PAR Technology Corporation (NYSE:PAR) Q1 2023 Earnings Call Transcript

PAR Technology Corporation (NYSE:PAR) Q1 2023 Earnings Call Transcript May 10, 2023

PAR Technology Corporation misses on earnings expectations. Reported EPS is $-0.46 EPS, expectations were $-0.34.

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

Christopher Byrnes: Thank you, Eric, and good afternoon, everyone, and thank you for joining us for PAR Technologies first quarter 2023 financial results call. Following the close of trading this afternoon, we released our financial results. The earnings release is available on the Investor Relations page of our website at partech.com, where you can also find the Q1 financials presentation as well as in our related Form 8-K furnished to the SEC. During our call today, we will reference non-GAAP financial measures which we believe to be useful to investors and exclude the impact of certain items. 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 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 the call is being recorded and it will be made available for replay via a link available on the Investor Relations page of the 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 good afternoon. Par is off to a solid start in 2023, delivering strong results in our first quarter. Restaurants of all types and at all stages are using PAR as their growth enabler, leveraging our unified commerce technology to solve their most challenging business obstacles. These restaurants range from emerging growth brands all the way to established enterprises. Today, I’d like to focus my comments on our recent quarter performance, a view of what our customers are looking at for their technology initiatives. And then finally, a look forward to the rest of 2023 and beyond, touching on the macro environment we’re observing and our own internal initiatives. We continue to deploy our unified commerce platform to help restaurants of all sizes improve operations and enhance the restaurant guest experience.

Unified commerce drives our most important KPI, customer satisfaction, which leads to longer LTVs and a greater TAM over time. At the end of Q1, ARR reached $116 million, delivering a 23% year-over-year increase, demonstrating the continued growth and scaling of our subscription services engine and contracted ARR now stands at $131 million. Importantly, when adjusting for one-time items such as severance, this growth came with no increase to operating expenses from Q4 2022. Operator Solutions ARR grew 27.4% to $45.2 million in Q1 when compared to the same period last year. During Q1 Operator Solutions added more than 1100 new store activations and new bookings total approximately 1200. Churn continues to be extremely low at 4% annualized for Brink in the quarter.

With the recent wins in table service and significant strength in our new customer pipeline, Brink is positioned well to continue scaling. The table service momentum is real and the first two deals I mentioned on the Q4 call are gearing up for launches at the very end of this year and into ’24. While the ramp up to take these customers lives is long, the ARR contribution will be meaningful. In addition, we find ourselves with the largest sprint customer pipeline in our history, suggesting continued resiliency within our customer base. Payments continues to be an important part of our growth for operator solutions and unified commerce. Rolling out new payment customer sites was slower in Q1 than we expected, but we’re recouping some of that delayed business in Q2.

Progress is being made and we should see improvement through the remainder of this year. We are confident that as we cross-sell and upsell payments to all new Brink deals and existing customers, we will continue to see significant customer wins in ARR acceleration. Combine this with a set of new payment offerings including One Tap Loyalty and an improved gateway. This is a strong indication for continued momentum. Moving to Guest Engagement ARR that includes our leading customer engagement platform Punchh and newly acquired MENU. Guest Engagement ARR grew 18% in Q1 when compared to Q1 ’22 and totaled $59.4 million. As we talked about last quarter, Punchh, while being the leader in loyalty for restaurants is currently experiencing a slowdown in the marketplace as marketing development funds have been impacted, in turn, delaying rollouts and slowing down new customer opportunities as RFPs are deferred for later in the year.

We also recognized some expected churn in the quarter. This was well mapped out and we’d argue in the bucket of healthy churn for both us and the customer. Active store count on a year-over-year basis still increased by 16% and we believe business will improve as the year progresses. In the quarter, we signed some return customers, customers who for whatever reason had in previous years churn and are now re-signing with Punchh as they have realized Punchh is best-in-class. We are also having success upselling additional Punchh modules to existing customers as they build out their loyalty and customer engagement priorities. New leadership in Punchh has started to build a foundation that we can begin to leverage and take Punchh to the next level.

Now to update you on MENU, we have been impressed by the early response that MENU has received from prospective customers this year. We have signed nearly 500 locations to date in the United States and this was in advance of any real sales effort. We had previously planned to wait until the second half of this year to bring MENU to the US, but it’s clear starting earlier is the right decision. We have aggressively started tooling the business for the US domestic market and we expect revenue to start matriculating in Q3 for these deals. We feel more confident now than we did at the time of the acquisition that MENU could grow into a dominant product line. The demand isn’t the problem as the RFP environment is ripe with opportunities as restaurants realize the operational benefits MENU can bring to their off premise orders while enhancing customer satisfaction and building real customer loyalty with a deep integration into Punchh.

We are very early in MENUS introduction to the domestic US market, but the early response and reaction has been nothing but overwhelmingly positive. Our teams are focused on operationalizing the business in the US so that we can blitz the market later this year. Back office continues its turnaround, reported ARR of $11.3 million in Q1 was a 30% increase from last year’s Q1. We had activations of 355 stores in the quarter and now have more than 7000 active stores. New store bookings remain on a strong pace as we continue to penetrate large national a large national chicken QSR with new stores being signed in the quarter. In summary, PAR seeing continued market traction with the execution of unified commerce in Q1 with various net new enterprise customers purchasing multiple products across our software ecosphere and legacy customers opting to expand their footprint with PAR.

Underpinning our unified commerce platform are four discrete requirements. First, best-in-class standalone products. Our products must be able to stand on their own. Second, best-in-class integrations. Third, unique lighthouse functionality and fourth, a truly open ecosystem that empowers restaurants to make choices that are best for their business. While the term unified commerce has become increasingly commoditized by our mostly single product competitors, our multi-product offering gives PAR a strategic advantage. Innovation requires coordination, and optimal coordination requires control. Unlike competitors, we are able to sync multi-quarter roadmaps between products on all sides of an integration and thereby dictate quality and unlock operational efficiencies such as singular contracts, singular account management, better SLAs and more.

Ultimately, what we offer is seamlessness and a unified experience that is scalable. As a platform, revenue may not be linear in ’23, given the large number, given the number of large deals we are involved with and the rollout schedule is being worked with the customer. But the scale of our pipeline is expanding and notable. At our core, we are in the customer data business and PAR’s unified commerce value for users in the massive amount of real time transactional data captured via unified commerce for Brink via customer identity data through Punchh and business data, including employees, inventory and menu items through data central. As an example, PAR processed 4.7 billion transactions through Punchh in 2022. We enriched this raw data based on machine learning to dedupe, standardize and transform it to make it more actionable.

This includes tracking the activity of each guest from multiple channels of engagement and assigning them into the right segment for analytics, targeting and attribution purposes. PAR makes these analytical insights and data available to our customers in a variety of ways. Customers can perform self-service analytics right in the product itself, including campaign performance analytics, employee and business reporting and guest analytics. Customers can export this data on demand for their own self-analysis and visualization. For advanced analytics, we also provide an automated ECL of raw data into their own environments through a data pipeline. This data culture sets up nicely for the wave of artificial intelligence entering our world. Most consistently we hear that there are three distinct ways restaurants see AI is being beneficial to their business.

AI can make restaurant visits more consistent and predictable. AI can improve the speed of service and AI can improve order accuracy. It also minimizes human interaction and lets experts focus their time and skill on other tasks. AI can be a lot of things to a lot of different restaurants. For some, it may be utilizing voice, recognizing kiosk or tools for cost cutting and reducing labor costs. For others, they are seeing conversational AI tech that improves order accuracy, while even others need tools to track employee performance and sales data along with inventory forecasting. The possibility of AI adoption is endless and restaurant owners wanting to stay ahead of the game and those wanting to match the market are embracing the early benefits.

We believe PAR’s core advantage is that we are the only enterprise firm with the data across customer identity, transaction, menu and COGS. This allows PAR and our customers to create real value as we have complete internal data to match with external sources, thereby having a stronger foundation to build large models that lead to insights and automation. The real exciting part of this is that PAR’s unified commerce allows us to have these first hand conversations with our enterprise customers, near-time integration with technology partners and a very aggressive product roadmap that includes AI to enterprise restaurants rely on part to consistently deliver. Underlying all this, though, is that while our industry gets caught up in the excitement around the technology, we will never get lost.

In the end, we must deliver to a franchisee who must deliver an incredible experience to a guest. The franchisee or store owner could care less what model they use or what algorithm we built. They just want the technology to work. The grit of PAR combined with our deep understanding of the customer along with our data advantage, set us up nicely to capitalize. Bryan will now review the numbers in more detail. Bryan?

Bryan Menar: Thank you, Savneet, and good afternoon, everyone. Total revenues were $100.4 million. For the three months ended March 31st, 2023, an increase of 25.1% compared to the three months ended March 31st, 2022 with growth coming from both restaurant retail and government segments. Net loss for the first quarter of 2023 was $15.9 million or $0.58 loss per share compared to a net loss of $15.7 million or $0.58 loss per share reported for the same period in 2022. Adjusted net loss for the first quarter of 2023 was $12.7 million or $0.46 loss per share compared to an adjusted net loss of $7.1 million or $0.26 loss per share for the same period in 2022. Adjusted EBITDA for the first quarter of 2023 was a loss of $8.8 million compared to the adjusted EBITDA loss of $2.9 million for the same period in 2022.

Included in our results for the first quarter of 2023 was a charge of 2.6 million to our hardware margin related to inventory. Including this charge, adjusted net loss for the quarter was $10.1 million or $0.36 loss per share compared to $7.1 million or $0.26 loss for 2022 and adjusted EBITDA was $6.2 million compared to $2.9 million for 2022. We continue to focus on driving improved EBITDA performance with continued top line growth while managing strong cost controls. Hardware revenue in the quarter was $26.8 million, an increase of $1.7 million or 6.8% from the $25.1 million reported in the prior year. We continue to see strong hardware sales, both with our Tier 1 legacy customers and across our Brink customer base. Subscription service revenue was reported at $28 million, an increase of $6.7 million, or 31.4% from the $21.3 million reported in the prior year.

The increase came across our unified commerce. The increase in revenues was driven by both site growth and an increase in average revenue per unit as we continue to cross-sell into our existing customer base. The annual recurring revenue exiting the quarter was $116 million, an increase of 23% compared to Q1 2022, with operator solutions up 27%, guest engagement up 18% and back office up 30%. Professional service revenue was reported at $13.8 million, an increase of $1.3 million or 10.8% from the $12.5 million reported in the prior year. Our total recurring revenue base, which includes both subscription services and hardware support contracts within professional services, continues to expand, with $35.3 million recorded in Q1 2023, an increase of 23.4% compared to the $28.6 million in Q1 2022.

Contract revenue from our government business was $31.9 million, an increase of $10.4 million or 48.6% from the $21.4 million reported in the first quarter of 2022. The increase in contract revenues was driven by a $9.9 million increase in government ISR solution product line. The increase was substantially driven by continued growth of Counter-UAS task orders. Contract backlog associated with our government business as of March 31st, 2023 was $324 million, an increase of 66% compared to the $196 million backlog as of March 31st, 2022. Total funded backlog as of March 31st, 2023 was $86 million, 105% increase compared to the funded backlog of $42 million for the prior year. Now turning to margins. Hardware margin for the quarter was 16.4% versus 20.2% in Q1 2022.

The decrease in margin was driven by a charge to our inventory. Excluding the adjustment, hardware margins were over 20% and we expect hardware margins of at least 20% going forward consistent with recent trending. Subscription services margin for the quarter was 50.2% compared to 50.1% reported in the first quarter of 2022. Subscription service margin during the three months ended March 31st, 2023, included $5.7 million of amortization of identifiable intangible assets compared to $5.1 million of amortization during the three months ended March 31st, 2022. Excluding the amortization of intangible assets, total adjusted subscription service margin for the three months ended March 31st, 2023, was 71% compared to 74% for the three months ended March 31st, 2022.

Our rate of acceleration of continued margin improvement slowed this quarter as we absorbed the initial growth of PAR payment services and MENU which are both in early stage products. Professional services margin for the quarter was 17.9% compared to 26.5% reported in the first quarter of 2022. The decrease in margin was driven by a decrease in margins related to our implementation and hardware repair services. Government contract margins were 7.2% compared to 7.3% for the first quarter of 2022. In regards to operating expenses. GAAP SG&A was $27.5 million, an increase of $5.1 million for the $22.4 million reported in Q1 2022. The increase was driven by increases in internal technology, infrastructure costs and sales and marketing expense. The variance also includes $1.5 million of expense related to MENU, which was acquired in Q3 2022.

Sequentially net R&D expense of $14.3 million inches Q1 2023 was down $0.6 million from the $14.9 million reported in Q4 2022. Compared to prior year, first quarter net R&D increased $3.5 million from the $10.8 million recorded in Q1 2022. Increase is related to personnel hired in 2022 as we continued to improve and diversify our product and service offerings, including $1.9 million for MENU. Included in operating expenses for Q1 2023 was a $5.2 million reduction to the fair value of the contingent consideration liability for the MENU acquisition. This contract expense is a non-GAAP adjustment. Total operating expenses, including the contingent liability adjustment, totaled $42.3 million versus Q4 2022 operating expenses of $41.2 million. Net interest was $1.7 million compared to $2.5 million recorded in Q1 2022.

The decrease is driven by increased interest revenue from our short-term investments. During the three months ended March 31st, 2023. Now to provide information on the company’s cash flow and balance sheet position. Three months ended March 31st cash used in operating activities was $16.7 million versus $21.2 million for the prior year. Operating cash needs during Q1 2023 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 annual variable comp payout in Q1 and increased accounts receivable within the restaurant retail operating segment. Cash used in investing activities was $1.8 million for the three months ended March 31st versus $3.1 million for the prior year.

Investing activities during the three months ended March 31st 2023 included $0.5 million for purchases of short term held to maturity securities and capital expenditures of $0.8 million for the internal use software. Capitalized software for developed technology costs for the three months ended March 31st was $0.5 million. Cash used in financing activities was $2.4 million for the three months ended March 31st, compared to $1.4 million for the prior year. Finding financing activities for 2023 was driven by stock-based compensation related transactions. Days sales outstanding for the restaurants and retail segment increased from 53 days as of December 31st, 2022 to 60 days as of March 31st, 2023. We expect DSO levels to come back to historical levels closer to 50 days in Q2.

Days sales outstanding for government segment decreased from 55 days as of December 31st to 51 days as of March 31st, 2023. I’ll now turn the call back over to Savneet for closing remarks prior to moving to Q&A.

Savneet Singh: Thanks, Brian. To comment briefly on the economic environment, while we can’t predict what the future holds at a macro level, we’re forging ahead with conviction and vigilance as we look to continue to fuel durable growth over the long-term and deepen our strategic advantages. Today, while there are pockets of weakness within the restaurant industry, broadly speaking, the market is still showing signs of strength. Outside of Punchh, we continue to see robust pipeline. In particular, we see more RFP activity for Brink than we ever have before. PAR’s internal execution matched with the macro worry creates a stage for a more aggressive M&A environment. If we can continue to deliver, we should be able to leverage our currency to effectuate accretive transactions that add unique product or additional market share to our business.

As I’ve mentioned, for the past several quarters, we’ve been able to grow revenue and IRR while not increasing overhead while adjusting for one-time items such as severance and inventory adjustments. We were successful in maintaining our operating expenses quarter-over-quarter as we implement our plans on becoming a profitable company. We’re focused on executing against our long-term goals and we’re eager to take this momentum and build upon it for the rest of the year in the out years to come. As always, I’d like to thank all of PAR’s employees for their dedication and efforts over the past quarter and for never forgetting our mission to enable personalized experiences that connect people to the brands, meals and moments they love. At PAR, we have a demanding environment and we ask a lot from our team members.

We are constantly striving to increase our growth without increasing OpEx spend, all the while expecting each and every one of us to do more to deliver for our customers. I thank you and have the utmost confidence that all your hard work will be rewarded. With that, I’ll open the call for Q&A. Operator?

Q&A Session

Operator: Thank you. At this time, we’ll conduct the question-and-answer session. [Operator Instructions] And our first caller is Samad Samana with Jefferies. Samad, your line is open. Please go ahead.

Operator: Standby for our next caller. And Will Nance is here with Goldman Sachs. Will, your line is open, please go ahead.

Operator: Standby for our next caller. Patrick Mcilwee with William Blair. Patrick, your line is open. Please go ahead.

Operator: Standby for our next question. And our next question comes from Mayank Tandon with Needham.

Operator: Yes, go ahead.

Operator: And standby. Our next question comes from Adam Wyden with ADW Capital. Adam, your line is open. Please go ahead.

Operator: Okay. Stand by. Our next question comes from George Sutton with Craig-Hallum. George, your line is open.

Operator: Okay. We have time for one last question. Standby. We have Anja Soderstrom with Sidoti. Anja, your line is open. Please go ahead.

Operator: Okay. That does conclude our Q&A, I would like to turn it back to Savneet Singh, CEO, for closing remarks.

Savneet Singh: Thanks, everyone for joining. We look forward to updating you on your progress as we go forward.

Operator: Thank you for your participation in today’s conference. This does conclude our program. You may now disconnect.