YASKAWA Electric Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

There are 13 speakers on the call.

Operator

Good day, everyone, and welcome to Par Technology Fiscal Year 20 24 Third Quarter Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Now I will pass the call over to the Senior Vice President of Investor Relations and Business Development, Christopher Burns.

Operator

Please go ahead.

Speaker 1

Thank you, Carmen, and good morning, everyone, and thank you for joining us today for Par Technologies' 2024 Third Quarter Financial Results Call. Earlier this morning, we released our financial results. The earnings release is available on the Investor Relations page of our website atpartech.com, where you can also find the Q3 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 like to 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 morning and in our annual and quarterly filings with the SEC. Finally, I'd like to remind everyone that this call is being recorded and it will be made available for replay via a link available on the Investor Relations section of our 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

Thank you, Chris, and thank you all for joining us today. Our Q3 results made available this morning represent the 7th consecutive quarter in which Par has delivered greater than 20% organic growth with limited operating expense. This continued sequential growth at scale and demonstrated operating leverage efficiency has enabled Parr to report positive adjusted EBITDA for the quarter, a first since the company began disclosing this metric earlier in management's tenure. Our performance this quarter reflects the continued validation of our products as best in class standalone and even better together. This strategic focus on delivering a unified solution is improving user experience, furthering customer stickiness and expanding sales opportunities beyond that of a single product.

Speaker 2

DefyWheel we've talked about is working and has generated the financial return we reported today. Digging into our results. Subscription services continues to be the growth engine of our company. Q3 exit ARR totaled more than $248,000,000 subscription services revenue for the period grew 91% when compared to Q3 last year. This revenue expansion was driven by 25% organic ARR growth compared to Q3 last year and contributions from our EBITDA accretive 2024 M and A activity, including the company's acquisition of TAX Group, which closed in July.

Speaker 2

Critically, our M and A activity is expected to continue to accelerate our overall growth trajectory into the future by unlocking new verticals and multi product attachment. Operator Cloud ARR grew 41 percent to $93,400,000 in Q3 when compared to the same period last year. This growth was driven by multi product attachment of Data Central and Par payments and continued ARPU improvement, which increased 11% from the same period last year. Observed ARPU improvement was driven by price increases and par payment service attachment. Our opportunity for new Tier 1 deals continues to be strong, and we believe ourselves to be well positioned to win and grow through both new logo signings and the upsell of data central and payments.

Speaker 2

Par POS has a robust backlog, and we have high confidence and visibility into consistent growth rates for years to come. Turning to Parr Payments. Q3 was a strong quarter marked by focused pipeline execution and the signing of several new concepts, including Acropolis Greek Tavern, Burgerville, Brooklyn Pickle, and Fat Boy Pizza, all of which are set to go live in the upcoming quarter. Q3 also marked the company's 1st full quarter since the launch of Punch Wallet, a product we've seen gain strong market momentum and resulted in customer wins with Clean Eats and Bergerville. Additionally, we executed our 1st payments funded hardware deal, which helps reduce capital expenditure pressures on merchants.

Speaker 2

Looking ahead, we're expanding our opportunities with the launch of QR code pay at the table capability in Q4 with customer go live expected before the end of the year. Turning towards Data Central. We see strong product pipeline and anticipate the conversion of this pipeline will accelerate. The momentum is real and we believe Data Central will be a strong growth driver as the Par POS plus Data Central combination is becoming the go to operator solution. PAR is uniquely positioned in the enterprise space with both market leading POS and back of house solutions, which is mirrored by our pipeline.

Speaker 2

We are excited to continue to see our operator cloud product suite gain traction with our largest customers. A combined POS plus back of house deal is worth almost 2x a project with only one product. It has taken time, but our vision of the connected operator suite is proving out and we're looking to double down on this in the coming months. Moving to Engagement Cloud. Q3 results have reflected our strongest year over year organic growth since 2022 driven by the go live of Wendy's.

Speaker 2

Total Engagement Cloud ARR grew by nearly 150% from the same period last year when including Par Retail and the Plexure division of TAZ Group and now totals $155,000,000 Year over year ARR growth for Engagement Cloud was nearly 17%. Our Engagement product suite continues to prove its market leadership with Punch Out Front onboarding over 12,000 new locations and 3 major Tier 1 clients in the last 12 months. With this growth, engagement cloud site count now stands at an impressive 118,000 sites. While we are winning and launching major new brands, we continue to invest for the future with new innovation, including Punch Wallet, which enables seamless earn, redeem and pay, as well as new C store functionality with gamification and in store customer interfaces. This past quarter saw significant new customer growth with 9 new brands launching on the Punch platform and 12 upsell deals to existing customers.

Speaker 2

In early July, we went live with Wendy's, a deal we first announced in Q1. This go live represented a record time line to take a Tier 1 enterprise customer live on Punch with over 7,000 1D stores and reflects the urgency with which our people are empowered to operate. Looking ahead, we expect Punch to be a strong profit contributor to PAR. PAR Retail, formerly Stuzo, now operates in over 25,000 convenience stores and fuel stations and provides a beachhead to cross sell additional products including payments and back office. Par retail is gaining sales momentum and picked up a large Tier 1 customer win in the quarter.

Speaker 2

We also extended our relationship with a major oil customer by adding over 400 sites and extending the current contract by 2 years. With more and more consumers utilizing C Stores' prepared food and meal delivery options, we are seeing our investment thesis play out in real time. Brick and mortar formats are colliding, and this is playing out even faster than we expected. Par is uniquely positioned to benefit from both C Store and QSR. We recently rebanded menu to par ordering and are seeing momentum in winning deals within the Punch base, most recently adding 115 Clean Eat stores.

Speaker 2

In connection with this rebrand, we also combined go to market teams to position par ordering in every Punch deal and increase our sales capabilities. We've made the necessary investments to build tighter integrations and the outputs are driving new customer wins. Part ordering is rapidly achieving scale and as we've crossed over 1,000,000 transactions per month threshold, while achieving 99% order health, a key milestone that demonstrates product strength to prospective customers and the industry. Moving to hardware. Q3 revenue grew 13% quarter over sequential quarter.

Speaker 2

We expect hardware to continue to stabilize as our team works to upgrade our legacy base of long term hardware only customers and pursue even higher attachment rates with our POS customers. Stepping back to review our consolidated results. Today's announcement of delivering 25% year over year organic ARR growth and positive Q3 adjusted EBITDA of $2,400,000 is an important milestone for us. And efficiency metrics continue to impressively scale with our focus on organic growth and EBITDA accretive M and A. Subscription sales and marketing expense as a percentage of subscription services revenue this quarter was 14%, a 400 basis point sequential improvement from 18% in Q2.

Speaker 2

Subscription R and D expense as a percent of subscription services revenue was 26%, a 500 basis point sequential improvement from 31% in Q2. And organic R and D spend again decreased year over year as we remain committed to spending in areas where we can prove ROI. We take pride in today's milestone, but today remains day 1. Crucially, the combined scalability of our products and the continued flex in our operating leverage ensures that our financial metrics will only continue to improve over the years. Brian will now review the numbers in more details.

Speaker 2

Brian?

Speaker 3

Thank you, Savneet, and good morning, everyone. Q3 was a successful quarter for Parr. Nutrition Services continued to fuel top line growth, while we stayed fiscally responsible, managing our operating expenses. As a result, adjusted EBITDA for the quarter was a positive $2,400,000 indicative of an inflection point, driving growth with profitability. Before moving forward, and as stated in our Q2 earnings call, all 2024 and comparative 2023 results that we will discuss this morning exclude any contributions from Par Government, as those results, including the gain on the respective sale of Par Government, have been isolated within our discontinued operations results.

Speaker 3

Total revenues were $96,800,000 for the 3 months ended September 30, 2024, an increase of 41% compared to the same period in 2023, driven by subscription service revenue growth of 91%, partially offset by a decrease in hardware revenue of 12%. Net loss from continuing operations for the Q3 of 2024 was $20,700,000 or $0.58 loss per share compared to a net loss from continuing operations of $19,200,000 or $0.70 loss per share reported in the same period in 2023. Non GAAP net loss for the Q3 of 2024 was $3,100,000 or $0.09 loss per share, a significant improvement compared to a non GAAP net loss of $9,700,000 or $0.35 loss per share for the same period in 2023. Adjusted EBITDA for the Q3 of 2024 was $2,400,000 compared to an adjusted EBITDA loss of $6,600,000 for the same period in 2023. Now for more details on revenue.

Speaker 3

Subscription service revenue was reported at $59,900,000 an increase of $28,500,000 or 91% from the 31,400,000 dollars reported in the prior year and now represents 62% of total par revenue. Excluding par retail and task, organic subscription service revenue grew 28% compared to prior year. Annual recurring revenue exiting the quarter was $248,100,000 an increase of 93% from last year's Q3 with Engagement Cloud up 149% and Operator Cloud up 41%. Excluding Par Retail and TASK, total organic annual recurring revenue was up 25% year over year. Parware revenue in the quarter was 22,700,000 a decrease of $3,200,000 or 12 percent from the $25,800,000 reported in the prior year.

Speaker 3

Sequentially, compared to Q2 this year, hardware was up $2,500,000 or 13%. The continued interest from our legacy hardware customers as well as the continued high attachment of hardware sales within our expanding software customer base gives us confidence that our hardware business will continue to contribute meaningful revenue and margin. Professional service revenue was reported at $14,200,000 an increase of $2,700,000 or 23% from the $11,500,000 reported in the prior year. We are pleased with our team's ability to continue to grow professional service revenue during a period of hardware revenue contraction. The growth was driven by recurring revenue service contracts.

Speaker 3

Dollars 8,900,000 of the professional services revenue in the quarter consisted of recurring revenue, a 23% increase versus prior year. Now turning to margins. Gross profit was $43,000,000 an increase of $17,900,000 or 71 percent from the $25,100,000 reported in the prior year. The increase was driven by subscription services with gross profit of $33,100,000 an increase of $17,300,000 or 109 percent from the $15,900,000 reported in the prior year. Subscription service margin for the quarter was 55.3 percent compared to 50.6% reported in the Q3 of 2023.

Speaker 3

The increase in margin is driven by a continued focus on efficiency improvements with our hosting and customer support contracts as well as accretive margin contributions from recent acquisitions. Excluding the amortization of intangible assets, stock based compensation and severance, total non GAAP subscription services margin for Q3 2024 was 67% compared to 69% for Q3 2023 and sequentially improved from Q2 66%. Our margin for the quarter was 25.5 percent versus 25.3 percent in Q3 2023. Professional service margin for the quarter was 29.2% compared to 23.8% reported in the Q3 of 2023. The increase primarily consists of increases in margins for field operations and installations substantially driven by improved cost management and reductions in third party spending.

Speaker 3

In regards to operating expenses, GAAP sales and marketing was $10,500,000 an increase of $1,000,000 from the $9,500,000 reported for Q3 2023, with the increase being driven by inorganic costs related to our acquisitions, while organic sales and marketing was flat year over year. GAAP G and A was 27,400,000 dollars an increase of $9,800,000 from the $17,500,000 reported in Q3 2023. The increase was primarily driven by non GAAP adjustment items for M and A transaction fees and stock based compensation as well as post acquisition costs. GAAP R and D was $17,800,000 an increase of $3,200,000 from the $14,700,000 recorded in Q3 2023. The increase was primarily driven by post acquisition expenses, while organic R and D expenses were flat year over year.

Speaker 3

Operating expenses, excluding non GAAP adjustments, was 47,700,000 dollars an increase of $10,300,000 or 28 percent versus Q3 2023. And excluding inorganic growth, organic operating expenses increased a modest 7%. The organic increase was primarily driven by variable compensation and benefits. Now to provide information on the company's cash flow and balance sheet position. As of September 30, 2024, we had cash and cash equivalents of $105,800,000 and short term investments of $12,600,000 For the 9 months ended September 30, cash used in operating activities from continuing operations was $2,400,000 versus $27,900,000 for the prior year.

Speaker 3

The improvement was driven by a $10,000,000 improvement in net loss, net of non cash adjustments. Cash used in investing activities was 178,100,000 dollars the 9 months ended September 30, which was $4,800,000 for the prior year. Investing activities included $293,600,000 of net cash consideration in connection with our recent acquisitions and capital expenditures of $4,000,000 for developed technology costs associated with our software platforms, partially offset by $92,100,000 of cash consideration received in connection with the disposition of Par Government and $24,900,000 of proceeds from med sales of short term health maturity investments. Cash provided by financing activities was $279,300,000 for the 9 months ended September 30, compared to cash use of $1,800,000 for the prior year. Financing activities was substantially driven by private placement of common stock to fund the Stuzo acquisition and a credit facility entered into to fund the TASK acquisition.

Speaker 3

I would like to take a moment to reiterate and thank our Par team. I'll continue to successfully execute our operating plan while managing the integration of both Par Retail and TASK in addition to completing the smooth divestiture of Par Government. As a result, we have driven significant improvement in key financial metrics with 25% organic ARR growth and 93% total ARR growth, Flat to modest growth in organic non GAAP operating expenses for a 7th consecutive quarter, culminating in Q3 positive adjusted EBITDA of $2,400,000 But to be sure, this is day 1 and not a finish line. We are excited about the opportunity in front of us to continue to deliver outcomes that drive value for all our stakeholders. I will now like to turn the call back over to Savneet for closing remarks prior to Q and A.

Speaker 2

Thanks, Brian. We continue to see PAR as uniquely positioned in the foodservice technology sector with best in class software across key operational and engagement pillars. Our ability to guarantee better together experiences across our products, while separately enabling a robust integration infrastructure keeps us ahead of single product competitors that only control one part of the better together equation and are dependent on third party integrations. Put into other words, our products are winning on a stand alone basis, but we continue to see a growing desire in the market for vendor consolidation. We believe the environment is ripe for continued M and A activity, and Par has shown itself uniquely capable of consolidating in the enterprise space, while driving higher growth and profitability.

Speaker 2

We are delivering an impressive Better Together platform and are smartly investing to continue that track record, balancing our need for both growth and profitability. We look forward to sharing more about our longer term vision and strategy at our Investor Day on November 25. Thank you to all Parr employees for your dedication and effort over the past quarter. Across the organization, our people have stepped up to ensure we deliver the outcomes our customers demand while embracing the hard work necessary to build a company capable of delivering long term shareholder value. And as I said earlier, we're still at day 1.

Speaker 2

Chris?

Speaker 1

Carmen, that concludes our formal remarks this morning. Can we now open the call to Q and A?

Operator

Thank you, Chris. And And it's from the line of Mayank Tandon with Needham. Please proceed.

Speaker 4

Thank you. Good morning. Congrats on the quarter. Savneet, I wanted to just focus on the large deal activity. I think when we came into 2024, you'd called out record RFP activity and I believe there were 7 large deals.

Speaker 4

I think you logged 1 or 2, if I'm keeping count correctly. I just wanted to get sort of a status update on the other ones. Do you think you could still land a few more? What's the status on that? And if you were able to do it, could that potentially help accelerate the organic ARR growth?

Speaker 4

I know you've said mid-20s. Is that something that's conceivable if you were to win some of these larger opportunities in the pipeline?

Speaker 2

I think we have a good shot of closing more before the end of the year. As far as accelerating our growth, it's hard to say, it depends on the rollout of these deals. It certainly won't hurt it. So I think our plan is built without even needing these mega deals. But if they come, they certainly would accelerate us.

Speaker 2

But it's hard to sequence the timing of assigning in a rollout.

Speaker 4

Understood. Maybe I'll switch over to the M and A. So good to hear that the progress on the acquisitions of Stuza and TASK has been good. Could you give us a little bit more color in terms of what's surprised you positively and even negatively? And maybe it would be helpful to get any sort of data points on your ability to cross sale into these accounts and with new logos?

Speaker 4

I know it's early, but any additional color beyond what you said in your prepared remarks would be helpful.

Speaker 2

Sure. On the par retail side, formerly StuZo, it's been a fantastic experience. We've seen really great receptivity by the end market for par's involvement. I think at the same time, we've been able to add some go to market heft to the area. And most importantly, I think we're really excited about the product delivery we can push into that market.

Speaker 2

And so it's been fantastic. I think culturally it's been a tremendous fit and I'm just crazy excited. As we mentioned, we signed our next large customer in the quarter and we think there's a lot more to come. And importantly, when we made this acquisition, it was a bit contrarian. The idea of C Stores becoming foodservice businesses was still really not a thing.

Speaker 2

And if you look today, it's not become the narrative, it's become consensus and that convenience stores are growing their foodservice businesses double digits across the industry. And for them to continue to compete with restaurants, they need tooling like we provide. And so I think we'll have the same playbook in this vertical as we did in restaurants. And obviously, it's great because we can leverage what we've done in restaurants in that market. So I think we feel really good, really excited, and it's a nice long term place for us to be.

Speaker 2

On the Task Group side, we are so early, we're a few months into it. But I think what we're looking at very quickly is the platform is special. It's one of those products when you demo, jobs aren't dropping but the enterprise version of that. And we've seen really strong interest, not just in restaurants, but in these adjacent verticals, call them shoulder markets, like sporting stadiums, hotels, casinos. And I'm not saying we're going to go into that, but it certainly gives us this vision of doing more than what we do today.

Speaker 2

And then I think importantly as we've talked about giving us that international arm that we've never had before is wildly important as our big United States customers are almost all growing more internationally than domestically. So, we're really excited for that as well.

Speaker 4

That's helpful. Congrats again. Thank you so much.

Operator

Thank you. One moment for our next question. That is from the line of Samad Samana with Jefferies. Please proceed.

Speaker 5

Hey, good morning. Thanks for taking my questions. And maybe we'll start first with Savneet. On the rollout of Burger King and Wendy's, I know they're adopting different products, but maybe what have you observed or learned from now that you're implementing at these larger customers, what the organization and the product is capable of? Is there anything that you've seen that maybe you could do better that they're asking for as you're rolling it out or something that's done particularly well?

Speaker 5

And how does that maybe inform you, as you think about targeting additional large customers?

Speaker 2

That's a great question, Samad. So on the Wendy side, that's an enterprise rollout of Punch. And I think our major learning is doing these at scale and getting it out. As we mentioned, it was our fastest large rollout ever. And honestly, I think it just gave us confidence that why can't we do that again.

Speaker 2

And so from a business perspective, I think what it's shown is that we can operate in these large enterprises. And so it's making us a lot more creative about how we structure our deals with these large Tier 1 brands and not giving them the cookie cutter process we've had for the last decade or so. So I think it's kind of it's not changed I think how we operate, but certainly given us confidence in thinking about how we structure future enterprise deals. On the POS side with Burger King, we're still relatively early. I think the major exciting takeaway is, I think our experience there has fully convinced us and I think we'll have this in our numbers over time that just doing POS is not the end game.

Speaker 2

And so I think what we're going to see more and more in these large rollouts is saying, hey, I know I said I wanted to upgrade my POS, but why don't we do POS in back office and XYZ after that all at once. And so it's created some really healthy conversations with us, with them, but also I think future brands are saying let's not sequence it, let's do it together. And that's sort of the comments I had in the script about the combination of Brink and Data Central as one is kind of my major takeaway there. There's obviously tons of learnings around the logistics and coordination such a huge rollout, but those are all things I think you'd expect us to learn.

Speaker 5

Great. And I don't want to front run the Analyst Day too much, since it's only in a couple of weeks and I suspect you'll go through some of these strategic views there. But you've obviously demonstrated the ability to get the EBITDA positive for the core business, but you're also talking about a very robust pipeline, good demand, M and A. Is there any thought on maybe hitting the gas on hiring or investment stuff that you show in the market that you can be profitable? I'm just curious how you think about that philosophically.

Speaker 2

Yes, I think we're going to have to continue to invest because the opportunity is there. We wouldn't invest, so we didn't take the opportunity there. As an example, as I mentioned, we brought down R and D expense again and that obviously can't continue forever. And so we'll certainly need to continue invest as we deliver on this revenue growth. As I observed, there's very few software companies of our size that are still growing in the mid-20s and we really do feel we're at day 1 of this very, very large opportunity.

Speaker 2

And so you'll see us continuing to invest. And candidly when that opportunity is not there you'll see us stop and you'll see the cash flow spigot accelerate tremendously. So we are trying to balance the trade off and we think this quarter was really important to show you that we could still grow in the 20s while delivering nice EBITDA. And our mandate for our team, we're in the middle of budgeting right now is we need both. This isn't a trade off.

Speaker 2

We need growth and we need profitability. And so we push ourselves to get there. But we certainly will need to continue invest because as we've suggested and you said, there's a lot of pipeline and we don't want to be penny wise pound foolish just to deliver optical number. We want to build something that's there for the very long run.

Speaker 5

Great. Congrats on all the success guys.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Will Nance with Goldman Sachs. Please proceed.

Speaker 2

Hey guys, appreciate you taking

Speaker 6

the questions. Nice results today. Sameet, I wanted to follow-up on some of the earlier commentary you had on data central. I thought it sounded fairly upbeat. And I think you mentioned in your response to one of the prior questions being more aggressive about trying to attach its POS deals and sell more of a unified experience.

Speaker 6

And so just kind of wondering how are you guys how has the go to market changed? What's led to the success that you've seen in driving more attractive data centers to these deals? And you mentioned doubling down on the strategy, I think, in the prepared remarks. What are you kind of have in mind from that perspective over the

Speaker 3

next year or so? Thanks.

Speaker 2

Yes. And you definitely read that through well. So we are really excited about what we're seeing at Data Central. To your question of what's driving it, it's 2 things. 1 is product.

Speaker 2

Brink being able to access Data Central reporting within the Brink platform is a really big unlock. Cutting 2 reporting systems to 1 gives our customers a huge advantage. It provides them a lot of confidence in the data, not having to go from one system to validate the next system. I think that connectivity of the platform is really powerful. And then the second part of it is that allowed us to then consolidate into 1 sales and marketing team.

Speaker 2

And by going to market as 2 as 1 excuse me versus 2, we were able to prove that out. The other part of it, I'd say, now we have demonstrable customer success showing the beauty of having both products at once. And so the reason why I think we're excited is that we've proven it to ourselves, we've proven it to our customers. And in our pipeline, it's quite remarkable how many deals we've been able to go into and say, hey, I know you're focused on point of sale, we'll absolutely deliver the best in class solution, but if you add Data Central, it will be better together and here's our track record of proving that. And we've been really encouraged how many customers and potential customers, excuse me, have resonated with that and said, okay, I think that makes sense.

Speaker 6

That's great to hear. I appreciate that. And then just maybe more of like kind of a modeling or expectation setting question. So the 25% organic ARR growth, super impressive this quarter. As we think about looking out over the next couple of quarters, folding in some of the recent acquisitions into the base, I know those were growing a little slower.

Speaker 6

Is low 20s still sort of the right range to be thinking about absent acceleration and sort of large deal activity that you referenced in an earlier question? Thanks.

Speaker 2

Yes, I think we've sort of said for the last few years, our goal is to grow greater than 20%. And when we buy a business, we want we sort of create a plan to get there. And I think what's exciting is that in every deal we have done, we have been able to accelerate the business, 1st starting with pipeline and then deals. And so we're just beginning that playbook. I already see it happening on the part retail side and we'll soon we'll see it on the TAS side.

Speaker 2

So that's our hope and like I said the market is still really strong. We're not seeing these deals push out. So we're very hopeful.

Speaker 6

Awesome. Sounds great. Appreciate you taking the question, Stephanie.

Operator

Thank you. Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed.

Speaker 5

Hey, thanks. Really nice work here. First, can you just talk some about the pipeline with convenience stores? Really nice to hear about another Tier one win there. And could it make sense to put even more sales resources towards that opportunity given the growth runway and some of the secular tailwinds you've been seeing?

Speaker 2

We have. The short answer is we have. It's actually I think in our go to market team the only place that has for next year we're planning to grow the go to market team there. So we completely agree and are adding. And like I said, I think it's funny when we did this deal it was people a little bit confused.

Speaker 2

And now it's so consensus that the greatest stretch of restaurants in America is convenience stores and the greatest opportunity for convenience stores is restaurants. And so there's this these formats are colliding and we get to be a little bit of an arms supplier.

Speaker 5

Got it. And then just on now that you've reached positive adjusted EBITDA, can you talk about your expectations to reach positive free cash flow and any rough sense on when you think that could happen?

Speaker 2

Yes, absolutely. What we've been telling people is we expect roughly a quarter lag. It may not be perfectly scientific. As you see this quarter, we were operating cash flow positive. And the main delta will just be the interest expense.

Speaker 2

And so as you know we took out a note to fund the TAS acquisition. But we don't have lots of traditional, call it, CapEx. And so I think there'll be roughly a quarter ish lag between the 2.

Speaker 5

Very helpful. Thank you.

Operator

Thank you. One moment for our next question. And it's from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed.

Speaker 7

Yes. The good ARR on the organic business says that all is well as far as the current state of affairs. But I was wondering from a macro perspective, are you seeing any change in the top of funnel pipeline, maybe RFPs that were there and then gone or pulled back, any change up the funnel?

Speaker 2

No, we haven't. We still feel pretty good. So we haven't really seen much change at all from our last quarter as far as demand. And like I said, the only change we see is relatively positive on the Data Central side and that's really the combination of Brink. So it's not like back office is exploding, it's that the attachment to Brink is what's gotten customers excited.

Speaker 7

Okay. And then you talked about a growth rate in excess of 20%, but just taking that down in another layer between engagement and the operator segments, what's the expectation there? Or is there a difference between the growth rate that should be anticipating over the next 2, 3 years?

Speaker 2

Absolutely. I mean, I think historically or not historically, the last kind of 12 months, you've seen tremendous growth in the operator cloud. That will continue. I think it's both a function of TAM. Operator cloud is in a third of the sites roughly of engagement cloud and so there's less market in front of it.

Speaker 2

And so you'll see more growth out of that side of the business. I think the other part of it is we've got more products to sell in that suite versus we can upsell you on back office payments and hopefully more to come. But generally, I think it's just a little bit earlier in its TAM.

Speaker 7

Got it. Thanks for taking my questions.

Operator

Thank you. Our next question is from the line of George Sutton with Craig Hallum. Please proceed.

Speaker 8

Thank you. Savneet, you had mentioned and obviously we all know that the U. S. Quick service restaurant brands are growing faster internationally. I'm just curious if you can give us an update now with TASK under your belt a little bit.

Speaker 8

What kind of an opportunity are you seeing for really driving those U. S. Brands into the TASK system? We're

Speaker 2

really early. We started the connectivity, if you will. And it's funny, just the announcement of the closing of the transaction led to a couple of people inbound to us about potential partnership over there. I think what I can say 100% validated is that our customers and not just our customers, other big U. S.

Speaker 2

Brands are looking for a solution internationally. Now we've got to prove that we can deliver on that going forward.

Speaker 8

Got you. And one other thing on the large brand opportunities in the U. S, obviously, with you rolling out, can you talk about your conversations with other brands as you're talking about really scaling up and scaling down that implementation capability? I'm just curious is that are you convinced you can take on other large opportunities like that concurrently?

Speaker 2

We are right now. We are right now. And I think the what I know for certain, we can take it down because that's you can take down that expense. Ramping it up, we feel like we did a really good job for Burger King and potentially could. But I think given the pipeline we have, we're likely to keep that going just because I think we're going to have more to roll out over time and hopefully this is our continued cadence.

Speaker 8

Perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Charles Navan with Stephens.

Speaker 9

Good morning and congrats on the quarter. Just a quick one on subscription gross margin based on the disclosure on Slide 15. Now if I look back over the past few quarters, sequentially it's been increasing in the mid single digit range,

Speaker 6

I think 4 bps this quarter.

Speaker 9

Just curious if you expect that trajectory to continue? And if you could remind us what specific products are accretive to that margin? I believe in the past you've said that Punch is accretive, Brink is in line, Payments and Menu are slightly below. But if you could just remind us of that those drivers that'd be helpful.

Speaker 2

Sure. So everything you said is correct. Essentially what's happening is, Brink is now in line or has gotten close to getting in line. And I think over time it even has a potential to be more, but right now it's getting in line. Punch is accretive, Data Central is very accretive, par ordering and payments are at the moment below that.

Speaker 2

And so what we balance is that par ordering and payments are the fastest growing part of the business at lower right now lower gross margin. So that hurts margin, but the larger products are having more efficiencies come out. And so that you're seeing the balance of that. And obviously as we fold in our acquisitions, we'll see the impact on gross margin. All of our acquisitions this year had been wildly accretive to the operating income side.

Speaker 2

As we get more disclosures out there, you'll sort of see their impact on the gross margin side. So, in general, I think over time that number will move its way up. Quarter to quarter, it's a little bit hard because you're sort of different growth rates at different products at different times.

Speaker 9

Got it. And if I could follow-up with that, on that topic. If I recall, when you had acquired Stuzo, you had indicated that their average ARPU was a bit higher than that of your existing product, which would indicate that there's potential for uplift from taking the competitor out of the market. It might be early, but I was wondering if you're starting to see some of that benefit from the StuZo acquisition on loyalty ARPU?

Speaker 2

Yes. So not yet, it's too early. But I would say that the benefit is not so much taking a competitor out, but more of converting the punch product customers to the Fuso platform, which is called Open Commerce. And then I think over time coming to market what we believe is the best solution and then obviously upsell down the road. So you'll see this nice trend of the Punch e store customers hopefully coming over the Open Commerce platform at a higher price and then we think we can convert them to more and more products over time.

Speaker 9

Got it. Thanks again. Appreciate the color.

Operator

Thank you. Our next question is from Adam Wyden with ADW Capital.

Speaker 10

Hey guys, congrats on a great quarter and reaching the milestone of $2,500,000 of EBITDA. I think I remember in 2018 sitting in my office with Chris Burns and talking about how hardware sales go down, you're going to lose a lot of money. And it's just an entirely different business now today than it was 6 years ago. And so I think as you sort of said over the last few quarters that it's not about hardware, it's not about this stuff, it's about building 80% to 90% gross margin software and letting that sort of tell the story of profitability. So it's great to see that.

Speaker 10

I just had a couple of questions. One is on Burger King. It doesn't at least from where I'm looking at, it doesn't feel like you really started ramping up Burger King a lot. Can you sort of give us an update on sort of the Burger King rollout? And then sort of making inroads in terms of the other brands?

Speaker 10

I know like on all the expert networks and stuff, the transcript have said the relationship is really strong and they really like you. So maybe sort of expand on sort of where that rollout is and sort of how that relationship is evolving to the extent that it could be great potential for the other brands as well?

Speaker 2

Sure. So we're really limited what we can say. It's while we're a vendor to a business and so there's not a ton I can give you specifics around. I would say the relationship is really strong. We are very close to the team both on a personal and a business level.

Speaker 2

I think we feel like we understand each other well. We have a long way to go here. And so I think the opportunity is great not just with Brink but with other products down the road. That's sort of a real excitement I have coming out of this partnership with them. But we can't say a lot without approvals and things like that.

Speaker 2

As far as the other brands, we're actively engaged with all of them. There's I think great respect for what we've delivered already. And I should mention that those other brands have experiences with other products and that is incredibly helpful. And so we are I think looking forward to leveraging not just the experience we've had at Burger King but with other products within those brands that help us as well. So I think we've got a good reputation within there.

Speaker 2

I think we've got now have a hopefully their perspective as Par delivers. And so I see no reason for us not to eventually do more.

Speaker 10

And just in terms of like the rollout of Brink, I mean, I know they have a mandate internally to make the franchisees roll it out before some deadline. I mean, is it fair to assume that some of the 20 because you're the way I'm looking at it is your growth is like 25 without a ton of Burger King. So the way I'm looking at is you probably would expect more Burger King in 2025. Is that sort of a fair assumption?

Speaker 2

We will definitely have a lot more in 2020. I want to say definitely. My expectation is we'll have I got a lawyer in the room, 25% greater than we have in 2025 and 2024.

Speaker 10

Right. Okay. Yes. That's sort of my read through is that you're picking up you're sort of sustaining this 25% growth with not a ton of Burger King, which means that it's just like it makes us more optimistic about your ability to sustain the growth rate. And then you talked about hoping to have some more announcements on other Tier 1s.

Speaker 10

Are you talk to me a little bit about M and A. I mean, obviously, you've done TASK and SUSO, they've done well. How do you think about being able to sort of add on more modules? I mean, you've sort of StuZo, you've now had, I guess, 8 months of it and it's gone really nicely. TASK is obviously a large public company.

Speaker 10

It's different. But in terms of what I would call industrial, we sort of call it bolt on M and A, sort of modules, not platforms. And if we think about PACS, it's sort of an international platform. I mean, could we do a couple of I mean, obviously, it's all cost of capital dependent and obviously, what they want to pay relative to what you're trading at and whatnot. But I mean,

Speaker 2

do you think that you could do 1

Speaker 10

or 2 bolt ons next year to add product functionality? Because at least from our perspective, we're seeing a lot of businesses in the private markets that are sort of stranded that have pretty nice products, but sort of don't have the distribution that you do. I mean, we spoke to a company just yesterday that's doing AI products and I don't know how big it is, but it's probably in the single digits of ARR, but like they have no distribution. I mean, these are the types of companies that you would be able to plug into your platform and cross sell. So I'm curious now with sort of private equity leverage and the IPO market sort of slow, like you really don't have a ton of competition to buy these assets.

Speaker 10

I mean, how do you think about like sort of returning to that market to do some of these deals at some point and valuations and growth? I'm just curious, like is that still possible or front of house?

Speaker 2

So the M and A focus is definitely more on the modules, the tuck ins, the bolt ons than it is on a platform. So we are really focused on that because I think we've now proven to ourselves that when we've got one, we can push it through the distribution pipeline with limit to no cost. So that is definitely the focus and I would completely agree with your comment on businesses being stranded.

Speaker 10

Okay, very good. Adam, we

Speaker 1

got others in the queue, okay? Last one.

Speaker 10

I'm good. No, I just wanted to say, I would only just say that like, look, to the extent that you guys can get your Tier 1 customers to be your advocates and allow you to announce it, I mean, look, having happy customers and letting them know that you're giving them great value. I mean, look, I know historically these customers have had a hard time letting you press release and what have you. I mean, Hooters has done a phenomenal job and Jeff Kaplan, if he's on the call, we appreciate all the missionary and he's doing for par. But to the extent that you can get your customers to speak on your behalf, I mean, that is the best sales engine that you can have.

Speaker 10

And to the extent that you let your customers, A, be an advocate for you publicly, but also with the press releases, I think it will help give everybody a sense that we our original thesis of this company is that there's no one else really penetrating Tier 1 is playing out almost perfectly. And so we see you guys as a 1 on 1 competitive asset with no competition. And so I think to the extent that others can see that and you can let other people speak on your behalf and put out these press release on the customers, I think that would help accelerate your cause. But no, this is great and congratulations.

Speaker 9

Thanks, Adam. Thank you.

Operator

Thank you. It comes from the line of Anja Soderstrom with Sidoti.

Speaker 11

Hi, thank you for taking my questions and congratulations on the nice performance here. Most of my questions have been addressed already, but can you just speak a little bit about the M and A environment and if you see any changes there?

Speaker 2

I think that it's a little bit we just talked about, which is I think our focus on the M and A environment is on these bolt on tuck ins modules that we can push through our platform once fully integrated into one of our products. From the environment perspective, it's very robust. It seems like there's more companies for sale than there are historically. Definitely some larger transactions have happened. What we haven't seen is a lot of the smaller and medium sized transactions come through yet and I think that's next.

Speaker 11

Okay. Thank you. That was all for me.

Operator

Thank you so much. And our last question, one moment please. Comes from the line of Mark Palmer with The Benchmark Company.

Speaker 12

Yes. Thank you for tucking me in here and very nice job in the quarter. My question is about Task Group and the potential of that platform. The initial thinking with regard to the acquisition of Task was that, it would enable PAR to follow its existing customers in the U. S.

Speaker 12

Internationally, especially because there's more growth there. But are there any other benefits, for our task that you foresee, especially in terms of, landing new customers, beyond the ones that you're able to accompany in their international forays? Thank you.

Speaker 2

Certainly. I think we are I hate anecdotal stuff, but we talked to a brand this week that we've never had a robust conversation with prior to who thinks of the TAS product as very unique, very special in the international markets. And hopefully we can bring that forward to U. S. Relationship over time.

Speaker 2

So absolutely I think the TAS group is delivered for customers that we don't have relationships to. And as I mentioned a little bit earlier, it's also delivered in markets that we're not in, things like stadiums and stuff that we'll take a look at as well. Thank you.

Operator

Thank you. And this concludes our Q and A session for today. I will turn the call back to Christopher Burns for closing comments.

Speaker 1

Thank you, Carmen, and thank you to everyone for joining us this morning. We look forward to updating you further in the coming weeks. In closing, we look forward to seeing everyone at our upcoming Investor Day on November 25th at the New York Stock Exchange. As space is limited for those intending to attend in person, please register via email at irpartech.com. We kick off at 1 p.

Speaker 1

M. That day and we will also be webcasting our presentation with an accessible link on the Investor page of our website. Have a great weekend everybody.

Operator

And thank you all for participating in today's conference and you may now disconnect.

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Earnings Conference Call
YASKAWA Electric Q3 2024
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