PAR Technology Corporation

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

Thank you, Stephen, and good afternoon, everyone, and thank you for joining us for today's call to review our third quarter financial results. Following the close of trading this afternoon, we released our financial results. The earnings release is available on the investor relations page of our website at parttech.com, where you can also find the Q3 financials presentation, as well as in our related form, AK Furnished to the SEC. During our call today, we will reference non-GAAP financial measures, which we'll believe to be useful to investors and exclude the impact of certain items. The description and timing of these items, along with the reconciliation of non-GAAP measures to the most comparable GAAP measures, can be found in our earnings release. I'd like also to remind participants that this conference call may include forward-looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information on this conference call related to projections or other forward-looking statements may be relied upon and subject to the Safe Harbor Statement included in our earnings release this afternoon and in our annual and quarterly filings with the SEC. Finally, as Stephen said earlier, I'd like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the investor relations section of our website. Joining me on the call today is PAR's CEO and President, Savneet Singh and Brian Minar, PAR's Chief Financial Officer. I'd now like to turn the call over to Savneet for the formal remarks portion of the call, which will be followed by general Q&A. Savneet?

Thanks, Chris. Good afternoon, everyone, and thank you for joining us on today's call. I'm pleased to report we delivered a strong third quarter. We grew subscription revenue by 24.6% and ARR by 20.4% year over year. Adjusted EBITDA improved by over 65% from the same period last year to negative 2.6 million, and contracted ARR came in at $143 million in the quarter. Our gross margins rebounded as we messaged last quarter, and we continue to hold OPEX flat while making important internal investments. Operator Solutions ARAR grew 38.3% to $53.8 million in Q3 when compared to the same period last year. Operator Solutions ARPU increased by 20% from the same period last year due to higher value projects, often with multi-product bundling, price increases, and par payment service implementations. We are seeing continued inelasticity of demand in this business unit and expect this trend to continue. Churn continues to be extremely low at 4.1% annualized for brink in the quarter. We continue to win new customer opportunities with Brink due to its mission-critical position within the restaurants and the feature-rich capabilities upon which has proven stable and scalable cloud platform. Brink is the growth enabler for enterprise and emerging enterprise restaurants. This proved out in Q3 as we announced the signing of Burger King as our next exclusive Brink and menu customer, with our products to be rolled out across our 7,000 domestic stores. This deal proves out our enterprise reach, and the beginning of what we expect will be a wave of Tier 1 brands transitioning from legacy third-party and internally developed systems to modern SaaS-based products like Brink. Brink is uniquely positioned in this environment, both due to its status as a category-leading cloud-native product, as well as the ability to uniquely partner and innovate with our multi-product offering. Our pipeline continues to be robust with ample white space for cross-sell. Our commitment and intention are to continue to expand our relationship within our RBI and their restaurant logos. RBI has over 30,000 restaurants globally, with brands that include Tim Hortons, Popeyes, Louisiana Chicken, and Firehouse Subs, along with Burger King. What's more, as we execute against the Burger King plan, we anticipate building deeper partnership with Burger King, and we'll look to push out the longer-term roadmap of unified commerce, starting with Brink, Menu, and Data Central. It's hard to express how transformative this new customer will be from both the strategic and the financial aspect of PAR. This selection by Burger King, one of the largest and most iconic restaurant brands, is something that we will build upon for the years to come. Burger King will be a strong driver for PAR, strong revenue driver for PAR for over the next two years as we work through our rollout plans with Burger King this quarter. We'll update you on our Q4 call with the financial impact and expectations on timing of that growth. Both PAR and BK are committed to an aggressive push working in partnership to deliver BK's goals of unified POS. I see this as a turning point for PAR in our broader industry, as we are well positioned in the market to secure additional deals as other large enterprise restaurant companies look to unify their POS, consolidate vendors, and bring on a growth enabler like Brink. Moving to payments. In Q3, we saw ARR from PAR Payment Services more than double from Q3 2022, and expect this growth trajectory to continue. This is incredibly impressive as we report payments on a net basis after all third-party and interchange costs. We saw momentum in the third quarter with customer adoption across our in-store, online, and one-tap loyalty programs. In Q3, we signed brands such as Rocky Mountain Chocolate Factory, Hat Creek Burger, and Coconut Kenny's to name just a few. We completed the system-wide rollout with Smoothie King's 1,100 stores, went live and initiated rollouts with Chopped and Clean Eats. customers are increasingly attaching PAR payments via Brink, Menu, and Punch, again validating our unified commerce strategy. Moreover, customers are seeing robust ROI in our unified commerce integrations and innovation. One-tap loyalty, which combines Brink, Punch, and Payments, is driving a 70% increase in loyalty program signups for Apple Wallet users and a 23% increase in repeat visits per customer using Apple Wallet. We believe that PAR's multi-product offering gives us a strong competitive advantage and moat in the current market climate. Bundle savings and incremental ROI in a time when tech spend is under scrutiny. Moving to guest engagement ARR, that includes our leading customer engagement at Punch and digital ordering platform menu. Guest engagement ARR grew 8.2% in Q3 when compared to Q3 2022 and totaled approximately $62.2 million. We again saw record usage across Punch platform and are encouraged by the increased customer value we are delivering on a daily basis. We went live with new customers, including Booster Juice, Smokey Moe's BBQ, and Dash In during the quarter. Equally important, we are seeing the pipeline build up from a slow start in the beginning of the year and expect to announce some exciting deals in the coming quarters. Even more interesting, while Punch has very low churn, we are even seeing some of the few brands that have churned from Punch over the last few years return, as they now realize Punch delivers the most value in the marketplace. We've invested in our platform to better support our customers' business requirements and are proactively adding features to increase our addressable market and the ability to raise price in the renewal cycles. The other important piece in guest engagement is our digital ordering engine menu. Menu is signing up new customers at a rapid pace. Excluding Burger King, we signed over 750 locations in Q3. Scooter's Coffee, Coconut Kenny's, and Restaurant Services Limited all signed during the past quarter. The new customer pipeline for Q4 is healthy and will drive additional logo signings. In Q3, menus integration was fully certified on DoorDash, Grubhub, along with Uber Eats, and we successfully piloted RBI on those integrations as well. In Q3, we went live with our first customer in the U.S. and now have over 1,100 sites signed up on menu. The majority of our menu signings include payments attachments. We continue to believe these early customer signings validate our investment thesis on acquiring menu and menu was a key part of our win at Burger King. Back Office and Data Central delivered a solid quarter. Reported ARR of $12.4 million in Q3 was a 21% increase from last year's Q3. We now have more than 7,500 active stores. In the quarter, we went live with Hooters Restaurants, Earl Enterprises, and expanded our relationship with Love's Travel Stops. Briefly, touching on hardware, we had another solid quarter and continue to see high attachment rates with Brink and also in shoulder markets that have rugged environments with high traffic and require maximum hardware performance and industry-leading reliability. Moving to the operating levers of our financial model within subscription services. Adjusted gross margins for subscription services year-to-date expanded to 67%. As we spoke about last quarter, one-time items and investment spend brought down Q2 gross margins, and we saw a strong return from those investments this quarter and the reduction of one-time credits. Our goal in the medium term is to get adjusted gross margins to 70% plus and in the long run to be in the mid 70s and higher. Over the last year, software has transitioned to become our largest business and similar to how we broke out subscription services as a revenue line this year and our coming releases will begin to provide more detail on the makeup of not just our gross margin, but the operating expenses supporting the growth in subscription services. As a start, When looking at Q3, we roughly estimate sales and marketing expenses for our subscription services to be around 25% of ARR. As we continue to grow revenues at a strong pace, we expect this number to continue to work its way down to our long-term goal of 15% or less. As we work through shared cost allocations, we'll provide more detail in the coming releases on how this number is trending. R&D expense as a percent of ARR on Q3 was estimated to be around 41%. R&D efficiency has been a huge focus for PARP, and we'll continue to work this number down to our long-term target of 25% of ARR. Our investment in menu and burking have slowed our efficiency here a bit, but we'll see continued improvement going forward, and as menu revenue expands, we will see this move rapidly. Without menu, our R&D expense as a percent of ARR would have been 400 basis points better, but we think we'll get that investment back in spades in time. Again, in the coming releases, we'll provide more details so that you can track our progress to our long-term targets. These improvements have been layered on a G&A base that we are continuing to hold tight on. But what I think is hidden in our results is that we've been able to expand gross margin and hold operating expenses near flap while making a tremendous investment in menu, ramping headcount rapidly for Burger King, and making a large internal investment into IT systems. These three large investments are being made without adding to our operating expenses. We estimate that while OpEx has been nearly flat for the last four quarters, we've actually made incremental investments of approximately $9 million in new internal IT, a Burger King ramp-up, and the additional menu investments needed for the US market, all without adding to our OpEx space. This has been done by reallocating our capital and teams to investment areas and becoming tremendously more efficient within Brink, Punch, and Data Central. To highlight just how efficient we've gotten, if we hypothetically were to remove Menu from our P&L, our adjusted EBITDA would be positive for this quarter. An incredible accomplishment when you think about where we were just one year ago. I highlight this to make two points. First, our core business of Brink, Punch, and Data Central have gotten efficient and efficient fast. While the spend on Menu and Burger King cover this up, it shouldn't be lost how efficient our teams are getting. Second, though, is that we believe our investments in Menu, IT, and Burger King will be worth the short-term pain. Menu's win at Burger King was the first of many proof points to come. Our plan is simple, to continue to drive strong revenue growth while holding operating expenses very tight. We're going to push aggressively towards the Rule of 40, and our path here will be accelerated via additional acquisitions we see coming around the corner. Brian will now review the numbers in more detail, and I'll come back at the end.