PAR - Q4 2022

Transcript

Operator (participant)

Good day. Thank you for standing by. Welcome to the PAR Technology Fiscal Year 2022 fourth quarter financial results. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will hear an automated message advising you 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 speaker today, Chris Byrnes, Senior Vice President of Business Development. Please go ahead.

Chris Byrnes (Senior VP of Business Development)

Thank you, Catherine, and good morning to everyone. I'd also like to welcome you today to the call for PAR's 2022 fourth quarter and year-end financial results review. The complete disclosure of our results can be found in our press release issued this morning, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations and News section of our website at www.partech.com. At this time, I'd like to take care of certain details in regards to the call this morning. Participants on the call should be aware that we are recording the call this morning, and it will be available for playback. If you ask a question, it will be included in both our live conference and any future use of the recording.

I'd also like to remind participants that this conference call includes 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 morning and in our annual and quarterly filings with the SEC. 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 and President)

Thanks, Chris, and thanks to everyone for joining the call this morning. I'm pleased to report that our growth momentum continues as we aggressively expand our Unified Experience to new and existing customers, drive our business to cash flow positive, and deliver customer satisfaction rates that are the highest in the industry. As I've done on prior calls, I'm going to break today's call into three sections. First, a review of our recent quarter results. Second, a review of strategic highlights that will lead to future results. Finally, some thoughts on 2023. First, our results. As I stated previously, I'm convinced that ARR remains the best metric to measure our success as each dollar of ARR, under each dollar of ARR is considerable future cash flow.

At the end of Q4, ARR reached $111.4 million, delivering a 26.4% year-over-year increase, demonstrating the continued growth and scaling of our Subscription Services engine. Contracted ARR now stands at $127.3 million, a 21% year-over-year increase from the end of 2021 and an 8% increase from sequential to Q3. Today, our Unified Experience consists of Operator Solutions, Guest Engagement, and Back Office. Operator Solutions, which is Brink and Payments, ARR grew 29.6% to $41.6 million in Q4 when compared to the same period last year. During Q4, Operator Solutions added 1,183 new store activations and new bookings total approximately 1,611. Churn continues to be extremely low at 4.3% annualized for Brink in the quarter.

We continue to be aggressive in attaching Payments to all new Brink deals and see a significant majority of our new customer wins in 2022 have done just that. In just this past quarter, we went live with 17 new customers. As we've mentioned in the past, this impressive growth has been somewhat muted by supply chain limitations of payment devices, which we expect to clear up later this year. What I like most about Payments is that it creates an avenue to consolidate transaction data across all channels, reframing conversations with our customers. Moving to Guest Engagement ARR, that includes our leading customer engagement platform, Punchh, and newly acquired MENU. Guest Engagement ARR grew 26.2% in Q4 when compared to Q4 2021 and totaled $58.9 million.

Punchh signed several new customers in Q4, including a 3,000 store fast casual enterprise, and went live in 10 new logos in the quarter. Punchh continues to be best in class for loyalty, We saw some softening in demand at the very end of Q4 and beginning of 2023 as restaurants rely on marketing development dollars to fund loyalty rollouts and expansions. Cautions around inflation and price elasticity for restaurants have impacted marketing development funds. In turn, we're expecting a minor slowdown in new customer demand for Punchh in the first half of this year. I continue to be very bullish on Punchh's opportunities going forward. As always, we prepare for the reality we're given today. Even with this headwind, we are forecasting total ARR growth across our Unified portfolio to be consistent with our 2022 year-over-year growth.

Updating the progress of introducing MENU to the United States. We are very encouraged and excited in the early interest and rave reviews we have received from prospective MENU customers. We're already participating in a fair number of RFPs and feel our opportunities for rapid acceleration of new customer wins and revenue growth is upon us. In Q4, we completed the fully integrated ordering capabilities of MENU with Brink, which allow us to start targeting existing customers aggressively. We hope to start booking customer wins starting next quarter. Back office and Data Central continue its turnaround with the market more focused on cost control. Reported ARR of $10.9 million in Q4 was a 16% increase from last year's Q4. We went live in seven new logos in Q4 and continue to sell into existing Brink and Punchh customers.

Notably in the quarter, we signed a popular casual dining wings brand that will add meaningfully to ARR in 2023. Also in this deal, we displaced the market leader for labor scheduling, validating the work we did earlier to reinforce our own scheduling module. We had activations of 350 stores in Q4 and a strong booking space of new stores being signed this quarter. We continue to see increased demand for back-of-house technology and applications to control food and labor costs that have a direct impact on improving margins and profitability as inflation, labor, and supply chain issues seem to be ever present. Moving on from the results, I wanna spend a bit of time on three of our strategic initiatives. Last quarter, I talked about our focus on freezing R&D spend and the shift of our R&D resources from technical debt to new product development.

We continue to see momentum behind this journey and feel confident the natural shift from technical debt to future development will allow PAR to increase new products without adding new R&D spend. Alongside this R&D focus, though, is a go-to-market plan that allows PAR to have a 360 degree view of our customers so that we can better effectuate cross-sell and the promotion of Unified commerce. In Q4, we consolidate parts of our sales team to create an account management team to own each of our existing accounts. This allows our customers to have one sales contact across all PAR products, thereby giving our customers a more streamlined view of PAR and simultaneously our sales team a 360 degree view of the customer's relationship with PAR to enhance our cross-sell.

It also gives us accountability on an an account-by-account basis to understand our performance with every concept we sell to and help drive performance at the account level. These account managers are partnered with a direct sales team that is still on the hunt for new logos and who can provide strong product-specific knowledge to our customers. As the utility of a more unified and integrated offering becomes more evident, we'll see a greater and greater need to manage our accounts at a more strategic level, balancing price, LTV, and customer satisfaction, thereby also making this group the right point of contact for renewals and upsell.

A good example of this momentum is with our recent signing of Zaxby's, a large restaurant enterprise that has implemented both operator solutions and guest engagement with our Brink POS and Punchh platforms in tandem to enhance their customer experience and drive efficiency in their 900+ stores. As we roll out and deliver value, our account manager will be tasked with working closely with the Zaxby's team to find avenues for new products that can solve their needs and deliver our Unified Experience. The second large strategic move PAR made in Q4 was Brink's entry into the table service market. We've been cautious in not overpromising too much, but in Q4, we received commitments from two notable and well-known table service chains. Table service opens up our addressable market to a large and new base that we previously have stayed out of.

Table service clients, in general, pay higher monthly subscription rates as they require more terminals and functionality than our QSR customers and will drive our continued ARPU expansion. What's exciting about our first two commitments is that both customers also took our Back Office and Payments offerings, highlighting the strategic fit of our products and candidly highlighting how simplicity wins. While much is made about new technology, the digitization of the restaurant, and the move away from in-store, today, our customers, more than anything else, want their products to work and work seamlessly. The third strategic update I wanted to touch on is data. In today's challenged global economy, PAR's Unified Experience is becoming a must-have for enterprise restaurants. Business complexity continues to increase. Homegrown solutions can no longer keep pace.

This creates a sustained opportunity for PAR as restaurants adapt and change their business models and evolve their technology platforms. Digital transformation within restaurant enterprises is creating enormous volumes of data that are all but unmanageable with conventional approaches to analytics and data and analytics. As restaurants mature in their data analytics practices, the approach becomes unwieldy. PAR is delivering significant value to our customers through the capture and management of this data as the enterprise serves their customers day in and day out. Through the Unified Experience offering, PAR has massive amounts of real-time, actionable data for customers that provide the foundation for machine learning-based personalization and analytics. This includes transactional data for Brink, customer identity data for Punchh, and employee inventory data for Data Central.

As an example of this scale, three out of every five U.S. adults use a Punchh loyalty program and generate $4.7 billion transactions a year. We make these analytical insights and raw data available to our customers in a variety of ways. Customers can form self-service analytics right in the product itself, including campaign performance analytics, employee reporting, and guest analytics. Customers can export this data on demand for their own analysis and visualization. This capability allows enterprise restaurants to use this mission-critical data to optimize customer engagement, drive operational efficiencies, and at the end of the day, optimize their profitability. As the world embraces artificial intelligence, these datasets and models we believe will become critical in that automation. I'll turn the call over to Bryan for more details on the numbers.

Bryan Menar (CFO)

Thank you, Savneet. Good morning, everyone. Before going into the financial details, I would like to highlight an important change to our financial reporting presentation. We have retroactively split the presentation of our services financial statement line items across new Subscription Services and Professional Services FSLIs. This change is a result of PAR's transformation into a true technology platform provider, with our Subscription services line items consisting of revenues and costs related to our SaaS solutions, recurring software support, and transaction-based payment processing services. Subscription Services represents 100% of our annual recurring revenue metric. Professional Services revenues and costs related to our portfolio relate to our portfolio of other support services, including implementation, training, on-site and technical support, as well as hardware repair and installation. In addition to splitting the services line items, we have changed the product line items name to Hardware.

Now on to the financial performance. Total revenues were $97.7 million for the three months ended December 31st, 2022, an increase of 19.7% compared to the three months ended December 31st, 2021, with growth coming from both restaurant retail and government segments. Net loss for the fourth quarter of 2022 was $13.5 million. $0.50 loss per share compared to the net loss of $25.6 million, or $0.95 loss per share reported in the same period in 2021. Adjusted net loss for the fourth quarter of 2022 was $7 million, or $0.26 loss per share, compared to an adjusted net loss of $9.8 million, or $0.36 loss per share for the same period in 2021.

Adjusted EBITDA for the fourth quarter of 2022 was a loss of $2.8 million compared to the Adjusted EBITDA loss of $4.9 million for the same period in 2021. Hardware revenue in the quarter was $29.6 million, a decrease of $2.6 million or 8.1% from the $32.2 million reported in the prior year. Both periods were historically high for Hardware sales. We continue to see strong Hardware sales both with our tier one legacy customers and across our current customer base. Subscription Service revenue was reported at $27.9 million, an increase of $8.9 million, or 47% from the $18.9 million reported in the prior year, driven by revenue from our Guest Engagement Solutions.

Q4 Subscription Services revenue included approximately $0.6 million of year-to-date adjustments within our Guest Engagement Solutions. The annual recurring revenue exiting the quarter was $111.4 million, an increase of 26.4% compared to Q4 2021, with Operator solutions up 29.6%, Guest Engagement up 26.2%, and Back Office up 16%. Professional Service revenue was reported at $13.5 million, an increase of $1.9 million, or 16.1% from the $11.6 million reported in the prior year, driven by hardware repair services, guest engagement, and operator solutions implementations.

Our total recurring revenue base, which includes both Subscription Services and Hardware support contracts within Professional Services, continues to expand with $34.9 million reported in Q4 2022, an increase of 34.2% compared to the $26 million in Q4 2021. Contract revenue from our government business was $26.7 million, an increase of $7.9 million, or 42.1% from the $18.8 million reported in the fourth quarter of 2021. The increase in contract revenues was driven by a $7.5 million increase in our ISR solutions. The increase in ISR solutions was driven by task orders resulting from the AFRL counter-small UAS contract awarded in 2021.

Contract backlog associated with our government business as of December 31st, 2022, was $334 million, an increase of 71% compared to the $195 million backlog as of December 31st, 2021. Total funded backlog as of December 31st, 2022, was $86 million, a 124% increase compared to the funded backlog of $39 million for the prior year. Turning to margins. Hardware margin for the quarter was 23.8% versus 23.4% in Q4 2021. We continue to strategically manage market changes in both supply chain and pricing so we can continue to provide premium product to our customers at competitive pricing while maintaining our margins.

Subscription Services margins for the quarter was 53% compared to 43.5% reported in the fourth quarter of 2021. We have been successful in driving multiyear Subscription Services margin improvement with improved hosting utilization, process improvements within support services, and more pricing rigor as we validate our value proposition to our customers. We continue to see additional opportunities for improvement as we enter 2023. Subscription Service margin during the three months ended December 31st, 2022 included $5.3 million of amortization of identifiable intangible assets compared to $5.1 million of amortization during the three months ended December 31st, 2021.

Excluding the amortization of intangible assets, total adjusted Subscription Service margin for the three months ended December 31st, 2022, was 72% compared to 70% for the three months ended December 31st, 2021. Professional Services margin for the quarter was 23.3% compared to 13.2% reported in the fourth quarter of 2021. The improvement was driven by hardware repair margins. Government contract margins were 4.3% as compared to 6.7% for the fourth quarter of 2021. The decrease in margin is driven by an increase in mission system direct material and labor costs, along with an increase in loss reserves. We expect margins to revert back to historical norms of 6%-8% in the following quarters.

In regards to operating expenses, GAAP SG&A was $25.9 million, an increase of $1 million from the $24.9 million reported in Q4 2021. SG&A decreased $0.6 million or 2.4% when excluding $1.6 million of expenses related to MENU. Net R&D was $14.9 million, an increase of $4.9 million from the $10 million recorded in Q4 2021. Backing out MENU and Non-GAAP adjustments, the growth in R&D is $1.8 million or 18%. Included in operating expenses for the fourth quarter was a $4.4 million reduction in the fair value of the contingent consideration liability for the MENU acquisition. This contra expense is a Non-GAAP adjustment. Total operating expenses excluding the contingent liability adjustment totaled $41.2 million.

As Savneet stated earlier, our plan is to hold quarterly operating expenses flat from Q4 2022 through Q4 2023. Net interest was $1.8 million compared to $5.6 million recorded in Q4 2021. The decrease is driven by a reduction of accretion resulting from our January 1, 2022 pronouncement adoption that resulted in our convertible debt securities being wholly accounted for as debt and negated the requirement to record accretion for the conversion feature. To provide information on the company's cash flow and balance sheet position. For the 12 months ended December 31st, cash used in operating activities was $43.1 million versus $53.2 million for the prior year. Operating cash needs were primarily driven by net loss, net of non-cash charges, and additional net working capital requirements.

Increase in net working capital requirements was primarily due to the growth of our business. We have been able to reduce gross inventory by $4 million since June 30, 2022 and are focusing on reducing another $3 million-$5 million over the combined following two quarters. Cash used in investing activities was $66.7 million for the 12 months ended December 31st versus $383 million for the prior year. Investing activities during the 12 months ended December 31st included $40.3 million for the purchase of short-term U.S. Treasury bills and notes to be held to maturity. $18.4 million of cash consideration for the Q3 2022 MENU acquisition, and $1.2 million of cash consideration for the Q1 2022 drive-thru tuck-in acquisition.

Capitalized software for development technology costs for the 12 months ended December 31st was $6.5 million. Cash used in financing activities was $2.6 million for the 12 months ended December 31st versus cash provided by financing activities of $443.6 million for the prior year. Financing activities for 2022 was driven by stock-based compensation related transactions. Days sales outstanding decreased within restaurant retail segment from 58 days as of December 31st 2021 to 53 days as of December 31st 2022. Days sales outstanding within government segment as of December 31st 2022 was 55 days and consistent with the 55 days as of December 31st 2021.

Before returning the call back to Savneet, I am pleased to report that we have fully remediated the material weaknesses and our internal controls over financial reporting are operating effectively. I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.

Savneet Singh (CEO and President)

Thanks, Bryan. Transitioning to our outlook for 2023. We continue to see strong demand across our business at PAR. While we expect to see some slowness from our Punchh product line, given the macro environment, we feel strongly in the growth in every other segment of our business. Our Operator Solutions of Brink and Payments has become a dynamic combination in the attachment of Data Central, and soon MENU comes next. Our goal for this year is to continue to grow our ARR at rates similar to 2022, between 20% and 30% a year. As we look and see these decelerating growth around the sector, we think our ability to maintain our growth rates is differentiated, driven by the Unified approach. Our customers continue to buy more than one product, and once unified, we're able to drive price given the value we provide.

The macro is not an excuse at PAR. We'll ensure our teams know that no matter what happens, we must deliver a win for our shareholders. Part of this push is that we must continue to demonstrate ROI to our customers, such that they are not looking at buying one product from PAR, but the entire experience, and thereby making our growth even more defensible. As we roll out new product offerings in 2023, I believe we'll have strong proof points to show and clearly demonstrate this to our customers. In addition to our efforts to maintain our revenue growth, we want to reaffirm our focus on driving to profitability. As we stated on our last call, we are keeping operating expenses flat from Q4 2022-Q4 2023, allowing every added dollar of gross margin to hit the bottom line.

Our focus on cost control is not new. A good example to highlight is our historical cost controls around SG&A expense. Excluding MENU, our MENU acquisition during 2022, PAR SG&A actually declined while ARR grew 26.4%. We've been able to continually grow revenue while not increasing overhead. What this number hides, though, is that while costs have come down with this growth, we've been able to increase investments in needed areas of sales and internal IT. As we've proven our ability to hold SG&A costs, we now intend to demonstrate that same discipline on the R&D line. While the macro environment may be challenged for 2023, we at PAR hope to continue to grow through the environment and do so in an incredibly efficient manner.

As always, I'd like to thank all of PAR's employees for the dedication and effort over the past quarter. Across the organization, people have stepped up to ensure we meet the needs of our customers while at the same time embracing the changes necessary to create a company for long-term sustainable success. With that, I'll open the call for Q&A. Operator?

Operator (participant)

Thank you. As a reminder, to ask a question, press star one one on your telephone and then wait for your name to be announced. To withdraw your question, press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Will Nance with Goldman Sachs. Your line is open.

Will Nance (VP of Equity Research)

Hey, guys. Good morning. appreciate you taking the questions. Savneet, I wanted to follow up on some of the weakness that you called out towards the latter part of Q4 and early 2023 in Punchh. I guess, could you maybe provide a little bit more color across what you're seeing in the market? I guess just could you talk about confidence level of the demand kind of coming back in the back half of 2023?

Savneet Singh (CEO and President)

Sure. We saw, you know, deals push out in the very end of December, for Punchh. I, you know, most of it tied to the economy and, you know, Punchh is funded through what's called marketing development funds or basically the marketing royalties that concepts bring in from their franchisees. During these challenged times, they tend to cut back on these expenses. We expect this to rebound from the conversations we have with our customers. As I said, I think it'll have a material impact on our growth for next year, but we wanted to be sort of transparent that there is some slowdown on marketing expenses, across all restaurant chains in 2023.

Will Nance (VP of Equity Research)

Got it. That makes sense. I guess just maybe can you talk through, you mentioned table services and seeing an upsized ARPU in some of those products. I'm just wondering if you could talk through ARPU trends on the operator, on the operator line and what you guys are seeing sort of like Brink ARPU uplifts on locations like that relative to a QSR. Just maybe a quick follow-up on the ARPU guidance. I mean, the lower range of ARPU guidance this year, kind of in line with last year, is that largely a function of some of the weakness you're seeing in Punchh, or is there something else that's changing the expectations?

Savneet Singh (CEO and President)

Yeah, I'll do the last one first. I think, you know, we're trying to maintain our revenue growth year-over-year, which, you know, I think is unique in this environment. You know, again, if we felt if we hadn't seen that slowdown in Punchh, you know, obviously I think it would've been higher, but we wanna make sure that we hit the numbers. You know, that's kind of how we got to our guidance number. On the first part of your question, remind me what it was, Will?

Will Nance (VP of Equity Research)

You mentioned higher ARPUs on the table service side.

Savneet Singh (CEO and President)

Oh, sorry on ARPU. Yeah.

Will Nance (VP of Equity Research)

Can you give some color on the back into there?

Savneet Singh (CEO and President)

Yeah. For sure. On the table service side, we've kind of kept this back pocket, but we've been working to sort of enable Brink to function in that market. We've received our first two commitments. Table service chains vary very widely in price. Oftentimes, POS is priced off of the number of terminals in a store. You can have some table service concepts that will have half a dozen terminals. You'll have some that have 20. They do vary tremendously. In general, I'd say a table service chain will have an uplift between 40% and 100% depending on the size of the concept.

What's, you know, I think extra special or unique is that in the first two commitments we've gotten, they've also taken two of our other products. You know, they were all bundled deals. I think that's a trend we'll see going forward in the table service market. It's not just that I think we'll get the Brink up- ARPU uplift, which is, you know, a function of the market. I think it's also, we have more ability to bundle in that market too.

Will Nance (VP of Equity Research)

Awesome. Appreciate you taking the questions. Thank you.

Savneet Singh (CEO and President)

Yeah.

Operator (participant)

Thank you. One moment for our next question. It comes from Samad Samana with Jefferies. Your line is open.

Samad Samana (Managing Director)

Hey, good morning. Thanks for taking my questions. Savneet, maybe just follow up on the 2023 ARR outlook. How should we think about maybe what some of the underlying assumptions are between the different pieces? It sounds like Punchh may be a bit of a downtick, but I think that implies that the core, that the core business, is actually doing quite well. Maybe just help us understand the assumptions now that there's several different products that are driving the growth.

Savneet Singh (CEO and President)

Yeah, for sure. I think, every other segment of PAR on the, sorry, the software side, you know, I think, has the potential and at least we're planning for acceleration from 2022. Obviously Payments, and Brink, you know, should have faster ARR growth in 2023 versus 2022. Data Central will have meaningfully faster growth in 2023 versus 2022. The rest of the business is super strong and you know, why we're so excited. I said, you know, Punchh rebounds, there's reason for optimism, but we wanna be cautious given what we're seeing, and really what the market's seeing.

Samad Samana (Managing Director)

That's helpful. Then maybe on the Payments side, now that we're some time in and you've started to see the attach rate move up, any early takeaways that we can do that we can kind of think about on the go forward side, whether it's the average size of the chain that's willing to adopt Payments or if you're seeing, you know, within a chain, is it typically all the franchises are using Payments? Just any kind of early observations that we can think through as we think about the potential there?

Savneet Singh (CEO and President)

It's a great question. The first question is, you know, it's a really wide range of customers. We have customers that are, you know, from our channel segment, which are, you know, 20 stores, if you will, all the way up to, you know, Smoothie King, which we announced earlier in the year, which is, you know, well over 1,000 stores. It's a lot wider than we expected, which is obviously a positive thing. You know, I think as we roll into this year, you'll see a couple of exciting things happening.

One is, our Payments business is a lot more than just processing transactions where we've expanded into a gateway business, and we'll have some cool announcements around partnerships with Apple Wallet and some really interesting ways to build software around our Payments product. I think the big trend you'll see is that not only will we have, you know, relatively strong penetration, this year 80% of Brink signings took on Payments, but we'll also see an expanding product portfolio that are really natural upsells for the customer base. You know, we're seeing, you know, really strong uptake. On the last question, all the Payments deals we've signed so far are for the entire concept.

They're a little bit different, which is, it's a positive for us, most of them end up taking, you know, they make a deal on behalf of all their franchisees.

Samad Samana (Managing Director)

Great. Very helpful and congrats on the strong growth and on the healthy margins side as well. Thanks.

Operator (participant)

Our next question comes from Kyle Peterson with Needham & Company. Your line is open.

Kyle Peterson (Managing Director of Equity Research)

Great. Good morning, guys. This is Kyle on for Mayank this morning. Thanks for taking the questions. Just wanted to touch, you know, on Data Central. You know, good to see the ARR is kind of heading back in the right direction there after kind of a little bit of a lull earlier in the year. Should we expect that to continue or is there still a little bit of, you know, choppiness ahead for, you know, that part of the business?

Savneet Singh (CEO and President)

You should expect it to accelerate actually. It'll get better from here. As I mentioned in the script, you know, we signed these table service chains that are also taking Data Central. You know, in general, I think we've kind of hit our stride as far as figuring out product market fit, attachment with Brink, new logos. You should expect it to accelerate. You know, I think we grew sort of 15%, 16% this year in Data Central. You know, we expect to grow meaningfully higher than that in 2023. As I mentioned on the last call, you know, we expect all the product lines to actually do better this year from a percentage growth perspective, outside of Punchh.

Kyle Peterson (Managing Director of Equity Research)

Okay. That's helpful. Then I guess just kinda thinking about the seasonality of the year, I guess it sounds like the second half should be a little better, at least due to Punchh. I guess, should we think about that kind of ARR growth rate across the whole business maybe getting better as the year progresses? Is really the only blip or change that you guys have seen so far is kind of within that Punchh product?

Savneet Singh (CEO and President)

I think it'll be consistent through the year. You know, we feel like we'll make up, you know, from Punchh in the other parts of the business. I wouldn't, we're not budgeting meaningful seasonality in our models.

Kyle Peterson (Managing Director of Equity Research)

All right. Great. Thanks, guys.

Operator (participant)

Thank you. One moment. Our next question comes from Adam Wyden with ADW Capital. Your line is open.

Adam Wyden (Chief Investment Officer and Founding Partner)

Hey, guys. Thank you for taking my questions. I want to talk a little bit about table service because, you know, that's been a product that you guys have been talking about for a while. You know, obviously, you know, a lot of guys, the incumbents are sort of slow as it relates to Oracle and NCR, and that's a you know, super high product, you know, sort of super high ARPU product. You know, I just, you know, would like to sort of. Then you mentioned sort of two big chains, like I think one of them is probably Buffalo Wild Wings. I mean, obviously it's great that you're getting a huge sort of logo with lots of, you know, units and whatever terminals.

I mean, can you talk about sort of what the pipeline is for table service, sort of what kind of ARPUs we could expect and sort of how quickly you can sort of roll that out? This is, I mean, a big sort of game changer, I think, in terms of your product roadmap.

Savneet Singh (CEO and President)

We signed our first two deals at the end of Q4. You know, we'll look to start rolling them out, you know, late first half, you know, second half of the year. As we talked on the last question, what's exciting is, you know, they are meaningfully higher ARPU. You know, the average, again, it varies tremendously in this market. There are table service chains that are, you know, 25%-30% higher than the average Brink cost, and there are table service chains that are 200%-300% higher, depending on the number of terminals, configurations, so on and so forth. It's a really wide range.

In general, we'll, you know, even a what's called a low priced table service chain will have a meaningful difference to our Brink ARPU. What, you know, I mentioned the last part of that call, last question, I think is really interesting here is that in the pipeline we have, most of them are also, you know, almost de facto taking our Payments product. The volume of payments transactions in a table service restaurant, excuse me, are the GMV is meaningfully higher. It creates also a really strong payments opportunity, and so we could potentially have higher payments ARPU within a table service chain. There are a lot of nice tailwinds when you enter that market.

You know, as far as strength of the pipeline, you know, we got our first two, we wanna get those right. We've got a nice pipeline of, you know, smaller mid-size chains. As the larger ones come to RFP, you know, we'll look to actually enter those RFPs. Historically, you know, we've even chosen not to respond to those RFPs if we weren't ready. I think, you know, given that the first couple chains are, you know, relatively well-known brands, we'll be able to leverage that to enter those bigger RFPs.

Adam Wyden (Chief Investment Officer and Founding Partner)

Good. You know, I know the another thing that we haven't really talked about is I think you mentioned sort of PAR analytics, PAR data, but I mean, a lot of sort of the R&D expense was getting shifted to new products. Obviously, you have MENU, but I mean, a big part of, I think, was Unified commerce platform and sort of all the sort of the modules around that. You didn't really mention, you know, sort of PAR data analytics or sort of the UCP as sort of another driver and, you know, that plus MENU. Because I mean, everyone's talking about Punchh and it's like, but you've got, you know, you've got four other products.

I mean, now that you're vertical and you have all these other products, there should be some sort of natural hedging mechanism. You're seeing sort of Data Central offset Punchh. I mean, can you talk about sort of the portfolio of new products? I've got one last question.

Savneet Singh (CEO and President)

Sure. you know, the portfolio is doing great. As I mentioned, you know, we're not, we feel confident that the rest of our portfolio can make up for any potential slowness we see in Punchh in 2023. We also have, you know, quite a bit coming after that. This year we launched our first Unified products, which are products that are built off of multiple PAR products. So think of them as products that you can really only get value from that if you have the PAR product portfolio. Those will be launched later this year. Then we've got, you know, a bunch of other levers, as I mentioned, a couple of new Payments products. The portfolio is growing.

You know, as I mentioned in my remarks, you know, one of the exciting parts about what's happening is the ability to leverage all this data to then create new insights back to the customer. You know, at some point, these will enter, you know, I hope we can create models such that they can leverage large intelligence. For today, all that data allows us to actually have a much more strategic conversation with the customer, so they no longer look at us as, "Hey, that's a POS product there. That's a, you know, an online ordering product there." They're looking at it as a relationship for us to help them solve that data challenge. I think if you went to most restaurants, they have a lot of data.

They truly do have endless amounts of data, but the insights they're pulling from it are still relatively limited because the lack of data integrity, the linearity, none of it really connects well. I think we, by having this suite of products, we're able to change that conversation. I think you're seeing the results, which is, you know, you're seeing more and more customers choose multiple products. I think that will continue.

Bryan Menar (CFO)

I think we'd also to add to that as well is having a unified with the data, the fact that we also have a very large white space with our existing sites that we have is that it allows us to accelerate the cross-sell opportunity we have. Now that we're aligning our sales organization for that's also gonna be helping to drive and take, you know, and smooth out any kind of headwinds we have in any one individual product.

Adam Wyden (Chief Investment Officer and Founding Partner)

Got it. Then, you know, going back sort of on the product portfolio, I mean, when I think about sort of PAR when it's all grown up and adult, you know, I sort of look at it like a little market access or SS&C. You know, SS&C bought, you know, Eze and all the rest. I mean, you know, SS&C is sort of the one-stop shop for the asset manager. You know, as I think about PAR, you know, think about what the business was when I invested in it originally, it was just Brink at, you know, low net promoter and low gross margin. Now we've got, you know, God knows how many more products in coming online. Can you talk, you know, sort of I look at this as sort of like, you know, many products.

I mean, can you talk, you know, a little bit about the M&A? I know you bought MENU, which was sort of, you know, an acqui-hire, tech hire. Can you talk a little bit about that ramp? Then, you know, what the M&A environment looks like? You know, a lot of companies, you know, I know Punchh thought about going into a SPAC originally, sort of the free money, easy money days are over for companies that are doing $10 million, $20 million, $30 million ARR that basically are, you know, funded, you know, indefinitely. Now those companies sort of have venture funds that need sort of liquidity events, the IPO market is closed, and you're a lender of last resort.

I mean, I think this must be a really good environment to sort of do tuck-in M&A, like, you know, more sort of like on the Restaurant Magic, $10 million, $20 million, $30 million in ARR. Can you talk a little bit about sort of what you're seeing in the M&A pipeline and, you know, what the realities are in terms of you being able to execute on sort of meaningful M&A this year?

Savneet Singh (CEO and President)

Sure. I'm gonna break it in two parts. I think if you look at the tuck-in acquisitions, so call it acquisitions in the size range you mentioned and smaller, that market has completely changed. You know, those are the companies that wanted the highest multiples over the last two years. They are all relatively rational and, you know, I think potentially ready to make a deal. We're, you know, we're always engaged with a number of those targets, and figuring out where we want to potentially add to the product suite. I think the key there is making sure that we can have a product that we can leverage what we have today at PAR.

You know, we don't wanna buy something that's sort of really cool technology that we can't distribute through our sales force because that efficiency, as you can see, you know, I think it's one of the things we haven't talked about a lot, but I think is most impressive is, you know, we haven't really grown our SG&A expense outside of acquisitions, you know, in a couple years, yet we've continued to grow the size of the business meaningfully, and we wanna be able to leverage that base. There's a lot more to do there than there's been in previous years.

The other part of the market, though, that you didn't ask about, but I think is interesting is, I think over the next, I don't know, one year or two years, but there will be much larger strategic transactions that happen in our space because I think as the markets have gotten rational, the value and synergy of scale have come to fruition. I think our customers want to work with larger partners, and I think the amount of R&D expense to keep up with the innovation is meaningful now, where previously, as you suggested, VCs and their capital was funding that. I think it's hard to do on small scale. You know, a big push of ours to get to profitability is also to continue the R&D investments.

If we were twice the size, you know, that creates a meaningful difference versus a small competitor trying to come in. I think scale will also become very valuable. I think, you know, we could potentially see things, you know, loosen up in that end of the market as well, which, you know, really hasn't happened in a long time in our space. Adam, we've got to jump to two other questions after this, but, thank you for the question.

Operator (participant)

Thank you. One moment. We have a question from Stephen Sheldon with William Blair. Your line is open.

Stephen Sheldon (Partner and Equity Research Analyst)

Hey, good morning. Just one here from me. Wanted to ask about the Subscription Services gross margin. Nice bounce back higher this quarter. I think that happened a little sooner than I would have expected given the drag from MENU and Payments. Can you just talk about some of the moving pieces under that and how you're thinking about potential for Subscription Services gross margin in 2023?

Savneet Singh (CEO and President)

I think in 2023, you know, we'll sort of be low 70s for the year. Again, a little bit ahead of schedule than we thought. We do still have. You know, what I think that hides, though, is that, you know, Payments and MENU are meaningfully below the rest of our products from a gross margin perspective. I think our run rate gross margins on our core products and our large products are meaningfully higher. We expect MENU and Payments to eventually get there too. There should be a really nice continued tailwind for gross margins in the coming years. You know, it came back quickly. A lot of it is some catch up from Punchh.

I think you'll see us sort of be in the low 70s for the year. Again, a lot of it depending on when we roll out Payments and potentially MENU customers, as the every dollar of revenue there has a meaningful impact on the gross margin base there. Sorry, the COGS base there.

Bryan Menar (CFO)

Correct. What we saw from Q3 to Q4, right, was that continued improvement on our operator solutions, both from Brink and on the efficiencies that we're getting in regards to those margins. In addition to that, we are starting to gather each quarter improvement on the Payments as it gets more and more critical mass.

Stephen Sheldon (Partner and Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from George Sutton with Craig-Hallum. Your line is open.

George Sutton (Partner, Co-Director of Research, and Senior Research Analyst)

Thank you, Savneet. Given that you restructured the sales force, and obviously you previously had folks selling into Punchh at a headquarters level, folks selling into Brink and others at a regional and franchise level, what sort of an impact do you think you've seen from that restructure? I'm obviously thinking of the Punchh perspective in particular with that question.

Savneet Singh (CEO and President)

It's a great question. We still separate out the franchise team, which we internally call SAM, and then our enterprise team. We will always keep those distinct because as you're suggesting, and it's right, selling to a franchisee is selling to a small business. To win a Brink or a Punchh or a Data Central deal, you've got to win at the corporate level, which is an enterprise sale, which is, you know, months to years, depending on the size of the chain and the relationship we have. We haven't disrupted the franchise process, and we'll always have that. That is an excellent team that just is automatic and great.

On the question of results, you know, it's way too early to talk about the impact of it, but I can tell you right now, what I enjoy about it is we do have a view now of the customer. If we've got a customer that has three of our products, you know, that salesperson now has to go in and say, "Okay, hey, they don't have, you know, payments, and their payments current contract ends in six months, and these are the pain points, and this is the using." It, it arms us to cross-sell into our base much better. I look at that team's ability to effectively create leads to cross-sell into our existing base, where I think historically, we've done it, but we haven't done it in a systematic way.

Now we've mapped out every single account, where the opportunities are, not when their RFPs come up, but when the next expiry of a contract happens. Then we have so much more data now to build off of and say, "Okay, they have Brink, they have Data Central, they have MENU. Here's the opportunity for Payments, and here's how that pitch will work." So it's really a focus on cross-sell. As I said, it's completely delineated from the small business franchisee team.

George Sutton (Partner, Co-Director of Research, and Senior Research Analyst)

Great. Finally, if I could just give you three kind of exclamation point things that you said that I wanna make sure I heard correctly. I think you said 17 new customers attached in Payments, which is meaningfully more than we thought. You mentioned a 3,000 unit fast casual enterprise, which fast casual being something, I'd say that's significant relative to the normal quick service. Lastly, the labor scheduling takeaway. We haven't talked much about labor scheduling. I wondered if you could just briefly address those three items.

Savneet Singh (CEO and President)

The first two is yes and yes. You know, as I said, Payments is really doing great. You know, we have a, you know, every year, you know, a decent chunk of our bookings from Brink come from our channel partners. You know, we've really found a way to push Payments aggressively there. As I mentioned, all the new Brink deals, almost all the new Brink deals have our Payments. It's just, you know, they're attaching really well, which I think, to the prior question, has kind of helped us, you know, feel more confident in kind of, you know, selling more from the same salesperson there.

On the Data Central side, you know, a lot of the work in addition to strong leadership has also been around the product and effectively realizing that Data Central is more than inventory and COGS, but also a beautiful labor and scheduling module. We did a lot of work earlier in the year to highlight that. Now that we've got a marketing effort, as I mentioned, I expect the growth in this business to be meaningfully more than it was in 2022. Part of that is signing these new logos, but it's also monetizing these modules within Data Central, which we used to candidly give for free or just bundle, and customers never realized it was even there.

It's kind of monetizing and pulling apart those products and realizing that our products are best in class. It's a much more strategic way of going to market.

George Sutton (Partner, Co-Director of Research, and Senior Research Analyst)

Super. Thank you.

Operator (participant)

Thank you. One moment for our next question. We have a question from Anja Soderstrom from Sidoti. Your line is open.

Anja Soderstrom (Senior Financial Analyst)

Hi. Thank you for taking my questions. Actually, all of them have been addressed. I'm just curious about the data. Do you own that data, and can you use that, sort of outside of your current customer base?

Savneet Singh (CEO and President)

It's a complicated question, the short answer is it depends on the customer. We are able to monetize that data in anonymized ways. Now we don't have an intention to do that. I think a lot of our excitement around the data is actually suggesting that we can build products for our customers leveraging that data. I think that's what's exciting to us. As I mentioned in the transcript, too, it's also a way to change the conversation because, you know, if we have a customer that has our products and payments, we know every single transaction. We can even pull up every single customer, and those insights are hard to get. That's pretty exciting for us.

Anja Soderstrom (Senior Financial Analyst)

Okay. Thank you. That's all for me.

Operator (participant)

There are no other questions in the queue. I'd like to turn the call back to Savneet Singh for closing remarks.

Savneet Singh (CEO and President)

Thanks everyone joining the call. We look forward to updating you on progress on our next call.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.