Outset Medical Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 10 speakers on the call.

Operator

I do apologize for the difficulties this morning. I'll just start right from the beginning. We are welcoming everyone to the call this morning, the fiscal 2023 4th quarter and year end financial results call. This morning, we did release our financial results. The earnings release is available on the Investor Relations page of our website atpartech.com, where you can also find the Q4 financial presentation as well as in our related Form 8 ks furnished to the SEC.

Operator

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. 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 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.

Operator

Joining me on the call today is Par's CEO and President, Savneet Singh and Brian Manar, PAR's Chief Financial Officer. I'd now like to turn the call over to Savneet for the formal remarks portion of the call, which will be followed by general Q and A. Savneet?

Speaker 1

Thanks, Chris,

Speaker 2

and thank you all for joining us on today's call. 2023 was a foundational year setting us up for a value creation 5 year we think takes flight in 24 hopefully years to come. The acceptance of our products by the industry's largest customers and the building blocks of an M and A muscle we intend to use regularly are now in place. I'll touch on these ideas later and begin with our results. For the Q4, subscription ARR grew by 23% when compared to Q4 2022.

Speaker 2

Our growth came across our products and was delivered without relying on the exciting customer wins we touched on last quarter as that revenue will begin later this year. Operator Solutions ARR grew by 45% to $60,200,000 in Q4 when compared to the same period last year. Operator Solutions ARPU increased by 15% from the same period last year due to higher value deals, API monetization, price increases and par payment services go live. We expect this trajectory to continue. Churn was 4.8% for the year in 2023 for Brink.

Speaker 2

Operator Solutions growth is being driven by increased win rates at Brink and we believe accelerated market acceptance of cloud solutions and a pivot away from legacy providers. This turned out in Q4 as we announced the signing of BURGER KING, by far our largest Brink and now menu customer, with our products to be rolled out across their 7,000 plus stores in North America. This deal validates our Tier 1 enterprise reach and sets us up nicely to win traditional Tier 1 projects with similar scope. From where we sit today, the deal pipeline for Brink is the largest and highest quality we have seen since beginning the PAR turnaround in 2018. While pipeline is just pipeline, we see a real commitment from brands across the country to accelerate their move to the cloud, and we think at the enterprise, PAR is not only the best choice, but the simplest.

Speaker 2

Our ability to integrate deeply into their existing ecosystems and also provide solutions to vendor consolidation, data integrity, and enterprise scale positions us nicely for continued market share growth. We continue to see Brink as the major cross sell driver for PAR. The POS relationship will open up avenues for all of our other products. Burger King will be a strong revenue driver for par over the next 2 years and when fully implemented when fully implemented and will deliver upwards of $23,000,000 in annualized subscription revenue. What's even more exciting is this number barely scratches the surface of the additional modules we hope to sell into Burger King over time.

Speaker 2

The rollout begins in earnest in Q2 this year and we expect on our next call to have details on the pace of this rollout as we work closely to align with Burger King on their timing. We feel confident executing against Burger King timelines and once we have visibility from the customer, we'll report back to the market. While payments is nested within an operator solutions business, this product line has some strong highlights in the quarter. In Q4, we saw ARR from Par payment services more than double from that in Q4 of 2022 and expect this growth trajectory to continue. Q4 was seasonally strong, which saw us achieve our highest gross processing volume annual run rate of $2,100,000,000 This growth is being driven by the continued adoption of parfait from brands such as Pita Pit, Zippy's and Ono's Hawaiian Barbecue to name a few.

Speaker 2

Brands are increasingly benefiting from operational efficiencies, cost savings and increased customer engagement by leveraging part pay across the operator and engagement suite of products. In Q4, our Apple Wallet Loyalty Solution won silver in the category of most innovative enterprise product of the year from Best in Biz Awards, a distinction that gives us confidence in the aggressive growth plans we have. This coupled with payment innovations such as Pay to Table and SMS Text Link ensured that Parr is executing against the mantra of best in class plus better together. Looking forward, as we natively embed Par Pay to drive differentiate and unique experiences, it's leading to the strongest pipeline we've ever had. Crucially, we are seeing payments uptake on Brink, Punch and Menu deals, offering us multiple avenues to grow deal value.

Speaker 2

We anticipate continued positive momentum in customer adoption. Moving to guest engagement ARR. Guest engagement ARR grew 8.2% in the quarter when compared to Q4 'twenty two and totaled approximately $54,000,000 In the quarter, Punch continued with strong execution and business revitalization evidenced by the wins we recently announced at Bob Evans, Insomnia Cookies and most recently Pinkberry. These wins don't hit revenue until later in 'twenty four, but show how punches turned around from the beginning of 'twenty three. In total, we signed 12 new logos in Q4 and over 40 in fiscal year 'twenty three, continuing to further our position of best in class and market dominance and loyalty and offers.

Speaker 2

Additionally, major platform investments are beginning to show improvements as the speed, uptime and general scalability are at all time highs to match the growth of our customers and focus on the enterprise. It was also lowest churn quarter all year with less than 0.5% gross churn. We've invested in our platform to better support our customers' business requirements and are proactively adding additional features to increase our addressable market and ability to raise price and renewal cycles. These investments will also help us potentially digest future acquisitions as we tend to run tightly on one platform. Moreover, as flagged above, Punch has begin to establish itself as a verified cross sell driver of payments, which we expect to accelerate in 2024.

Speaker 2

The other important piece of guest engagement is our online ordering engine menu. As we have discussed, domestic menu revenue will begin in Q1 and will continue to grow throughout 2024. 2 weeks ago, we celebrated the launch of the first full menu solution at Beef O'Brady's, a chain of nearly 200 stores. What makes this win even more exciting is that Beef O'Brady's is a win back for Punch as this customer turned from Punch years ago, again, highlighting the power of unified ordering loyalty. This quarter, we'll announce the rollout plan.

Speaker 2

This quarter, excuse me, we have an aggressive rollout plan with several customers, including an 800 store chain. Further, the new customer pipeline for 24 will drive additional logo signings. We spent the majority of 23 investing in converting Menyoo into a product that we can scale in the United States and are seeing this work validated. Menyoo highlights our attempts to build a platform out of our products. HeartPay is built into almost every Menyoo deal and I believe almost every single menu customer signing is a punch or bring customer.

Speaker 2

The vision of attaching menu and selling it into existing par logos is still in the early phases, but starting to become a reality as the majority of customers today are a customer of another par product. This creates a roadmap for future acquisitions. Back office and Data Central again delivered a solid quarter, reported ARR of $13,000,000 in Q3 with a 19% increase from last year's Q4. We have now more than 7,700 stores active and in the quarter signed 2 additional new concepts along with a large franchisee of Burger King. ARPU increased more than 8% from last year's Q4 and we're seeing an accelerated pipeline as we closer attach Data Central with Brink sales.

Speaker 2

The plan for 24 is to work to aggressively to bundle Data Central and payments within Brink and create a closer go to market motion. For instance, there are obvious advantages to supplanting Brink reporting with the more powerful data central reporting. This serves as both the gateway to the wider data center product as well as an immediate revenue stream. We'll be moving data center revenues within Operator Solutions in coming quarters to simplify our reporting as well. We think the connection between Data Central and Brink will accelerate the Data Central pipeline and win rates, while allowing us to rationalize sales specific resources.

Speaker 2

To touch on expenses, I feel confident in our expense control as we continue not to grow our R and D expense outside of additions for Burger King, which we believe is very high ROI spend. I think for 2024, we'll be able to grow OpEx single digits, continue to show operating leverage, while maintaining revenue and margin growth. As I've mentioned, we'll have a couple of quarters of growth to prepare for our big rollout, but overall the rest of the business is still running for the fixed level resources and delivering on long term growth. Our headwind in cost is almost exclusively within our menu business unit, which drove the majority of our loss in fiscal year 'twenty three, hiding that Brink, Punch and Data Central grew their revenue with almost no net new headcount. In 'twenty four, we will not have this headwind as menu revenue finally hits and we have worked to aggressively reduce headcount this quarter.

Speaker 2

My confidence in our commitment to moving to the Rule 40 is that we have absorbed the cost of menu and Burger King in advance of the revenue impact. That will reverse in 2024. This gives me great confidence that there is more decrease from our expense base without risking our growth making the setup for 2024 exciting. Brian will now read the numbers and I'll come back at the end with some concluding messages. Brian?

Speaker 3

Thank you, Savneet, and good morning, everyone. Total revenues were $107,700,000 for the 3 months ended December 31, 2023, an increase of 10.3% compared to the 3 months ended December 31, 2022, with growth coming from subscription service and contract revenue, partially offset by hardware and professional service revenue. Net loss for the Q4 of 2023 was $18,600,000 or $0.67 loss per share, compared to a net loss of $13,500,000 or $0.50 loss per share reported for the same period in 2022. Adjusted net loss for the Q4 of 2023 was $9,300,000 or $0.33 loss per share compared to an adjusted net loss of $7,000,000 or $0.26 loss per share for the same period in 2022. Adjusted EBITDA for the Q4 of 2023 was a loss of $4,500,000 compared to an adjusted EBITDA loss of $2,800,000 for the same period in 2022, driven by reduction in professional service margin and increased R and D investments in advance of our large customer ramp, partially offset by increased margin contribution from subscription services.

Speaker 3

Now for more details on revenue. Hardware revenue in the quarter was $24,400,000 a decrease of 5,200,000 dollars or 17.5 percent from the $29,600,000 reported in the prior year. Q4 2022 was an historically strong quarter, hardware quarter for us to lap. We continue to be optimistic of our hardware business as we launch new products to address demands from legacy hardware customers, as well as attached hardware sales within our expanding software customer base. Subscription services revenue was reported at $32,900,000 an increase of $5,000,000 or 18 percent from the $27,900,000 reported in the prior year.

Speaker 3

The increase was primarily driven by increased attrition services revenue from our Operator Solutions business of $3,900,000 driven by a 19% increase in active sites and a 15% increase in average revenue per site. Residual increase was driven by increased subscription services revenue of $600,000 from our guest engagement business. The annual recurring revenue exiting the quarter was $137,000,000 an increase of 23% from last year's Q4 with operator solutions up 45%, guest engagement up 8% and back office up 19%. Professional services revenue was reported at $12,600,000 a decrease of $900,000 or 6.5 percent from the 13,500,000 dollars reported in the prior year. Dollars 7,500,000 of the professional services revenue in the quarter consisted of recurring revenue primarily from our hardware support contracts.

Speaker 3

Contract revenue from our government business was $37,800,000 an increase of $11,100,000 or 41.7 percent from the $26,700,000 reported in the Q4 of 2022. The increase in contract revenue was driven by $11,800,000 increase in government's ISR Solutions product line. The increase was substantially driven by continued growth of counter EUAS task orders. Contract backlog associated with our government business continues to be strong and appropriately funded. As of December 2023, backlog was $326,000,000 a decrease of 2% compared to $333,900,000 as of December 2022.

Speaker 3

Total funded backlog as of December 2023 was $73,200,000 Now turning to margins. Hardware margin for the quarter was 29% versus 23.8% in Q4 2022. The improvement in margin year over year was substantially driven by improved inventory management and price increases. Our focus of demonstrating value for our price with improved operational efficiency has allowed us to improve hardware margins in the second half of the year and finished 2023 with full year hardware margins of 22%. Subscription Services margin for the quarter was 48.1% compared to 53.1% reported in the Q4 of 2022.

Speaker 3

The decrease in margin is driven by absorbing the initial investment into the Burger King rollout, while also absorbing the initial growth of menu and par payment services, which are both early stage products. Excluding the amortization of intangible assets, total adjusted subscription services margin for the 3 months ended December 31st was 65% compared to 72% in the Q4 of 2022. Professional services margin for the quarter was 10.4% compared to 23.3% recorded in the Q4 of 2022. The decrease in margin was driven by decreases in margins from implementation services and hardware service repair. We expect professional services margins to transition to the mid teens for 2024.

Speaker 3

Government contracts margins were 5.8% as compared to 4.3% for the Q4 2022. The team continues to manage direct labor to properly support task orders and improve margins. In regards to operating expenses, GAAP sales and marketing was $9,300,000 an increase of $300,000 from the $9,200,000 reported for Q4 2022. GAAP G and A was $18,600,000 an increase of $1,900,000 from the $16,700,000 reported in Q4 2022. The increase was driven by an increase in M and A due diligence as well as higher stock based compensation.

Speaker 3

Net R and D was $14,500,000 a decrease of $400,000 from the $14,900,000 recorded in Q4 2022. Non GAAP R and D increased $1,300,000 or 9% driven by investments in our larger customer rollout. Total non GAAP operating expense was $37,500,000 an increase of $2,400,000 or 7% versus Q4 2022, primarily driven by R and D expenses as we continue to invest responsibly in our large enterprise customer rollout that Smedes discussed earlier. Net interest expense was $1,800,000 compared to $1,800,000 recorded in Q4, 2022. Now to provide information on the company's cash flow and balance sheet position.

Speaker 3

For the year ended December 31, cash used in operating activities was $17,100,000 versus $43,100,000 for the prior year. The reduction in cash burn compared to the prior year was due to the management of net working capital, primarily resulting from improved inventory management. Cash used in investing activities was $7,800,000 for the year ended December 31st versus $66,700,000 for the prior year. Investing activities during the year ended December 31, 2023 included $1,900,000 of cash consideration for our payments tuck in acquisition for the rights to merchant payment commissions from 1 of our restaurant tech partners. Capital expenditures of $5,800,000 for internal use software and $5,300,000 for developed technology costs associated with our restaurant retail software platforms, partially offset by $5,000,000 of proceeds from net sales of short term held to maturity securities.

Speaker 3

Cash used in financing activities was $1,600,000 for the year ended December 31, compared to $2,600,000 for the prior year. Financing activities for 2023 was driven by stock based compensation related transactions. Days sales outstanding for the restaurant and retail segment increased from 53 days as of December 31, 2022 to 57 days as of December 31, 2023. We expect DSO levels to remain near historical levels of the lower 50 day range. Days sales outstanding for the government segment decreased from 55 days as of December 31, 2022 to 51 days as of December 31, 2023.

Speaker 3

I will now turn the call back over to Savneet for closing remarks prior to moving to Q and A.

Speaker 2

Thanks, Brian. Let me wrap with a few key messages. What's clear to me is that as we bring our products closer together, our ability to cross sell is increasing. The tight integration with menu as an example has led to 70% of menu deals including Par Pay, while even more interesting every menu deal has come from an existing Punch or Brink customer. Historically, words like consolidation and bundling have had negative connotations, and I think for the right reasons.

Speaker 2

Prior attempts to consolidate were not done around industry leading products. It requires customers to trade off functionality for simplicity. This is explicitly what we are not doing at par. Our products must stand on their own, be best in class when integrated and unified. And when unified deliver surprise and delight.

Speaker 2

As the new years move on, I think we'll see a standardization around the platform that will then allow development to come on top of that system of record, hopefully increasing innovation and true technical outcomes. As mentioned in the opening, we think the shareholder value creation flywheel is in motion. I believe the flywheel starts with land and expand with the KAR platform within our current category, followed by the cross sell of additional products and then followed by the addition of accretive M and A to bolster our platform capabilities and expand our TAM. Each new product and acquisition allows us to drive higher returns on capital because we leverage our existing go to market infrastructure. The acquisition of Punch and Menu were table setting.

Speaker 2

Now we're ready to get the machine in motion. As we scale, it allows us to invest in more integration and thereby continue to have best in class products starting the flywheel all over again. 2023 is where we saw real evidence of the first step in this flywheel, landing our platform into enterprise. Designing at Burger King as a Brink customer followed by our second step of leveraging a seamless integration with Menyoo was a good example of the flywheel in motion. The next part of this flywheel is accretive and cash flowing M and A.

Speaker 2

Through the back half of 2023, we ramped up our corporate development efforts and believe we will be able to deliver accretive and cash line cash generating M and A in short order. As the market continued to move towards a platform like towards platform like solutions, individual point solutions must partner up with platforms like PAR. Today, the market realizes that the value is in the platform, not the standalone solution, creating a strong dispersion in acquisition multiples. Some of these targets we feel are great fits for par and hence our ramped up efforts here. What I like most about these deals is that they are all cash flow business cash flowing businesses with tremendous real synergy to par, either addressing product holes or allowing us to leverage our existing cost base.

Speaker 2

Our ramp up in M and A infrastructure should lead to results in the near future, thereby accelerating our flywheel. And then finally, I should comment that working at par has never felt more like day 1. Today, from what I see in front of me, the restaurant market is adopting our products at a faster rate than ever. I think we can not only execute on an aggressive organic growth plan, but also put into motion the acquisition machine we want to stream to go. Our team has built an equally important structure to execute to ensure we don't drop the ball on our plan, while allowing us to balance the short term with the long term.

Speaker 2

The excitement internally is palpable, and we think our success will only be limited by our ambition. What I like about our setup today is I think we continue growing at our current rates with our existing core business, improve our margins as our emerging low margin products scale and continue to run the business on a closely managed OpEx base. As I mentioned earlier, our core products at Brink, Punch, Payments and Data Central have run a near flat headcount in 2023 and the headwinds on menu and Burger King Investments should reverse in 20 24. Said differently, our revenue should continue to grow while our product unit economics get better with scale our G and A costs stay tight as revenue absorbs the cost we've taken the hit on in 'twenty three. Any additional M and A would then drive meaningful cash flow to the bottom line, which is why this foundation is so important.

Speaker 2

Outside of our incremental hiring for Burger King, there are almost no new hires needed to hit our growth plans, and we feel confident that the efficiency of this org design will only get better as we continue to consolidate our teams. Today, we are still relatively small business with less than $150,000,000 of AR, but we believe we have the foundation to do much more and the team is excited to execute on it. With that, I'll open the call for Q and A. Operator?

Speaker 4

Thank Our first question comes from the line of Mayank Tandon from Needham.

Speaker 5

Thank you. Good morning. Savneet, great to see all these new logo wins outside of BK as well in the last several months. I wanted to start with I know you're not giving formal guidance, but just based on your comments, I wanted to get a sense of your expectations for ARR growth. Can you sustain the current levels in 'twenty four?

Speaker 5

Or should we expect some acceleration given you've had these new wins, most notably, as you mentioned, Bob Evans, Hooters, etcetera? So just want to get a sense of your expectations for 2024?

Speaker 2

Yes, I think we feel confident we'll maintain and potentially grow a lot of it depending on as we get the Burger King rollout going, the sequencing of that rollout. We don't have that today. But even without that and assuming conservative numbers there, I think we feel really good about the growth maintaining and growing. And I think we'll do a great job on that rollout. And so I think there's opportunity for it to get even better.

Speaker 2

But once we get that data, we'll report back to the market because obviously it will be very, very influential for us. But I think we feel very good about it and I think we've got more wins to come that we'll announce. And so we've had a lot of these announced wins, but none of the revenue for that yet. And so I think what's exciting is the growth we've had in 'twenty three didn't complement the logos we've announced the last 3, 6 months.

Speaker 5

Let me just ask you this way. I think in the past, you've said you can grow ARR between 20% 30%. Is that still the target model for the company? And on that note, should subscription revenue follow the ARR growth trajectory? Is that a pretty good correlation, the way to think about it?

Speaker 2

Yes. I think that's a good way. And then as I said, once we get the timing of working, I can come back and say, do we think it will be 30 or 25? I think we just need the details of that, which we don't yet have.

Speaker 5

Got it. And then just as a quick follow-up in terms of the leverage in the model, great commentary around that. So just based on what you said, is it reasonable to then think that you could potentially reach EBITDA profitability at some point in 2024? Or given some of your comments, is it going to be maybe in 2025 given the timing of some of these sort of leverage points in your model?

Speaker 2

It will all be dependent on Burger King because we've ramped up costs meaningfully to support that launch both in menu and in Brink. Can we get there by the end of the year? I think so unless Burger King decides to not roll out do all the roll out in 2025, which is extremely unlikely. And so we feel really excited. And then I think the exciting part I tried to mention on the call, which is we've absorbed so much cost from menu was the vast majority of our loss in 'twenty three.

Speaker 2

That revenue itself is coming live. Today, we just took live another large customer. And so I think there's a lot of optimism on the bottom line because we've been taking hits on cost to get the rollout built out for both of these chains, both these products, which will reverse in 'twenty four. But short answer is, I'm going to give guidance I think on next quarter once I have details on BURGER KING and kind of guide you exactly where I think we'll be. But that has such that changed the model tremendously.

Speaker 5

Got it. Very helpful. Thank you so much.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Stephen Sheldon from William Blair.

Speaker 6

Hey, good morning. Lots to dig into here as always. But just on Burger King, as we think about that, what are some of the key milestones that we externally should be thinking about for that implementation? It sounds like there's still quite a few moving pieces. And then what are the biggest risks to that process in your view that you're concerned about?

Speaker 6

And I guess asking that another way, what do you absolutely need to get right as we think about the supplementation?

Speaker 2

So, everything is on track. I would say going better than expected on the far side. So we feel great about it. So no concern. To me, it's the only thing you're tracking is the stores that go live.

Speaker 2

It's pretty simple. And so we haven't started the rollout, which is so a lot of it is we'll see when we go live, but we feel really, really good. We're in a couple of 100 stores now as sort of tests, they're going great. And so to me, it's just the store is going live. And like I said, I think we feel really, really good.

Speaker 2

It's a 2 year rollout, so it's going to be very, very quickly. It's just going to be about how much is in 24 versus how much is in 25. 5. And we don't have those details yet. But just like any other large organization, I think they understand that we don't want to do everything back in because will put a lot of stress on everybody.

Speaker 2

But until we have that, I think we're going to sort of be conservative till then. But the metric to track is just how many stores go live because that's the only metric that matters.

Speaker 6

Got it. And I guess related to Operator Solutions, you had a really good bookings quarter there, I think 3,400 net new site bookings there. Is Burger King in that at all? I guess, is that the majority of it? Did you have a lot of good booking activity there outside of Burger King?

Speaker 6

Just any detail on how much of the new cycle

Speaker 2

is Burger King versus others? Burger King is almost none of it, like maybe 100 or 150, I think it's all other logos.

Speaker 6

Wow, okay. That's great. And then I guess sticking with operator solutions, just one more. The step up in ARR per active site, it seems like that was up 7% to 8% sequentially. Just curious if you can give us more detail on the moving pieces there.

Speaker 6

I guess the payments adoption is a big part of that, but any notable benefit from pricing uplift or just anything else you call out?

Speaker 2

It's about fifty-fifty payments and price uplift, and you're going to that's going to continue. This is an exciting part of the model. The size of the deals we're in are much larger than before and also higher ARPU. And so that's going to continue. So we feel really good about the pricing.

Speaker 2

Brink is a premium product is getting rewarded from premium product and deals and that will continue. But I think right now it's about fifty-fifty call it, modules, modules being primarily payment, but also API monetization and the other half being true price increase.

Speaker 4

Our next question comes from the line of Eric Martisnoonsi from Lake Street Capital Markets.

Speaker 1

Yes, I wanted to dive in a little bit more on the transaction due diligence. That $2,300,000 number caught my eye for your M and A work. I'm just curious to know, obviously, you're talking about some point solutions that you can tuck into your platform, but are these pointed in any particular direction as far as engage versus operator solutions versus back office?

Speaker 2

So, obviously, we've been from numbers, it's clear we're deep in the M and A process and that's why we disclosed it because it's meaningful now. As far as where that M and A is happening, it's I'd say within guest engagement and operations where we have most of the deals, guest engagement is where we're seeing the most activity right now. But M and A is opportunistic at times and so we'll see where stuff picks up. But the deal flow is the highest. But what I think is exciting today is the strategic fit both from a price perspective and a product perspective is great, which is why we ramped up cost so much, which is pushing hard to get these done.

Speaker 1

And you did say that those were cash positive targets or is it kind of post acquisition they would be

Speaker 2

No, these are all very profitable. I think every company we look at is at Rule of 40 independent and so at par it will be better than if they're not rule of 40, they're close to rule of 40 and we can take it to rule of 40. So we're really focused on that. And I don't expect you'll ever see us buy something that's money losing. We made these investments menu, which is obviously been a headwind to the cost, but once we have the platform, which we have the platform now, everything on top of it is needs to be cash generating and create the flight that I mentioned.

Speaker 1

Got it. Thanks for taking my question.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of George Sutton from Craig Hallum.

Speaker 1

Hey, good morning.

Speaker 7

This is Adam on for George. Savneet, on the last earnings call, you mentioned that there are 3 additional large QSR brands that we're taking a pretty meaningful look at Brink.

Speaker 3

Just curious if you had

Speaker 7

an update on those specific potential customers?

Speaker 2

So I can't comment anything until we announced the press release, but I'd say the number is now more than 3, just the pipeline has really gotten far bigger than anything we've seen in the past. I think we've got we see 3 logos that are sort of what we call near term within our funnel, and then another 4 that are sort of medium term. So that the funnel is large and it's real. And one thing in particular, this is on the POS side. POS funnels, RFPs are really robust processes for the customer we work with.

Speaker 2

Generally, they're hiring consultants. They spend 100 of $1,000 on consultants, on surveys. And so when it gets to the near term, decisions do come because they've already spent a ton of money to get to the point of making that decision. So it is usually a great sign as it relates to business, provided we win that business.

Speaker 7

Great. And then with respect to menu, can we just get an update on where that product is in terms of development of features as well as the integration path? Are you 90% done, 80% done? Anything else you can move

Speaker 3

it off would be great.

Speaker 2

We're there. So we're not making investments. In fact, we've cut costs meaningfully just in the last month there as we hit the product parity we want to get to in the United States. And so we took the cost basis down there pretty meaningfully just like I said 2 weeks ago because we kind of hit the goals we need to. As I mentioned, we had our first U.

Speaker 2

S. Go live with Beef O'Brady's 2 weeks ago. You can download the app, check out the website and I think you'll see how innovative and beautiful product it is. We had our 2nd customer go live today. I'll talk about that later because it's not public, but a really impressive 700 to 800 store chain.

Speaker 2

So it's coming and I know it's been painful because what kills me is the core business is running so much more efficiently. We haven't added headcount in a long time. Many were we have the major loss. And like I said, that's reversing in 'twenty four as we have revenue coming on for menu to offset that impact plus these cost stuff that I mentioned.

Speaker 7

And then one final question for me. With respect to the Burger King rollout, did most of the scaling from a headcount and cost perspective come during Q4 or should we see that continuing in Q1 as well?

Speaker 2

You'll see some of it in Q1, but a lot of it was in Q4. We're scaling up, call it, 140 people. Now these are short this is short term. This is not they're not going to stay apart forever, but think of it as installations, limitations, dev teams to finish the integration. And so it's a meaningful amount of cost.

Speaker 2

But again, that cost isn't perpetual because once we roll out, we don't need those costs and those will come down over the next 2 years. So we've taken a lot of it now. It will scale its way back down. The way I like to think about it is, call it, 2 scrum teams, 2.5 scrum teams for some short period of time and then it's primarily support professional services and that's about it. And so it's not like I said, it's painful to absorb that for a couple of quarters before we get any revenue from it, but we will get it back very, very quickly and then both costs will rationalize themselves back down.

Speaker 4

Our next question comes from the line of Samad Samana from Jefferies.

Speaker 6

Hi, good morning. Thanks for taking my questions. Maybe first one, I mean, you guys have done a great job in terms of mismatching the cost structure to where the business is at. And in today's slide deck, it looks like there is a new disclosure about sales and marketing and R and D as a percentage of ARR. And I look at the gross margins and I look at those percentages, it kind of looks like the subscription part of the business is now actually profitable even factoring in expenses.

Speaker 6

Am I getting the right read on that? Is that the signal that you were trying to send with that disclosure? And then I have a follow-up.

Speaker 2

Yes. So I think disclosure is really to give you a lot more transparency on how fast we're rationalizing the cost basis on that side. And that's why we also do it ex menu because I said menu is majority of our loss. It's just more to sort of track how fast we're going to get there. And then as I said, as we get M and A done, you'll see that take step functions.

Speaker 2

But it's really more just to provide transparency and that we're going to get there quickly.

Speaker 3

Yes. And Samad, it doesn't include that slide you're referring to, does not include the G and A and that is from a looking at it from a non cash perspective.

Speaker 6

Okay, okay, perfect. And then you've called out the impact of menu and payments on gross margins. When do you expect these investments to lap? Do you expect something of a permanent headwind to gross margins from payments as the mix shifts? Or do do you expect that to get back up to the 70s?

Speaker 6

Just how should we think about that?

Speaker 2

We're definitely going to get to the 70s and then higher over time, is that question. So we recognize payments on a net basis. So our payment gross margins will be near our software margins because we are super conservative in terms of doing the net versus the gross. And so the payments won't be the issue. Menu will take a couple of years to get to where we need to, but it's not going to be permanent headwind because the rest of the business is also growing nicely.

Speaker 2

And so if you remove out those products, we're kind of back to exactly where we were in the past, a little higher. So it's just the growth of those two businesses. Menu has been the major headwind because you've got such a major cost without really any revenue. Like I said, we just took our 1st customer live in the U. S.

Speaker 2

We got another big one going and that's before the Burger King revenue turns live there. And so you'll see a nice movement there this year and then the Outletters get there. But all of our products need to get to mid-70s and higher gross margins. It's the mandate we're going to drive towards.

Speaker 6

Great. Appreciate taking my questions.

Speaker 4

Thank you. One moment for our next question.

Speaker 2

I'm having a hard time hearing this, so just grab it like that.

Speaker 4

Our next question comes from the line of Anja Soderstrom from Sidoti.

Speaker 8

Hi, thank you for taking my questions. I'm just curious in terms of you said you said the sort of cloud transition from prem accelerated. Do you think I mean, aside from wanting to get to tech stack, is there a security aspect to this?

Speaker 2

So, I think implicit in all of it, there is essentially a security risk, but that's not the major driver. I think the major driver is the legacy guys are giving up share more rapidly than in the past. I think this is being driven by a bunch of different factors. I think the biggest one is that if you were on an old product, even if continually even an old product that's on the cloud, your ability to innovate and take on these innovations that are driving the restaurant of the future, you are really limiting your experience. And I would say the simplest way to do this is look at the stock charts of the restaurants that have made these major investments in technology, Chipotle, Cava, McDonald's, so on and so forth.

Speaker 2

You can see the actual returns that they've had and then look at the ones that haven't. And so I think it's more about the functionality you're getting from a modern product and of course security is part of that.

Speaker 8

Okay. Thank you. That was all for me.

Speaker 2

Okay. Sure. We're actually just curious.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Andrew Harte from BTIG.

Speaker 9

Hey, good morning. When we're thinking about 2024, the kind of the different components of ARR growth, obviously, operator solutions with BURGER KING should be the key driver of it. But some of these in the past, you've kind of sized up relative growth of guest engagement and back office compared to operator solutions. Can you just help us on how you're thinking about the growth of kind of the other pieces there in 2024?

Speaker 2

Yes, absolutely. So I think we'll have an acceleration from guest engagement, driven by Punch and Menu. As sort of suggested, Punch has won a bunch of logos in the back half of 'twenty three. We're going to announce some more in the next month or 2 here. And so we'll have an acceleration on Punch.

Speaker 2

Menu, we'll have revenue growth. We haven't really had any growth there because of this move to the U. S. And so we'll see growth there. I don't think that business grows 30% just because of the size, but I do think we'll see a nice uplift from where we are today.

Speaker 2

On the back office side, which is a small part of our business, that group, call it 19%, 20% this year, I think that business will also have an ability to move up this year with the bundling within Brink. And I think we'll see some interesting acquisition opportunities that come out of there too. And then we've talked about Brink already, but there's just a lot of pipeline there. The key part though is that Brink Landing allows everything else to grow faster. And so at Brink lands, almost every Brink customer we signed in 'twenty four added another product.

Speaker 2

And so that will drive everything, which is why we continue to consolidate the units together because as we land Brink, expansion is getting easier and easier.

Speaker 9

Thanks. And then appreciate the comment on kind of ramping up your M and A capabilities. I guess on kind of the other side of that question, can you just kind update us strategically about how you're thinking about the government business here?

Speaker 2

I look at the disclosures in the doc.

Speaker 9

Fair enough. Thanks.

Speaker 4

Thank you. At this time, I'm showing no further questions. I would like to turn the conference back over to Savneet Singh for closing remarks.

Speaker 2

Thanks everybody for your time. Look forward to seeing you in next quarter and feel free to reach out with any questions.

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Earnings Conference Call
Outset Medical Q4 2023
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