PAR Technology Corporation

Good day and thank you for standing by. Welcome to PAR Technology second quarter 2023 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and an answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Burns, Senior Vice President of Business Development.

Thank you, James, and good afternoon, everyone. Thank you for joining us today to review 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 Brian Minar, 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.partec.com and 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're 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 and gross processing volumes, along with customer adoption across our in-store, online, and loyalty platforms. This was highlighted by the full rollout of our one-tap loyalty solution powered by Apple Pay with Salsa Ritas and 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, McPunch, and our digital ordering platform menu. Guest engagement error grew 14.5% in Q2 when compared to Q2 2022, in total 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 a quarter where we saw record campaign usage on the Punch platform, well beyond anything we'd ever seen. Usage has increased 4x in just the last 12 months, creating both tremendous opportunities and challenges for PAR. This grew up to challenge us to scale up our infrastructure quickly while also thinking through the optimal long-term business model for Punch. 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 three 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 with 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, allowing us to grow our footprint outside the store and set us up for the expected proliferation of 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 matriculating in Q3. We feel more confident now than we did 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 and 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 Punch. 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 AR 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 Brian to review the financials, I wanted to touch briefly on gross margins in the quarter and specifically margins for our prescription 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 two 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're at the peak of that spend and investment should moderate from here. As I referenced, we experienced a dramatic growth in usage across our products and in particular punch. This usage was beyond anything we had planned for and resulted in us having short-term disruptions which led to one-time customer credits to certain customers. To ensure we can support this new baseline of usage, we've ramped up spend and 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 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're 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 one time 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 values that have shaped our company. Brian will now review the numbers in more detail. Brian?

Thank you, Stephanie, and good afternoon, everyone. Total revenues were $100.5 million for the three months ended June 30th, 2023, an increase of 18.2% compared to the three months ended June 30th, 2022. with growth coming from both restaurant retail and government segments. Net loss for the second quarter of 2023 was 19.7 million, or 72 cent loss per share, compared to a net loss of 18.8 million, or 70 cent loss per share reported for the same period in 2022. Adjusted net loss for the second quarter of 2023 was 14.1 million, or 52 cent 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 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 30th, 2023 was 297 million, an increase of 61% compared to the 184.5 million backlog as of June 30th, 2022. Total funded backlog as of June 30th, 2023 was 96.6 million, 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 reflected of a 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 three months ended June 30, 2023, included $5.3 million of amortization of identifiable items intangible assets compared to 5.7 million for Q1. Excluding the amortization of intangible assets, total adjusted subscription service margin for the three months and the June 30th 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 one-time charges We expect professional services margin to transition back to the 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 mixed and direct labor associated with the counter SUAS revenue. We expect contract margins to trend back to higher single-digit margins as we progress through the second half of the year. In regards 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 six months ended June 30th, 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 network and capital needs. Cash used in investing activities was $6.2 million for the six-month end of June 30th versus $5 million for the prior year. Investing activities during the six-month end of June 30th, 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 six-month ended June 30th compared to $1.8 million for the prior year. Financing activities for 2023 was driven by stock-based compensation-related transactions. Day sales outstanding for the restaurants and retail segment increased from 53 days as of December 31st, 2022, to 62 days as of June 30th, 2023. expect dso levels to come back to historical levels within the lower 50-day range day sales outstanding for the government segment decreased from 55 days as of december 31st 2022 to 52 days as of june 30th 2023 i will now turn the call back over to 70 for closing remarks prior to moving to qa q a let me wrap up with a few key messages before we open the call for q a parts 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 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 were humbled by the employee response and motivated not to stay static and improve from here. As always, I'd like to thank all of PAR's employees for the dedication and effort over the past quarter. With that, I'll open the call for Q&A. Operator?

Thank you. We will now connect the question and answer session. As a reminder, to ask a question, please press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

Please stand by while we compile the Q&A roster. Our first question comes from Mynek Tandon from Needham and Company.

Hey guys, it's actually Sam on for mine today. Thanks for taking the questions here. 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?

Yeah, it's a relatively simple growth algorithm. We've got continued nice addition of sites, as we talked about, 1150 went live, but also growth in Brink ARPU is very high alongside the attachment of payments. And so, you know, our goal is to land with Brink at a higher price than we have historically and then bring in our payments business. You know, I think as impressive as, you know, just in the last year, the total base has, ARPU has grown by about, I think, 14%. And that's with 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 BRIC moving up throughout the last year or so.

Yeah, 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, you know, 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'll expect to claw back some of that next quarter. As I mentioned, some of this is one time in nature and that'll come back to us. um next quarter um and you know like i said i think this is the this is this is the the peak of the investments then on menu in particular um and you know par pay is growing faster than our base and so it brings down gross margin because it's it's still not to the the sas cross margin it will be up um so i think you'll see us from this quarter on claw back on gross margins and then i think you know as we get to 2024 we'll get back to you know 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 margins 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. It also kind of, I think, forced us to think about how we price our product, how we charge our product, given how much usage we have, which are all things that I think down the road we can play a 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.

Got it. That's very helpful.

Thanks, guys. Our next question comes from Jamie, Jeremy sailor from Jeffries.

Hey guys, I'm on first. I'm on tomorrow. Thanks for taking my questions. Um, I guess maybe first on the three chains that you signed for menu, um, can you maybe talk about, I guess, what drove those wins and then where these existing customers and are you replacing an existing solution?

Sure. And we've signed more than three chains. I was just highlighting that, you know, we've got three more that are in the hopper that are about to sign that will double the store count we have already. So it's been very exciting. You know, I think what's driving it is a few things. The first is when you partner or couple Brink, excuse me, Menu and Punch, 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's 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. 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 in my existing solution? And so our demo is why we win. And I mentioned this in the last call, You know, we want a decent chunk of business without really, you know, driving hard on the sales initiatives like we do on other products, and that will come. So, you know, the product itself is really what's winning, and that partnership with Punch is very powerful. As far as who we're displacing, 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, Kyler. And then maybe can you provide one other – One point I should mention is, I believe, I'm pretty sure every single online ordering deal we sign also includes payments. And so it's a nice twofer deal, if you will.

Got it. That's helpful. Can you maybe provide an update on table services? Are you targeting any specific customer sizes? Where is the product now? Are there any features that you still need?

Yeah. So, you know, one of the things that's, I think, really exciting about the Brink business is just, you know, 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 in the last call, in 2024. And so, you know, we've been able to kind of continue this momentum at Brink without those. But specific to your question, you know, we continue to see deals inbound from the very largest of chains on the table server side to smaller and medium-sized chains. And so that pipeline is growing really nicely, you know, 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.

Got it. Thanks for answering my questions, guys.

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

Yeah, I wanted to first focus on the guest engagement. You're obviously making a pretty substantial investment in your emerging business lines. You talk 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, you know, menu has won a number of deals in, you know, end of Q1, Q2, and then we expect, you know, a couple nicer ones this quarter. So it's very much, you know, deals that are signed that we need to get out the door.

Gotcha. Okay. And then on the operator solution side of the house, I'm curious to know if you're, you know, the pipeline tempo, are you seeing any change in the rate of progression in 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, you know, what's been exciting about this year is our engagement with, you know, some of the largest chains in the world, coupled with, you know, 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. You know, there's not one sense of slowdown because of the macro at all in that business. And I think what's, You know, really starting to click, obviously, is that, you know, consistent bundling payments with Brink, not only creating tons of value for PAR, but creating a lot more value for our customers.

Got it.

Thanks for taking my question. Our next question comes from Will Natz from Goldman Sachs.

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

You know, I think as we message on Punch, I think we're kind of getting our footing here. We've spent a ton of money scaling the platform. The usage on Punch, you know, as I mentioned, you know, it's kind of crazy, but, you know, the usage of the platform is up 4x in just one year, and it was already a really big base of usage. And so, you know, we've grown into that. We've definitely got, you know, 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 painful to make investments, obviously, in this environment, it's 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 it did last quarter, and it looks better than if you asked me two quarters ago. And so we see nice momentum. I just met with one of the sales leaders a couple days ago. The pipeline looks strong for Q3, Q4. But we've got to close that business. We've got to win that business and make sure we pull it into 2023. Got it.

And then, you know, 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, you know, any updates to the expectation for 10 to 15 million of ARR exiting the year?

We feel very good about hitting that target on payments. You can see just the big jump we had this quarter. 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. It's 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, you know, one hand to shake. The service thing is all of the above. And then, you know, if we don't, if for some reason we don't win the payments business, you know, 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, you know, 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 the ARPU increase rate in operator solutions, because it's, in essence, right, attached through there on top of Brink, so the ARPU per site that has now bolted Brink and also the payments is driving that increase.

Yep, I see that. Makes sense. I appreciate you taking the questions, guys.

Thanks, Will.

Our next question comes from Patrick McElwee from William Blair.

Hey, guys. I'm on for Steven Sheldon today. My first one, given some of the one-time 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 break-evens?

Absolutely. I think this quarter we took a hit on the gross margins, but the OpEx line stayed exactly where we wanted it 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 mentioned earlier, I think we feel confident we're going to claw back some of the gross margin gains next quarter and in the following quarter and moving forward. And, you know, I think there's no doubt, you know, profitability is around the corner. And, you know, if we can deliver on, you know, 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, is very clean from, from, from here.

I think we've reset like on the, a subscription margin, right? We ended this quarter 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 onto 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 that on the younger products.

And what I think is interesting there is that, you know, most of that is coming back from, you know, a little bit of efficiencies, but also just revenue turning on for these investments we've made, you know, particularly menu, which, you know, starts adding revenue this quarter, and this quarter being Q3, and then really in Q4. But what that growth that Brian talked about doesn't take into account is the actual investments we're making in Punch and Brink and so on and so forth, which will come in 2024. So I think that, you know, this will be the story. This year has been the story of holding out that 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 Punch, you had, or guest engagement, I should say, you had 3,400 activations in the quarter. but only saw I think about a million and a half step up in ARR sequentially. So I just wanted to ask, is that step up as expected or have you seen any pickup and churn there related to some of the budget headwinds or some of the capacity issues you had this quarter on that front?

So, you know, I think it's as expected. I think there's always some churn quarter to quarter, but not, you know, not anything meaningful or concerning on our end. But there's definitely churn in the quarter for Punch that offsets some of that activation. And then, you know, as you suggested, there were these one-time issues that kind of impacted it. But no, there's been Punch, as you can see from the sites versus the ARR, you know, Punch pricing is up a little bit. So it's not, there's no discount or anything like that. Correct.

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

Okay. Thanks, guys.

Appreciate the call. Our next question comes from George Sutton from Craig Hallam.

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

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

Great. And just one follow-up question for me. With the acquisition of Menu, you brought along some international accounts with that acquisition. 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?

You know, it's a great question. So we made the street decision, you know, I'd say the beginning of this year to not focus on those international accounts and business and retool the business for the United States, which is why the cost structure is so high because we started operating in two 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-based. 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 swimming to where... the customers want our stuff. And so we're feeling really excited about that. You know, in time, I think, you know, we will eventually go back and build that out. But today, you know, 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 have been significant, we've got to get those live so we can make sure we can take on this pipeline. You know, it's a unique situation where, you know, sales isn't the problem. It's us getting the stuff out the door that's the next challenge, and then we'll you know, 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 Weidel from ADW Capital.

Hey, guys, a couple questions here. Obviously, we're seeing the investment in Punch 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, you know, based on our channel check work, you know, there are two, you know, I would call tier one customers, one being Burger King Restaurant Brands that's doing an RFP for, you know, basically their entire tech stack, 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 know, you've got all the products, you know, no one else is sort of has, you know, sort of the direct integration and the ability to service the customers and that, you know, this is, you know, sort of investment, you know, to basically in customer service and support because you anticipate winning these big logos and, and sort of an acceleration in your growth. I mean, is that sort of a fair way, fair way to think about it?

So, um, Let me first comment on my comments. So what I was actually suggesting was on the punch side, we've made some big investments in the DevOps infrastructure, really scaling the platform. And what I think we realized was given how large the punch 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, Punch is the largest, clearly invested, I think, close to the most or if 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're doing is building just a scalability mode along with the product mode and the service mode we want to continue to build and get better at. But it's going to be very hard for those big companies. For our competitors to come in and undercut us or do whatever they want to do to try to win large restaurant logos, I think it's going to be hard given the sheer infrastructure investments we've made. I think we'll create a nice gap. The second part you're saying, I think what's exciting is I do believe that in the enterprise restaurant category, there are not a lot of people that can deliver what we do, particularly when you put it under the lens of being cloud-based. first and also being able to provide the full solution with high quality products. And so we feel really well situated to start breaking into that market. And I think as we hopefully win one of our large next logos, we'll be able to then go to the next one with that proof point. But I think I would say categorically what you're saying roughly would be my pitch to our customers, which is who else has the scale and the product 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 become.

Right. So said in a different way, you know, you've obviously taken gross margins down to basically invest in product in anticipation of larger customer needs. And, you know, these, you know, 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 know, you keep, you know, you said it would be EBITDA break-even if we hit the high end of our revenue range. Is it unfair to assume that we can expect, you know, sort of, you know, the company to, you know, 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, you know, we can't talk about, you know, customers we haven't, you know, you know, as the math is pretty simple, right? You know, you win one large super tier one and it's, you know, equivalent to like half our revenue. You know, it's their enormous step functions. And so, you know, Our goal is we've got to continue growing as we're growing. We hope and expect to win those types of customers and those create that 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, tackling, getting it right, making those investments. In many ways, I wish we made these investments earlier because we'd have more customers live now, and we would have never dealt with credits and things like that. 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 parsed 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 get 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 getting that value realized is creating this company a pure play and divesting the government business to get the company in a place where it would be easy for you to sell to a strategic or someone that could get rid of all that public company costs. I know it was a challenge a few years ago to sell it because you were waiting for this contract to basically be won, but now you have this multi-year pipeline on fast and you know, you've, you know, gotten to a certain amount of scale and you've got the balance sheet. I mean, what is the, what is the holdup in terms of, you know, selling that government business and sort of, uh, you know, making, uh, you know, making this a pure play for, for others or for, you know, the company as a standalone.

Um, so there's no holdup. I think, you know, um, we've delivered, you know, when we told shareholders, we want to deliver a year of strong growth from this contract. And, you know, I just, you know, we needed to do that. That was important. So we'd get the multiple there. And now we have. And so, you know, we are always focused on creating value. And as I've said many times over, I think it's very logical for a part to make that decision. But, you know, 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, you know, obviously was sort of a technology investment that, you know, you basically are internally skunk working, you know, growth. But I mean, there are plenty of companies now that are sort of, you know, orphaned in the VC world that are doing anywhere from 10 to 40 million of ARR that, you know, might be able to leverage our public company costs and be acquired accretively and sort of help you sort of you know, balance this sort of organic growth investment with, you know, cashflow and public company costs and whatnot. I mean, can you comment about like sort of what your, I mean, you said on the call, you know, look, data central was good. Punch was good. You know, those were sort of tucked in. Those are nice scale businesses. You know, they're, you know, 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, yeah. 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, you know, I don't think we would look to buy something to offset public company costs because then you could literally buy anything that generates cash flow. I think we have to buy stuff that creates synergy with our existing products within our customers. And that's where you'll get the operating leverage on your sales and marketing opportunities. and hopefully your R&D over time. And, you know, we see a number of deals that we think are very, very interesting 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. You know, it's hard to predict these things, but I think you'll see us very active. You know, as far as dimensionalizing, the sizing of that, you know, we want it, you know, 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 space 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 we'll see us buy more mature assets where we think there's tons of synergy for our customers. and then we can integrate them nicely and create a good home for those teams. So I think you'll see it's 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 or we're going to get cut off.

Our next caller is Andrew Hart from BTIG.

Hey, guys. Thanks for the question. Obviously, it sounds like ParPay 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 ParPay, how penetrated is it within the existing base today? And what will ParPay gross margins look like once it kind of reaches a more mature level? Thanks.

Great questions. The other big driver is just price. We've taken price, Brink, nicely. I hate to say we take price. I think we're getting value that we deliver to our customers. 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 in business and build the logos. That's the other big driver is just pure price. I think our customers you know, transparently know exactly what we're charging. So there's not like a, 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, you know, I don't, we don't lose on price and we are not the cheap, you know, the cheapest product in the market. So, you know, I think it's capturing value there. As far as payments, you know, you know, payments, you know, it's not even 10% penetrated into 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 rearing 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. You know, we're well over a billion dollars 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, you know, super scale payments margins should get close to what our SaaS margins are. But, you know, what's unique about our payments business is that it's not just processing. You know, 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 margins, sorry, payments to forever be a drag on gross margins as is today because it's scaling. But, you know, and I think there's many ways we're excited of the products we can build on top of payments. Because, you know, one of the things I feel passionate about is, you know, anybody can sell cheap payments, like literally anybody. It's, you know, what's the value brings the customer around the payments is really what's going to make them sticky. And, you know, I think we're seeing how valuable that is today.

Thanks. And then, you know, you've talked about in the past of kind of this year, you know, operator solutions and back office offsetting some headwinds and guest engagement. But you know, guest engagement, at least on the activation side, like seems like a really strong quarter and, you know, kind of ahead of our expectations. Do you still feel that's kind of the dynamic for the back half of the year where, you know, back office and operator solutions carry a lot of the weight or, you know, is guest engagement, you know, holding in better than, you know, where we were thinking about a quarter ago?

That's planned. I think, you know, we expected to, you know, keep saying it'll get better and, you know, it keeps getting better every quarter. And so, I think it's a grind up purely from just the sizing. You can't take a business that's $61 million of revenue and flip it in a quarter back to $30, but we're climbing up now. And listen, Operator Solutions has 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. I think one on size, but two, just the existing pipeline is there. Thanks, Chase.

At this time, I'm showing no further questions. I would like to turn the conference back to Savit 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.