PAR Technology Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Closing on March 11, 2024 and therefore our reported first quarter results include 20 days of StuZO results as well. At times during this call, we may discuss organic or standalone results, which exclude StuZO to help listeners understand our organic performance. Now I'll turn the call over to Savneet for the formal remarks portion of the call, followed by Q and A.

Speaker 1

Thank you, Chris. We had a strong start to 'twenty four, achieving 25% growth in ARR, while closing 1 M and A transaction and announcing a second. Our sufficient services business is clicking, and we feel confident we'll be able to continue to drive growth while turning EBITDA positive in Q3. Crucially, our products continue to be validated as standalone best in class while working better together, helping prove the value of our unified solution and demonstrating to our customers that buying more from par does not sacrifice functionality, but rather generates better outcomes. This is a point that I really wish to underscore again.

Speaker 1

Each of our products generates better experiences on other PAR products, thereby enhancing total stickiness and expanding sales opportunities beyond what a single product sale could generate. The flywheel at par is real. For the Q1, subscription services ARR organically grew by 25% when compared to Q1 'twenty three. When we add SUSE's contribution, ARR now stands at $185,700,000 a 60% increase from the Q1 last year. Additionally, once TASK closes, our current ARR would be over $225,000,000 on a pro form a basis.

Speaker 1

In Q1 'twenty four, all of our products grew and part achieved 25% organic year over year expansion without material contribution from large logos we've signed the past few months, notably Burger King and Wendy's. As I mentioned last call, we're going to be reporting in 2 segments: Operator Cloud, which includes Brink, Data Central and Payments and Engagement Cloud, which includes Menu, Punch and SUSO. Simply put, we are reporting in the same manner as we are organized internally. Our Operator Cloud solutions predominantly work with IT and operations teams, while our Engagement Cloud solutions work with marketing and digital teams. Operator Cloud ARR grew 39 percent to $78,500,000 in Q1 when compared to the same period last year.

Speaker 1

Operator cloud growth is being driven by increased win rates at Brink and continued ARPU improvement. Operator cloud ARPU increased by 22% from the same period last year due to higher value deals, API monetization, price increases and par payment services go live. We expect the growth in ARPU to continue given current white space in existing high value accounts as well as a robust pipeline. Brink is our most strategic product, and when selected by an enterprise, it presents an opportunity to cross sell additional par products. POS remains a heartbeat of the restaurant, where scalability, stability and extensibility are central tenants of successful operations.

Speaker 1

This is demonstrated by the fact that Brink received almost 1,000,000,000 API pings per month across a relatively small number of stores. The mission critical nature of POS for in store, above the store and kitchen is where we feel the true mission criticality of our solution lies. We've ramped up our teams for the BK project, where we expect rapid install velocity to start as of Q2. Payments continues to accelerate its growth and more than doubled year over year. While Q1 is a seasonally slow period with lower processing volume, Far Payments managed to achieve its highest annualized gross processing volume run rate of $2,400,000,000 We achieved this via the full rollout of the 1100 store chain and 4 additional restaurant concepts.

Speaker 1

Each of these enterprise benefit from operational efficiencies, cost savings and increased customer engagement by leveraging par pay across multiple par products. Looking forward, par pay is becoming a native infrastructure across all of our products, which has led to very high growth and the strongest pipeline we have ever had. With the recently announced acquisition of Stuzo and Task, the team is fully engaged in expanding Parpay into new verticals, which will continue to drive deal volume, customer adoption and materially higher margins. Data Central delivered a strong Q1. The quarter includes the go lives of Luxe Travel Center.

Speaker 1

We continue to build out a robust pipeline of business opportunities for Data Central with the attachment to Brink and Par Payment deals with multiple Tier 1 concepts in the funnel. Feel very bullish about our ability to drive cross sell, especially as Brink works through its very large pipeline of deals this year. Our operator cloud offerings provide less complexity, lower total cost of ownership, enhanced security and reliable payment processing. Operator cloud products remain highly sticky, which we expect only to be strengthened in difficult macroeconomic times. Our engagement cloud, which includes Punch menu and now SUSO, continued its momentum with a stronger than expected quarter.

Speaker 1

Deals closed in the second half of last year are starting to go live and our year over year ARR growth excluding Suzo was 11%. Meanwhile, our platform and tech debt investments are helping lower customer churn, improve customer satisfaction and expand hosting margin. Also continued solid sales momentum in Q1 with some strong brand wins, including Wendy's and a leading national chicken chain. Looking ahead, we expect Punch to be a strong profit contributor to PAR and the engagement cloud solution to drive stable growth. At the same time, we're announcing the launch of exciting new functionality in our Punch wallet.

Speaker 1

This solution will help enable seamless payment and redemption flows and drive material cross sell opportunities, further increasing the value and implied stickiness of the PAR product suite. Menu, our digital ordering application, also delivered an improved Q1 by going live in more than 1200 sites across 5 new logos, including major chains like Beef O'Brady's, Burger King and a 700 store coffee chain. The newest part of Engagement Cloud is our recent acquisition of StuZo. Just as a refresher, Stuzo is a leading digital engagement software provider to the convenience and fuel retailer industry, including its open commerce platform, which empowers C Stores to gain more share of customer wallet and drive customer lifetime value. The combination of Punch and Suzo allows us to offer best in class loyalty and digital engagement products across 2 food service markets, restaurant and C store.

Speaker 1

Additionally, with Suzo, Par is now the leading provider leading technology provider for convenience stores with over 25,000 customer sites and substantial opportunities for innovation in the C store industry with a TAM of 150,000 stores domestically. Chuzo also provides the opportunity for additional cross sell opportunities for other par products into a new customer base with material, stronger unit economics. Engagement Cloud ARR now totals more than $107,000,000 of SUSO's contribution at the end of Q1. Also, as we previously reported, SUSO's trailing 12 month adjusted EBITDA was $14,000,000 Although Q1 only had revenue contribution from Stuzo for around 3 weeks, the positive impact for the full Q2 and full year 'twenty four will certainly be continue to see PAR's 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 3rd party integrations for customer experiences.

Speaker 1

Moving to hardware. We had a softer than normal Q1 due to increased seasonality issues and a shifting demand environment in our legacy restaurant non Brink base. Harbor sales are always hard to predict given their sensitivity to the macro environment. And as such, we'll continue to forecast conservative numbers to protect us from getting ahead of ourselves. We are focusing our efforts to make up this shortfall and believe there are opportunities to drive sales in hardware, namely increased McDonald's sales during their convention year and with the recent favorable industry response to our newly released terminal, the Par Wave.

Speaker 1

Additionally, we're focusing on selling hardware to the few concepts who use Brink, who have not historically used our hardware, as well as current Brink customers that will benefit from an updated equipment. Additionally, with a near 100% attachment rate of hardware to upcoming Brink projects, hardware will be able to tap into new large cap customers in the near future. Hardware white space will only continue to grow and this is truly an issue of when, not if. Moving to expenses. Our non GAAP operating expenses grew 7% when compared to Q1 last year and excluding Stuzo.

Speaker 1

Almost the entire OpEx increase is associated with the Burger King and Wendy's rollout that will have significant return on investment and that cost will then rationalize downward. In addition, earlier this year, we right sized our go to market team, giving us additional expense tailwinds, and we expect to end 2024 at a lower quarterly OpEx than we started excluding our acquisitions. So similar to last year, where we expect ARR to grow meaningfully without adding operating expense. This rigid expense management combined with consistent organic ARR growth will allow our company as we sit today to be EBITDA positive by the Q3 of this year. What I'm most proud about though, as I just mentioned, is that we also expect par OpEx, excluding Suzhou, to actually come down through 2024.

Speaker 1

Said differently, I expect us to grow at the rates we're growing without additional operating expenses. And of course, any accretive M and A only accelerated profitability. To provide more detail, I want to walk through the underlying margin for our subscription services business, which will provide clarity on how healthy our unit economics are becoming. These numbers exclude tasks, which if added would only help prove the point. At the very top, our adjusted subscription services gross margin this quarter were 66%, flat quarter over quarter.

Speaker 1

As we get scale, we want to drive this to 70% plus. We feel confident we can get this done and think we'll see improvements this year. We estimate our sales and marketing expense as a percentage of ARR this quarter when including the annualized contribution from STUZO, would be around 21%. This number will continue to improve as we get the benefit of the cost cuts I mentioned earlier this year. As I flagged last call, we want this number to get to 15% or lower.

Speaker 1

We estimate our R and D expense as a percentage of ARR, again including the annualized contribution from Suzo, was around 35%. This number continues to get better and we have our sights on our target of 25%. As I hope investors can see, we're focused on driving towards our long term goals and the intense focus on keeping our OpEx flat has led to a strong acceleration in margin. What's more, as we bring TASK into par, we'll be adding another $6,000,000 to $8,000,000 EBITDA and a large pipeline of deals and a strong base of customers to cross sell par products, creating the same flywheel internationally. To recap, we're executing a strategy that we established several years ago, and we're seeing the benefits of that strategy.

Speaker 1

We have a business model with strong organic fundamentals that positions us well to drive shareholder value, while continuing to acquire new products to cross sell into our base. We partner with some of the largest and most innovative restaurant companies in the world and have established ourselves as a trusted technology partner at these companies as they undertake their digital journey. We've executed disciplined M and A strategy that is accretive to our journey towards profitability and rule of 40, while crucially expanding our TAM into markets with greater margin and cross sell potential. And finally, we have a talented and dedicated employee base across the globe who are committed to helping our customers and our company win the industry. Brian will review the numbers in more detail and then I'll come back to offer some guidance for the rest of the year.

Speaker 1

Brian?

Speaker 2

Thank you, Stephanie, and good morning, everyone. Total revenues were $105,500,000 for the 3 months ended March 31, 2024, an increase of 5% compared to the 3 months ended March 31, 2023, with growth coming from increases in sufficient services and contract revenue, partially offset by decreases in hardware and professional service revenue. Net loss for the quarter of 2024 was $18,300,000 or $0.62 loss per share, compared to a net loss of $15,900,000 or $0.58 loss per share reported for the same period in 2023. Adjusted net loss for the Q1 of 2024 was $10,800,000 or $0.36 loss per share compared to an adjusted net loss of $12,700,000 or $0.46 loss per share for the same period in 2023. Adjusted EBITDA for the Q1 of 2024 was a loss of $7,200,000 compared to an adjusted EBITDA loss of $8,800,000 for the same period in 2023, driven by increased margin contribution from subscription services, partially offset by reduction in hardware revenue and margin.

Speaker 2

Now some more details on revenue. Precision service revenues reported at $38,400,000 an increase of $10,400,000 or 37.2 percent from the $28,000,000 reported in the prior year. The increase was substantially driven by increase of shipment service revenues from operator cloud services of $5,900,000 driven by a 20.7% increase in active sites and a 22.2% increase in average revenue per site and from our engagement cloud services of $4,500,000 primarily driven by $2,700,000 of post acquisition Stuzo revenues. The residual increase of 1,800,000 dollars from our engagement cloud services was driven by a 5.8% increase in active sites and a 7.5% increase in average revenue per site. Excluding Stuzo, organic subscription service revenue grew a meaningful 27% compared to prior year.

Speaker 2

The annual recurring revenue exiting the quarter was $185,700,000 an increase of 60.2% from last year's Q1 with engagement cloud up 80.5% and operator cloud up 38.8%. The acquisition of StuZo contributed $41,000,000 to ARR included within Engagement Cloud as of March 31. Excluding Stuzo, total organic annual recurring revenue was up 24.8% year over year. Hardware revenue in the quarter was $18,200,000 a decrease of $8,600,000 or 31.9 percent in the $26,800,000 recorded in the prior year. The decrease was substantially driven by timing of enterprise customer hardware refreshes and timing of next generation part terminal and headset rollouts.

Speaker 2

We continue to be optimistic of our hardware business as we address the growing demands from both legacy hardware customers as well as attached hardware sales within our expanding software customer base. Professional service revenue was reported at $13,500,000 a decrease of $400,000 or 2.7 percent from the $13,800,000 reported in the prior year. Dollars 7,700,000 of the professional service revenue in the quarter consisted of recurring revenue primarily from our hardware support contracts. Contract revenue from our government business was $35,400,000 an increase of $3,600,000 or 11.2 percent from the $31,900,000 reported in the Q1 of 2023. The increase in contract revenue was driven by $4,500,000 increase in government's ISR solution product line.

Speaker 2

Contract backlog associated with our government business continues to be strong and appropriately funded. As of March 2024, backlog was $315,400,000 a decrease of 3% compared to $326,000,000 as of December 2023. Total funded backlog as of March 2024 was 72,000,000 dollars Now turning to margins. Gross profit was $28,600,000 an increase of $5,400,000 or 23% from the $23,200,000 reported in the prior year. The increase was driven by subscription services with gross profit of 19,800,000 dollars an increase of $5,700,000 or 41 percent from the $14,000,000 reported in the prior year.

Speaker 2

Subscription service margin for the quarter was 51.6 percent compared to 50.2% reported in the Q1 of 2023. Increase in margin is driven by a continued focus on efficiency improvements with our hosting and customer support costs for our operator cloud services well as improved margins stemming from Stuza's post acquisition operations. Excluding the amortization of intangible assets, total adjusted subscription service margin for the 3 months ended March 31 was 66% compared to 71% in the Q1 of 2023. Sequentially, Q1 2024 adjusted sufficient service margin is consistent with Q4 2023. Hardware margin for the quarter was 22.3% versus 16.4% in Q1 2023.

Speaker 2

The improvement in margin year over year was substantially driven by improved inventory management and price increases. Focus of demonstrating value for our price with improved operational efficiency has allowed us to continue to improve hardware margins year over year. Professional service margin for the quarter was 16.5% compared to 17.9% reported in the Q1 of 2023. The decrease in margin was driven by a decrease in margin for hardware related services. We expect professional service margins to remain in the upper teens for the remainder of 2024.

Speaker 2

Government contract margins remained essentially flat at 7.1% as compared to 7.2% for Q1 2023. In regards to operating expenses, GAAP sales and marketing was $10,900,000 an increase of $1,500,000 from the $9,400,000 reported in Q1 2023. As Savneet mentioned, during the quarter we made changes to the sales and marketing organization to enable more efficient growth. GAAP G and A was $25,600,000 an increase of $7,500,000 from the $18,100,000 reported in Q1 2023. The increase was driven by an increase in M and A transaction fees as well as stock based compensation, severance costs and post acquisition STUSA.

Speaker 2

GAAP R and D was $15,800,000 an increase of $1,500,000 from the $14,300,000 recorded in Q1 2023. The increase was primarily driven by post Stuzo acquisition costs. Q1 2024 operating expense, excluding non GAAP adjustments was $42,300,000 an increase of $3,700,000 or 10% versus prior year and excluding STUZO costs, the increase was 7%. As Satneet explained earlier, we expect organic operating expenses to be flat for the remainder of the year as we continue to drive ARR and revenue growth, consistent with how we manage operating expenses last year. Now to provide information on the company's cash flow and balance sheet position.

Speaker 2

For the 3 months ended March 31, cash used in operating activities was 23 point $6,000,000 versus $16,700,000 for the prior year. Cash used for the 3 months ended March 31 was essentially driven by a net loss from operations and additional net working capital requirements due to an increase in accounts receivable resulting from revenue growth. Cash used in investing activities was $151,900,000 for the 3 months ended March 31, versus $1,800,000 for the prior year. Investing activities during the 3 months ended March 31st included $166,300,000 of net cash consideration in connection with the Stusel acquisition and capital expenditures of $1,400,000 for developed technology costs associated with our restaurant retail software platforms. This is all partially offset by $15,900,000 of proceeds from net sales of short term investments.

Speaker 2

Cash provided by financing activities was $190,800,000 for the 3 months ended March 31, compared to cash used in financing activities of $2,400,000 for the prior year. Financing activities during the 3 months ended March 31 was substantially driven by a private placement of common stock. I will now turn the call back over to Savneet for closing remarks prior to moving to Q and A.

Speaker 1

Thank you, Brian. Let me wrap up with a few key messages before we open up the call for Q and A. In regards to the initial phase of the Burger King implementation program, early indications are that new orders are being submitted at a healthy pace. While it's hard to perfectly predict where we will sit at the end of the year, we're executing well on our end and feel confident we can give Burger King every reason to only accelerate our 2 year rollout plans. The BK rollout has a strong impact on our year over year growth and profitability and to provide clarity, I'll share what I shared internally with our team.

Speaker 1

In the event we have a very low installed base from BK, our growth will be around 20%. In the event we have a very fast rollout, our growth will approach 30% or higher. As a mid case, we're assuming mid-20s growth and I feel confident we can hit that. As we mentioned on the last call, whatever we don't install this year will get quickly rolled out in 2025 and the early parts of 2026. BK and Parr are in sync and the desire for fast progress and high quality rollouts give every indication of a strong 2024.

Speaker 1

With new customers, Burger King and Wendy's, and then including our acquisitions, we certainly feel we are at an inflection point for Par. As I said earlier, we intend to be EBITDA positive in Q3 and then continue a fast acceleration to meaningful profits. This holds true even with the momentary challenges we see in the hardware business today. Our business flywheel will lead to a cash flow flywheel, rewarding our shareholders for their investment and transitioning our focus to free cash flow per share. As we've highlighted in the past, our ARR per share number at par has grown substantially and ARR for us is a proxy for future cash flow.

Speaker 1

As we look to the future, it's exciting to not have to use a proxy for free cash flow, but actually focus on free cash flow. This focus on cash flow will not take our attention off of our products and customer flywheel. The 2 will work in balance, living our core value of winning together, where customers, employees and shareholders must all win together. With that, I'll open the call for Q and A. Operator?

Speaker 3

Thank you. We will now begin the question and answer session. And our first question comes from the line of George Sutton from Craig Hallum. Please go ahead.

Speaker 4

Thank you. Savneet, I wanted to better understand as you were talking about working through your pipeline of opportunities, given that you've got a pretty massive Burger King rollout and on the loyalty side of Wendy's rollout, Are you getting any pushback from some of those folks in your pipeline? Or are they even more encouraged that you're able to roll these out as they're looking at you versus other options?

Speaker 1

I think it's the latter. We obviously have to sort of give transparency of what we're rolling out, what we think we can roll out for potential new deals, but it's very validating. And as I said a couple of calls ago, we've never had so much deal flow on the brink, data central and payment side before. And we're looking forward to sharing more details on that as we win those deals, put out press releases. And so I think it's reflective in that as you win a large customer and then another, it helps other brands feel comfortable that you can handle that scale.

Speaker 1

And as I mentioned, we feel we're doing a great job on the rollout of that first big customer. I think they would say the same and that customer reference will only help new customers.

Speaker 4

Now knowing that you have in the past been unable to take on international opportunities for some of these larger chains, I'm just curious how those discussions go, particularly with those in your pipeline as you're bringing on task later this year?

Speaker 1

Historically, it's been a challenge, as you said, and I'd say a mark against us in RFP. But we've I think, obviously, we've been public that we've signed an agreement to acquire TASK and we think TASK will be a good solution. I would say categorically, the response to that has been positive from customers and future customers because it's really a pain point for them. And if we can execute on international strategy under the par umbrella, I think it gives the customers a lot of comfort that we'll execute just like we have for them in the U. S.

Speaker 1

And so we're really excited to rapidly integrate the TASK into the PAR family. But I also think we'll see a lot of acceleration within the TASK business because it allows us the ability to cross sell things like payments, hardware and additional modules. So it will work both ways.

Speaker 4

Okay. And then just lastly for me. Brian, could you when you look at SG and A spend in the quarter, was there anything one time in nature that wouldn't necessarily recur just so I'm being clear?

Speaker 2

Yes, there was there are large amounts related obviously for the M and A transaction, the transaction fee goes in G and A. We did have some reorg take place during the quarter too, which you can see in the severance. Most of what you see in the non GAAP adjustment in the 8 ks is all related to kind of what happened within OpEx. And so when we look at what we did from a standpoint of organic non GAAP, it's about a 7% increase in total OpEx year over year.

Speaker 4

Perfect. Thank you.

Speaker 3

Our next question comes from the line of Eric Martinuzzi from Lake Street. Please go ahead.

Speaker 5

Yes. I wanted to better understand the product roadmap post StuZo acquisition. Are we going to be running 2 product lines essentially with punch pointed towards the enterprise restaurant brands and StuSO aimed at C Stores?

Speaker 1

Great question. So we are aggressively consolidating and working towards consolidating into one application. I think we feel really excited. It's going to be a multi year process, but I would tell you having spoken to large customers, the Sysil large customers, we feel that they're very excited about combining with that special functionality. And so the short answer is we're going to get down to one product for the market, and it will be a multi year process.

Speaker 1

But as an example, we're focusing new deals on the StuZO product, so that we don't complicate the merging of the 2 products. So we feel really good about the opportunity so far. The customer feedback has been excellent. And I would tell you what has changed from our only first announcement is that I think we think we'll see faster cross sell of additional product into this market than we had expected when we acquired the business.

Speaker 5

Okay. And then on the hardware side, you talked about kind of some, I guess, it was two reasons for that. We had some issues with season lumpiness in enterprise customer orders and then you talked about next gen part terminal and headset rollout. But historically, I thought of the hardware business as kind of a $100,000,000 annual business. Is that do we get back to that?

Speaker 5

And is it do we recover in Q2 or is this kind of a it's

Speaker 1

a small business? So, yes, the weakness is in our non Brink base. So our Brink customers are attaching, they continue to attach and we've got optimism, as I mentioned, given how strong the Brink pipeline is and the deals that we've won recently that what we believe will attach hardware, there's an incredible amount of opportunity to for hardware to get back to that 100 and then grow well beyond it. When we get there this year, I think that will be harder for us. It's certainly in the cars, but I don't want to tell you we're guaranteed.

Speaker 1

But this to me, again, it's a matter of if not when. The hardware on Brink is going to be the driver of that business going forward. And given how large these Brink deals are that we're winning or in final stages of winning and their attachment of Brink hardware, we think we'll make it up. It's just the rollouts will sort of depend when that comes in. So, will we get back to the $100,000,000 Absolutely.

Speaker 1

Will it be this year? I'm not counting on that, but I think there's there are people at par that said absolutely.

Speaker 5

Thank you for taking my questions.

Speaker 3

Our next question comes from the line of Stephen Sheldon from William Blair. Please go ahead.

Speaker 6

Hey, thanks. And appreciate all the additional detail this quarter. Maybe just on the Burger King rollout, can you maybe talk about I think you maybe started to come go live in April. I mean, how just generally how are things progressing relative to your own expectations? And what's your level of confidence that you have the right headcount now to complete the implementation successfully?

Speaker 1

Steve, thanks for the question. And short answer is yes and yes. I feel great about what we're delivering. We check-in weekly with leadership. They're really happy with us.

Speaker 1

They communicate that to us. The coordination is very tight. Our general manager of that our Brink business will tell you there's only room for optimism here given our execution and their execution. So we feel very good. Now we're 1 month into it.

Speaker 1

So could things change? Yes. I'm not expecting it given how much prep work each side has done to get to where we are today. We feel appropriately staffed, as I mentioned on the call, we're not expecting OpEx to grow from here. In fact, I think it will come down.

Speaker 1

And so we've ramped up. We're rolling out. I think that ramped up is why the rollout is going so well. And we don't expect to add more to support it.

Speaker 6

That's great to hear. Then just on the gross the adjusted gross margins, can you maybe help frame where adjusted gross margins fit for the different products you have? Are most products currently in that 70% plus range that I think you've mandated every kind of product to get to? And just remind us where the drag is coming from and whether those the areas of drag are moderating at all, such as with menu, which I think menu is one that you called out before as being a drag?

Speaker 1

Yes. So, as all the products are between low 60s and mid 70s, Punch being Punch and Data Central at the high end of that and menu at the very bottom of that. Menu is definitely a drag, but as you saw, menu added 1200 sites this quarter, which is a very, very large amount in this category. So as the revenue gets live there, you'll have a good headwind there. Payments is getting it's got to get to that margin too.

Speaker 1

But again, as the payment is growing so fast, so that too will get there. And so at the very bottom of its menu, the top end is Data Central and Punch and Brink is kind of in the middle.

Speaker 6

Great. Thank you.

Speaker 3

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

Speaker 7

Hey, guys. This is Jeremy on for Samad. Thanks for taking my questions. So I wanted to follow-up on that question about the BK rollout. It's great to see that color on the 20% to 30% revenue based on the rollout.

Speaker 7

I guess, what are some of the hurdles to

Speaker 1

get to that higher BK rollout in 2024? Or I guess, what

Speaker 7

would prevent it from moving faster or slower? What would give you more visibility?

Speaker 1

So number 1 is our performance. And like I said, that's the part I feel really strongly about. Our whole team feels that way. And I think BK would tell you the same thing. We're executing as we promised, committed to and probably even better and the communication is excellent.

Speaker 1

So that's the number one reason for anything to go up or down in our own performance and that's the variable we control. The variable we all control is on the other side because these are incredibly choreographed rollouts and we sort of need to work alongside our corporate partners. And so the only reason we wouldn't be way above where the midpoint is if they need some time, they want to slow it down, the internal machinations there. But as I mentioned, because we're both committed to a 2 year rollout, we're equally incentivized to make it go as fast as possible.

Speaker 7

Got you. That's really helpful color. And then I wanted to ask about the Wendy's win that you announced a few weeks back. It's great to see another Tier 1 customer. Some of the low language in the press release, maybe it seemed a little bit different from other wins.

Speaker 7

You mentioned the Punch Enterprise support. I guess, was this a full rip and replace for Wendy's or is it maybe something more complementary? I guess, what was the deal like? No,

Speaker 1

it's a full rip and replace. So it's a really big win. It's a big initiative. It's truly the full solution within Punch.

Speaker 2

Got you. Thanks for taking my questions.

Speaker 3

Our next question comes from the line of Adam Wyden from ADW. Please go ahead.

Speaker 8

Okay, guys. Can you hear me? Yes. All right. So just help me with some math here.

Speaker 8

It appears that you guys added about $8,000,000 of ARR organically. If I sort of look at your minus 7 of EBITDA in the period, Obviously, you have some Burger King implementation costs that will come down or obviously are non recurring. Is there anything you can do to sort of give us some sort of parameters as to like how much of that is sort of implementation costs, whether it's Burger King or Wendy's that you expect to sort of go down? I mean, obviously, there's one time severance in transaction. But can you give us a little bit and then I want to sort of move forward with the question.

Speaker 8

How about this? Take the minus 7 of EBITDA. You have $8,000,000 of organic in the period. If you hold that true and your OpEx is flat and you're adding Stuzo, which you got very little contribution, wouldn't that make you EBITDA breakeven in the second quarter? I mean, take $8,000,000 of organic, if your OpEx is flat, again, take a 70% or 80% incremental gross margin, that gets you to 5%, 6%, right?

Speaker 8

And then you get a full quarter of Stuza, which is doing like 4%. Wouldn't that take you into profitability in the Q2 if OpEx is coming down? Am I doing something wrong? It certainly could.

Speaker 1

We're putting out guidance to make sure we can hit it. And as I said, we're doing our guidance assuming the hardware business doesn't get better. So I guess that we feel really I mean the software business is clicking, the margins are growing, you can see how efficient we've got in sales and marketing, R and D is working its way there. And so we feel really good about it. So could we I think it's possible, but I want to make sure we hit what we put you tell you.

Speaker 1

And then specifically in Q1, Q1 is always a challenging quarter because there are what I would call one time items that can't be adjusted out, things like bonus accrual adjustments, Canadian pension, insurance payments that for some reason don't get amortized that we can spend an hour talking about that offline. And so I would say the Q1 number is not apples to apples compared to Q4 as an example. So in summary, I think we feel really good about getting there in Q3. As I said, I think it continued to be meaningful acceleration. The part that I the real part I was trying to push on the call was, we're not adding any heads within the core products of Brank, Punch, Data Central and Payments.

Speaker 1

It's really holding this expense flat. The only heads we added were Wendy's and Burger King. And as I said in the call, we expect the OpEx to actually come down organically, so excluding SUSO even. So it's the core business driving meaningful profitability SUSO will add. And then obviously, when we roll in TAP, that's another, call it, 6, 7, 8 annualized.

Speaker 8

But would you expect, I mean, obviously in the quarter you had about I think I calculated about a $3,500,000 gross margin headwind, which probably a lot of it's EBITDA. I mean, would you I'm just basically taking the point from the Q1. Are you expecting additional headwinds in hardware sequentially? Because it was a pretty big decline year over year. I mean, you wouldn't I mean, that sort of is already in the cake.

Speaker 8

So I mean, you're not expecting additional declines in hardware sort of from the level where you are in Q1, is that right?

Speaker 1

I'm not. I'm not. And as I said, I think in the second half when we announced some of these wins that we've had that we haven't when they get public, I think will cost them of that. But I'm not expecting Q1 sorry, Q2 over Q1 to be meaningfully worse by any mean. And in fact, I think we are currently expecting a little bit better.

Speaker 8

Right. So like just again, going back to sort of the analysis I'm doing, if you expect similar organic revenue in the second quarter and you're holding OpEx flat, if anything down, right? And you get I mean, what was the contribution from StuZo in the quarter on EBITDA? Must have been only like a couple of weeks, right? I mean, you didn't get very much of it, right?

Speaker 1

We got about a little bit less than 3 weeks of StuZo in the quarter. So it's not really in there. And we get the benefit of that full in Q2?

Speaker 8

Right. So you get a full quarter of StuZo, you get hopefully some declines in OpEx in the Q2 because there was obviously some layoffs that were online and whatnot. And obviously, hopefully some of the implementation comes down. And if you add organic now, how do you last question, how do you think about adding organic revenue? So when you say OpEx is flat, how should we think about the incremental dollars of revenue against a statement of OpEx flat, right?

Speaker 8

Are you talking about 100% flow through or are you talking about a flow through at your gross margin rate?

Speaker 1

A flow through at our gross margin rate, obviously depends on the product, right. So when we like one of the things we've seen is that we are really getting much, much better at stapling Data Central into Brink deals. Data Central is an incredibly high gross margin product. And so that gross margin flow through is higher versus menu, which stays lower. So depends on product.

Speaker 1

So I budget internally, let's assume gross margins just stay flat, that's what drops down. As you know and we've talked about, we expect that number, the gross margin to grow as well.

Speaker 8

When your gross margins go up in your lower margin products as you get as you drive better utilization? I mean, I guess if you're at a 60% gross margin menu, wouldn't the incremental margin on a dollar of revenue be higher on menu than a Brink? I mean is that

Speaker 1

Once we clear the cost, yes. And so it's remember, even when you add a menu customer, as an example, we're still firing up an Amazon instance. We're still launching a product, so there's still incremental costs. But yes, over time, menu should get to the same gross margins. I mean, I want menu to get to punch gross margins, which are really exciting and growing a ton.

Speaker 1

And so over time, yes, it will get there. But the actual revenue dollars have to come in. So we launched these 6 or 7 customers this quarter. In Q2, we get the full quarter of that revenue. And that's again going to boost up those gross margins.

Speaker 1

So I think what your point is, what is incremental gross margin of a customer? It's on menu, it's a little bit hard because we're still early, right? We're $1,000,000 $2,000,000 into this thing. And so we're still not where I can say, oh, it's 90% drop, but it should be no different than any other SaaS product because every incremental instance, as an example, is higher margin than last. Right.

Speaker 8

So it's a fair assumption that at minimum our incremental gross margin should be around 70 and hopefully they should be higher as we drive utilization in our lower margin products, right. So if I take sort of 70,000,000 where we are, at 8,000,000 that's 5.6 dollars plus a full quarter of StuZO plus lower OpEx. I mean assuming hardware doesn't get worse, I mean I'm seeing profitability in the Q2. I guess you guys are just sort of being conservative with your guidance. Is that a fair way to walk away from this?

Speaker 1

On those assumptions, it is. And I think your math is generally pretty directionally accurate on everything.

Speaker 2

Okay. All

Speaker 8

right. That's it. Thank you.

Speaker 3

And there are no further questions at this time. I'll hand the conference back to management for any further remarks.

Speaker 1

Thanks everybody for joining our call. We look forward to updating you in the future and giving you more updates on our progress towards free cash flow profitability, but also some of these large great wins. Thanks.

Speaker 3

Thank you all for joining the call today. You may now disconnect.

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Earnings Conference Call
PAR Technology Q1 2024
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