PAR Technology Corporation (NYSE:PAR) Q2 2023 Earnings Call Transcript

PAR Technology Corporation (NYSE:PAR) Q2 2023 Earnings Call Transcript August 9, 2023

PAR Technology Corporation misses on earnings expectations. Reported EPS is $-0.52 EPS, expectations were $-0.32.

Operator: Good day and thank you for standing by. Welcome to PAR Technologies’ Second Quarter 2023 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Byrnes, Senior Vice President of Business Development.

Christopher Byrnes: Thank you, James, and good afternoon, everyone. Thank you for joining us for PAR Technologies second quarter 2023 financial results call. Our earnings press release was issued at the close of market this afternoon and is posed on our website. With me on the call today are Savneet Singh, PAR’s Chief Executive Officer; and Bryan Menar, the company’s Chief Financial Officer. After preliminary remarks, we will open the call to a question-and-answer session. During this call we may make statements related to our business that would be considered forward-looking statements under Federal Securities laws, including projections of future operating results. Due to a number of factors, actual results may differ materially from those set forth in such statements.

These factors are set forth in the earnings press release that we issued today under caption forward-looking statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our second quarter 2023 earnings press release and investor presentation, which can be found at www.partech.com in the Investor Relations page. With that, I would like to turn the call over to our Chief Executive Officer, Savneet Singh. Savneet.

Savneet Singh: 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 CEO, I have the privilege and opportunity to sit down face-to-face with our customers 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 are also trying to reduce costs, mitigate risk and convert cost centers to profit centers.

For years, they viewed technology as a capital investment, and today, they are coming around to the idea that software is now a key investment in the OpEx line of their P&Ls. We believe PAR is well situated to take share with these dynamics. At the end of Q2, subscription services revenue increased by 31.2% from last year’s second quarter and ARR topped $122.5 million, a 24.3% year-over-year increase, demonstrating the continued growth and scaling of our subscription services engine. Contracted annual recurring revenue ended the quarter at $140.2 million, a strong 7% sequential increase from Q1. Importantly, we are keeping operating expenses flat from our Q4 2022 run rate. Operator Solutions ARR grew 38.4% to $50 million in Q2 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 115 new stores and new bookings totaled approximately 1100. Churn continues to be extremely low at 3.6% annualized for Brink in the quarter. Brent 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 return 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 is highlighted by the full rollout of our one tap loyalty solution powered by Apple Pay with Salsarita’s in Q2. We are confident this momentum will deliver strong results for the rest of the year.

Moving to guest engagement ARR that includes our leading customer engagement at Punchh and our digital ordering platform MENU. Guest engagement ARR grew 14 a half percent in Q2, when compared to Q2 2022 in total approximately $61 million. We continue to work hard to deliver in our current environment our hyper focused on delivering scalability and innovation at the same time. In the quarter, we successfully kicked-off the deployment of a 2400 unit fast casual chain, and we launched our new subscriptions product. Active store count on a year-over-year basis increased by 13% and we believe business will continue to improve as the year progresses. We did this during the quarter, where we saw record campaign usage on the Punchh platform well beyond anything we would ever seen.

Usage has increased four times in just the last 12-months, creating both tremendous opportunities and challenges for PAR. This growth has challenged us to scale up our infrastructure quickly, while also thinking through the optimal long-term business model for Punchh. We are humbled by the trust given to us by our customers and are committed to helping them to drive ROI from our products. MENU continued its migration to the United States this quarter. We have 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 are 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 ordering, allowing us to grow our footprint outside the store and set us up for the expected proliferation and 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 particularly in Q3. We feel more confident now than we did at the same time of the acquisition that MENU will grow into a dominant product line as a result, we increased our infrastructure investments in the quarter.

We are doing this methodically by focusing on customers that we can take lives sooner, in balancing our desire to build more for customers with our belief that we should first deliver on today’s promises. Demand isn’t the problem as our existing customers see the power of MENU coupled with Punchh. So it is on us to build up our operations, support and service teams to deliver on those trusting us today. Back office and data center delivered a strong quarter as well. Reported ARR of $11.6 million in Q2 was a 25.3% increase from last year’s Q2. We had activations of 221 stores in the quarter and now have more than 7200 active stores. Before handing the call over to Brian to review the financials, I wanted to touch briefly on our 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 made a large investment in MENU and PAR payments in advance of revenue we expect to take live later this year and throughout 2024. These investments, while short-term painful, are needed in order to build out our pipeline and then future revenue. We believe we are at peak of that spend and investments to moderate from here. Second, as I referenced, we experienced a dramatic growth in usage across our products and in particular, Punchh. 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 have 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 more important in part being able to deliver for our customers. And I believe we will make up for it many times over, as I believe we are likely the only player in our category able to deploy at such a large scale. To summarize on margins, we expect consistent future growth, as PAR payments and menu revenues continue to scale. While it is challenging to have given out credits, those are one time in nature, and we are going all in on our infrastructure and 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 are heading into the second half of the year with significant momentum and a strong pipeline, and as we will approach 2024 with the same focus, ambition and values that have shaped our company. Bryan will now review the numbers in more detail. Brian.

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

Hardware revenue in the quarter was 26.4 million, a decrease of two 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 increase 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 at 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 ISR Solutions product line.

The increase was substantially driven by continued growth of counter SUAS task orders. Contract backlog associated with our government business as of June 30, 2023 was 297 million. An increase of 61% compared to the 184.5 million backlog as of June 30, 2022. Total funded backlog as of June 30, 2023 was 96.6 million, 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 cost resulting from significant utilization of our guest engagement products, we made the additional investments to ensure the quality of our customer’s experience was not impacted. Sequentially, subscription services margin during the three months ended June 30, 2023, included 5.3 million of amortization of identifiable intangible assets compared to 5.7 million for Q1. Excluding the amortization of intangible assets, total adjusted subscription service margin for the three months ended 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 mix in direct labor associated with the Counter-UAS 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 increases 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 decreases 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 use and 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 ended June 30th versus five million for the prior year. Investing activities during the six month ended June 30, 2023 included capital expenditures of 3.2 million for internal use software, two 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 31, 2022 to 62-days as of June 30, 2023. We expect DSO levels to come back to historical levels within the lower 50-day range. Day sales outstanding for the government segment decreased from 55-days as of December 31, 2022 to 52-days as of June 30, 2023. I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.

Savneet Singh: Let me wrap up with a few key messages before we open the call for Q&A. PAR’s business, organizational model and growth strategy are strong, resilient and reliable. I believe this is most demonstrated in our ability to continue to maintain our growth without growing operating investments. This fine balance is a result of a deep focus on operating efficiency, recruiting top talent and an expectation that we can do more. While there is 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 are pushing on a number of opportunities, all of which we thank 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 desired to drive a fulfilling and rewarding work experience. Earlier this year, PAR was named by Energage, as a Top Workplace in 2023 for the technology industry. Their survey touched almost every employee at PAR, and we are humbled by the employee response, and motivated not to stay static and improve from here.

As always, I would like to thank all of PAR’s employees for their dedication and effort over the past quarter. With that, I will open the call for Q&A. Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from .

Unidentified Analyst: Hey, guys. It is actually Sam on for Mayank today. Thanks for taking the questions here. Wanted to start on Operator Solutions, which saw a really nice growth this quarter. Can 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?

Savneet Singh: Yes. It is a relatively simple growth algorithm. I think we have got a 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, our goal is to land with Brink at a higher price than we have historically, and then bring in our payments business. I think is impressive is, just in the last year, the total base ARPU has grown by about, I think, 14%. And that is with still a large portion of our base at the very, very old contract price. And so it is moving up nicely. Payments being the biggest driver followed by the list price of Brink moving up throughout the last year or so.

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

Savneet Singh: Absolutely. So we will expect to call back some of that next quarter. As I mentioned, some of this is one time in nature, and that will come back to us, next quarter. And you know, like I said, I think this is the peak of the investments spend on menu in particular. And par pay is growing faster than our base, and so it brings down gross margin because it is still not to the SaaS gross margin it will be at. So I think you will see us from this quarter on claw back on gross margins. And then I think, as we get to 2024, we will get back to low seventies hopefully, and then higher. And you know, the key aspect here is these investments we are 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 are making.

It also has 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, we can play lever on. So, I think we will see gross margins climb next quarter, the following quarter in subsequent quarters going forward as we get back to our historical base of the low seventies.

Operator: Our next question comes from Jeremy Sahler from Jefferies.

Jeremy Sahler: I guess maybe first on the three chains that you signed for menu, can you maybe talk about, I guess what drove those wins and then were these existing customers and are you replacing an existing solution?