PAR - Q3 2023
November 9, 2023
Transcript
Operator (participant)
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 one one on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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 Byrnes, Senior Vice President of Business Development. Please go ahead.
Chris Byrnes (SVP of Investor Relations and Business Development)
Thank you, Steven, 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 partech.com, where you can also find the Q3 financials presentation, as well as in our related Form 8-K furnished to the SEC. During our call today, we will reference non-GAAP financial measures, which we 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. As Steven said, I'm sorry, excuse me.
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 Steven 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 Bryan Menar, 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?
Savneet Singh (CEO)
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 -$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 continued to hold OpEx flat while making important internal investments. Operator Solutions ARR grew 38.3%-$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 Services 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 its 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 to will be a wave of tier one 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 Kitchen, 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 a strategic and a financial aspect to 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 and 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 Chopt and Clean Eatz. Customers are increasingly attaching PAR payments via Brink, Menu, and Punchh, 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, Punchh 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 Punchh 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 Punchh 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 Mo'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 Punchh has very low churn, and we're even seeing some of the few brands that have churned from Punchh over the last few years return, as they now realize Punchh
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 adjustable 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, 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, Menu's 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 is 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 at 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, software has been transitioned to become our largest business.
And similar to how we broke out subscription services as a revenue line this year, in our coming releases, we'll 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 in Q3 was estimated to be around 41%.
R&D efficiency has been a huge focus for Par, and we'll continue to work this number down to our long-term target of 25% of ARR. Our investment in Menu and Burger King 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 flat, 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 U.S. 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, Punchh, and Data Central.
To highlight just how efficient we've gotten, if we hypothetically were to remove Menu from our PNL, 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, Punchh, 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-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. Bryan will now review the numbers in more detail, and I'll come back at the end. Bryan?
Bryan Menar (CFO)
Thank you, Savneet, and good afternoon, everyone. Total revenues were $107.1 million for the three months ended September 30, 2023, an increase of 15.5% compared to the three months ended September 30, 2022, with growth coming from contracts and subscription services revenue, partially offset by hardware and professional service revenue. Net loss for the third quarter of 2023 was $15.5 million, or $0.56 loss per share, compared to a net loss of $21.3 million, or 79-cent, 79-cent loss per share reported for the same period in 2022.
Adjusted net loss for the third quarter of 2023 was $5.8 million, or $0.21 loss per share, compared to an adjusted net loss of $11.9 million, or $0.44 loss per share, for the same period in 2022. Adjusted EBITDA for the third quarter of 2023 was a loss of $2.6 million, compared to an adjusted EBITDA loss of $8 million for the same period in 2022. This improvement was driven by an increase in subscription services margin and our continued commitment to holding operating expenses flat while allocating investments for menu and internal enterprise systems and Burgers King. Hardware revenue in the quarter was $25.8 million, a decrease of $5.5 million, or 17.6%, from the $31.3 million reported in the prior year.
The $25.8 million revenue recorded in Q3 is consistent with Q1 and Q2 results and in line with expectations. Subscription services revenue was reported at $31.4 million, an increase of $6.2 million, or 24.6%, from the $25.2 million reported in the prior year. The increase was primarily driven by increased subscription services revenue from our Operator Solutions business of $4.2 million, driven by a 21% increase in active sites and 20% increase in average revenue per site. The remaining increase of $1.7 million was driven by increased subscription services revenue from our guest engagement business, driven by 1.5% increase in active sites and 5% increase in average revenue per site.
The 1.5% increase in guest engagement sites is a result of approximately 6% site growth, partially offset by 5% site churn. We've managed churn as we transition menu strategy from international to North America, in addition to managing the inflection point of Punchh's product maturity to enable continued site growth and noted increase in product usage from our existing customer base. The annual recurring revenue exiting the quarter was $128.3 million, an increase of 20.4% from last year's Q3, with Operator Solutions up 38%, Guest Engagement up 8%, and Back of House up 21%. Professional services revenue was reported at $11.5 million, a decrease of $0.3 million or 2.8% from $11.8 million reported in the prior year.
$7.2 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 $38.4 million, an increase of $14 million or 57.4% from the $24.4 million reported in the third quarter of 2022. The increase in contract revenues was driven by a $14.6 million increase in government's ISR solution product line. The increase was driven by continued growth of counter UAS task orders. Contract backlog with our government business as of September 30, 2023, was $327.5 million, a decrease of 5% compared to $344.8 million as of September 30, 2022. Total funded backlog as of September 30 was $88.3 million.
Now, turning to margins. Hardware margin for the quarter was 25.3% versus 18.8% in Q3 2022. The increase in margin year over year was driven by better inventory and cost management with kitchen displays, mobile, and drive-through products. The team continues to effectively execute on managing costs in addition to pricing where deemed appropriate. We continue to expect overall hardware margins of at least 20% as we go forward. Subscription services margin for the quarter was 50.6%, compared to 48.1% for the third quarter of 2022. Increase in margin is driven by continued improvements of our hosting and customer support costs. Sequentially, subscription services margin of 50.6% improved compared to 43.3% in Q2.
Subscription services margin during the three months ended September 30, 2023, included $5.8 million of amortization of identifiable intangible assets, compared to $5.3 million for Q2. Excluding the amortization of intangible assets, total adjusted subscription services margin for the three months ended September 30 was 69%, compared to 61% in Q2. The increase in margin is driven by the reduction of one-time credits and efficiencies from investments we made in Q1 and Q2. Professional services margin for the quarter was 23.8%, compared to 7.4% reported in the third quarter of 2022. The increase in margin was driven by timing adjustments, including identified use cases in Q3 2023 for previously reserved service inventories.
We expect professional services margin to transition back to the mid- to high-teens as we end the year, consistent with the professional services margin of 17% for the nine months ended September 30, 2023. Government contract margins were 7.9% as compared to 10.4% for Q3 2023. Margins bounced back from, to normal historical levels during the quarter as the team transitioned to internal direct labor to properly support task orders and improve margins, compared to the 4.3% recorded in Q2 2023. In regard to operating expenses, GAAP SG&A was $26.2 million, a decrease of $0.3 million from the $26.5 million reported in Q3 2022. The decrease was driven by lower benefit expenses and corporate expenses.
Net R&D was $14.7 million, an increase of $1.8 million from the $12.8 million recorded in Q3 2022. Backing out menu and non-GAAP adjustments, the growth in R&D is $1.1 million, or 7%. The increase is related to personnel hired as we continue to improve and diversify our product and service offerings, including the ramp-up needed for our recent Burger King win. Sequentially, net R&D expense of $14.7 million in Q3 was down $0.2 million from the $14.9 million reported in Q2, as we continue to appropriately manage the effectiveness of our R&D investments. Total non-GAAP operating expenses was $37 million, an increase of $1.6 million versus Q3 2022. And backing out menu, we are flat versus Q3 2022.
As we indicated at the end of 2022, we will continue to manage the growth of our business while keeping 2023 operating expenses flat compared to 2022 exit rate. Net interest expense was $1.7 million, compared to $2.1 million recorded in Q3, 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 nine months ended September 30, cash used in operating activities was $18.5 million, versus $33.6 million for the prior year.
The reduction in cash burn compared to the prior year was due to management of working capital, primarily resulting from improved inventory management, as well as the impact of operating leverage resulting from our freeze in OpEx. Cash used in investing activities was $4.8 million for the nine months ended September 30, versus $64.3 million for the prior year. Investing activities during the nine months ended September 30, 2023, included capital expenditures of $5 million for internal enterprise system software, $3.4 million for developed technology associated with our restaurant retail software platforms, partially offset by $3.6 million from transfer of short-term investments. Cash used in financing activities was $1.8 million for the nine months ended September 30, compared to $2 million for the prior year.
Financing activities for 2023 was driven by stock-based compensation-related transactions. Day sales outstanding for the restaurant and retail segment increased from 53 days as of December 31, 2022, to 60 days as of September 30, 2023. We expect DSO levels to come back to historical levels of the lower 50-day range. Day sales outstanding for the government segment decreased from 55 days as of December 31, 2022, to 46 days as of September 30, 2023. As we reflect on our Q3 performance, we delivered on improving margin rates and allowing those margin gains to flow through to the bottom line as we continue to manage OpEx investments to drive profitability improvement.
As Savneet mentioned, we've made considerable investments in internal IT and menu development, while not growing the R&D and G&A base in a meaningful way. This reallocation of resources highlights the agility of our team. ARR and corresponding subscription services revenue are our growth drivers, and we are confident there is significant growth runway ahead of us, with both cross-sell acceleration and new logo wins, such as our recent announcement of Burger King. I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.
Savneet Singh (CEO)
Thanks, Brian. Let me wrap up with a few key messages before we open the call for Q&A. We're at a unique point of inflection at PAR. We believe our business is winning at a higher rate than ever. At the same time, we're observing a strong change in our financial profile. What makes us even more positive is that we believe we're just at the beginning of a tidal wave of large deals coming to market, which should provide for long-term sustainable growth. In our next earnings call, we'll look forward to giving guidance on the details of that growth, in addition to more color on our big rollout, as well as more detail on our buckets of spend, so that you can have clarity on how to get to the Rule of Forty.
Second, as I mentioned earlier, what I think is hidden in our results is that while it looks like we aren't growing investment spend as viewed by our flat operating expenses, in reality, we're spending large amounts on Menu, internal IT, and Burger King... our existing expense at base. We are funding tomorrow's growth engines without net new expense. Third, we are working towards the Rule of 40. This quarter, our adjusted EBITDA was negative $2.6 million. As I mentioned, if we backed out Menu from Q3, our adjusted EBITDA would have been positive. Similar to my last point, our core products of Brink, Payments, Punchh, and Data Central are becoming very profitable, allowing us to pump money into our growth engines.
We are making the investments into Menu, Burger King, and internal IT because we believe we'll make a return that far exceeds the investment, and our win at Burger King has proven the value of that spend already. This also reinforces a point I made on our Q3 2022 call. I shared that for roughly every dollar of sales and marketing expense, we add about one dollar of ARR. What we've shown since then is that for those incremental dollars of ARR, we have not needed to grow R&D, sales and marketing, or G&A to take that new revenue live. Meaning that for every dollar of new gross profit generated from this new ARR, a dollar has been falling to the bottom line as we have not added new OpEx.
I think this highlights the scalability of our business and the underlying true cash flow of each new contract we sign. Adding new customers with our existing product suite requires little to no incremental R&D, sales and marketing, and G&A expense. We're working hard to balance our focus on profitability and between reinvesting in our products to maintain long-term revenue growth and maximize our TAM. But more is to come, and we'll use that same focus on profitability we have shown on our existing products on Menu once it scales. This has also given us tremendous confidence to move faster on acquisitions broadly as our playbook is working. In summary, our competitive position has never been stronger, our strategy is winning, and it's the right path to this market at the right time. It's a special opportunity that we are not taking lightly.
Restaurants need to consolidate vendors, unify their systems and data, and PAR is the only player of enterprise scale we think worthy of their trust. In closing, I'd like to thank our global team for their efforts and dedication on the continued success at PAR. With that, I'll open the call up to the Q&A. Operator?
Operator (participant)
Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Will Nance of Goldman Sachs. Your line is now open.
Will Nance (VP, Equity Research Analyst)
Hey, guys, appreciate you taking the question, and, thank you for all the, all the helpful details. Looking forward to all the new disclosures in the coming quarter. Wanted to maybe start on the BK win. So, you know, you mentioned you think this kicks off a wave of Tier One restaurants looking to upgrade their technology going forward. I wonder if maybe you could kind of double-click on that. What are you seeing in the market? You know, what do you think the timeline is on that wave? And then maybe on the BK win specifically, could you maybe give us a, a little bit better sense for how the RFP process went for this? How long did it take? How many competitors were in the process?
You know, any color on, you know, whether you were seeing more legacy competitors in that process or maybe more challengers like yourself. And then how do you think about the competitive positioning going forward with this win under your belt? Thanks.
Savneet Singh (CEO)
Yes. So on the first question, you know, we feel like we're in the beginning of that tidal wave. You know, I'd say just in this quarter, we've seen more RFPs and interest from the largest brands in the world than we have in my entire time at PAR as it relates to POS. And we also see that in loyalty within Punchh, and so it seems to have kicked off, and I don't think it was coordinated, but it, there is this movement by the large players to now look at third-party software. Because of the reasons I think we've talked about in the past, which is it's incredibly expensive to maintain your own IT systems, and it's very hard to keep them modern.
The advantage of having a modern software product is you get the benefit of the development we do for everybody. So I think we see that happening, and the RFPs that have kicked off, you know, again, you know, that we've been just notified in the last, you know, couple months here, are far more than we've ever had, you know, literally since I've been at PAR. So it's very exciting to see that. As it relates to, you know, our big win, you know, all processes are competitive, and for a deal this large, that's an exclusive and a mandate, it's incredibly competitive. You know, the competition, I'd say, historically are the large enterprise players.
You know, there isn't another large sort of upstart like ourselves in the enterprise space that can handle the scale, volume, and innovative demands of a brand as large as BK. And so in the end, I think it came down to one, our product. Yeah, I think our product, you know, stood on its own, and I think, you know, if you talk to anybody there, I think they would say we won clearly on product, but two, I think there was a sense of modernity, a sense of, you know, culture and alignment of, "Hey, unifying POS is a big project. We want to do it really fast." And I think they felt that, you know, really came from who we were in our culture, and they've been an incredible partner through that.
So, you know, I think it showed all the best parts of PAR. It showed our product, it showed our culture, our speed, but also our ability to roll out quickly.
Will Nance (VP, Equity Research Analyst)
Got it. Very well. And then, and then, look, just maybe a question. The contract business is obviously firing on all cylinders right now, and, I know you previously said you wanted to make sure that the market appreciated, the kind of momentum at that business and the size of some of the recent contract wins, and, you know, it keeps getting better. So I guess the question is, you know, is now the time to evaluate a process for that business? Can the performance get better? And then, you know, I sort of ask in the context of, you know, you've got a lot going on, huge win now. It sounds like you're going to be ramping expenses to kind of absorb the BK win. You're talking more acquisitions, and I know you're working on Menu as well.
You know, when you think about all that, like, how are you thinking about priorities for kind of, like, simplifying the business and, and maybe recycling some of the capital?
Savneet Singh (CEO)
Yeah, no doubt the time is right. And, you know, in our Q2 MD&A, you can kind of see we, you know, we're continuing on those strategic alternatives for that business, and we'll push forward aggressively because we do think it's the right time. And, you know, I think we would look to deploy that capital exactly how you suggested. You know, as it relates to you know, ramping up for Burger King and stuff, you know, the beauty of our deal there is that while we ramp up you know, quickly, we're very quickly compensated for it. So there's short term you know, spend, but long term, it's incredibly profitable. So, I'm not too worried about there.
So I think the investment would be primarily in M&A, you know, for what we're looking to do. I don't. We don't need to, you know, potentially divest the business to fund, you know, the go-forward growth we see in Menu and in, you know, Burger King and other large deals.
Will Nance (VP, Equity Research Analyst)
Got it. That's very helpful. I appreciate you taking the questions today.
Savneet Singh (CEO)
Thanks, Will.
Operator (participant)
Thank you. One moment for our next question. Next question comes from the line of George Sutton of Craig-Hallum. Your line is now open.
George Sutton (Senior Research Analyst)
Thank you. Savneet, congrats on the BK. So curious, in terms of the capacity for what you can roll out, in other words, how quickly you did 1,200 units this quarter. Can you give us a sense of what the capacity is without substantial cost increases?
Savneet Singh (CEO)
You know, I would say, you know, today, if we did nothing, we'd probably double that. You know, obviously, we'd ramp up what we needed to. You know, this quarter, we're kind of working out the rollout plans with BK, and so, you know, next quarter, I'll be able to kind of announce, you know, how we see that ramp-up going. You know, it will be aggressive, and it'll be a push, but I think a big part of their evaluation of PAR was, you know, could we handle that? And how we'd handle the bursts and overages on expectations, and so I think that was a big part of the reason why we won.
George Sutton (Senior Research Analyst)
As you're looking at these large-scale RFPs, how many of them are focused on the point of sale versus a broader unified solution as you think of it?
Savneet Singh (CEO)
You know, I would say they oftentimes start out as POS, and then we're able to bring in more to the table. And so, you know, our goal is to always start every customer out with at least two products. You know, BK was a great example, but, you know, I think as I look at the ones coming down the pike, you know, most of them will also be two-product deals. We've got one that's a four-product deal we're working on right now. And so, the market is definitely... You know, what my comments, when I meant that the opportunity in TAM was, the market is kind of now turned to our strategy, I think.
There is just this tremendous desire to have simplification, vendor consolidation, and I think a, you know, like I said, a big part of the reason that we won Burger King was we had the menu offering built into Brink, and so I think that, that helped us differentiate ourselves. I think other brands will look at that the same way, particularly if they're saying, "Well, you can also do online ordering, and you can also do back office." It helps, it helps it the story, and, and the ROI equation gets stronger and stronger for the brand.
George Sutton (Senior Research Analyst)
Just one, clarity question. When you get into a four-product deal opportunity, the list of competitors gets extremely short. Is that correct?
Savneet Singh (CEO)
I don't think there's anyone else. So it's generally saying, "Hey, I can PAR do this, or I can, you know, put together three or four other vendors." And you can just imagine in an environment where tech spend is being scrutinized, where, you know, you've got small IT teams, you know, that pitch is pretty attractive.
George Sutton (Senior Research Analyst)
Understand. Thank you very much.
Operator (participant)
All right. Thank you. One moment for our next question. Next question comes from the line of Samad Samana of Jefferies. Your line is now open.
Jeremy Sailor (Analyst)
Hey, guys, this is Jeremy Sahler on for Samad Samana. Thanks for taking the questions. On the guest engagement turn, churn, you mentioned it briefly in your opening remarks. It was related to taking Menu to the US market. Can you maybe elaborate a little more on that? What exactly drove the churn?
Savneet Singh (CEO)
Yeah, it, it's nothing meaningful, but, when we acquired Menu, it had a large, not a large, but an international base. And, you know, we made a decision to, to direct the business to the US, and so, it's kind of, you know, the idea is to sort of say, "Let's not focus on, on an international business that's unprofitable. Let's bring it to the US, where we think we can quickly get it to profitability." And then, given that our, you know, our first, you know, major customer was BK, we kind of need all hands on deck to, to get that, to get that win.
Jeremy Sailor (Analyst)
Got it. That's useful color. And then maybe following up on the rebates that you guys issued last quarter, I know there was some infrastructure maybe you had to invest in. I guess, are you all caught up there, or are there still kind of investments you need to make to kind of get that up to speed?
Savneet Singh (CEO)
Well, yeah, you know, I just thought we had the gross margin jump back pretty quickly here. Part of that was just we, you know, the investments that we made, the ROI. Part of that was not having any credits in this quarter. So, you know, we didn't have the credits issue on this quarter, you know, because we kind of addressed that spike we had last quarter. And we feel good about that. You know, there's always ongoing investments. You know, I don't ever expect and, you know, knock on wood, our gross margins to ever drop to where they were in Q2 again. So we feel pretty good. And like I said, you know, in the short run, we wanna get these short and medium run, we got this to be 70% plus.
In the long run, we want it to get to be much higher. And again, the vast majority of that will be tied to us constantly making Brink more scalable because that's where we have the most aggressive usage of DevOps costs, and then the ramping of payments and Menu, who both have very high margins but are really early in their life cycle.
Jeremy Sailor (Analyst)
Got it. That's a really useful color. Maybe if I could just squeeze one last one in. We saw earlier this week, from a competitor, you know, one large brand, they turned off to take their tech house, their tech stack in-house. Is there any concern about becoming maybe a broader trend? Are you seeing that, among any of your prospects?
Savneet Singh (CEO)
... We're seeing the opposite. You know, I think Burger King being a great example of that, and we've got others we'll talk about later. But we see the opposite, and I think, you know, that dynamic is very much, you know, if you're a single product company doing, you know, one verticalized need of the restaurant, you are really exposed to that risk. When you're the POS, you know, it is such an enormously large product. That's not something you can—you, you really do want to take in, and the expense to do that. And then I think if you're a POS company like us, and you can say, "Hey, we can do this, but we can also offer you loyalty, online ordering, back office," it's a lot easier to transition your systems because then you're, again, not managing multiple vendors.
So we're seeing the opposite in our market, and I think that's just the nature of the product we have, but also the family of products we have. It really makes it a different conversation.
Jeremy Sailor (Analyst)
Got it. That, that makes a lot of sense. Thanks for taking my questions, guys.
Savneet Singh (CEO)
Maybe I would say, said differently, if, you know, if we were a verticalized product like you mentioned, and that product was deeply integrated into the POS or the loyalty, I don't think you'd have that churn. You know, so I think it's really being unified is what keeps you sticky.
Jeremy Sailor (Analyst)
Right. Thanks, guys.
Operator (participant)
All right. Thank you. One moment for our next question. Our next question comes from the line of Adam Wyden of ADW Capital. Your line is now open.
Adam Wyden (Managing Partner)
Thanks, guys. I've got three questions. First one, really impressive on the gross margin pickup and the burn, and all sort of makes sense with piloting Menu last quarter and, you know, the Punch. You know, if I just sort of do some back-of-the-envelope math, assuming, you know, no sort of gross margin degradation, if you guys add, pick a number, you know, $5 million of ARR next quarter, I'm sure you'll likely add more than that. But like at, you know, 80% incremental gross margin or even 70%, it's fair to assume that with OpEx flat, you know, you're going to be EBITDA positive in the fourth quarter. Is it unreasonable to think that you guys could be at EBITDA breakeven in the fourth quarter or very close to it?
You know, is it fair to assume that, you know, from obviously, you'll, you know, sort of make investments here and there, but I mean, is it, is it fair to assume that, you know, you're-- you know, you have a path to getting to Rule of Forty without M&A? I mean, obviously, M&A will accelerate it, but I mean, do you feel like there is a, a standalone path to Rule of Forty? I mean, it looks like there is, based on the numbers. I'm just trying to understand.
Savneet Singh (CEO)
Yeah, so listen, I think we can get to the Rule of Forty without M&A, and I'll let me answer that in two ways. First is, you know, this deal for BK will accelerate our growth in the out year, right? So what we will likely, you know, I'm guessing, and again, we'll talk about it in our next call, we have guidance, we'll likely grow faster in 2024 than 2023. And as I mentioned, this is not the only deal. There are deals coming down the pike that are going to expand this even more. And so I think we'll be, you know, really good on the revenue side. And then as you know, as I mentioned on the call, you know, our entire burn this quarter was Menu.
The moment that we can flex Menu to positive, which we think is coming, you know, we announced some really, you know, Scooter's. These are big brands now coming on Menu. This will also help. So I think there's a path to Rule of Forty on our own, and we will get there, we will get there no matter what. We have no choice, and we will, and that's our goal. M&A, though, will accelerate it. And it's because the deals that we are, you know, working on are, you know, cash flow positive, you know, not dilutive to our growth, and, you know, I think, you know, accretive to a Rule of Forty score. So it should help us get there faster.
You know, as you know, we've talked about a lot, we are really good on the G&A side. You know, we are really good at cutting lots of areas of G&A and then reinvesting those in areas of growth. G&A, you know, I mentioned, you know, we $9 million of our OpEx went to Menu, the BK ramp up in IT systems. We did that without growing the OpEx, and we do that again on the next M&A deal. And so I feel really good that if we acquire something, we can get a lot of operating leverage out of our operating expenses, particularly G&A and sales and marketing. So it will certainly get us there faster.
Adam Wyden (Managing Partner)
Got it. Yeah, no, I mean, look, when you, when you look at the sales and marketing at 15% at scale, and you look at gross margin, I mean, this thing can clearly be a 40% , you know, EBITDA margin business at scale. And so, you know, if there's revenue growth and, you know, 30%-40% EBITDA margins, then you're Rule of 40. Let me ask you, something about the cross-sell. Your competitor, or he who will not be named, has had a very hard time sort of cross-selling. You know, you're starting to see cross-sell.
I mean, you know, if I sort of add up all the products, you know, Brink at $3,000, payments at a couple thousand, PAR Pay, you know, maybe another $1,000, you know, Data Central at $1,500, Menu at $2,000, Punchh at $2,000. I mean, you're well into the double-digit thousands. I mean, where do you think you are in terms of, you know, really getting everything in under one house and really getting... I mean, I know you're sort of, a lot of the call has been talking about that, that the Unified Commerce is creating the stickiness, and we're seeing it with your competitors, you know, losing customers.
But I mean, you know, when do you expect to sort of get that $2 million AUV restaurant, you know, basically paying you $10,000-$12,000 for everything? I mean, are, is that something that could be a possibility? I mean, could we have a large chain really taking every single one of our products at max in 2024?
Savneet Singh (CEO)
Oh, yeah. Listen, I would say absolutely. I mean, I think, if you just look at the numbers, right, and the growth in ARPU, you know, that's pricing, but it's also the upsell of more products. You know, if you look at our last couple big deals here, you know, one of which we announced, you know, others that are coming, none of them are single product deals. And I would tell you, Adam, we're seeing this cross-sell and upsell motion happen without us doing the best job of it. I would say it's the area we need the most improvement on internally, but it's just happening naturally.
You know, when I wrapped up, I was saying that, you know, it's the right time in this market, and that's kind of what I was referring to, which is, you know, we're stumbling into doing a good job on cross-sell and upsell. You know, just imagine when we get great at it, and we will. So I think your guess is like, of course, we will get there. And I think you're going to see it, you know, pretty quickly. I think you're going to see us be very good at stapling Brink payments, Data Central out the box. And then I think Punch and Menu are, you know, slam dunk combo. As I mentioned on the call, almost all of our Menu signings have had payments and Punch.
And so, you know, if you think about the front of house and sort of the operator side, like, we will get there. So I think, you know, getting up to that on a large brand is very possible, and particularly if we do a good job on this first one.
Adam Wyden (Managing Partner)
Yeah, and I think you mentioned that, you know, earlier on the call that, you know, obviously, you know, RBI's, or I think you said this earlier in the call, but, you know, RBI is a large chain, but I mean, I think the intent is that, you know, if we execute well on Burger King, that, you know, you would expect to, you know, move horizontally into the other brands and perhaps, you know, sell Punch and the rest of Menu and the rest. I mean, there is, you know, obviously everything is competitive and, you know, the deal goes to the best guy. But, I mean, I think it's your expectation that if you deliver that, you know, that the relationship should grow meaningfully. Is that right?
Savneet Singh (CEO)
That's right. I mean, it, you know, I want to expand the timing on that, which is it's gonna expand in two ways. It's gonna expand, and that we, you know, I think we've been great partners to RBI. I think they've been incredible partners to us, and we want to grow the relationship across the logos they have. We think we're a great fit. We are, both culturally, but from a product perspective, that'll be great expansion. But I also think from a product perspective, we will be pushing, you know, Data Central and Punchh and so on and so forth, provided we're adding value that aligns their roadmaps. And so, it's just an incredibly large opportunity that we will, we will get to.
I think it's a really huge sign that they chose not Brink, but Brink and Menu, understanding that they now have an op—a, a sort of transaction product and an off-premise product. From us, it's highlighting that. Again, Q4-
Adam Wyden (Managing Partner)
No, hold on. I have, I have a third... My third question is about M&A.
Savneet Singh (CEO)
Okay.
Adam Wyden (Managing Partner)
My question is, you know, we saw, we've seen the public companies, you know, sort of materially, sort of, I would say, the single product companies have materially lost their valuation multiple, you know, largely because of stickiness around customers. I think in the past, you know, you've sort of said, you know, the private equity firms and everyone have sort of been hanging on to sort of 2020 and 2021 valuations. You haven't really done an M&A deal, you know, in two and a half years. You've done a lot, but, you know, Menu was sort of an acqui-hire, and it won you Burger King. I mean, what do you think the probability is that you land sort of a $100 million ARR business?
Because my sense is that, you know, if you were able to sort of, you know, cross the transom and make this a $300 million-$400 million ARR business at a 40% margin, that, you know, I mean, we're not going to be trading at 3.5 times ARR. We're trading at 10 or 12 like Agilysys. I mean, this company is massively undervalued.
Savneet Singh (CEO)
Let me answer this way: I think, yes, I think there's the possibility to buy 100 million ARR absolutely exists. I don't know if it's in one ticket or three, but I think that's there. And I would tell you, it's my number one priority. As CEO, my KPI is to get that done, is, is on the M&A front. And so, we think it's really the right time. And again, I can't stress you enough, the fact that we got Menu right on here, and obviously, we got Punch really right, has just emboldened us to say, "You know, we got to do this twice as fast.
Adam Wyden (Managing Partner)
What are companies thinking that are doing $200 million of ARR, trading at 1.5x revenue? What's their exit strategy? I mean, my question is: What do these companies do if they're losing customers, if they're not selling to you? That's my question. What is the company doing?
Savneet Singh (CEO)
I'm not sure.
Adam Wyden (Managing Partner)
What is the exit strat-
Savneet Singh (CEO)
I think it's... You know, they all have an opinion. They'll have some idiosyncratic reason, rationale. I think in the end, if you're a shareholder of that company, it's hard to sort of stay there forever without wanting to drive a return, and I think that return is partnering with a firm like PAR. So I think I agree with you. I think it makes a ton of sense. And, you know, in the end, I think markets are logical and objective, and that benefits PAR. Thanks. Sorry, I want to jump to the next call.
Adam Wyden (Managing Partner)
Thank you.
Operator (participant)
All right, thank you. One moment for our next question. Our next question comes from the line of Charles Nabhan of Stephens. Your line is now open.
Charles Nabhan (Managing Director, Research Analyst)
Hi, good afternoon, guys, and thank you for taking my question. I wanted to drill into payments a little bit. Good to see the growth in that area, but wanted to understand a couple of areas better. Specifically, where and how are you winning? Is it on price or just, you know, one throat to choke, consolidating vendors? And then secondly, I know it's in the early stages of scaling, and it's dilutive to margins at this point, but if you could give us some color on how to think about the scaling of that payments business and when it could potentially be accretive to, to the gross margin.
Savneet Singh (CEO)
For sure. So why are we winning? We're winning, I think, first, because that one throat to choke, the simplicity of the product. But it's so much more than that. It's the integration of that product into everything that we do, the same dashboards. Like, it's just so powerful to have that integrated. And so it's, you know, one throat to choke if you've got a problem, but it's really that integration into the rest of what we do. I give that example of One Tap Loyalty on Apple Pay. You know, we-- I think we're the only people that can do that, where you can pay with Apple Pay and get enrolled in a loyalty program and pay. It's so powerful to the brand. So it's that one throat to choke, plus the innovation we can do once you're integrated across us.
I think that's why we win, and we continue to win really, really nicely. From a margin perspective, you know, our payments business will be accretive to our operating margins, you know, now or close to now. So we are seeing a lot of growth because, you know, we're selling it through our same sales team, right? And we have one sprint team that works on it from a product perspective. I think the gross margins are going to take a little more time just because we're growing into the infrastructure costs, but it will no doubt be a big driver of our gross margin growth over time, just because the revenue is coming in and we're not adding a lot of cost here.
Charles Nabhan (Managing Director, Research Analyst)
Got it.
Savneet Singh (CEO)
Yeah, I forgot to mention, you know, we account, unlike our competitors, you know, on a net basis, right? And so, you know, on an apples-to-apples basis, you know, we can make our revenue growth look like it was, you know, twice as big or whatever, ten times as big on a payments basis because we're giving you the true net take.
Charles Nabhan (Managing Director, Research Analyst)
... Right. Got it. And I want to follow up with the earlier question around guest engagement and menu. You know, the 8% growth, obviously, some of that is attributable to, to controlled churn. Just wanted to get a better sense for, how long that churn is going to take place and how we should think about, you know, the normalized growth rate of that business, if there is one, as well as, you know, if you could quantify the impact of the churn this quarter, I think that would be helpful as well.
Savneet Singh (CEO)
The churn was, you know, for the year, our churn is around 5%, so it's, it's not, you know, been a high churn year. That's kind of our normal churn. So, you know, for us, it's, you know, how do we get the growth engine going? And I think, you know, Q3, we had a really great quarter as it relates to PAR signing new logos. Q4 looks really good. You know, we'll know in the next, you know, six, seven weeks here, where that ends up. And that will get the growth engine going, where I think we want to get this thing, you know, much faster growth than where we are today.
But this will also be the area I think you'll see us be acquisitive because we want—we need more products to pump into the front of the house, and this will be coming from that side of the place. So I think you'll see us be acquisitive in that part of the market, but also we are winning really good deals here now. And I think that's, you know, a testament to our leadership there. So that is starting to turn. And again, the churn has been 5% for the year. It's, you know, that's kind of where we want to be. You know, year-over-year, it's pretty good numbers.
Bryan Menar (CFO)
For both of those products that are in that business area, this, they were both at an inflection point this year, right? As you mentioned, with Menu, making the kind of transition strategically, holding off and trying to grow international, where they were originally when we acquired, to getting it ready for North America, which as obviously you can see, we've done here with this most recent win. So it was getting ready for next year's growth and going forward. Similar with Punchh, where it was hitting that kind of inflection point of where it needed to continue to set itself up for continued growth going on, and the fact that we're seeing more usage in the product as our current customers are using it more and more and seeing the value in it. So it's getting that product stabilized for that.
We were not really hitting the gas on the growth engine for those. So it was kind of making sure we managed the churn during that year, knowing that we're going to have a low growth year.
Charles Nabhan (Managing Director, Research Analyst)
Got it. Appreciate the call, guys. Thank you.
Operator (participant)
All right. Thank you. One moment for our next question. Next question comes from the line of Patrick McKeever of William Blair. Your line is now open.
Patrick McIlwee (Equity Research Analyst)
Hi, guys. Thanks for squeezing me in. I just had one more question I wanted to get in here. So last quarter, I think you said you had a few sizable deals in the pipeline for Menu, and safe to assume, you know, BK was one of them. So I just wanted to ask how your pipeline there looks now. Are there any other sizable deals we could expect to flow through in the coming quarters? And, you know, could we reasonably expect any of those to drive a divergence in the profit trajectory from where we stand now?
Savneet Singh (CEO)
For sure. So, you know, BK was one, Scooter's another one I mentioned on this call, was another big chain, really fast-growing chain, impressive chain. We've got, you know, more around the corner. So, you know, the challenge for us is actually not winning business here. We're winning business. You know, if you think about it, we've already won, you know, 1,100 stores. We'll add, you know, more this next coming quarter. You know, we'll be, you know, compared to our, you know, big peer in the space, we're not, you know, leaps and bounds away from what they had in a year now, and so it's coming. For us, the challenge is really getting the product out the door, because as I said, we so rapidly brought this business to the United States.
We need to, you know, make that investment, and that's what we've been doing. So winning the business hasn't been a problem. It's a superior product. It's when you integrate into Punch, it's an incredible experience. It's getting the product out the door. So I think you'll see, you know, some of that happen in Q4, a bunch more in Q1, and then we hopefully have some nice flow-through of payments revenue that comes with that as well.
Patrick McIlwee (Equity Research Analyst)
Very clear. Thanks, Savneet.
Operator (participant)
All right. Thank you. One moment for our next question. Next question comes from the line of Andrew Harte of BTIG. Your line is now open.
Andrew Harte (Director, FinTech Analyst)
Hey, Savneet. I just want to follow up on that, that comment you made about M&A, you know, being your number one priority. I guess, you know, when you think about it, what, what boxes do you want to check? Is it just thinking about, you know, building scale, or is there a specific capability you'd like to, to acquire or focus on a region? Just want to unpack that, where your focus is the most.
Savneet Singh (CEO)
Yeah. So, you know, it's always product-based, right? You know, everything we've done so far, we've taken a product, been able to accelerate the revenue growth and create a better customer experience. You know, the acquisition, Menu allowed us to make Brink better, but also Punch better. The acquisition of Punch made Brink better, allowed for things like One Tap Loyalty with payments. And so we focus on there. You know, the areas that I think, like, as I mentioned, you'll see us, I think, be active on the guest engagement side, where we want to ramp up the revenue bit growth there. The other part, I would say, is for market share. You know, I think PAR continues to perform and outperform our peers.
And in this environment, we think it's a really good idea for us to take advantage of that by, you know, being acquisitive, bringing those businesses in-house. And, you know, again, given our ability to control costs, you know, to value. So I think... Create value. So I think, market share is the other part we look at, which is how do we get faster market share? Because we know that if, as we add logos that we don't have today at PAR, we can then take that logo and penetrate with additional products, creating tremendous value, the cross-sell question that someone mentioned earlier. So we're seeing that. And then the last part I would say is new verticals and geographies.
You know, we are getting pulled into new verticals and geographies all the time, and oftentimes our answer is, "We're not ready for that yet." But, you know, with an acquisition, we could be there, and we can move quickly. So those are the three parts that we're looking at today.
Andrew Harte (Director, FinTech Analyst)
... Thanks. And then on our numbers, you know, it looks like sequentially, ARPU, kind of across all three ARR segments, was up. We talked about PAR Pay, I think, being a driver of that in Operator Solutions. Anything else to kind of call out on the ARPU side? And then also on guest engagement, kind of the most significant jump there, is that just a function of kind of lower ARPU menu customers rolling off? Or, you know, anything you'd call on the guest engagement, ARPU?
Savneet Singh (CEO)
No, it's price. It's price. Yeah, so it's, you know, payments on the other side, but it's price. So we've continued to, you know, become smarter at how we take price and renewal cycles. You know, how do we show value to our customer and then create value for PAR? So it's price is the other big lever.
Andrew Harte (Director, FinTech Analyst)
Thanks.
Operator (participant)
All right. Thank you. One moment for our next question. Next question comes from the line of Eric Martinuzzi of Lake Street Capital Markets. Your line is now open.
Eric Martinuzzi (Senior Research Analyst)
Yeah, I wanted to revisit the Burger King rollout. I know you're gonna formalize the plans here in Q4, but just curious to know if you've got insight on the incentives that they'll be using to motivate the installed base of franchisees to adopt the new product, whether it's kind of in line with maybe historical large customer deployments or maybe something a little bit greater than?
Savneet Singh (CEO)
I probably can't talk about those specifically just 'cause those are private to them. But I would say, you know, they're very focused on, you know, unifying their POS. You know, they, that's how they introduce us. That's their path, and the franchisee base is so excited for it. What I can say, Eric, is I expect this to be a relatively rapid rollout for a business this size. There's just tremendous alignment between us, between them. And so this is not gonna be the kind of, you know, chain that sits on this for many years. This will go very quickly. And, you know, we're contracted that way and aligned that way. And so we both want that to happen, and I think that's why it'll happen.
Eric Martinuzzi (Senior Research Analyst)
Okay, and then a follow-up to that, also tied to BK. Curious to know, your hardware run rate's been in the neighborhood of $25 million-$26 million or so. Does that change with the deployment with Burger King?
Savneet Singh (CEO)
You know, we'll. It'll depend. You know, we'll, we'll see. On our next call, we'll be able to give you a little bit better guidance on that as, again, we're working through these plans. The Burger King franchisees, some of them will absolutely take our hardware and our services, and, you know, it'll be our push that by 2025, all of them are taking it, but we've got to get them there. But it will be a meaningful driver over time of hardware and services. And then I think as we, you know, hopefully are able to get to the other, RBI brands, it'll be, you know, a staple to all of them. But it will certainly be a nice, new customer for us to have on hardware and, and, and services going forward.
Eric Martinuzzi (Senior Research Analyst)
Thanks for taking my questions.
Operator (participant)
Thank you. One moment for our next question. Next question comes from the line of Kyle Peterson of Needham. Please go ahead.
Kyle Peterson (Senior Analyst)
Great. Good afternoon, guys. Thanks for sneaking me in here. Most of my questions have been answered, but you know, just wanted to ask quickly on the government business here. You know, looks like you know, the revenue came in you know, really strongly. Were there any kind of one-time task orders or anything that you know, pushed that you know, to the upside? Or or is you know, what we saw in the third quarter you know, a good run rate you know, to use in our models moving forward?
Bryan Menar (CFO)
Yeah, I think, from a revenue standpoint, government obviously hitting all cylinders this quarter. I mean, we expected that was in the upper 30s. We expected it to be in the lower 30s on a quarterly basis. The margin, we were able to convert that back over, because the team was able to properly manage direct labor, where at times that was being passed through in some of the task orders to a third party. And the team was able to set up internally so that it actually leveraged the internal team, and that gave us higher margins. So now we're back to what would you expect, you know, you'd call it, your 6%-8% margins, and that's what we expect to kind of move forward with.
Kyle Peterson (Senior Analyst)
Got it. That's really helpful. Thanks, guys.
Operator (participant)
All right. Thank you for your questions. This does conclude the question and answer session. I would now like to turn it back to Savneet Singh for closing remarks.
Savneet Singh (CEO)
Thanks, everybody, for joining us during this exciting time. We look forward to updating you on our next call.
Operator (participant)
All right. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.