a franchisee who must deliver an incredible experience to a guest. The franchisee or store owner could care less what model they use or what algorithm we built.

Speaker 2

They just want the technology to work. The grit of par combined with our deep understanding of the customer along with our data advantage set us up nicely to capitalize. Brian will now review the numbers in more detail. Brian?

Speaker 3

Thank you, Sapneet, and good afternoon, everyone. Total revenues were $100,400,000 for the 3 months ended March 31, 2023, an increase of 25.1% compared to the 3 months ended March 31, 2022, with growth coming from both restaurant retail and government segments. Net loss for the Q1 of 2023 was $15,900,000 or $0.58 loss per share compared to a net loss of $15,700,000 or $0.58 loss per share reported for the same period in 2022. Adjusted net loss for the Q1 of 2023 was $12,700,000 or $0.46 loss per share, compared to an adjusted net loss of $7,100,000 or $0.26 loss per share for the same period in 2022. Adjusted EBITDA for the Q1 of 2023 was a loss of $8,800,000 compared to adjusted EBITDA loss of $2,900,000 for the same period in 2022.

Speaker 3

Included in our results for the Q1 of 2023 with a charge of $2,600,000 to our hardware margin related to inventory. Excluding this charge, adjusted net loss for the quarter was $10,100,000 were $0.36 loss per share compared to $7,100,000 or $0.26 loss for 2022. And adjusted EBITDA was $6,200,000 compared to $2,900,000 for 2022. We continue to focus on driving improved EBITDA performance with continued top line growth while managing strong cost controls. Hardware revenue in the quarter was $26,800,000 an increase of $1,700,000 or 6.8 percent from the $25,100,000 reported in the prior year.

Speaker 3

We continue to see strong hardware sales both with our Tier 1 legacy customers and across our Brink customer base. Subscription service revenue was reported at $28,000,000 an increase of 6,700,000 were 31.4% from the $21,300,000 reported in the prior year. The increase came across our unit for our unit by Commerce. The increase in revenues was driven by both site growth and an increase in average revenue per unit as we continue to cross sell into our existing customer base. The annual recurring revenue exiting the quarter was $116,000,000 an increase of 23% compared to Q1 2022 with operator solutions up 27%, guest engagement up 18% and back office up 30%.

Speaker 3

Professional service revenue was reported at $13,800,000 an increase of $1,300,000 or 10.8 percent

Speaker 2

from the

Speaker 3

$12,500,000 reported in the prior year. Our total recurring revenue base, which includes both subscription services and hardware support contracts within professional services continues to expand with $35,300,000 recorded Q1 2023, an increase of 23.4 percent compared to the $28,600,000 in Q1 2022. Contract revenue from our government business was $31,900,000 an increase of $10,400,000 or 48.6 percent from the $21,400,000 reported in the Q1 of 2022. The increase in contract revenues was driven by a $9,900,000 increase in government's ISR solution product line. The increase was substantially driven by continued growth of counter UAS task orders.

Speaker 3

Contract backlog associated with our government business as of March 31, 2023 was $324,000,000 an increase of 66% compared to the $196,000,000 backlog as of March 31, 2022. Total funded backlog as of March 31, 2023 was $86,000,000 a 105% increase compared to the funded backlog of $42,000,000 for the prior year. Now turning to margins. Hardware margin for the quarter was 16.4% versus 20.2% in Q1 2022. The decrease in margin was driven by a charge to our inventory.

Speaker 3

Excluding the adjustment, hardware margins were over 20%, and we expect hardware margins of at least 20% going forward consistent with recent trending. Subscription services margin for the quarter was 50.2% compared to 50.1% reported in the Q1 of 2022. Subscription service margin during the 3 months ended March 31, 2023 included $5,700,000 amortization of identifiable intangible assets compared to $5,100,000 of amortization during the 3 months ended March 31, 2022. Excluding the amortization of intangible assets, Total adjusted subscription service margin for the 3 months ended March 31, 2023 was 71% compared to 74% for the 3 months ended March 31, 2022. Our rate of acceleration of continued margin improvement slowed this quarter as we absorb the initial growth of Par payment services and menu, which are both in early stage products.

Speaker 3

Professional services For the quarter was 17.9% compared to 26.5% reported in the Q1 of 2022. The decrease in margin was driven by a decrease in margins related to our implementation and hardware repair services. Government contract margins were 7.2% compared to 7.3% for the Q1 of 2022. In regards to operating expenses, GAAP SG and A was $27,500,000 an increase of $5,100,000 from the $22,400,000 reported in Q1 2022. The increase was driven by increases in internal technology infrastructure costs and sales and marketing expense.

Speaker 3

The variance also includes $1,500,000 of expense related to menu, which was acquired in Q3 2022. Sequentially, net R and D expense of $14,300,000 in Q1 2023 was down $600,000 from the $14,900,000 reported in Q4 2022. Compared to prior year, in the Q1, net R and D increased $3,500,000 from the $10,800,000 recorded in Q1 2022. Increase is related to personnel hired in 2022 as we continue to improve and diversify our product and service offerings, including $1,900,000 for menu. Included in operating expenses for Q1 2023 was a $5,200,000 reduction to the fair value of the contingent consideration liability for the menu acquisition.

Speaker 3

This contra expense is a non GAAP adjustment. Total operating expenses including the contingent liability adjustment totaled $42,300,000 versus Q4 2022 operating expenses of $41,200,000 Net interest was $1,700,000 compared to $2,500,000 recorded in Q1 2022. The decrease is driven by increased interest revenue from our short term investments during the 3 months ended March 31, 2023. Now to provide information on the company's cash flow and balance sheet position. 3 months ended March 31, Cash used in operating activities was $16,700,000 versus $21,200,000 for the prior year.

Speaker 3

Operating cash needs during Q1 2023 were primarily driven by net loss, net of non cash charges and additional net working capital requirements. Increase in net working capital requirements was primarily due to the annual variable comp payout in Q1 and increased accounts receivable within Retail operating segment. Cash used in investing activities was $1,800,000 for the 3 months ended March 31 versus $3,100,000 for the prior year. Investing activities during the 3 months ended March 31, 2023 included $500,000 for purchases of short term held to maturity securities and capital expenditures of 800,000 for internal use software. Capitalized software for developed technology costs for the 3 months ended March 31 was 500,000 Cash used in financing activities was $2,400,000 for the 3 months ended March 31, compared to $1,400,000 for the prior year.

Speaker 3

Financing activities for 2023 was driven by stock based compensation related transactions. Day sales outstanding for the restaurants and retail segment increased from 53 days as of December 31, 2022 to 60 days as of March 31, in 2023, we expect DSO levels to come back to historical levels closer to 50 days in Q2. Day sales outstanding for government segment decreased from 55 days as of December 31 to 51 days as of March 31, 2023. I'll now turn the call back over to Savneet for closing remarks prior to moving to Q and A.

Speaker 2

Thanks, Brian. To comment briefly on the economic environment, while we can't predict what the future holds at a macro level, we're forging ahead with conviction and vigilance as we look to continue to fuel durable growth long term and deepen our strategic advantages. Today, while there are pockets of weakness within the restaurant industry, broadly speaking, the market is still showing signs of strength. Outside of Punch, we continue to see robust pipeline. In particular, we see more RFP activity for Brink than we ever have before.

Speaker 2

PAR's internal execution matched with the macro worry creates a stage for a more aggressive M and A environment. If we can continue to deliver, We should be able to leverage our currency to effectuate accretive transactions that add unique product or additional market share to our business. As I've mentioned for the past several quarters, we've been able to go revenue in ARR while not increasing overhead. While adjusting for one time items such as severance and inventory adjustments, We were successful in maintaining our operating expenses quarter over quarter as we implement our plans on becoming a profitable company. We're focused on executing against our long term goals and we're eager to take this momentum and build upon it for the rest of the year and the out years to come.

Speaker 2

As always, I'd like to thank all of Pars and Folies for their dedication and efforts over the past quarter and for never forgetting our mission to enable for slide experiences that connect people to the brands, meals and moments they love. At par, we have a demanding environment and we ask a lot from our team members. We are constantly striving to increase our growth without increasing OpEx spend, all the while expecting each and every one of us to do more to deliver for our customers. I thank you and have the utmost confidence that all your hard work will be rewarded. With that, I'll open the call for Q and A.

Speaker 2

Operator?

Operator

Thank you. At this time, we'll conduct a question and answer session. Please standby while we compile the Q and A roster. And our first caller is Samad Samana with Jefferies. Samad, your line is open.

Operator

Please go ahead.

Speaker 4

Hi, great. Hey, good afternoon. Thanks for taking my questions. Maybe, Savneet, first one for you. Just looking at the metrics ex Punch, You actually added the most dollars of operator solutions there are quarter over quarter that you've done and As far back as my model goes, so I think you're seeing pretty good strength there and you got a pretty tough year over year comp.

Speaker 4

I'm curious how much of that is just the timing Of go lives versus payments adoption versus just new customer acquisition, if you could just maybe break that apart and help us understand what's driving that Strand and how much of it is company specific versus maybe seasonal?

Speaker 2

It's definitely company specific and not In fact, it's actually understated because as I mentioned or said quickly, our payment should have been higher this quarter. Some of it slipped into Q2 and it shouldn't have. And so it's Definitely, a trend that I think will continue throughout the year. It's resulting really from the continued growth of Brink and the cross sell of payments that is we're really starting to figure out on a more consistent basis. So it's a combo of Brink adding more customers at higher ARPU and I think doing a good job of stapling payments to every deal we can.

Speaker 4

Great. And then maybe Brian, one for you. Just as I think about the gross margins and operator solutions and restaurant magic growing faster, how should we think maybe the subscription revenue gross margin either mixing or changing as Punch's growth has been a little bit slower. Should we think about that as having a material impact going forward or Should it be in a fairly consistent range is what we've seen over the last few quarters?

Speaker 2

Well, I'll take the high level and give it to Brian. So the short answer is, The margins are muted now because of primarily menu and to a degree payments. We put a lot of investment into menu as you heard Given the unexpected customer demand in the U. S. And payments because we have a buildup there.

Speaker 2

The margins of Punch, Data Central And Brink are all relatively high, not all the same, but all very high. And so as menu and payment scale, it will bring the gross margin up because the rest of them all are Brian, anything else you want to add? Yes.

Speaker 3

The only thing I would add there is, as you know Samad, over the past couple of years, we have also had saw a deep improvement in Brink As we improve margins there and the hosting costs, I think we've gotten ourselves to a pretty good level there. There's still some opportunity. And the next area is Doing something similar on the punch side. So we will see improvements there, but you're not going to see the drastic of each quarter, but we have to absorb a couple more quarters Of the early growth of menu and payments, as they get critical mass.

Speaker 4

Okay. I'm going to break the rules and squeeze in the third question. Kasatne, your closing remarks, You mentioned, it sounded like you might have been hinting at that there may be M and A on the horizon where you're going to attempt to be opportunistic. I'm curious if 1, that's what you're trying to intimate and 2, how we should maybe consider that with the backdrop of trying to get to profitability?

Speaker 2

So I think I don't know about it's hinting or sensibly saying, I think we're going to see a lot of M and A in our category. There was a lot of venture Capital money that came in that I think is stranded in companies that either really didn't deserve venture capital money or can't raise at prices that make sense anymore. And We're seeing a lot of deal flow today. The interesting part is that we see that both in the small startups but also in the large part of the market. And what I think it's interesting is that, I believe we will have outperformance as an organization and as a result have a better multiple than the deals we're looking at.

Speaker 2

And I think If we look to be the consolidator, we will be in a very, very strong position. So I think it was there. As it relates to the points of being profitable, I don't think you'll see us do a deal that doesn't get us to profitability faster or similar unless it added Tremendous growth where the ROI would have made sense. But I think the deals we're seeing today not only can be accretive to our growth but also to our margins.

Speaker 4

Great. Appreciate you taking all my questions.

Speaker 2

Of course.

Operator

Stand by for our next caller. And Will Nance is here with Goldman Sachs. Will, your line is open. Please go ahead.

Speaker 5

Hey, guys. Good afternoon. I appreciate you taking the question. Sanyal, I'm wondering if you can talk about maybe the outlook for ARR growth in the context of some of the comments you made on the various segments. It sounds like maybe a little bit more positive on Brink, Sounds like pulling forward some of the menu rollout and then still some of the ongoing weakness in Punch.

Speaker 5

I guess when you put it all together, How are you thinking about the outlook for ARR growth and could the net of pulling the demand in Brink and pulling forward menu Lead us to be sort of outperforming or even accelerating over the course of the year?

Speaker 2

Yes. I think we'll be comfortable in the range we put at that 20% to Where we are is still we still have a long way to go. In particular, we've got a couple of Opportunities we won and signed, as I mentioned, these table service initiatives, the date they go live has a tremendous swing in our revenues for the year because of the sheer quantity of ARR. So it's obviously All good. If we can pull those in earlier, it does have a big impact.

Speaker 2

As you said, menu winning ahead of schedule certainly gives us an opportunity for upside. Now it takes a little bit of time to get every deal live because building an online ordering website is not an overnight process, but it's not also nearly as long as it is to take a Brink customer live. So those are really positive things. And like I said, we see really strong stabilization of Punch, better than I expected. If you ask me I felt this quarter about Punch versus last quarter, I'd say we feel much better.

Speaker 2

Where we need to pick up the pace is on payments because the opportunity is too large and while it's working, it should be better. And I think menu needs to really capture this opportunity and it's right given where our competitors are and where we are. We've got to pick that up. But I think in aggregate, we feel pretty good about where we are. And like I said, quarter to quarter, we can't we don't have perfect visibility, but There are levers we have into the year that do have some nice potential off swings for us, particularly the large table service deals that I mentioned.

Speaker 2

And we can land 1 of the Larger menu RFPs were in, those will have pretty nice impacts for us. Got it. Very helpful. And then maybe

Speaker 5

as a follow-up, I'm just think it's recorded you made some comments around 1 of the big five chains potentially moving to upgrade some of their point of sale, potentially moving to a more modern platform. Obviously, we've seen the headlines around some of the big chains and the big cost cutting efforts. Just maybe wondering if you could provide a landscape on the An update on the landscape for some of the Tier 1 fast food chains. 1,

Speaker 2

where do you

Speaker 5

see them in sort of closer or farther from the upgrade cycle? And maybe in the near term, how that relates to sort of demand on the hardware side, which kind of continues to outperform at least your top line expectations, I would think relative to the macro uncertainty that we're seeing.

Speaker 2

Yes. It might be the most interesting observable data point In that I said on the call a few times, we've never had a Brink pipeline so robust with large customers. We've always have a robust Pipeline with midsized customers, emerging customers, but we've never had so many large customers in RFP, not even sort of pipeline, real potential transactions. And, why I think that's so interesting is that we are in a slowdown for restaurants, but the customers are still going forward on these Technology initiatives around POS. So the short answer is, we see this sort of secular shift to the cloud within POS Really gaining share.

Speaker 2

Is it flash in the pan or is it secular? I think there's enough In the pipeline that makes me think that this is just the snowball building. And as you sort of referenced, we are seeing more large, large, large brands Opening the door now. I'd say probably a little bit ahead of schedule from what we expected. Now we'll see if any of them actually do anything.

Speaker 2

We'll see if it comes through. But Purely from a pipeline RFP perspective, I think it's highlighting the strength of those customers, but also their commitment to upgrading technology no matter what the environment is.

Speaker 5

Got it. Makes sense. Appreciate you taking the questions.

Operator

With Patrick McIlwee with William Blair. Patrick, your line is open. Please go ahead.

Speaker 6

Hi, thanks for taking my questions. So I think you said that you attached payments to roughly 80% of your Brink signings last year. And I wanted to ask, 1, are you still seeing that level of attachment this year? And 2, given some of those payment deals We're pushed out a little bit, it sounds like potentially back a quarter. Are you still thinking that you can generate somewhere around that $15,000,000 in payments ARR this year?

Speaker 6

Or have your thoughts changed there?

Speaker 2

So I think we'll continue to hit sort of that 80% plus attachment rate on new Brink deals. The real Velocity for us will be the upsell into the base where we haven't done as good of a job. As far as where the revenue would land, I think it's probably between 10% and 15%. I think 15% would be a stretch today. But if one of these large POS deals They take our payments offering, then that would be an underestimate.

Speaker 2

But I think to be conservative, I wouldn't go that high.

Speaker 6

Understood. Thanks. And then on menu, it sounds like things

Speaker 2

are going well. Sorry, I wasn't there.

Speaker 6

Go ahead.

Speaker 2

The deals are Being pushed, the rollout was being pushed. So this is a quick clarification. It wasn't a deal being pushed, it was the deal signed, papered. It's the rollout that got slowed down.

Speaker 6

Got it. Got it. Thanks. And then my second one on menu. So can you It sounds like things are going really well there.

Speaker 6

I guess, can you just provide any more context on how early conversations are going there and how far along you are in terms of building out those 3rd party integrations that you had needed.

Speaker 2

Yes, it's a great question. So It's been surprising. We had not planned to bring menu to the United States really until the second half of this year, as you suggested, because of Desire for us to build out these integrations more fully and to focus on some of the international business that had already been signed. And essentially what happened was Enough customers literally pulled us into their RFs and then started giving us business that we sort of reassessed and said this is clearly where the market opportunity is, where we can win customers against the biggest and the best, Roll out inter year and then create the opportunity for a real unified commerce experience where we are the POS loyalty and And online ordering. And so we have been retooling the business to focus on the U.

Speaker 2

S, which has created an acceleration in those integrations. What's been amazing is that A number of these customers, as I mentioned, we've almost signed 500 stores already, which putting that perspective, we signed 1100, 1200 Brink sites Quarter, we're already at $500,000,000 for menu. Many of those are waiting for us to finish a specific point to point integration to go live. And I think that just highlights The product that the customers truly want the product and are waiting for us. So we're excited.

Speaker 2

We could be wrong, but I think we now see enough pipeline and also candidly enough signed deals against, like I said, great competitors that It would behoove us not to continue to push on the U. S. And also be smart about how we stage that. We could win a lot more deals right now, but we need to go slower and make sure we service those deals, do a good job on those deals and let our reputation

Speaker 6

Got it. Thanks, Hamid. That's very encouraging and really helpful. Thanks for taking my question.

Operator

Stand by for our next question. And our next question comes from Mayank Tandon with Needham.

Speaker 7

Thank you. Good evening. Yes. Thank you. Good evening.

Speaker 7

Savneet, could you sort of give us a sense of where you are on the journey, the cross sell journey and maybe share any data points in terms of how many customers are using multiple products versus where you could penetrate over time? I guess the broader question is, how much of the growth in ARR is coming from the land and expand versus new logos as we look out over 2023?

Speaker 2

We have a long way to go on the cross sell and up sell within our organization. In fact, I think it's the singular most exciting and biggest We have is that the average Brink customer has 2 to 3 modules. So that's the average. So Usually a Brink customer on average has at least one of our other products. But we need to really take that into 3, 4, 5 products now.

Speaker 2

And it's clear that Brink is the land and expand product for us. But the amount of under penetration is enormous. Payments is probably not even in 10% of Brink customers yet. Data Central is not even half of Brink customers yet. Menu is obviously in almost no print customers yet.

Speaker 2

And so there's an incredible opportunity to push that forward, not to mention the 70,000 stores that punches in Where Menyoo is a really, really perfect fit. And so the ability for us to grow revenue going forward will be as much driven by our ability to cross sell and upsell as it will be for net new sites. Today, most of our growth though is still net new sites, but we are seeing a continued pickup in driving cross sell as being more and more of our revenue contribution. And that will continue to get higher this year as menu gets rolled out and as payments gets rolled out because of them both upsell products.

Speaker 7

Got it. And then I want to ask about the government business, just given the pickup in revenue here. Any sort of directional guidance on where we should see that trend at least over the current year? And then if you could maybe give any update on your plans for that business, So if there's anything incremental that you can share with us?

Speaker 2

No sort of public update yet. I think As we said, we're a year into 1 year into where we said we would be when we would look at those strategic alternatives. Again, and I think When we have an update, we'll come back to you. But the business has delivered as we expected. And in the event we wanted to do something, I think there'll be no better time both Look from what we're executing on internally and also the macro environment.

Speaker 3

And just a follow-up to that, we talked In the call, the large growth year over year in there, a lot of the company accounted UAS. We've now gotten to, I think, A big part of that past quarter, critical mass, right? So we've seen that build up over the past 5 quarters. I think the growth that you're going to continue to see is going to be solid, but having that 50% year over year, it's going to get down to more muted level As we've gotten kind of critical mass within that real large contract that we have.

Speaker 7

Great. That's helpful color. Thank you so much.

Operator

Our next question comes from Adam Wyden with ADW Capital. Adam, your line is open. Please go ahead.

Speaker 8

Okay. Three questions. I'll start with the easiest one. You had said, I guess, Inter quarter or perhaps last quarter that PAR was going to have the greatest improvement in their Rule of 40 score of sort of any SMID cap software company. And I guess you were basically talking about just the part software segment.

Speaker 8

Can you talk about sort of exiting the year at Whatever X percent growth rate and X percent margin such that you're exiting the year at rule of 40 or close to it or sort of Can you sort of elaborate sort of on the efficiency improvement throughout the year and whether you're on track or ahead of that?

Speaker 2

Yes, obviously, our guidance is relatively wide as it relates to revenue growth. So what I can say is, we are We're executing a plan to grow within the range we said while holding our operating expenses flat. And as you saw, R and D actually came down quarter over quarter, which is our biggest line item. And so I do expect us to be able to have nice growth rate with a tremendously improving Cost structure along that and be a large mover on the rule of 40. Will we be the largest or not?

Speaker 2

I don't know. It's just we have to look at everybody else. But I think we're executing on that plan. Nothing's really changed, Which is continue to grow the revenue between 2030 and then keep the OpEx flat and hopefully we have some accretive M and A On there that accelerates revenue and or accelerates profitability.

Speaker 8

Okay, good. 2nd question, 3. Second question is around M and A. When you first got in, you did the tuck in of Restaurant Magic, which is now data central. That's doing well.

Speaker 8

Sort of was growing and slowed down, now growing again, sort of talks to the portfolio approach. Menu is An R and D box, which you guys are excited about, I am as well. But I mean, what is the timing and likelihood of sort of substantial M and A. I mean, you've done it in the past, you did punch. You have not done a meaningful ARREBITDA contributor in 2 years.

Speaker 8

Obviously, the market has changed from a public markets perspective. Is the issue cost of capital? What is sort of holding it back? I mean, there's lots of private market assets that are sort of up for sale. And I'm just Trying to understand what the bottleneck is in terms of getting sort of what I would call more Substantial ARR deals done sort of in the 10 to 50 and then there's obviously the larger public companies that could be merger candidates.

Speaker 2

Yes. So I said in my commentary, we think now is the time. We see I think what you see in the public markets and the private markets. What I mean by that is there are a number of assets now where a year ago, I wouldn't say it was a cost of capital problem. I think it was an expectation problem from 2020 2021 where people were sort of hoping for prices that we didn't feel were appropriate for the risk.

Speaker 2

I think today, 2 really interesting things have happened. One is, I think partly or primarily because of our POS business, but broadly because of our unified platform, It is understood that our company deserves a premium multiple to any single product. What I mean by that is, if you are a company that's solving one particular need within the restaurant I believe we can very comfortably argue with you and your shareholders that we should deserve the premium also relative to you given the resiliency of our business and the growth of that business. And so I don't think it's a cost of capital problem. I think the market actually now appreciates that.

Speaker 2

And in my conversations, we get very comfortable there. The second thing that's happened, which I think clearly happened in the public market is the quantity of deals available has changed. There are many companies that we went after the last 18 months That it was a chase. Where today, we see numerous companies not only be up for business, but hiring investment bankers and change the conversation. And I think we feel excited about the M and A opportunity set, primarily in actually the larger deals that you're talking about, most of the small deals.

Speaker 2

I don't think you'd see us do a menu like deal. That was a very unique product with a very unique hole that we needed to fill. But I I think we feel more excited about the larger deals than the smaller deals because the smaller deals are a ton of work and we don't have like a massive product gap we're trying to fill like we did with menu. Here we're trying to build market share, more cash flow and more growth.

Speaker 8

Right. So let me build on that. This is the final part of my question. Obviously, this has been a long journey. When you joined on the company, it was subscription revenue of 7,000,000 Whether we finished the year at 140 or 150, government is bigger, hardware is not profitable, but the company arguably trades at the lowest multiple.

Speaker 8

Private equity firms are out there buying different businesses, 20%, 25% growers, 30% growers, At double digit revenue multiples. I mean, if you are unable to scale this business in the public markets, I mean, how do you think about creating shareholder value for folks? Because I mean, I would make arguments that this would be an amazing platform for any private equity firm or Another sort of larger strategic public player because there seems to be a very large dichotomy between sort of what private market value is for an asset like this or Strategic market value and where you're trading. And so obviously, I appreciate your willingness and interest to sort of buy companies and be the consolidator. But If people don't want to dance with you, I mean, how do you think about sort of being the consolidated because right now interest rates are 5% and If you're not trading $50,000,000 of revenue, you're trading at a fraction of what your private market or if you're not trading $50,000,000 a day in Public markets are not Microsoft.

Speaker 8

You can't get valued in the public market. So I'm just sort of thinking, what is your willingness to Extract value for shareholders if you are unable to sort of do a transformational merger or acquire enough businesses to sort of get scale in the public markets?

Speaker 2

Yes. So I'll break it to you. I think there's 3 or 4 questions I jotted down. So the first is, I think PAR is a great platform, whether it's private or public to Have an incredibly successful run for a long period of time. As you heard in my comments, while we've grown a lot, our pipeline has never been bigger.

Speaker 2

And I believe that We may not be the 100 percent grower, but the durability of long term high quality growth is here for a long run. And so I think that's a very attractive whether it's public or private. To your question of our ability to extract value, I believe PAR is up for sale every single day. Every single day, we are available for to create value for our shareholders. And if there's an opportunity for that to be, where we are not the consolidator and we are the consolidated, We're not running from that.

Speaker 2

I think we have to drive value wherever value can be found. And so we wouldn't run from that. Now do I think it's the right long term fit for shareholders for it depends on price. And we see a really strong path for us to Be the consolidator and to drive higher returns on capital. But if someone comes in and price that defeats that, no problem, Ari.

Speaker 2

We're not going to Hold on to anything because their job is to create value for our shareholders. On your sort of last part about size, You're not excited about this, but I think that if we can get to the property numbers that we think we can get and become a Rule of 40 company, And I think there are good examples in the public markets of that. And so I would call that sort of the path we're going on with M and A alongside of that. But I guess, we're open to creating value in any which way we can. So, I guess that would be my answer.

Speaker 2

Okay. Thank you.

Operator

Our next question comes from George Sutton with Craig Hallum. George, your line is open.

Speaker 9

Thank you. This is Adam on for George. Thanks for taking my questions. Savneet, it's great to hear the menu is off to such a strong start, but I'd be curious to know if there's anything specific you've heard from the signed customers that's really driving that enthusiasm and whether or not that's something you think is persistent through the industry landscape or if this is really more of A unique or operator specific

Operator

move?

Speaker 2

It's a product move. So I think when we show a demo of the back end of menu, It reminds me of when I first became the CEO and people would see a demo of Frank and they would say, how did you crawl on my head and know exactly what I wanted. Menu was built to be the modern version of the legacy online ordering companies that exist today. And what I see is our customers quickly see that. Our customers are moving from a world where they from a templated online ordering site to something that configures and makes them feel like it's their brand.

Speaker 2

I use examples, if you go to different large brands or online ordering websites, they relatively look quite similar. And I think back When online ordering was an acute problem, I. E. During the pandemic, it didn't really matter. But today, competition is fierce, we're in a recession.

Speaker 2

You really need that online ordering presence to match the brand, the feel, the look, the ethos, the culture that you've built in store. And with menu, you have that ability. It's beautiful, it's configurable, you control it. But the back end then makes your life so much simpler and tying that all together into Punch and into Brink, It really is a beautiful and winning combination. And so it's very much product led and I think that's very much being driven by par.

Speaker 2

And I do think we get credit from our customers for having done a good job on Punch, having led this transformation of Brink to say, okay, we can try to trust Parq to do this. Over time, we'll add other layers, sort of unified service, unified contract, unified support, all these things

Speaker 6

I think will come.

Speaker 2

But right now, I do believe we're winning because of the product. And over time, I think we'll add more layers to that. Now there are amazing companies that are in the space that we look up to and have MBF. But in the end, we believe that our sort of gritty nature, our ability to empathize with the operator, not the CIO, but the actual operator on the ground will continue to help us win business here.

Speaker 9

That's great. And I was hoping you could also provide a little more detail on the pipeline. I know you mentioned that there's more large QSRs than ever before, but any other detail would be appreciated.

Speaker 2

It's hard to give detail on pipeline, but what I think we see happening is that every year I used to say we want to get 1 or 2 Large customers. And today what we see is this pipeline fill up with very, very substantial brands That I would have thought would be the late adopters. That may be the best way to explain it. There are late adopters now that are active in evaluating Upgrades to their technology infrastructure that are way ahead of the schedule I would have had. And so much so that And I think what's happened is that they've seen the success of other brands adopting the cloud.

Speaker 2

They've also seen the challenges of Homegrown systems and the ability to kind of build POS or loyalty on your own and how hard it is to maintain that in a world over the cloud where You're doing an update every month or every 2 weeks where before it was static. And then I think there is some ability where I think our reputation and We may not be the greatest company in the world, but I do believe our customers know that they can trust us. They can call me at any time and I will pick up the phone and we'll get to a solution. They can Anyone on our team, they'll get a response. And in the restaurant business, it's a real time business.

Speaker 2

If something goes down, you need a response, you need someone to care for you. And I think we've done a really good job of while we've had, I think, good success and we feel like we've accomplished a lot, we haven't lost that gritty nature of When you're a store operator and you're in that store and that POS is down, the last thing you want to get it want you to hear is, hey, we'll get back to you tomorrow. And so I think it's a combination of they're saying, all right, we're now at a scale where we can continue to operate, but they see the success of other people doing it. And I think they see the potential failures in trying to do it themselves Given how much technology has changed over the last decade.

Speaker 9

Thanks. And I'm going to squeeze in one more, if that's all right. I'd be remiss if I didn't ask At least one question on AI. And I appreciate the tempered enthusiasm. Obviously, it's very early, but without getting ahead of ourselves, It would be great to hear your thoughts on what may be the lowest hanging fruit for restaurant operators and how you think about that in terms of development?

Speaker 2

I don't know if I've got the perfect answer for that. I think we see test cases happening everywhere. I think the industry answer would be the highest area of artificial intelligence usage would be on voice AI. It's calling in for phone orders, Using voice at the kiosk or using voice at the drive thru. But that I would say isn't sort of industry wide, but there's some I think that would be the most common answer you'd see Because those solutions have kind of been out in the market for some time and you're now sort of getting, I think, customer acceptance, that's just the way we operate.

Speaker 2

The stuff that I think could be a lot more interesting for our operators is actually leveraging this data to redo their scheduling to manage their labor force, Manage their inventory more efficiently, optimize their menu in ways that they didn't think about, maybe real time pricing of a menu. Things like Maybe our burger prices change $0.05, $0.05 depending on the time we go to a store. Those are the areas I think that could be more interesting for the restaurant. In the end, we operate in a market that is highly ROI focused. And so I don't see restaurants being The early adopters of AI until we can give them a use case that we can say this is the return on that investment we're giving you.

Speaker 2

And that was sort of my point, which is if I went to our customers and said, Hey, we're spending 20% of our budget on AI products. I think they would shoot me and they'd say, what are you talking about? Like, we want this stuff to work better in the store. We want more delivery. However, Given that we are I think have so much data gravity across all of our products.

Speaker 2

We have more data I think than anybody else in the enterprise. When that innovation happens, we are the Perfect place for that to be built out of it. So we have a ton of initiatives internally to build great products, but we can't lose sight of the fact that we still need to deliver every single day. And so we're trying to Walk that line carefully, which is we do have a lot of initiatives going on, but we have to do a great job on our core products on its own. I'll be remiss I didn't add.

Speaker 2

Internally at par, I think you'll see really cool tools. We're going to use AI obviously for our things like our chatbots, our support for our customers, our support internally. We're using it to understand how we manage our own resources to make our developers more efficient. And so AI, it will be used within Parq, So I think as we have to sort of watch how the industry ends up adopting and getting to a point where we can actually prove ROI.

Operator

Okay, we have time for one last question. Standby. We have Anja Soderstrom with Sidoti, Anja, your line is open. Please go ahead.

Speaker 2

Okay. Thank you. And I actually only have one question as most of my other questions have been addressed. But I'm just curious when you upsell or cross sell, do you often displace other providers or is it Selling into an empty space. Hey, Anja.

Speaker 2

Good evening. It is almost always displacing other providers. There's once in a while where I think Punch is going into an organization that may not have a loyalty product or may have something home built. But for the most part, we're displacing an existing vendor. Okay.

Speaker 2

And is it most often the same vendor or various or? It's various although if you think of the categories we operate in online ordering, POS, loyalty, There are some large competitors that are probably we see more often, but it's various. Okay. Thank you. That was all for me.

Speaker 2

Thanks, Anja. Okay.

Operator

That does conclude our Q and A. I would like to turn it back to Sanveet Singh, CEO, for closing remarks.

Speaker 2

Thanks everyone for joining. We look forward to updating you on your progress as we go forward.

Operator

Thank you for your participation in today's conference. This does conclude our program. You may now disconnect.

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Earnings Conference Call
PAR Technology Q1 2023
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