Q4 2023 PAR Technology Corp Earnings Call
Participants
Chris Byrnes; SVP of IR and Business Development; PAR Technology Corp
Savneet Singh; CEO and President; PAR Technology Corp
Bryan Menar; CFO; PAR Technology Corp
Mayank Tandon; Analyst; Needham & Company LLC
Stephen Sheldon; Analyst; William Blair & Company LLC
Eric Martinuzzi; Analyst; Lake Street Capital Markets, LLC
Samad Samana; Analyst; Jefferies LLC
George Sutton; Analyst; Craig-Hallum Capital Group LLC
Anja Soderstrom; Analyst; Sidoti & Company LLC
Andrew Harte; Analyst; BTIG LLC
Presentation
Operator
Good day, and thank you for standing by, and welcome to PAR Technology Fiscal Year 2023 Fourth Quarter Financial Results Conference Call. Time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session question. During the session you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised to withdraw your question, press star one one. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Byrne, Senior Vice President of Investor Relations and Business Development. Please go ahead.
Chris Byrnes
Thank you, G.G., and good morning, everyone. Thank you for joining us for PAR Technology's 2023 Fourth Quarter and Year-End Financial Results Call. This morning, 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 Q4 financials presentation as well as in our related Form eight 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. A description and timing of these items, along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.
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 and 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.
So finally, I'd like to remind everyone that this call is being recorded and will be made available for replay via a link available on the Investor Relations section of our of our website.
Joining me on the call today is PAR's CEO and President, Savneet Singh, and Bryan are PAR's Chief Financial Officer. I'd now like to turn the call over to Stephanie for the formal remarks portion of the call, which will be followed by general Q&A.
Certainly.
Savneet Singh
Thanks, Chris, and thank you all for joining us on today's call. 2023 was a foundational year settings and setting us up for a value creation flywheel. We think take Slide 20 for a 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 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 RPU increased by 15% from the same period last year due to higher value deals, API monetization, price increases and PAR payment services go live. We expect this trajectory to continue churn was 4.8% for the year in 2023. For brick operations growth is being driven by increased win rates at Brink and we believe accelerated market acceptance of cloud solutions and a pivot away 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 power turnaround in 2018. While pipeline is pipeline, we see a real commitment from brands across the country to accelerate their move to the cloud. So we think at the enterprise part, not only the best choice, but the simplest, our ability to integrate deeply into their existing ecosystems and also provide solutions of vendor consolidation, data integrity and enterprise scale positions us nicely for continued market share growth, we continued to see Brink as a major cross-sell driver for PARPUS. relationship will open up avenues for all of our other product. Burger King will be a strong revenue driver for part of the next two years and when fully implemented will fully implement and will deliver upwards of $23 million of annualized subscription revenue. What's even more exciting is December barely scratching 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 Infergen timelines and once we have visibility from the customer report back to the market, while payments has never been an operator solutions business, this product line has been 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 in 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 and parfait from brands such as Peter bit Zippy and Ono swine barbecue to name a few brands are increasingly benefiting from operational efficiencies, cost savings and increased customer engagement by leveraging parfait across the operator engagement suite of products in Q4 for Apple, Walt loyalty solution, one silver in the category of most innovative Enterprise Product of the Year from Best in Biz awards and distinctions 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 ensured that part is executing against the mantra mantra of best in class plus better together.
Looking forward, as we natively embed parfait to drive differentiated and unique experiences, it's leading to the strongest pipeline we've ever had. Crucially we are seeing payments uptake on Brink punch in menu deals, offering us multiple avenues to grow the value. We anticipate continued positive momentum in customer adoption.
Moving to guest engagement, a our guest engagement ARR grew 8.2% in the quarter when compared to Q4 '22 in total, approximately $54 million in the quarter. Punch continue the strong execution and business revitalization, evidenced by the wins we recently announced that Bob Evans insomnia equities and most recently think very these wins don't get revenue until later in '24, but show our punches turnarounds in the beginning of '23. In total, we signed 12 new logos in Q4 and over 40 to 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 in general, scalability are at all-time highs. Domestic growth of our customers and focus on the enterprise has also lowest churn quarter all year with less than 0.5% gross churn. We are investing 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 and renewal cycles. These investments will also help us potentially digest future acquisitions as we tend to run tightly on one platform. Moreover, as flagged above, punches begin to establish itself as a verified cross-sell driver payments, which we expect to accelerate in '24. Get an 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 saw the launch of the full the first full menu solution it before Brady's a chain of nearly 200 stores. What makes us win even more exciting is our default rate is a win-back for punch at this customer. Churn from Fund two years ago, again highlighting the power of unified ordering loyalty. This quarter, we'll announce the rollout plan this quarter, achieving 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 were validated menu highlights. Our attempt to build a platform of our products for base building almost every menu deal. And I believe almost every single new customer signing a punch or bring customer division of attaching menu and selling it into existing. Probably those is still in the early phases, but certainly become reality has the majority of customers today are a customer of another product. This creates a roadmap for future acquisitions.
Back office and data central again delivered a solid quarter. Reported a growth of $13 million in Q3. three was a 19% increase in last year's Q4. We have now more than 7,700 stores active in the quarter, signed two additional new concepts, along with a large franchisee of Burger King RPU increased more than 8% from last year's Q4, and we're seeing an accelerated pipeline as we close or a test data. Central of Brink sales plan for '24 is to work aggressively to bundle data, central payments within Brink and create closer go-to-market motion. For instance, there are obvious advantages to supplanting group reporting with the more powerful data central reporting. This serves as both the gateway to the wider data center product as well as an immediate revenue stream will be moving data center revenues within operator stations in coming quarters to simplify our reporting as well, we think the connection between data central Brink will accelerate data center pipeline and win rates while allowing us to rationalize sales specific resources to touch on expenses, I feel confident in our expense controls 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 are able to grow OpEx single digits. Can you continue to show operating leverage while maintaining revenue and margin growth? And that message will have a couple of quarters of growth to prepare for a big rollout. But overall, the rest of the business is still running for the fixed resources and delivering on long-term growth. Our headcount and cost is almost exclusively within our menu business unit, which drove the majority of our loss in fiscal year '23, hiding that break punch in data central grew their revenue almost no net new headcount and '24 will not have this headwind as many revenue finally hits, and we have worked to aggressively reduce headcount to support my confidence in our commitment to moving to the Rule of 40 is that we have absorbed the cost of menu and Burger King in advance of the revenue impact that will reverse in 2024. Just gives me great confidence that there's more to squeeze from our expense base without risking our growth, making the setup for '24 exciting. Brian will now be the numbers, and I'll come back at the end with some concluding messages. Brian?
Bryan Menar
Thank you, Stephanie, and good morning, everyone. Total revenues was $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 $0.5 loss per share reported for the same period in 2022. Adjusted net loss for the fourth quarter of 2023 was $9.3 million, our $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 and 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 an historically strong quarter hardware 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 attached hardware sales with 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 increases in 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 interest 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 of 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 ISR. solutions product line increase was essentially driven by continued growth of countering UAS. task 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 to total funded backlog as of December 2023 was $73.2 million.
Now turning to margins, our margin for the quarter was 29% versus 23.8% in Q4 2022. The improvement in margin year over year was essentially 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 our margins in the second half of the year and finished 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 very key 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 with 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 10s for 2024. Government contract margins were 5.8% as compared to 44.3% for the Q4 2022. The team continues to manage direct labor to properly support task orders and improved 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 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 disclosed 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 31, 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 31 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 billion for the year ended December 31 compared to $2.6 million for the prior year. Financing activities for 2023 was driven by stock-based compensation related transactions. Days sales outstanding for the restaurant and retail segment increased from 53 days as of December 31, 2022, 57 days as of December 31, 2023. We expect DSO levels to remain near historical levels of the lower 50 day range.
Days 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 David for closing remarks prior to moving to Q&A.
Savneet Singh
Thanks, Brian. Let me wrap with a few key messages was 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 Powerpay fall. Even more interesting. Every menu deals come from the existing punch or bring customer historically words like consolidation and bundling have had negative connotations. And I think for the right reasons, prior attempts to consolidate were not done around industry leading products to requires customers to trade off functionality for simplicity, this is explicitly we are not doing apart. Our products stand on their own, be best in class, integrated and unified to one unified, deliver surprise and delight. It isn't one 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 in inflation into technical outcomes.
As mentioned in the opening. We think the shareholder value creation flywheel is in motion. I believe the flywheel starts with the land and expand with the core 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. The acquisition allows us to drive higher returns on capital because we leverage our existing go-to-market infrastructure, the addition of Punchh menu or table setting. Now we're ready to get the machine in motion as we scale allows us to invest more integration and thereby continue to have best-in-class products starting the flywheel over again, 2023 is where we saw real evidence of the first step in this flywheels landing our platform, the enterprise, signing a Burger King as a bring customer, followed by a 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 and cash flowing 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 flowing cash-generating M&A in short order as the market continued to move move toward the platform like towards platform like solutions individual point solutions must partner up with platforms like Park today, the market realize the value is in the platform, not the standalone solution, creating a strong dispersion acquisition multiples. Some of these targets, we feel are great fits for Par and hence, our ramped-up effort here, what I like most about these deals that they are all cash flow business, cash-flowing businesses with tremendous real synergies apart either addressing protocols or allowing us to leverage our existing cost base for a 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 apart has ever felt more like day one 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 can not only execute on an aggressive organic growth plan, but also put into motion the acquisition machine. We once dreamed it up, 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 excitement internally is palpable, and we think our success will only be limited by our ambition. We like about our setup today because I think we continue growing at our current rates with our existing core business, improve our margins as our emerging low margin products scale and continue to run the business on a closely managed OpEx base.
As I mentioned, earlier, our core products of brake punch payments and data central have run a near flat head count in '23 and the headwinds on menu and Berkeley investments to 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 working there. Almost no new hires needed to hit our growth plans. We feel confident that the efficiency of its or design will only get better as we continue to consolidate our teams today, we are still relatively small business with less than [$150 million] of ARR. So but we believe we have the foundation to much more and the team is excited to execute on.
And with that, I'll open the call for Q&A. Operator?
Question and Answer Session
Operator
Thank you. As a reminder, to ask a question, press star one one on your telephone and wait for your name to be announced to withdraw your question, press star one one.
Yes.
Our first question comes from the line of Mayank Tandon from me.
Mayank Tandon
Thank you.
Good morning, Salveen, great to see all these new logo wins outside of B-K as well in the last several months.
I wanted to start with I know you're not giving formal guidance, but just based on your comments, I wanted to get a sense of your expectations for ARR growth. Can you sustain the current levels in '24 or should we expect some acceleration given you've had these new wins, most notably, as you mentioned, Bob Evans orders, et cetera. So just want to get a sense of your expectations for 2024.
Savneet Singh
Yes. I think we feel confident we'll maintain and potentially grow a lot of it, depending on as we get the BURGER KING rollout going the sequencing of that rollout, we don't have that today but even without that and assuming conservative numbers there, I think we feel really good about the growth, maintaining and growing. And I think we'll do a great job on that rollout.
And so I think there's opportunity for it to get even better. But once we get that data, we'll report back to the market because obviously it will be very, very influential for us, but I think we feel very good about it. And I think we've got more wins to come that was announced. And so we've had a lot of these announced wins, but none of the revenue for that yet. And so I think what's exciting is the growth we've had in '23, you've seen company logos. We've announced the last three six months.
Mayank Tandon
Let me just ask you this way. I think in the past you've said you can grow ARR between 20% and 30%. Is that still the target model for the Company.
And on that note, SaaS subscription revenue follow the ARR growth trajectory. Is that a pretty good correlation the way to think about it?
Savneet Singh
Yes, I think that's a good way. And then as I said, once we get the timing of working, I can come back and say, do we think it will be 30 or 25? I think we just need the details of that, which we don't yet have.
Mayank Tandon
Got it.
And then just a quick follow-up in terms of the leverage in the model, a great commentary around that so just based on what you said, is it reasonable to then think that you could potentially reach EBITDA profitability at some point in 2024 or given some of your comments is going to be maybe in 2025, given the timing of some of these sort of leverage points in your model.
Savneet Singh
It will all be dependent on converting because we've ramped up cost meaningfully to support that launch and both the menu and then and then on brake and can we get the rest of the year. I think so unless Burger King decides to not roll out small, do all the rollout in '25, which is extremely unlikely. And so we feel really excited. And then I think, you know, the the exciting product I tried to mention on the call, which is we've absorbed so much cost from your menu is the vast majority of our loss in '23. That revenue itself is coming live today. We just slots to live another large customer. And so I think there's a lot of optimism on the bottom line because we've been taking the hits on costs to get the rollout build out for both of these shales and both these products, which will reverse in '24.
But Jonathan, I'm going to give guidance. I think in the next quarter once I have details and working and kind of gotten to exactly where I think we'll be, but that is such that that changed the model tremendously.
Mayank Tandon
Got it, very helpful. Thank you so much.
Operator
Thank you.
One moment for question.
Our next question comes from the line of Stephen Sheldon from William Blair.
Stephen Sheldon
Hey, good morning. Lots to dig into here as a hallways, but just on Burger King, if we think about that, what are some of the key milestones we externally should be thinking about for that implementation? Sounds like there's still quite a few moving pieces in there. What are the biggest risks to that process in your view that you're concerned about? And I guess asking that another way what do you absolutely need to get right as we think about the implementation.
Savneet Singh
So there is everything on track as a growing at better than expected on the far side. So we feel great about it and there's no concern on it.
To me.
It's still within your tracking is stores like a life and it's pretty simple. And so we haven't started the rollout, which is so a lot of it. We'll see when we go live, but we feel really good. We're in a couple of hundred stores now as sort of test they're going great. And so to me, it's just the stores going live and that, like I said, I think and we feel really good. It's a two year rollout. So it's going to be very, very quickly. It's just going to be about how much is in '24 of assumptions and '25, John, and we don't have those details yet, but just like any other large organization. I think that they understand that we don't want to do everything back in because I put a lot of stress on everybody, but not until we have that I think we're going to sort of be conservative till investments. The metric in fact, is just how many stores go live because that's the only metric that matters.
Stephen Sheldon
Got it.
And I guess we'll wait for operator solutions, and they had a really good bookings quarter there. I think 34,000 net new site bookings there is Burger King in that at all, I guess or is that the majority of it did you have a lot of good booking booking activity there outside of Burger King? Just any detail on how much of the news that came out of the Permian versus other system.
Savneet Singh
And King is almost none of us like maybe 100 or 150. I mean, it's all other logos.
Stephen Sheldon
Okay, great.
And then I guess sticking with operator solutions, just one more on the step up in ARR per active site, seems like that was up 7% to 8% sequentially. Just curious, I guess, more detail on the moving pieces there. I guess the payments adoption is a big part of that, but any notable benefit from pricing uplift or just anything else you'd call out.
Savneet Singh
It's a 50-50 payments and price uplift and you're going to that's going to continue. This is an exciting part of the model. The size of the deals we're in are much larger than before and also higher RPU. And so that's going to continue. So we feel really good about the pricing of prepreg is the premium product is getting rewarded for the premium product and deals and that will continue. But I'd say right now, it's about 50-50, call it modules modules being primarily payments, but also safety amortization and the other happy two price increase.
Stephen Sheldon
Okay. Thank you.
Operator
Thank you. One moment for question. Our next question comes from the line of Eric mark Newsy from Lake Street.
Eric Martinuzzi
But on markets, wanted to dive in a little bit more on the transaction due diligence that $2.3 million number caught my eye for your M&A work and just curious to know, obviously, you're talking about some point solutions that you can tuck into your platform. But are these have pointed in any particular direction as far as Engage versus operator solutions versus back office.
Savneet Singh
And so obviously, we've been yes, from numbers, it's clear. We're deep in the M&A process, and that's why we disclose it because it's a meaningful amount as far as where that M&A is happening, I'd say yes, within that guest engagement and operations, where we have most deals, I guest engagements where we're seeing and at the most activity right now, but M&A is opportunistic at times. And so we'll see where stuff picks up, but that the deal flow is high. But what I think is exciting today is the strategic fit, both from a price perspective and a product perspective is great, which is why we ramped up cost so much, which is pushing hard to get these done and you did say that those were cash positive targets are of kind of post acquisition. There would be no leader, all very profitable on. I think every company look at is at Rule of 40 independent. And so far, it will be better on it. Then it's not really for either a question for you. We can take you through a 40. So we're really focused on that. And I don't suspect you'll ever see us buy something that's money-losing. We made these investments menu, which has obviously been a headwind to the cost, but once we have the platform, which we have the platform. Now, everything on top of it is it needs to be cash earnings and create a flywheel that I mentioned.
Eric Martinuzzi
Got it. Thanks for taking my questions.
Operator
Thank you.
One moment for question.
Our next question comes from the line of George Sutton from Craig.
Hey, good morning. This is Adam on for George. 70 on the last earnings call, you mentioned that there are three additional large QSR brands that we're taking a pretty meaningful look at Brink. Just curious if you had an update on those specific potential customers.
Savneet Singh
And so I think on anything that we've announced a press release, but I think the number is now more than three that the pipeline has really gotten far bigger than anything we've seen the past. I think we've got and we see three logos that are sort of what we call near-term wins within our funnel. And then you know another four that are sort of medium term so that the funnel is large and it's real. And one thing in particular, this is on the POS side, POS funnels, RFPs are really robust processes for the customer. We work with generally the hiring consultants. They spend $100,000 on consultants on surveys. And so when it gets the near term, decisions do come because they've already spent a ton of money to get to the point of making that decision. So it is usually a great sign as it least the business provided we win that business.
Great.
And then with respect to menu, can you just give an update on where that product is in terms of development of features as well as the integration path? Are you 90% done, 80% done and anything else you can drop would be great.
Savneet Singh
We're there. So we're not making investments. In fact, we've cut costs meaningfully just in the last month there as we hit the product parity we wanted to get to in United States. And so we took the cost bases down there pretty meaningfully just like I said two weeks ago because we kind of hit the goals we need to. As I mentioned, we had our first U.S. go live with people Brady's two weeks ago, you can download the app checkout, the website, and I think you'll see how innovative and beautiful product it is. We had our second customer go live today. I'll talk about that later because it's not public, but it really impressive on 700 store chain. It was coming. And I know it's been people because we know what killed me is the core business is running so much more efficiently. We haven't added headcount in a long time as many were. We have some major Lawson and I guess that that's reversing in '24 as we have revenue coming on for menu on to offset that impact plus these cost cuts that I mentioned.
And then one final question for me. With respect to the Burger King rollout.
Did most of the scaling from a headcount cost perspective come during Q4 or should we see that continuing in Q1 as well.
Savneet Singh
You'll see some of it in Q one, but a lot of it was in Q4 and we're scaling up, call it now 140 people now leader shortly. The short term, this is not they're not going to stay apart forever, but think of it as inflation implementations, dev teams to finish the integration. And so it's a meaningful amount of cost, but that cost is in perpetual because once we roll out, we don't need those costs and those will come down over the next two years. And so we're taking a lot of it now. It will scale its way back down into the way I'd like to think about it is, you know, call it two scrum teams to have scrum teams for that sort of some short period of time. And then it's primarily support professional services and and that's about it. And so it's not that you had people to absorb that for a couple of quarters. Before we get any revenue from it, but and we will get it back very quickly and then those costs will rationalize themselves back down.
Operator
Thank you. One moment for Next question, Our next question comes from the line of Samad Samana from Jefferies.
Samad Samana
Hi, good morning. Thanks for taking my questions. Maybe first, why does that mean you did a great job in terms of mismatch in the cost structure where the business is that? And in today's slide deck, it looks like there is any disclosure about sales and marketing and R&D as a percentage of ARR adds. However, the gross margin that was at those percentages in time, it looks like the subscription part of the business is now actually profitable, even factoring in expenses. Am I getting the right read on that? Is that a signal you are trying to settlement that disclosure? And then I have a follow-up.
Savneet Singh
Yes.
So no disclosure is really to give you a lot more transparency on how fast or rationalizing cost basis on that side. And that's why we also do it X menu because the menu is the majority of our loss is just more of a sort of tracked how fast we're going to get there. And then as I said, as we get M&A done, you'll see that take step functions, but it's really more just provide transparency and that we're going to get there quickly.
Bryan Menar
Yes, it's not. It doesn't include that slide. Furniture does not include the G&A and that is for me looking at it from a noncash perspective.
Savneet Singh
Okay. Okay. Perfect.
Samad Samana
And then you've called out the impact of menu and payments out of gross margins. When do you expect these investments to last, do you expect something of a permanent headwind to gross margins from payments as the mix shifts or defense or the impact of this M&A? Just how should we think about that?
Savneet Singh
We're definitely in the 70s and a higher overtime. So that question. So we recognize payments on a net basis. So our payment gross margins will be near our software margins because we are super conservative in sort of doing the net income versus the growth. And so the payments will be the issue menu will take a couple of years to get where we need to. But it's not going to be from a headwind because the rest of the business is also growing nicely. And so if you remove out those products. We're kind of back to exactly where we were in the past a little higher. So it's just the growth of this business and menu has been the major headwind because you've got such a major cost without really any revenue that, like I said, we just had our first customer live in the US. We got another big one going and that's before the Burger King revenue turns live there. And so you'll see a nice movement there this year and then the out years get there. But all of our products need to get to mid 70s and higher gross margins as sort of the mandate we're going to drive towards.
George Sutton
Great.
Appreciate the question.
Operator
Thank you.
One moment for our next question cybersecurity suite relatively quickly.
Our next question comes from the line of Anja Soderstrom from Sidoti.
Anja Soderstrom
Well, so let me give you my questions.
Have, I guess curious in terms of where you said you said and as sort of cloud transition from trauma per stock accelerated, I do think and I mean, aside from from wanting to get attacked, it was security aspect.
Savneet Singh
So I think implicit in all of it, there's a central versus carriers, but it's that's not the major driver. I think the main major driver is the legacy guys are giving up share more rapidly than in the past. I think this is being driven by a bunch of factors. I think the biggest one is that if you are on an old product, even content or even an old product is on the cloud, your ability to innovate and take ambiance and innovations that are driving the the the restaurant of the future. You were really limiting your experience. And I would say the simplest way to do this is a look at the stock chart of the restaurants that have made major investments in technology to pull a cover of McDonald's and so forth. You can see the actual returns that they had and then look at the ones that haven't. And so I think it's more about the functionality you're getting from a modern product and of course, security is part of that.
Anja Soderstrom
Okay, thank you.
That was all for me.
Savneet Singh
Sorry, I can just.
Operator
Thank you. One moment for question.
Our next question comes from the line of Andrew Hart from BTIG.
Andrew Harte
Hey, good morning. When we're thinking about 2024 the kind of the different components of ARR growth. Obviously, operator solutions with Burger King should be the key driver of it, but some need in the past, you've kind of sized up relative growth of guest engagement and back office compared to operator solutions. Can you just help us on how you're thinking about the growth? It's kind of the other pieces there in 2024.
Savneet Singh
Yes, absolutely. So I think we'll have an acceleration from guest engagement and driven by punch.
And then you sort of suggested punches one, a bunch of logos in the back half of '23. Now we're announcing more and more in the next month or two here. And so we'll have an acceleration on time. And menu will have revenue growth. We have really had any growth there because of business in the U.S. And so we'll see growth there. And I don't think that business grows 30% just because of the size. But I do think we'll see a nice uplift from where we are today on the back office side, which is a small part of our business. If that grew, call it, [19.5%] this year. I think that business will also have an ability to move up this year with the bundling within Brink. And I think we'll see some interesting acquisition opportunities that come out of there, too. And then we've talked about Brink already, but there's just a lot of pipeline there. I think the key part, though, is that Brink landing allows everything else to grow faster. And so it brings plants almost every bring customer we signed in '24 added another product. And so that will drive everything, which is why we continue to consolidate the units together because as we land Brink expansion is beginning is getting easier and easier.
Andrew Harte
Thanks.
And then I appreciate the comment on kind of ramping up your M&A capabilities.
I guess on kind of the other side of that question, can you just kind of data strategically about how you're thinking about the government business here?
Savneet Singh
And I would look at the disclosures in the data.
Andrew Harte
Fair enough.
Thanks.
Operator
Thank you. At this time, I'm showing no further questions. I would like to turn the conference back over to Savneet Singh for closing remarks.
Savneet Singh
Thanks, everybody, for your time and look forward, I think next quarter and feel free to reach out with any questions.
Operator
This concludes today's conference call. Thank you for participating.
You may now disconnect.
