PAR Technology Corporation (NYSE:PAR) Q4 2023 Earnings Call Transcript
PAR Technology Corporation (NYSE:PAR) Q4 2023 Earnings Call Transcript February 27, 2024
PAR Technology Corporation misses on earnings expectations. Reported EPS is $-0.33 EPS, expectations were $-0.27. PAR Technology Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to Par Technology Fiscal Year 2023 Fourth Quarter Financial Results Conference Call. [Operator Instructions] 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 Investor Relations and Business Development. Please go ahead. [technical difficulty]
Chris Byrnes: Thank you, for your patience. I do apologize for the difficulties this morning. I'll just start right from the beginning. We are welcoming everyone to the call this morning, fiscal 2023 fourth quarter and year-end financial results call. This morning, we did release 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 Q4 financial 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. I'd also like 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, 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: Thanks, Chris, and thank you all for joining us on today's call. 2023 was a foundational year setting us up for a value creation flywheel; we think takes flight in '24 and hopefully years to come. The acceptance of our products by the industry's largest customers and the building blocks of an M&A muscle we intend to use regularly are now in place. I'll touch on these ideas later and begin with our results. For the fourth quarter, subscription ARR grew by 23% when compared to Q4 2022. Our growth came across our products and was delivered without relying on the exciting customer wins we touched on last quarter as that revenue will begin later this year. Operator Solutions ARR grew by 45% to $60.2 million in Q4 when compared to the same period last year.
Operator Solutions ARPU increased by 15% from the same period last year due to higher value deals, API monetization, price increases and power payment services go live. We expect this trajectory to continue. Churn was 4.8% for the year in 2023 for Brink. Operator Solutions growth is being driven by increased win rates at Brink, and we believe accelerated market acceptance of cloud solutions and a pivoted way from legacy providers. This come down in Q4 as we announced the signing of Burger King, by far our largest Brink and now MENU customer, with our products to be rolled out across our 7,000-plus stores in North America. This deal validates our Tier one enterprise reach and sets us up nicely to win traditional Tier one projects with similar scope.
From where we sit today, the deal pipeline for Brink is the largest and highest quality we have seen since beginning the PAR turnaround in 2018. While pipeline is just pipeline, we see a real commitment from brands across the country to accelerate their move to the cloud. And we think at the enterprise, PAR is not only the best choice, but the simplest. Our ability to integrate deeply into their existing ecosystems and also provide solutions to vendor consolidation, data integrity and enterprise scale positions us nicely for continued market share growth. We continue to see Brink as the major cross-sell driver for PAR. The POS relationship will open up avenues for all of our other products. Burger King will be a strong revenue driver for PAR over the next two years and when fully implemented -- and will deliver upwards of $23 million of annualized subscription revenue.
What's even more exciting is this number barely scratched the surface of the additional modules we hope to sell into Burger King over time. The rollout begins in earnest in Q2 this year, and we would expect on our next call to have details on the pace of this rollout as we work closely to align with Burger King on their timing. We feel confident in executing against Burger King's time lines and once we have visibility from the customer, we report back to the market. While payments is nested with an Operator Solutions business, this product line has some strong highlights in the quarter. In Q4, we saw ARR from PAR payment services more than double from that in Q4 2022 and expect this growth trajectory to continue. Q4 was seasonally strong. We saw us achieve our highest gross processing volume annual run rate of $2.1 billion.
This growth is being driven by the continued adoption of PAR Pay from brands such as Pita Pit, Zippy's and Ono Hawaiian Barbeque to name a few. Brands are increasingly benefiting from operational efficiencies, cost savings and increased customer engagement by leveraging PAR Pay across the operator and engagement suite of products. In Q4, our Apple Wallet loyalty solution won silver in the category of Most Innovative Enterprise Product of the Year from Best in Biz Awards, a distinction that gives us confidence in the aggressive growth plans we have. This coupled with payment innovations such as pay-at-the-table and SMS text link ensures that PAR is executing against the mantra of best-in-class plus better together. Looking forward, as we natively embed Par Pay to drive, differentiate and unique experiences, it's leading to the strongest pipeline we've ever had.
Crucially, we received payments uptake on Brink, Punchh and MENU Deals, offering us multiple avenues to grow deal value. We anticipate continued positive momentum in customer adoption. Moving to Guest Engagement ARR. Guest Engagement ARR grew 8.2% in the quarter when compared to Q4 '22 and total approximately $54 million. In the quarter, Punchh continued with strong execution in business revitalization evidenced by the wins we recently announced that Bob Evans, Insomnia Cookies and most recently, BRINK POS. These wins don't hit revenue until later in '24, but show how Punchh has turned around from the beginning of '23. In total, we signed 12 new logos in Q4 and over 40 fiscal year '23 continuing to further our position of best-in-class and market dominance and loyalty and offers.
Additionally, major platform investments are beginning to show improvements as the speed, uptime and general scalability are at all-time highs to match the growth of our customers and focus on the enterprise. It was also the lowest churn quarter all year with less than 0.5% gross trend. We've invested in our platform to better support our customers' business requirements and are proactively adding additional features to increase our addressable market and ability to raise price in renewal cycles. These investments will also help us potentially digest future acquisitions as we intend to run tightly on one platform. Moreover, as flagged above, Punchh has begun to establish elf as a verified cross-sell driver of payments, which we expect to accelerate in '24.
The other important piece of Guest Engagement is our online ordering engine menu. As we have discussed, domestic menu revenue will begin in Q1 and will continue to grow throughout '24. two weeks ago, we celebrate launch of the full -- of the first full MENU solution at Beef O Brady's a chain of nearly 200 stores. What makes this win even more exciting is that Beef O Brady's is a win back for Punchh as this customer turned from Punchh years ago, again, highlighting the power of unified ordering loyalty. This quarter, we'll announce the rollout plan, this quarter, excuse me, we have an aggressive rollout plan with several customers, including 800 store chain. Further, the new customer pipeline for '24 will drive additional logo signings. We spent the majority of '23 investing in converting MENU into a product that we can scale in the United States and are seeing this work validated.
MENU highlights are attempts to build a platform out of our products. PAR Pay is built into almost every menu deal, and I believe almost every single menu customer signing is a Punchh or Brink customer. The vision of attaching menu and selling it into existing PAR logos is still in the early phases but starting to become a reality as the majority of customers today are a customer of another PAR product. This creates a road map for future acquisitions. Back office in Data Central, again delivered a solid quarter. Reported ARR of $13 million in Q3 was a 19% increase from last year's Q4. We have now more than 7,700 stores active and in the quarter signed two additional new concepts along with a large franchisee of Burger King. ARPU increased more than 8% from last year's Q4, and we're seeing an accelerated pipeline as we close our attached Data Central with Brink sales.
The plan for '24 is to work too aggressively to bundle data center and payments within Brink and create a closer go-to-market motion. For instance, there are obvious advantages that the plant in Brink reporting with a more powerful Data Central reporting. This serves as both the gateway to the wider Data Central product as well as an immediate revenue stream. We'll be moving Data Central revenues within Operator Solutions in the coming quarters to simplify our reporting as well. We think the connection between Data Central and Brink will accelerate the Data Central pipeline and win rates while allowing us to rationalize sales-specific resources. Touch on expenses. I feel confident in our expense control as we continue not to grow our R&D expense outside of additions for Burger King, which we believe is very high ROI spend.
I think for '24, we were able to grow OpEx single digits, continue to show operating leverage while maintaining revenue and margin growth. As [ I had ] messaged, we'll have a couple of quarters of growth to prepare for our big rollout. But overall, the rest of the business is still running for the fixed resources and delivering on long-term growth. Our headwind in cost is almost exclusively within our menu business unit, which drove the majority of our loss in fiscal year '23, hiding that Brink, Punchh and Data Central grew their revenue with almost no net new headcount. In '24, we will not have this headwind as MENU revenue finally hits, and we have worked to aggressively reduce headcount this quarter. My confidence in our commitment to moving to the real 40 is that we have absorbed the cost of MENU and Burger King in advance of the revenue impact.
That will reverse in 2024. This gives me great confidence that there is more discrete from our expense base without risking our growth, making the setup for '24 exciting. Bryan will now read the numbers, and I'll come back at the end of the concluding messages. Bryan?
Bryan Menar: Thank you, Savneet, and good morning, everyone. Total revenues were $107.7 million for the three months ended December 31, 2023, an increase of 10.3% compared to the three months ended December 31, 2022 with growth coming from subscription service and contract revenue, partially offset by hardware and professional service revenue. Net loss for the fourth quarter of 2023 was $18.6 million or $0.67 loss per share compared to a net loss of $13.5 million or $0.50 loss per share reported for the same period in 2022. Adjusted net loss for the fourth quarter of 2023 was $9.3 million or $0.33 loss per share compared to an adjusted net loss of $7 million or $0.26 loss per share for the same period in 2022. Adjusted EBITDA for the fourth quarter of 2023 was a loss of $4.5 million compared to an adjusted EBITDA loss of $2.8 million for the same period in 2022, driven by reduction in professional service margin and increased R&D investments in advance of our large customer ramp, partially offset by increased margin contribution from subscription services.
Now for more details on revenue. Hardware revenue in the quarter was $24.4 million, a decrease of $5.2 million or 17.5% from the $29.6 million reported in the prior year. Q4 2022 was a historically strong quarter, however, quarter for us to lap. We continue to be optimistic of our hardware business as we launch new products to address demands from legacy hardware customers as well as attach hardware sales within our expanding software customer base. Subscription Services revenue was reported at $32.9 million, an increase of $5 million or 18% from the $27.9 million reported in the prior year. The increase was primarily driven by increased subscription services revenue from our Operator Solutions business of $3.9 million, driven by a 19% increase in active sites and a 15% increase in average revenue per site.
Residual increase was driven by increased subscription services revenue of $0.6 million from our Guest Engagement business. The annual recurring revenue exiting the quarter was $137 million, an increase of 23% from last year's Q4 with Operator Solutions up 45%, Guest Engagement up 8% and back office up 19%. Professional services revenue was reported at $12.6 million, a decrease of $0.9 million or 6.5% from the $13.5 million reported in the prior year. $7.5 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 $37.8 million, an increase of $11.1 million or 41.7% from the $26.7 million reported in the fourth quarter of 2022.
The increase in contract revenue was driven by $11.8 million increase in government's ISR Solutions product line. The increase was substantially driven by continued growth of Counter-s UAS tasks orders. Contract backlog associated with our government business continues to be strong and appropriately funded. As of December 2023, backlog was $326 million, a decrease of 2% compared to $333.9 million as of December 2022. Total funded backlog as of December 2023 was $73.2 million. Now turning to margins. Hardware margin for the quarter was 29% versus 23.8% in Q4 2022. The improvement in margin year-over-year was substantially driven by improved inventory management and price increases. Our focus of demonstrating value for our price with improved operational efficiency has allowed us to improve hardware margins in the second half of the year and finish 2023 with full year hardware margins of 22%.
Subscription Services margin for the quarter was 48.1% compared to 53.1% reported in the fourth quarter of 2022. The decrease in margin is driven by absorbing the initial investment into the Burger King rollout while also absorbing the initial growth of MENU and PAR payment services, which are both early-stage products. Excluding the amortization of intangible assets, total adjusted subscription services margin for the three months ended December 31 was 65% compared to 72% in the fourth quarter of 2022. Professional services margin for the quarter was 10.4% compared to 23.3% recorded in the fourth quarter of 2022. The decrease in margin was driven by decreases in margins from implementation services and hardware service repair. We expect professional services margins to transition back to the mid-teens for 2024.
Government contract margins were 5.8% as compared to 4.3% for the Q4 2022. The team continues to manage direct labor to properly support task orders and improve margins. In regards to operating expenses, GAAP sales and marketing was $9.3 million, an increase of $0.3 million from the $9.2 million reported for Q4 2022. GAAP G&A was $18.6 million, an increase of $1.9 million from the $16.7 million reported in Q4 of 2022. The increase was driven by an increase in M&A due diligence as well as higher stock-based compensation. Net R&D was $14.5 million, a decrease of $0.4 million from the $14.9 million recorded in Q4 2022. Non-GAAP R&D increased $1.3 million or 9%, driven by investments in our larger customer rollout. Total non-GAAP operating expense was $37.5 million, an increase of $2.4 million or 7% versus Q4 2022, primarily driven by R&D expenses as we continue to invest responsibly in our large enterprise customer rollout that Savneet discussed earlier.
Net interest expense was $1.8 million compared to $1.8 million recorded in Q4 2022. Now to provide information on the company's cash flow and balance sheet position. For the year ended December 31st, cash used in operating activities was $17.1 million versus $43.1 million for the prior year. The reduction in cash burn compared to the prior year was due to management of net working capital, primarily resulting from improved inventory management. Cash used in investing activities was $7.8 million for the year ended December 31st versus $66.7 million for the prior year. Investing activities during the year ended December 31, 2023 included $1.9 million of cash consideration for a payments tuck-in acquisition for the rights to merchant payment commissions from one of our restaurant tech partners.
Capital expenditures of $5.8 million for internal use software and $5.3 million for developed technology costs associated with our restaurant retail software platforms, partially offset by $5 million of proceeds from net sales of short-term held-to-maturity securities. Cash used in financing activities was $1.6 million for the year ended December 31st compared to $2.6 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 57 days as of December 31, 2023. We expect DSO levels to remain near 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 51 days as of December 31, 2023.
I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.
Savneet Singh: Thanks, Bryan. Let me wrap with a few key messages. What's clear to me is that as we bring our products closer together, our ability to cross-sell is increasing. The tight integration with menu, as an example, has led to 70% of MENU Deals including PAR Pay, while even more interesting, every MENU Deal has come from the existing Punchh or Brink customer. Historically, words like consolidation and bundling have had negative compensations, and I think for the right reasons. Prior attempts to consolidate were not done around industry-leading products. It requires customers to trade off functionality for simplicity. This is explicitly what we are not doing at PAR. Our products must stand on their own, be best-in-class integrated and when unified deliver surprise and delight.
As the years move on, I think we'll see a standardization around the platform that will then allow development to come on top of that system of record, hopefully increasing innovation and true technical outcomes. As mentioned in the opening, we think the shareholder value creation flywheel is a notion. I believe the flywheel starts with the land and expand with the car platform within our current category, followed by the cross-sell of additional products and then followed by the addition of accretive M&A to bolster our platform capabilities and expand our TAM. Each new product and acquisition allows us to drive higher returns on capital because we can leverage our existing go-to-market infrastructure. The acquisition of Punchh and MENU were table setting.
Now we're ready to get the machine in notion. As we scale, it allows us to invest in more integration and thereby continue to have best-in-class products starting the flywheel all over again. 2023 is where we saw a real evidence of the first step in this flywheel, landing our platform in the enterprise. The signing of Burger King as a Brink customer, followed by our second step of leveraging a seamless integration with MENU was a good example of the flywheel in motion. The next part of the flywheel is accretive in cash flow and M&A. Through the back half of 2023, we ramped up our corporate development efforts and believe we will be able to deliver accretive and cash-generating M&A in short order. As the market continued to move towards a platform like towards platform-like solutions, individual point solutions must partner out to platforms like PAR.
Today, the market realized that the value is in the platform, not the stand-alone solution, creating a strong dispersion acquisition multiples. Some of these targets, we feel are great fits for PAR and hence, our ramp-up efforts here. What I like most about these deals is that they are all cash flowing businesses with tremendous real synergy to PAR, either addressing product holes or allowing us to leverage our existing cost base. Our ramp-up in M&A infrastructure should lead to results in the near future, thereby accelerating our flywheel. And then finally, I should comment that working PAR has never felt more like day 1. Today, from what I see in front of me, the restaurant market is adopting our products at a faster rate than ever. I think we cannot only execute on an aggressive organic growth plan, but also put into motion the acquisition machine we want stream about.
Our team has built an equally important structure to execute to ensure we don't drop the ball on our plan while allowing us to balance the short term with the long term. The excitement internally is palpable, and we think our success will only be limited by our ambition. What I like about our setup today is that I think we continue growing at our current rates with our existing core business, improve our margins as our emerging low-margin product scale and continues to run the business on a closely managed OpEx base. As I mentioned earlier, our core products of Brink, Punchh, Payments and Data Central have run a near flat headcount in '23 and the headwinds on MENU and Burger King investments should reverse in '24. Said differently, our revenue should continue to grow while our product unit economics get better with scale and our G&A cost stay tight as revenue absorbs the cost we've taken the hit on in '23.
Any additional M&A would then drive meaningful cash flow to the bottom line, which is why this foundation is so important. Outside of our incremental hiring for Burger King, there are almost no new hires needed to hit our growth plans, and we feel confident that the efficiency of this order design will only get better as we continue to consolidate our teams. Today, we are still a relatively small business with less than $150 million of ARR, but we believe we have the foundation to do much more and the team is excited to execute on it. With that, I'll open the call for Q&A. Operator?
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