PAR Technology Corp (PAR) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to PAR Technology's Second Quarter 2023 Financial Results. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to hand the conference over to your host today Chris Byrnes, Senior Vice President of Business Development.

Thank you, James, and good afternoon, everyone. Thank you for joining us for PAR Technology's second quarter 2023 financial results. Our earnings press release was issued at the close of market this afternoon and is posted on our website. With me on the call today are: Savneet Singh, PAR's Chief Executive Officer; and Bryan Menar, the company's Chief Financial Officer. After preliminary remarks, we will open the call to a question-and-answer session.

During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned "Forward-Looking Statements", and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our second quarter 2023 earnings press release and investor presentation, which can be found at www.partech.com in the Investor Relations page.

With that, I'd like to turn the call over to our Chief Executive Officer, Savneet Singh. Savneet?

Thanks, Chris, and good afternoon. In the second quarter, PAR again delivered strong results. Restaurants of all types and at all stages are using PAR as their growth enabler, leveraging our offerings to create a more seamless, cost-effective and simpler infrastructure. In my position as PAR's CEO, I have the privilege and opportunity to sit down face-to-face with our customers and our top integration partners regularly. The message I'm hearing is remarkably consistent. Again and again, I hear that large enterprise restaurants are focused on creating consistent customer experiences across multiple ordering channels. But in today's world, they're also trying to reduce costs, mitigate risk and convert cost centers to profit centers. For years, they viewed technology as a capital investment. And today, they are coming around to the idea that software is now a key investment in the OpEx line of their P&Ls. We believe PAR is well situated to take share with these dynamics.

At the end of Q2, subscription services revenue increased by 31.2% from last year's second quarter and ARR topped $122.5 million, a 24.3% year-over-year increase, demonstrating the continued growth and scaling of our subscription services engine. Contracted annual recurring revenue ended the quarter at $140.2 million, a strong 7% sequential increase from Q1. Importantly, we are keeping operating expenses flat from our Q4 2022 run rate. Operator Solutions ARR grew 38.4% to $50 million in Q2 when compared to the same period last year. Even more impressive is that Operator Solutions ARR increased 11% from the sequential prior quarter. During Q2, Operator Solutions added 1,150 new stores and new bookings totaled approximately 1,100.

Churn continues to be extremely low at 3.6% annualized for Brink in the quarter. Brink continues to be our land and expand product and this expansion is demonstrated by an increase of over 14% in ARR per site for Operator Solutions from Q2 last year. With opportunities in table service continuing to surface and interest from the largest of quick-service restaurant organizations increasing, the new customer pipeline for Operator Solutions continues to drive new business. The Operator Solutions weighted pipeline continues to be at an all-time high.

Payments is an important part of our growth for Operator Solutions. Rolling out new payments customer sites returned to the pace we had expected and was much faster than Q1. We continue to offer a compelling and transparent pricing model, along with a strong set of integrations and coupled with the ease of doing business with PAR that is winning for our customers. We saw momentum in the second quarter, which resulted in record quarterly activations in gross processing volumes along with customer adoption across our in-store, online and loyalty platform. This is highlighted by the full rollout of our One-Tap Loyalty solution powered by Apple Pay with [software rated] in Q2. We are confident this momentum will deliver strong results for the rest of the year.

Moving to Guest Engagement ARR that includes our leading customer engagement app Punchh and our digital ordering platform MENU. Guest Engagement ARR grew 14.5% in Q2 when compared to Q2 2022, and totaled approximately $61 million. We continue to work hard to deliver in our current environment and are hyper-focused on delivering scalability and innovation at the same time. In the quarter, we successfully kicked off the deployment of a 2,400-unit fast casual chain, and we launched our new subscriptions product. Active store count on a year-over-year basis increased by 13%, and we believe business will continue to improve as the year progresses.

We did this during the quarter, where we saw record campaign usage on the Punchh platform, well beyond anything we'd ever seen. Usages has increased 4x in just the last 12 months, creating both tremendous opportunities and challenges for PAR. This growth has challenges to scale up our infrastructure quickly while also thinking through the optimal long-term business model for Punchh. We are humbled by the trust given to us by our customers and are committed to helping them drive ROI from our products.

MENU continued its migration to the United States this quarter. We've been impressed by the early response MENU has received from prospective customers this year. We are signing customers at a brisk pace, and I'm pleased to report we're in the final stages of signing 3 additional brands this quarter that will more than double the number of stores signed to-date. As we scale up our operations, I expect the logo and store count to grow meaningfully. These early signings validate our investment thesis of MENU and the product features and functionality that are driving this early success will continue to give us the opportunity to unify our customers' ordering channels. MENU is a special product, and we believe truly the next generation of ordering, along is to grow our footprint outside the store and set us up for the expected proliferation in ordering channels to come.

As I mentioned last quarter, we have aggressively started tooling the business for the U.S. domestic market, and we expect revenue to start reticulating in Q3. We feel more confident now than we did at the same time -- at the time of the acquisition that MENU will grow into a dominant product line, and as a result, we increased our infrastructure investments in the quarter. We are doing this methodically by focusing on customers that we can take live sooner in balancing our desire to build more for customers with our belief that we should first deliver on today's promises. Demand isn't the problem as our existing customers see the power of MENU coupled with Punchh. So it's on us to build up our operations, support and service teams to deliver on those trusting us today.

Back Office and Data Central delivered a strong quarter as well. Reported ARR of $11.6 million in Q2 was a 25.3% increase from last year's Q2. We had activations of 221 stores in the quarter and now have more than 7,200 active stores. Before handing the call over to Bryan to review the financials, I wanted to touch briefly on our gross margins in the quarter and specifically margins for our Subscription Services business.

We reported lower-than-normal adjusted gross margins for subscription services at 61% for the quarter and 65% year-to-date. This decline was driven by 2 factors. First, as mentioned above, we've made a large investment in MENU and PAR payments in advance of revenue we expect to take live later this year and throughout 2024. These investments, while short-term painful, are needed in order to build out our pipeline and then future revenue. We believe we are at the peak of that spend and investments should moderate from here.

Second, as I referenced, we experienced a dramatic growth in usage across our products, and in particular, Punchh. The decision was beyond anything we had planned for and resulted in us having short-term disruptions, which led to onetime customer credits to certain customers. To ensure we can support this new baseline of usage, we've ramped up spend in importantly tooling so that we don't encounter these issues again. As CEO, unplanned spend is not fun, but I'm confident this investment spend is more important -- is important in part being able to deliver for our customers, and I believe we'll make up for it many times over as I believe we are likely the only player in our category able to deploy at such a large scale.

To summarize on margins, we expect consistent future growth as PAR payments and MENU revenues continue to scale. While it's challenging to have given out credits, those are onetime in nature, and we're going all in on our infrastructure now to enjoy the spoils of 2024 and beyond. Our spend in margins will normalize as we deliver on core investments that will again increase our efficiency. In summary, we're heading into the second half of the year with significant momentum and a strong pipeline and we'll approach 2024 with the same focus, ambition and value that have shaped our company.

Bryan will now review the numbers in more detail. Bryan?

Thank you, Savneet, and good afternoon, everyone. Total revenues were $100.5 million for the 3 months ended June 30, 2023, an increase of 18.2% compared to the 3 months ended June 30, 2022, with growth coming from both Restaurant-Retail and Government segments. Net loss for the second quarter of 2023 was $19.7 million or $0.72 loss per share compared to a net loss of $18.8 million or $0.70 loss per share reported for the same period in 2022. Adjusted net loss for the second quarter of 2023 was $14.1 million or $0.52 loss per share compared to an adjusted net loss of $9.8 million or $0.36 loss per share for the same period in 2022. Adjusted EBITDA for the second quarter of 2023 was a loss of $9.9 million compared to an adjusted EBITDA loss of $5.8 million for the same period in 2022.

Hardware revenue in the quarter was $26.4 million, a decrease of $2 million or 7% from the $28.4 million reported in the prior year. Sequentially, Q2 hardware revenue was flat compared to Q1 and ahead of our forecast as we continue to see strong hardware sales, both with our Tier 1 legacy customers and across our Brink customer base. Subscription services revenue was reported at $30.4 million, an increase of $7.2 million or 31.2% from the $23.2 million reported in the prior year. The increase was substantially driven by increased subscription services revenue from our Operator Solutions business of $3.3 million, driven by a 21% increase in active sites and 19% increase in average revenue per site. The residual increase of $2.9 million was driven by increased subscription service revenue from our Guest Engagement business, driven by a 13% increase in active sites, a 7% increase in average revenue per site and $0.5 million of post-acquisition MENU revenue.

The annual recurring revenue exiting the quarter was $122.5 million, an increase of 24.3% from last year's Q2, with Operator Solutions up 38%, Guest Engagement up 14% and Back of House (sic) [Back Office] up 25%. Professional services revenue was reported at $12.8 million, an increase of $0.2 million or 1.1% from the $12.6 million reported in the prior year. $7.1 million of the professional services revenue in the quarter consisted of recurring revenue, primarily from our hardware support contracts.

Contract revenue from our Government business was $31 million, an increase of $10.1 million or 48.2% from the $20.9 million reported in the second quarter of 2022. The increase in contract revenues was driven by a $12.6 million increase in government's ISR solutions product line. The increase was substantially driven by continued growth of counter sUAS task orders. Contract backlog associated with our government business as of June 30, 2023, was $297 million, an increase of 61% compared to the $184.5 million backlog as of June 30, 2022. Total funded backlog as of June 30, 2023, was $96.6 million, a 102% increase compared to the funded backlog of $47.9 million for the prior year.

Now turning to margins. Hardware margin for the quarter was 19.2% versus 14.7% in Q2 2022. The increase in margin year-over-year was due to an inventory charge in Q2 2022. We continue to expect hardware margins of 20% as we go forward. Subscription services margin for the quarter was 43.3% compared to 53.9% in the second quarter of 2022. The decrease in margin is reflective of the continued growth within our early-phase products in addition to increased hosting costs resulting from significant utilization of our guest engagement products. We made the additional investments to ensure the quality of our customers' experience was not impacted.

Sequentially, subscription services margin during the 3 months ended June 30, 2023, included $5.3 million of amortization of identifiable intangible assets compared to $5.7 million for Q1. Excluding the amortization of intangible assets, total adjusted sufficient service margin for the 3 months ended June 30 was 61% compared to 71% in Q1. Professional services margin for the quarter was 7.7% compared to 16.8% reported in the second quarter of 2022. The decrease in margin was driven by onetime charges. We expect professional services margin to transition back to mid-teens for the second half of the year. Government contract margins were 4.3% as compared to 11.1% for the second quarter of 2022. The decrease in margin was related to lower mix and direct labor associated with the Counter sUAS revenue. We expect the contract margins to trend back to higher single-digit margins as we progress through the second half of the year.

In regard to operating expenses, GAAP SG&A was $25.6 million, a decrease of $0.8 million from the $26.4 million reported in Q2 2022. The decrease was driven by lower acquisition costs and corporate expenses. Net R&D was $14.9 million, an increase of $4.8 million from the $10.1 million recorded in Q2 2022. Backing out MENU and non-GAAP adjustments, the growth in R&D is $2.4 million, or 24%. The increase is related to personnel hired as we continue to improve and diversify our product and service offerings.

Sequentially, net R&D expense of $14.9 million in Q2 was up $0.6 million from the $14.3 million reported in Q1. Total non-GAAP operating expenses was $36.9 million, an increase of $4.2 million versus Q2 2022. MENU accounted for $3.9 million of the increase. As we indicated at the end of 2022, we will continue to manage the growth of our business while keeping operating expenses flat during 2023. Net interest expense was $1.7 million compared to $2.5 million recorded in Q2 2022. The decrease is driven by increased interest revenue from our short-term investments in 2023.

Now to provide information on the company's cash flow and balance sheet position. For the 6 months ended June 30, cash used in operating activities was $12.8 million versus $31.6 million for the prior year. Operating cash flow for Q2 was $4 million net positive due to efficient management of our net working capital needs. Cash used in investing activities was $6.2 million for the 6 months ended June 30 versus $5 million for the prior year. Investing activities during the 6 months ended June 30, 2023, included capital expenditures of $3.2 million for internal use software, $2 million for developed technology costs associated with our restaurant retail software platforms and $0.9 million for reinvestment of short-term investments.

Cash used in financing activities was $2.5 million for the 6 months ended June 30 compared to $1.8 million for the prior year. Financing activities for 2023 was driven by stock-based compensation related transactions. Days sales outstanding for the restaurants and retail segment increased from 53 days as of December 31, 2022, to 62 days as of June 30, 2023. We expect DSO levels to come back to historical levels within the lower 50-day range. Days sales outstanding for the government segment decreased from 55 days as of December 31, 2022, to 52 days as of June 30, 2023.

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

Let me wrap up with a few key messages before we open the call for Q&A. PAR's business, organizational model and growth strategy are strong, resilient and reliable. I believe this is most demonstrated in our ability to continue to maintain our growth without growing operating investments. This fine balance is a result of a deep focus on operating efficiency, recruiting top talent and an expectation that we can do more. While there's always a chance end markets could continue to be volatile, we feel our growth engine is on strong footing, we wake up excited at the opportunities in front of us. Whether it be unification of their tech stack or vendor consolidation, our customers continue to look to simplify their life, and we believe PAR is well positioned to help.

As I said in Q1, we believe that the M&A environment is also ripe to enhance the value -- our value creation. Today, we're pushing on a number of opportunities, all of which we think add new product and talent to PAR, while increasing our financial profile. M&A has been a strong value driver to PAR and it will continue to be as we go forward. I look forward to keeping you up to date on our progress.

Lastly, I wanted to pass on an employee update. While we work to drive results for the customer, alongside this focus is also a desire to drive a fulfilling and rewarding work experience. Earlier this year, PAR was named by Energage as a top workplace in 2023 for the technology industry. Their survey touched almost every employee at PAR, and we are humbled by the employee response and motivate not to stay static and improve from here. As always, I'd like to thank all of PAR's employees for their dedication and effort over the past quarter.

With that, I'll open the call for Q&A. Operator?

(Operator Instructions) Our first question comes from Mayank Tandon from Needham & Company.

This is actually Sam on Mayank today. I wanted to start on Operator Solutions, which saw really nice growth this quarter. Could you guys just unpack what drove some of the strength here, and how we should think about growth in the back half of the year?

Yes. It's a relatively simple growth algorithm. I think we've got continued nice addition sites as we talked about 1,150 went live, but also growth in Brink ARPU is very high alongside the attachment of payments. And so our goal is to land with Brink at a higher price than we had historically and then loop Brink in our payments business.

I think, [it's] impressive is just in the last year, the total base has -- ARPU has grown by about I think 14% and that's what still a large portion of our base at the very, very old contract price. And so, it's moving up nicely, payments being the biggest driver, followed by the list price of Brink moving up throughout the last year or so.

Yes. Got it. That's helpful. And then appreciate the color you gave on the subscription gross margins there this quarter. I guess could you talk a little bit more about how we should think about gross margins in the back half of the year and maybe into 2024, and maybe dive in a little bit more into how we should think about those investments that are being made in the MENU and PAR Payments?

Absolutely. So we expect to claw back some of that next quarter. As I mentioned, some of this is onetime in nature and that will come back to us next quarter. And I guess, I think this is the peak of the investment spend on MENU, in particular, and PAR Pay is growing faster than our base, and so it brings down gross margin because it's still not to the SaaS gross margin, it will be up.

So I think you'll see us from this quarter on clawback on gross margins. And then, I think, as we get to 2024, we'll get back to low-70s, hopefully, and then higher. And you know the key aspect here is these investments we're making, they really are for both the short term and the long term because not only do they help us recapture the gross margin that we should be at, but they also set us up to have higher gross margins once we get through these investments that we're making.

I mean, also it's kind of I think forced us to think about how we price our products, how we charge our product given how much usage we have, which are all things that I think down the road we can play lever on. So, I think we'll see gross margins climb next quarter, the following quarter and subsequent quarters going forward as we get back to our historical base of the low-70s.

Our next question comes from Jeremy Sahler from Jefferies.

I'm on for Samad Samana. I guess, maybe first on the 3 chains that you signed for MENU. Can you maybe talk about, I guess, what drove those wins? And then were these existing customers, and are you replacing any existing solution?

Sure. And we signed more than 3 chains. We're just highlighting that we've got 3 more that are in the hopper that about to sign that will double the store count we have already. So it's been very exciting. I think what's driving that is a few things.

The first is when you partner a couple of Brink -- excuse me, MENU and Punchh, it is really a hard solution to beat. The integration is strong. Obviously, the interactions between our products is very tight and our teams. And so there is a real value add to the customer overnight and they see that.

The second is that MENU fundamentally we believe is the best product in the market. The best way is sort of seeing a demo -- you know, when we show demos to our customers, it's always a little bit of like, "Wow, how did you crawl into my head and know exactly all the challenges I have with my existing solution?". And so our demo is why we win. And I mentioned this on the last call, but we won a decent chunk of business without really driving hard on the sales initiatives like we do on other products, and that will come. So the product itself is really what's winning and that partnership with Punchh is very powerful.

As far as who we're displacing, you know, we're displacing the legacy online ordering companies that have existed for a long time. There's a couple of big players that we see pretty much in every logo, and it's very exciting because we're just starting and this is going to be a snowball over time.

Got it. That's useful color. And then, maybe can you provide an update...

Sorry, one other.

Sure. Go ahead.

One point to mention is. I believe I'm pretty sure every single online ordering deal we signed also includes payments. And so it's a nice two-for deal, if you will.

Got it. That's helpful. And then can you maybe provide an update on table services? Are you targeting any specific customer sizes? And kind of, I guess, where is the product now? And are any features that you still need?

Yes. So one of the things that I think really exciting about the Brink business is just how much it's pulled in for this year. But the large table service chains that we won at the end of 2022 are actually going live as I mentioned on the last call, in 2024. And so we've been able to kind of continue this momentum at Brink without those. But specific to your question, we continue to see deals inbound from the very largest of chains on the table service side to smaller and medium-sized chains. And so that pipeline is growing really nicely, it's very high ARPU. And it continues, I think, to highlight, the sheer fact that Brink is even in the RFPs, I think highlights the product market fit that we've started to hit with our customers.

Our next question comes from Eric Martinuzzi from Lake State Capital Markets.

Yes. I wanted to first focus on the Guest Engagement. You're obviously making a pretty substantial investment in your emerging business lines. You talked about a second-half scale-up. Is that in anticipation of winning business or servicing business you've already won?

We've already won. So MENU has won a number of deals in end of Q1, Q2, and then we expect a couple of nicer ones this quarter. So it's very much deals that are signed that we need to get out the door.

Got you. Okay. And then on the Operator Solutions side of the house, curious to know if you're -- the pipeline tempo, are you seeing any change in the rate of progression for some of your up-funnel conversations?

I don't think we see any change. I think it just continues to be high. I think what's been exciting about this year is our engagement with some of the largest chains in the world, coupled with a focus on the emerging chains that we've always been very strong with. So I don't think there's been a change. It just seems very consistent. There's not one sense of slowdown because of the macro at all in that business. And I think what's really starting to click obviously is that consistent bundling payments with Brink, not only being -- creating tons of value for PAR but creating a lot more value for our customers.

Our next question comes from Will Nance from Goldman Sachs.

Yes. I appreciate you taking the question. I wanted to ask on the Punchh business. I know you said exceeded your expectations. That seems to be maybe a little bit of an understatement and looks like it was up pretty substantially sequentially. Just wondering if you could talk about the sustainability of the pace of activations in that business, and just how you're thinking about the remainder of the year?

I think as we messaged on Punchh, I think we're kind of getting our footing here. We've spent a ton of money scaling the platform. The usage on Punchh, as I mentioned, it's kind of crazy, but the usage of the platform is up 4x in just 1 year, and it was already a really big base of usage.

And so we've grown into that. We definitely got some bruises through that, but I think what's great is, it also provides a great moat for us because there are not -- we're not aware of any other organization that has the ability to deploy at the scale that we do. And so while it's [able] to make obviously, in this environment is also exciting because there really isn't anybody that can kind of step into that scale like we can. And so, it is a long-term strategic advantage.

And the pipeline looks better now than the last quarter and it looks better than -- if you ask me 2 quarters ago. And so, we see nice momentum. I just met with the sales -- one of the sales leaders, the sales leader a couple of days ago. The pipeline looks strong for Q3, Q4, but we've got to close that business and we've got to win that business and make sure we pull it into 2023.

Got it. And then, I know you mentioned a little bit of investments on the payment side. I'm just wondering if you could kind of revisit attach rates there, and any updates to the expectation for $10 million to $15 million of ARR exiting the year?

We feel very good about hitting that target on payments. You can see just a big jump we had this quarter. As I expect us to hit that range, I also think that we'll exit the year with a very strong backlog for 2024 given what we see today.

The attachment rates of payments on Brink is still very high. 80% plus is my guess. I'll come back to you with the actual number, but it's very, very high. When we get a new customer, we are usually successful in attaching payments because it creates a ton of value to the end customer. It's generally more cost-effective, simpler, one hand to shake, the servicing is all of the above. And then if we don't -- if for some reason, we don't win the payments business. It's generally either because they are in an existing contract with somebody else that doesn't have a buyout clause. And then we'll wait around the corner for that opportunity to come back to us.

And Will, you're seeing how that attachment is high too through the ARPU increase, right, in Operator Solutions because it's in essence, right, attached through there on top of Brink. So the ARPU per site that has now both the Brink and also the payments is driving that increase.

Our next question comes from Patrick McIlwee from William Blair.

My first one, given some of the onetime expenses and profit that came in a little bit late this quarter, how should we be thinking about the trajectory for profit, adjusted EBITDA over the rest of the year? And is it fair to expect we kind of return to pretty steady progress towards breakeven?

Absolutely. I think this quarter, we took a hit on the gross margins, but the OpEx line stayed exactly where we wanted to be and our growth was strong. I think growth will continue to be strong through the year. And the key for us hitting our profitability goals will be getting to the high end of our guidance from the beginning of the year.

Like I had mentioned earlier, I think we feel confident we're going to claw back some of the gross margin next quarter and in the following quarter and moving forward. And I think there's no doubt profitability is around the corner. And if we can deliver on the high end of the revenue side, I think we'll hit there. If we don't, we'll miss, but I think it's on us to kind of execute as fast as we can to get there. But I think the trajectory is very clean from here.

I think (inaudible). We've reset, like on the subscription margin, right? We ended this quarter to lower 60s. We're seeing the visibility for mid-60s, and then to higher 60s as we go to Q3, Q4, right? Getting ourselves back on to that 70% margin that we were at, at the end of last year before we were kind of putting the foot on the gas in regards to the investments on the younger products.

And what I think interesting there is that most of that is coming back from a little bit of efficiencies, but also just revenue turning on for these investments we've made, on particularly MENU, which starts adding revenue this quarter and this quarter being Q3 and then really in Q4. But what that growth that Bryan talked about doesn't take into account the actual investments we're making in Punchh and Brink and so on and so forth, which will come in 2024. So, I think that this will be the story -- this year has been the story of holding OpEx flat while maintaining growth. I think next year will be a deep focus on trying to get the best-in-class gross margins while maintaining growth.

Okay, great. And at Punchh, you had or Guest Engagement I should say, you had 3,400 activations in the quarter, but only saw I think about $1.5 million step up in ARR sequentially. So I just wanted to ask is that a step up as expected. Or have you seen any pickup in churn there related to some of the budget headwinds or some of the capacity issues you had this quarter on that front?

So I think it's as expected. I think, there's always some churn quarter-to-quarter, but not anything meaningful or concerning our end. But there's definitely churn in the quarter for Punchh that offset some of that activations, and then as you suggested, there were at least one-time issues that kind of impacted it. But no, there has been Punchh -- as you can see from the sites versus the ARR, Punchh pricing is up a little bit so it's not -- there is no discount or anything like that.

Correct. But it's in line what we kind of forecast or look at maybe call it the beginning of the year, we were expecting some churn in the first half of this year, right? And as this was the year that we kind of had that the pivot reflection point with Punchh and we're right on forecast in those expectations in 70s, right. That's the one That's the one with the ARPU. That's been kind of consistent. Primarily site growth is driving the ARR growth.

Our next question comes from George Sutton from Craig-Hallum.

This is actually Adam on for George. Savneet, it's great to see the growth in ARPU this quarter. I was hoping you could provide a little more detail on exactly how high you are thinking about ARPU going in the future.

It's going to continue to trend upward. What you're seeing is the result of the new deals we've been taken live plus payments. And as more and more of these new concepts and stores go live, we'll continue to move upward. And the deals that we have in pipeline today that we win them are meaningfully fair prices. And so I think it's just the base catching up to what we've been doing the last year or 2. So we expect that ARPU to continue to trend upward for a long time here. And you can see it across all products. You can see it even Data Central, obviously within Operator Solutions, it's super meaningful, but even Punchh a little bit. So I think we feel pretty good about that lever now.

Great. And just one follow-up question from me. With the acquisition of MENU, you brought along some international accounts with that acquisition. I would love to better understand how you're now thinking about the international market, and how you're managing those international accounts given that you've been primarily focused on the U.S. up to this point.

It's a great question. So we made the Street decision, I'd say, at the beginning of this year to not focus on those international accounts and business and retool the business in the United States, which is why the cost structure is so high because we're sort of operating in 2 different geographies. So think about it as support teams, sales teams in different geos plus DevOps infrastructure in different geos. That's why, it's so expensive.

And the reason why we did that was demand base. It was very clear how much demand there was for this product in the United States. And instead of waiting for it in Europe and doing it there, we thought we should bring it here and take advantage of that. And that's why you also see the cost structure flip hopefully nicely the other way as the revenue turns on here that we've booked and signed. So it's very much a swimming to where the customers want our stuff. And so we're feeling really excited about that.

In time, I think we will eventually go back and build that out. But today, I think the main focus is getting our U.S. customers live because it's not just the pipeline as long as the deals we want to have been significant, and we've got to get those lives that we can make sure we can take on this pipeline. It's a unique situation where sales isn't the problem. If it's us getting the step up the door, that's the next challenge and then we'll increase the funnel and increase the funnel. So today, we're really focused on delivering for customers that need what we have. And I think tomorrow, will be, okay, where can we expand from there.

Our next question comes from Adam Wyden from ADW Capital.

A couple of questions here. Obviously, we're seeing the investment in Punchh and MENU, and there seems to be a little bit of a stopgap between the revenue being turned on in the next couple quarters and sort of the investment on the front end. But you made a comment that basically said, no one else can do what you do, right, I mean, [Toast] is a big company, but no one else is really out there winning these large logos.

And based on our channel check work, there are 2, I would call Tier 1 customers, one being Burger King restaurant brands that's doing an RFP for basically their entire tech stack in North America, which could be 15,000 units and then Wendy's at 5,500 units. I mean is this your way of saying that basically you've got all the products no one else sort of has sort of the direct integration and the ability to service the customers and that this is sort of investment to basically in customer service and support because you anticipate winning these big logos and sort of an acceleration in your growth? I mean, is that sort of a fair way to think about it?

So let me first comment on my comments. So what I was actually suggesting was on the Punchh side, we've made some big investments in the DevOps infrastructure. It's really scaling the platform. And what I think we realized was given how large Punchh penetration is, I think it's 45, 46 of the top 100 restaurant chains in America, it's been very hard for people to compete with us to deliver the sheer volume of campaigns that we deliver to our customers.

If you think about it, Punchh is the largest, clearly invested I think close to the most or the most, and for someone to come in and then put that investment, I just don't see that happening. And so I think what we do is building just scalability moat along with the product moat and service moat. We want to continue to build and get better at. But it's very hard for those big -- for our competitors to come in and undercut us to do whatever they want to do to try to win on large restaurant but the things to be hard, given the sheer infrastructure investments we've made, I think, will create a nice gap.

Second part, you're saying I think what's exciting is I do believe that in the enterprise restaurant category, there not a lot of people that can deliver what we do, particularly when you put it under the lens of being cloud-first and also being able to provide the full solution with high-quality products. And so, we feel really well situated to start bringing into that market. And I think as we hopefully win one of our large next logos, we'll be able to go to the next one and with that proof point.

But I think I would say categorical what you're saying roughly is -- would be my pitch to our customers, which is who else has the scale and not only in the products to deliver what you need. Because if you think about it, if you're a large restaurant organization, you're taking a huge leap of faith on your POS in this example, provider or your loyalty provider to deliver to your customers and your franchisees. And so the more that we can show that we have that breadth and depth of product, the easier those conversations to come.

Right. So said a different way, you've obviously taken gross margins down to basically invest in product in anticipation of other customer needs. And these -- obviously, whether it's payments, upsell or whether it's winning a Burger King or a Wendy's I mean, is it fair to assume that you keep -- you said it will be EBITDA breakeven if we hit the high end of our revenue range. Is it unfair to assume that we can expect sort of the company to grow revenues at a faster pace in '24 and '25 and sort of -- this is sort of the short-term pain for sort of accelerated revenue growth in the future?

I hope so. I mean I think we can't talk about customers we have. We haven't disclosed publicly yet. But as the math is pretty simple, right? You win one large super Tier 1, and it's equivalent are like half our revenues, if there are enormous step functions. And so, our goal is we got to continue growing as we're growing. We hope and expect to win those type of customers and those create that step function upward, but without question.

On the margin side, we're going to make that whether we win a large deal or not. That is just blocking and tackling and getting it right, making those investments. And in many ways, I wish we made the investments earlier because we have more customers live now. And we would have never dealt with credits and things like that. But -- so on the margin side, we're going to do that irregardless of who we win.

Okay. Second question is around M&A. On the last call, you basically said PAR is for sale every day. Obviously, the company still trades at a pretty big discount to what I would call sort of low-churn enterprise restaurant software businesses that are being bought out by private equity or other ones in the public markets. I guess that you're making investments now, but you are seeing this sort of accelerated ARR growth and you have public company costs and whatnot.

I guess what I would say is a meaningful part of sort of getting that value realized and is creating this company at pure play and sort of divesting the government business to sort of get the company in a place where it would be easy for you to sell to a strategic or someone that could sort of get rid of all that sort of public company costs. I mean I know it was sort of a challenge a few years ago to sell it, because you were waiting for this contract to basically be won. But now you sort of have this multiyear pipeline on [fast], and you've gotten to a certain amount of scale, and you've got the balance sheet. I mean, what is the holdup in terms of selling that government business and sort of making this a pure play for others or for staking the company as a stand-alone?

So there's no hold up. I think we've delivered -- when we told shareholders we want to deliver a year of strong growth from this contract, we needed to do that. That was important so we'd get the multiple there, and now we have been. So we are always focused on creating value. And as I've said many times over, I think it's very [logical for PAR] to make that decision, but I can't say anything until we come out with that decision.

Can you comment on the tuck-in M&A? I mean, obviously, you did MENU, which obviously was sort of a technology investment that you basically are internally skunk working growth. But I mean, there are plenty of companies now that are sort of orphaned in the in the VC world that are doing anywhere from $10 million to $40 million of ARR that might be able to leverage our public company costs and be acquired accretively and sort of help you sort of balance this sort of organic growth investment with cash flow and public company costs and whatnot.

I mean can you comment about like sort of what your -- I mean, you said on the call, look, Data Central was good, Punchh was good. Those were sort of tucked in. Those are nice scale businesses. They're growing nicely and generating positive contribution margin. I mean, how do we think about sort of that next layer of products and sort of getting scale that way as well? I mean, is that something that is a 2023 possibility? And what is the quantum of M&A you think you can do over the next 12 months?

So yes, I'd say without question, I expect us to be acquisitive now, things can change and we won't be, but we are excited by that opportunity. And we don't -- I don't think we would look to buy something to offset public company costs because then you can really buy anything that generates cash flow. I think we have to buy stuff that create synergy with our existing product suite within our customers. And that's where you'll get the operating leverage on your sales and marketing and hopefully, your R&D over time. And we see a number of deals that we think are very, very interested to us. And I think we are very interesting to these sellers.

So you will see PAR active there And I do expect that to happen. It's hard to break those things, but I think you'll see us very active. As far as dimensionalizing the sizing of that, we wanted -- I think we, like you believe in economies of scale here. And as we have been able to show that we're very good at leveraging our OpEx base to continue to grow. I think scale helps.

And so, I think we like larger assets because we can push them through, they're established, the product is more developed. I don't think you'll see us acquire science experiments or things that need a ton of R&D projects. I think you'll see us buy more mature assets where we think there's tons of synergy for our customers, and we can integrate them nicely and create a good home for those teams. So, I think you'll see us very active here. It's a core focus of mine. I've definitely shifted a decent portion of my own focus just to get these over the finish line.

Adam, we've got to jump to the next caller, so we can cut off.

Our next caller is Andrew Harte from BTIG.

Obviously, it sounds like PAR Pay was a big driver of the Operator Solutions ARPU jump. Is there anything else you would call out there kind of benefiting? Obviously, I think table service will come into the mix next year. And I guess, bigger picture on PAR Pay, how penetrated is it within the existing base today? And what will PAR Pay gross margins look like once it kind of reaches a more mature level?

Great questions. So the other big driver is just price. We've taken price at Brink nicely. And I think, I hate to say we would take price. I think we're getting the value that we deliver to our customers. And I think, as you know, a large portion of our initial base of Brink was very, very underpriced because it was a startup trying to get business and build the logos. And so that's the other big driver. It's just pure price. And I think our customers transparently know exactly what we're charging. So there's not like we're trying to sneak one by them. We really want to be open and transparent with them and show them the value we drive. And so I don't -- we don't lose on price, and we are not the cheapest product in the market. So I think it's capturing value there.

As far as payments, payments is not even 10% penetrated to the Brink base yet, and it's already a meaningful measure of the Operator Solutions revenue. So I think you'll see us have a lot of white space within the Brink base for payments. I'm raring up for these renewals that are coming up where we can show what we have at PAR. And what's fascinating about it is we are processing meaningful amounts of volume every single month now. We're well over $1 billion of annual GPV. And as that business scales, it helps the cost structure because as we process more volume, our rates come down more and it allows us to expand the margin there, which is a good segue into your last question on margins.

Steady-state superscale payments margins should get close to what our SaaS margins are. But what's unique about our payments business is that it's not just processing. We have a gateway product. We've got a reporting product. We've got a fraud product. There's a number of product innovation that's happening in there, all of which will expand those gross margins. So I don't expect gross margin -- sorry, payments to forever be a drag on gross margins as it is today because it's scaling. But -- and I think there's many ways we're excited about the products we can build on top of payments. Because one of the things I feel passionate about is anybody can sell cheap payments like literally anybody, it's what's the value you bring to the customer around the payments is really what's going to make them [stick in]? And I think we're seeing how valuable that is today.

And then Savneet, you've talked about in the past of kind of this year, Operator Solutions and Back Office offsetting some headwinds in Guest Engagement. But Guest Engagement, at least on the activation side, like it seems like a really strong quarter and kind of ahead of our expectations. Do you still feel that's kind of the dynamic for the back half of the year where Back Office and Operator Solutions carry a lot of the weight or Guest Engagement holding in better than where we were thinking about a quarter ago?

I guess, it's as planned. I think we expect to -- we keep saying it will get better and keeps getting better every quarter. And so I think it's just -- it's a ground up purely from like just the sizing, right? It's -- you can't take a business that's $61 million of revenue and flip in a quarter back to $30 million, but it's climbing that, it's coming -- we're coming up now. And listen, Operator Solutions is just got great momentum, will continue to have great momentum. And so, it will be the driver. You can see how fast it's growing, almost 40%, and we don't expect that to really slow down much. And so just I think one on size, but two, just the existing pipeline is there.

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

Thanks, everyone, for joining us. We look forward to updating you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.