PAR Technology Corporation (NYSE:PAR) Q1 2024 Earnings Call Transcript

PAR Technology Corporation (NYSE:PAR) Q1 2024 Earnings Call Transcript May 9, 2024

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: closing on March 11, 2024. And therefore, our reported first quarter results include 20 days of Stuzo, results as well. At times during this call, we may discuss organic or standalone results, which excludes Stuzo, to help listeners understand our organic performance. Now I’ll turn the call over to Savneet for the formal remarks portion of the call, followed by Q&A.

Savneet Singh: Thank you, Chris. We had a strong start to 2024, achieving 25% growth in ARR, while closing one M&A transaction and announcing a second. Our subscription services business is clicking, and we feel confident we’ll be able to continue to drive growth while turning EBITDA positive in Q3. Crucially, our products continue to be validated as standalone best-in-class while working better together, helping prove the value of our unified solution and demonstrating to our customers that buying more from PAR does not sacrifice functionality, but rather generates better outcomes. This is a point that I really wish to underscore again. Each of our products generates better experiences on other PAR products, thereby enhancing total stickiness and expanding sales opportunities beyond what a single product sale could generate.

The flywheel at PAR is real. For the first quarter, subscription services ARR organically grew by 25% when compared to Q1, 2023. When we add Stuzo’s configuration, ARR now stands at $185.7 million, a 60% increase from the first quarter last year. Additionally, once TASK closes, our current ARR would be over $225 million on a pro forma basis. In Q1, 2024, all of our products grew, and PAR achieved 25% organic year-over-year expansion without material contribution from large sellers we’ve signed the past few months, notably Burger King and Wendy’s. As I mentioned last call, we’re going to be reporting in two segments, Operator Cloud, which includes Brink, Data Central, and Payments, and Engagement Cloud, which includes Menu, Punchh, and Stuzo.

Simply put, we are reporting in the same manner as we are organized internally. Our Operator Cloud solutions predominantly work with IT and operations teams, while our Engagement Cloud solutions work with marketing and digital teams. Operator Cloud ARR grew 39% to $78.5 million in Q1 when compared to the same period last year. Operator Cloud growth is being driven by increased win rates at Brink and continued ARPU improvement. Operator Cloud ARPU increased by 22% from the same period last year due to higher value deals, API monetization, price increases, and PAR payment services go live. We expect the growth in ARPU to continue, given current whitespace and existing high-value accounts, as well as a robust pipeline. Brink is our most strategic product, and when selected by an enterprise, it presents an opportunity to cross-sell additional PAR products.

POS remains the heartbeat of the restaurant, where scalability, stability, and extensibility are central tenets of successful operations. This is demonstrated by the fact that Brink receives almost 1 billion API pings per month across a relatively small number of stores. The mission-critical nature of POS for in-store, above the store, and kitchen is where we feel the true mission criticality of our solution lies. We’ve ramped up our teams for the BK project, where we expect rapid and solid velocity to start as of Q2. Payments continues to accelerate its growth and more than double year-over-year. While Q1 is a seasonally slow period with lower processing value, PAR payments managed to achieve its highest annualized gross processing volume run rate of $2.4 billion.

We achieved this via the full rollout of an 1,100 store chain and four additional restaurant concepts. Each of these enterprises benefits from operational efficiencies, cost savings, and increased customer engagement by leveraging PAR pay across multiple PAR products. Looking forward, PAR Pay is becoming a native infrastructure across all of our products, which has led to very high growth and the strongest pipeline we have ever had. With the recently announced acquisition of Stuzo and TASK, the team is fully engaged in expanding PAR Pay into new verticals, which will continue to drive deal volume, customer adoption, and materially higher margins. Data Central delivered a strong Q1. The quarter includes the go-live of Love’s Travel Center. We continue to build out a robust pipeline of business opportunities for Data Central through the attachment to Brink and PAR payment deals, with multiple Tier 1 concepts in the funnel.

We feel very bullish about our ability to drive cross-sell, especially as Brink works through its very large pipeline of deals this year. Our Operator Cloud offerings provide less complexity, lower total cost of ownership, enhanced security, and reliable payment processing. Operator Cloud products remain highly sticky, which we expect only to be strengthened in difficult macroeconomic times. Our Engagement Cloud, which includes Punchh, Menu, and now Stuzo, continues its momentum with a stronger-than-expected quarter. Deals closed in the second half of last year are starting to go live and our year-over-year ARR growth, excluding Stuzo, was 11%. Meanwhile, our platform and tech debt investments are helping lower customer churn, improve customer satisfaction, and expand hosting margins.

We also continue solid sales momentum in Q1 with some strong brand wins, including Wendy’s and a leading national chicken chain. Looking ahead, we expect Punchh to be a strong profit contributor to PAR and the engagement cloud solution to drive stable growth. At the same time, we’re announcing the launch of exciting new functionality in our Punchh wallet. This solution will help enable seamless payment and redemption flows and drive material cross-sell opportunities, further increasing the value and implied stickiness of the PAR product suite. MENU, our digital ordering application, also delivered an improved Q1 by going live in more than 1,200 sites across five new logos, including major chains like Beef O Brady’s, Burger King, and a 700-store coffee chain.

The newest part of engagement cloud is our recent acquisition of Stuzo. Just as a refresher, Stuzo is a leading digital engagement software provider to the convenience and fuel retailer industry, including its open commerce platform, which empowers C-Stores to gain more share of customer wallet and drive customer lifetime values. The combination of Punchh and Stuzo allows us to offer best-in-class loyalty and digital engagement products across two food service markets, restaurant and C-Store. Additionally, with Stuzo, PAR is now the leading technology provider for convenience stores with over 25,000 customer sites and substantial opportunities for innovation in the C-Store industry with a TAM of 150,000 stores domestically. Stuzo also provides the opportunity for additional cross-sale opportunities for other PAR products into a new customer base with material, stronger unit economics.

Engagement Cloud ARR now totals more than $107 million with Stuzo’s contribution at the end of Q1. Also, as we previously reported, Stuzo’s trailing 12-month adjusted EBITDA was $14 million. Although Q1 only had revenue contribution from Stuzo for around three weeks, the positive impacts for the full Q2 and full year 2024 will certainly be meaningful. We continue to see PAR is uniquely positioned in the food service technology sector with best-in-class software across key operational and engagement pillars. Our ability to guarantee better together experiences across our products while separately enabling a robust integration infrastructure keeps us ahead of single product competitors that only control one part of the better together equation and are dependent on third-party integrations for customer experiences.

Moving to hardware. We had a softer than normal Q1 due to increased seasonality issues and a shifting demand environment in our legacy restaurant non-brink base. Hardware sales are always hard to predict given their sensitivity to the macro environment, and as such, we’ll continue to forecast conservative numbers to protect us from getting ahead of ourselves. We are focusing our efforts to make up this shortfall and believe there are opportunities to drive sales with hardware, namely increased McDonald’s sales during their convention year and with the recent favorable industry response to our newly released terminal, the PAR WAVE. Additionally, we’re focusing on selling hardware to the few concepts who use Brink who have not historically used our hardware, as well as current Brink customers that will benefit from an updated equipment.

Additionally, with a near 100% attachment rate of hardware to upcoming Brink projects, hardware will be able to tap into new large-cap customers in the near future. Hardware whitespace will only continue to grow, and this is truly an issue of when, not if. Moving to expenses. Our non-GAAP operating expenses grew 7% when compared to Q1 last year and excluding Stuzo. Almost the entire OpEx increase is associated with the Burger King and Wendy’s rollout that will have significant return on investment, and that cost will then rationalize downward. In addition, earlier this year, we right-sized our go-to-market team, giving us additional expense tailwinds, and we expect to end 2024 at a lower quarterly OpEx than we started excluding our acquisitions.

So similar to last year, where we expect ARR to grow meaningfully without adding operating expense. This rigid expense management combined with consistent organic ARR growth will allow our company, as we see today, to be EBITDA positive by the third quarter of this year. What I’m most proud about, though, as I just mentioned, is that we also expect PAR OpEx, excluding Stuzo, to actually come down through 2024. Said differently, I expect us to grow at the rates we’re growing without additional operating expenses. And of course, any accretive M&A only accelerates profitability. To provide more detail, I want to walk through the underlying margin for our subscription services business, which will provide clarity on how healthy our unit economics are becoming.

These numbers exclude tasks which, if added, would only help prove the point. At the very top, our adjusted subscription services gross margin this quarter was 66%, flat quarter-over-quarter. As we get scale, we want to drive this to 70% plus. We feel confident we can get this done and think we’ll see improvements this year. We estimate our sales and marketing expense as a percentage of ARR this quarter, when including the annualized contribution from Stuzo, would be around 21%. This number will continue to improve as we get the benefit of the cost cuts I mentioned earlier this year. As I flagged last call, we want this number to get to 15% or lower. We estimate our R&D expense as a percentage of ARR, again, including the annualized contribution from Stuzo, was around 35%.

This number continues to get better, and we have our sights on our target of 25%. As I hope investors can see, we’re focused on driving towards our long-term goals, and the intense focus on keeping our OpEx flat has led to a strong acceleration in margin. What’s more, as we bring TASK into PAR, we’ll be adding another $6 to $8 million EBITDA, and a large pipeline of deals and a strong base of customers to cross-sell PAR products, creating the same flywheel internationally. To recap, we’re executing a strategy that we established several years ago, and we’re seeing the benefits of that strategy. We have a business model with strong organic fundamentals that positions us well to drive shareholder value, while continuing to acquire new products to cross-sell into our base.

We partner with some of the largest and most innovative restaurant companies in the world, and have established ourselves as a trusted technology partner at these companies as they undertake their digital journey. We’ve executed a disciplined M&A strategy that is accretive to our journey towards profitability, and rule of 40, while crucially expanding our TAM into markets with greater margin and cross-sell potential. And finally, we have a talented and dedicated employee base across the globe who are committed to helping our customers and our company win the industry. Brian will review the numbers in more detail, and then I’ll come back to offer some guidance for the rest of the year. Bryan?

Bryan Menar: Thank you, Savneet. Good morning, everyone. Total revenues were $105.5 million for the three months ended March 31, 2024, an increase of 5% compared to the three months ended March 31, 2023, with growth coming from increases in sufficient services and contract revenue, partially offset by decreases in hardware and professional service revenue. Net loss for the quarter of 2024 was $18.3 million, or a $0.62 loss per share, compared to a net loss of $15.9 million, or $0.58 loss per share reported for the same period in 2023. Adjusted net loss for the first quarter of 2024 was $10.8 million, or a $0.36 loss per share, compared to an adjusted net loss of $12.7 million, or $0.46 loss per share, for the same period in 2023.

Adjusted EBITDA for the first quarter of 2024 was a loss of $7.2 million, compared to an adjusted EBITDA loss of $8.8 million for the same period in 2023. Driven by increased margin contribution from subscription services, partially offset by reduction in hardware revenue and margin. Now for more details on revenue. Subscription service revenue was reported at $38.4 million, an increase of $10.4 million, or 37.2% from the $28 million reported in the prior year. The increase was substantially driven by increased subscription service revenues from the operator cloud services of $5.9 million, driven by a 20.7% increase in active sites and a 22.2% increase in average revenue per site, and from our engagement cloud services of $4.5 million, primarily driven by $2.7 million of post-acquisition Stuzo revenues.

The residual increase of $1.8 million from our engagement cloud services was driven by a 5.8% increase in active sites and a 7.5% increase in average revenue per site. Excluding Stuzo, organic subscription service revenue grew a meaningful 27% compared to prior year. The annual recurring revenue exiting the quarter was $185.7 million, an increase of 60.2% from last year’s Q1, with engagement cloud up 80.5%, and operator cloud up 38.8%. The acquisition of Stuzo contributed $41 million to ARR, included within Engagement Cloud, as of March 31st. Excluding Stuzo, total organic annual recurring revenue was up 24.8% year-over-year. Hardware revenue in the quarter was $18.2 million, a decrease of $8.6 million, or 31.9% from the $26.8 million recorded in the prior year.

The decrease was substantially driven by timing of enterprise customer hardware refreshes and timing of next generation part terminal and headset rollouts. We continue to be optimistic of our hardware business as we address the growing demands from both legacy hardware customers as well as attached hardware sales within our expanding software customer base. Professional service revenue was reported at $13.5 million, a decrease of $0.4 million, or 2.7%, from the $13.8 million recorded in the prior year. $7.7 million of the professional service revenue in the quarter consisted of recurring revenue primarily from our hardware support contracts. Contract revenue from our government business was $35.4 million, an increase of $3.6 million, or 11.2%, from the $31.9 million recorded in the first quarter of 2023.

Increase in contract revenue was driven by a $4.5 million increase in government’s ISR solution product line. Contract backlog associated with our government business continues to be strong and appropriately funded. As of March 2024, backlog was $315.4 million, a decrease of 3%, compared to $326 million as of December 2023. Total funded backlog as of March 2024 was $72 million. Now turning to margins. Gross profit was $28.6 million, an increase of $5.4 million, or 23%, from the $23.2 million reported in the prior year. The increase was driven by subscription services, with gross profit of $19.8 million, an increase of $5.7 million, or 41%, from the $14 million reported in the prior year. Subscription service margin for the quarter was 51.6%, compared to 50.2% reported in the first quarter of 2023.

Increase in margin is driven by a continued focus on efficiency improvements with a hosting and customer support cost for operator cloud services, as well as improved margins stemming from Stuzo’s post-acquisition operations. Excluding the amortization of intangible assets, total adjusted subscription service margin for the three months ended March 31st was 66%, compared to 71% in the first quarter of 2023. Sequentially, Q1 2024 adjusted subscription service margin is consistent with Q4 2023. Hardware margin for the quarter was 22.3%, versus 16.4% in Q1 2023. 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 continue to improve hardware margins year-over-year.

Professional service margin for the quarter was 16.5%, compared to 17.9% reported in the first quarter of 2023. The decrease in margin is driven by a decrease in margin for hardware-related services. We expect professional service margins to remain in the upper teens for the remainder of 2024. Government contract margins remain essentially flat at 7.1%, as compared to 7.2% for Q1 2023. In regards to operating expenses, GAAP sales and marketing was $10.9 million, an increase of $1.5 million from the $9.4 million reported in Q1 2023. As Savneet mentioned, during the quarter we made changes to the sales and marketing organization to enable more efficient growth. GAAP G&A was 25.6 million, an increase of 7.5 million from the 18.1 million reported in Q1 2023.

The increase was driven by an increase in M&A transaction fees, as well as stock-based compensation, severance costs, and post-acquisitions dues. GAAP R&D was $15.8 million, an increase of $1.5 million from the $14.3 million recorded in Q1 2023. The increase was primarily driven by post-Stuzo acquisition costs. Q1 2024 operating expense, excluding non-GAAP adjustments, was $42.3 million, an increase of $3.7 million, or 10% versus prior year, and excluding Stuzo costs, the increase was 7%. As Savneet explained earlier, we expect organic operating expenses to be flat for the remainder of the year as we continue to drive ARR and revenue growth. Consistent with how we manage operating expenses last year. Now to provide information on the company’s cash flow and balance sheet position.

For the three months ended March 31st, cash used in operating activities was $23.6 million versus $16.7 million for the prior year. Cash used for the three months ended March 31st was substantially driven by a net loss from operations and additional net working capital requirements due to an increase in accounts receivable resulting from revenue growth. Cash used in investing activities was $151.9 million for the three months ended March 31st versus $1.8 million for the prior year. Investing activities during the three months ended March 31st included $166.3 million of net cash consideration in connection with the Stuzo acquisition and capital expenditures of $1.4 million for developed technology costs associated with our restaurant retail software platforms.

This is all partially offset by $15.9 million of proceeds from net sales of short-term investments. Cash provided by financing activities was $190.8 million for the three months ended March 31st compared to cash used in financing activities of $2.4 million for the prior year. Financing activities during the three months ended March 31st was substantially driven by a private placement of common stock. I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.

Savneet Singh: Thank you, Bryan. Let me wrap up with a few key messages before we open up the call for Q&A. In regard to the initial phase of the Burger King implementation program, early indications are that new orders are being submitted at a healthy pace. While it’s hard to perfectly predict where we will sit at the end of the year, we’re executing well on our end and feel confident we can give Burger King every reason to only accelerate our two-year rollout plan. The BK rollout has a strong impact on our year-over-year growth and profitability, and to provide clarity, I’ll share what I shared internally with our team. In the event we have a very low install base from BK, our growth will be around 20%. In the event we have a very fast rollout, our growth will approach 30% or higher.

As a mid-case, we’re assuming mid-20s growth, and I feel confident we can hit that. As we mentioned in the last call, whatever we don’t install this year will get quickly rolled out in 2025 and the early parts of 2026. BK and PAR are in sync in the desire for fast progress, and high-quality rollouts give every indication of a strong 2024. With new customers, Burger King and Wendy’s, and then including our acquisitions, we certainly feel we’re at an inflection point for PAR. As I said earlier, we intend to be EBITDA positive in Q3 and then continue a fast acceleration to meaningful profits. This holds true even with the momentary challenges we see in the hardware business today. Our business flywheel will lead to a cash flow flywheel, rewarding our shareholders for their investment and transitioning our focus to free cash flow per share.

As we’ve highlighted in the past, our ARR per share number at PAR has grown substantially, and ARR for us is a proxy for future cash flow. As we look to the future, it’s exciting not to have to use a proxy for free cash flow, but actually focus on free cash flow. This focus on cash flow will not take our attention off of our products and customer flywheel. The two will work in balance, living our core value of winning together, where customers, employees, and shareholders must all win together. With that, I’ll open the call for Q&A. Operator?

See also 15 Most Expensive Lipsticks in the World and 20 Biggest Grain Exporting Countries in the World.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of George Sutton from Craig-Hallum. Please go ahead.

George Sutton: Thank you. Savneet, I wanted to better understand as you were talking about working through your pipeline of opportunities, given that you’ve got a pretty massive Burger King rollout and on the loyalty side a Wendy’s rollout. Are you getting any pushback from some of those folks in your pipeline, or are they even more encouraged that you’re able to roll these out as they’re looking at you versus other options?

Savneet Singh: I think it’s the latter. We obviously have to give transparency of what we’re rolling out, what we think we can roll out for potential new deals, but it’s very validating. As I said a couple of calls ago, we’ve never had so much deal flow on the brink, data central, and payment side before. We’re looking forward to sharing more details on that as we win those deals, put out press releases. I think it’s reflective in that as you win a large customer and then another, it helps other brands feel comfortable that you can handle that scale. As I mentioned, we feel we’re doing a great job on the rollout of that first big customer. I think they would say the same, and that customer reference will only help new customers.

George Sutton: Now, knowing that you have in the past been unable to take on international opportunities for some of these larger chains, I’m just curious how those discussions go, particularly with those in your pipeline as you’re bringing on TASK later this year.

Savneet Singh: Historically, it’s been a challenge, as you said, and I’d say a mark against us in our fee. Obviously, we’ve been public that we’ve signed an agreement to acquire TASK, and we think TASK will be a good solution. I would say categorically, the response to that has been positive from customers and future customers because it’s really a pain point for them. If we can execute on an international strategy under the PAR umbrella, I think it gives the customers a lot of comfort that we’ll execute just like we have for them in the U.S. We’re really excited to rapidly integrate the task into the PAR family, but I also think we’ll see a lot of acceleration within the TASK business because it allows us the ability to cross sell things like payments, hardware, and additional modules. It’ll work both ways.

George Sutton: Okay, and then just lastly for me, Bryan, when you look at SG&A spend in the quarter, was there anything one time in nature that wouldn’t necessarily recur just so I’m being clear.

Bryan Menar: Yes, there were large amounts related, obviously, for the M&A transactions that were sitting in G&A. We did have some re-org take place during the quarter, too, which you can see in the severance. Most of what you see in the non-GAAP adjustment in the AK is all related to kind of what happened within OpEx. And so when we look at what we did from a standpoint of organic non-GAAP, there’s about a 7% increase in total OpEx year-over-year.

George Sutton: Perfect. Thank you.

Operator: Our next question comes from the line of Eric Martinozzi from Lake Street. Please go ahead.

Eric Martinuzzi: Yes, I wanted to better understand the product roadmap post-Stuzo acquisition. Are we going to be running two product lines essentially with punch pointed towards the enterprise restaurant brands and Stuzo aimed at the C-stores?

Savneet Singh: Great question. So we are aggressively consolidating and working towards consolidating into one application. I think we feel really excited. It’s going to be a multi-year process. But I would tell you, you know, having spoken to our large customers, the Stuzo large customers, we feel that they’re very excited about combining those sets of functionality. And so the short answer is we’re going to get down to one product for the market. And it’ll be a multi-year process. But as an example, we’re focusing a new deal on the Stuzo product so that we don’t complicate the merging of the two products. So we feel really good about the opportunity so far. The customer feedback has been excellent. And I would tell you what has changed from when we first announced it is that I think we think we’ll see faster cross-sell of additional PAR products into this market than we’d expected when we acquired the business.

Eric Martinuzzi: Okay. And then on the hardware side, you talked about kind of some, I guess it was two reasons for that. We had some issues with lumpiness in enterprise customer orders. And then you talked about next gen product terminal and headset rollout. But what, historically I thought of the hardware business as kind of a hundred million dollar annual business. Is that — do we get back to that? And is it — do we recover in Q2? Or is this kind of a, it’s a smaller business?

Savneet Singh: So, yes, the weakness is in our non-Brink base. So our Brink customers are attaching, they continue to attach. And we’ve got optimism, as I mentioned, given how strong the Brink pipeline is and the deals that we’ve won recently that we believe will attach hardware. There’s an incredible amount of opportunity to — for hardware to get back to that hundred and then grow well beyond it. Will we get there this year? I think that will be harder for us. It’s certainly in the cards, but I don’t want to, I don’t want to tell you we’re guaranteed. But this to me, again, it’s a matter of if not when. The hardware attachment on Brink is going to be the driver of that business going forward. And given how large these Brink deals are that we’re winning or in final stages of winning, and their attachment of Brink hardware, we think we’ll make it up.

It’s just the rollouts will sort of depend when that comes in. So, will we get back to the hundred million? Absolutely, will it be this year? I’m not counting on that, but I think there’s people at PAR that said absolutely.

Eric Martinuzzi: Thank you for taking my questions.

Operator: Our next question comes from the line of Stephen Sheldon from William Blair. Please go ahead.

Stephen Sheldon: Hey, thanks. And I appreciate all the additional detail this quarter. Maybe just on the Burger King rollout, can you maybe talk about — I think you maybe started to — from Go Live in April. I mean, just generally how are things progressing relative to your own expectations? And what’s your level of confidence that you have the right head count now to complete the implementation successfully?

Savneet Singh: Stephen, thanks for the question. And short answer is, yes and yes. I feel great about what we’re delivering. We check in weekly with leadership. They’re really happy with us. They communicate that to us. The coordination is very tight. Our general manager of that — our Brink business will tell you there’s only room for optimism here given our execution and their execution. So we feel very good. Now, we’re one month into it. So, could things change? Yes. I’m not expecting it given how much prep work each side has done to get to where we are today. We feel appropriate staffed. As I mentioned on the call, we’re not expecting OpEx to grow from here. In fact, I think it’ll come down. And so we’ve ramped up. We’re rolling out. I think that ramp up is why the rollout’s going so well. And we don’t expect to add more to support it.

Stephen Sheldon: Great to hear. And then just on the gross, the adjusted gross margins, can you maybe help frame where adjusted gross margins fit for the different products you have? Are most products currently in that 70% plus range that I think you’ve mandated every kind of product to get to? And just remind us where the drag is coming from and whether those – the areas of drag are moderated at all, such as with MENU, which I think menu is one that you’ve called out before as being a drag.

Savneet Singh: Yes. So I would say all the products are between low 60s and mid-70s, Punchh being — Punchh and Data Central at the high end of that, and MENU at the very bottom of that. MENU’s definitely a drag, but as you saw, MENU added, 1200 sites this quarter, which is a very, very large amount in this category. So as the revenue gets live there, you’ll have a good headwind there. Payments is getting – it’s got to get to that margin too. But again, as the payments is growing so fast, so that too will get there. And so, at the very bottom is MENU, at the top end is Data Central and Punchh, and Brink is kind of in the middle.

Stephen Sheldon: Great. Thank you.

Operator: Our next question comes from a line of Samad Samana from Jefferies. Please go ahead.

Unidentified Analyst: Hey, guys. This is Jeremy [ph] on for Samad. Thanks for taking my questions. So I wanted to follow up on that question about the BK rollout. It’s great to see that color on the 20% to 30% revenue based on the rollout. I guess what are some of the hurdles to get to that higher BK rollout in 2024, or I guess what would prevent it from moving faster or slower, and what would give you more visibility?

Savneet Singh: So number one is our performance. And like I said, that’s the part I feel really strongly about. Our whole team feels that way, and I think, BK would tell you the same thing. We’re executing as we promised, committed to, and probably even better, and the communication is excellent. So that’s the number one reason for anything to go up or down is our own performance. And that’s the variable we control. The variable we don’t control is on the other side because these are incredibly, choreographed rollouts, and we sort of need to work alongside our corporate partners. And so the only reason, we wouldn’t, be way above, where the midpoint is, if, they need some time, they want to slow it down, the internal machinations are. But as I mentioned, because we’re both committed to a two-year rollout, we’re equally incentivized to make it go as fast as possible.

Unidentified Analyst: Got you. That’s really helpful, color. And then I wanted to ask about the Wendy’s win that you announced a few weeks back. It’s great to see another tier one customer. Some of the language in the press release, it seemed a little bit different from other wins. I mentioned the Punchh Enterprise support. I guess, was this a full rip and replace for Wendy’s, or is it maybe something more complimentary? I guess, what was this deal like?

Savneet Singh: No, it’s a full rip and replace. So it’s a really big win. It’s a big initiative. It’s truly the full solution within Punchh.

Unidentified Analyst: Got you. Thanks for taking my question.

Operator: Our next question comes from the line of Adam Wyden from ADW. Please go ahead.

Adam Wyden: Okay, guys. Can you hear me?

Savneet Singh: Yes.

Adam Wyden: All right. So just help me with some math here. It appears that you guys added about $8 million of ARR organically. If I sort of look at your minus seven of EBITDA in the period, obviously, you have some Burger King implementation costs that will come down, or obviously, are non-recurring. Is there anything you can do to sort of give us some sort of parameters as to like how much of that is sort of implementation costs, whether it’s Burger King or Wendy’s, that you expect to sort of go down? I mean, obviously, there’s one times seven in transaction, but can you give us a little bit? And then I want to sort of move forward with the question. How about this? Take the minus seven of EBITDA. You have $8 million of organic in the period.

If you hold that true, and your OpEx is flat, and you’re adding Stuzo, which you got very little contribution, wouldn’t that make you EBITDA break even in the second quarter? I mean, take 8 million of organic, if your OpEx is flat, again, take a 70% or 80% incremental gross margin. That gets you to five, six, right? And then you get a full quarter of Stuzo, which is doing like four. Wouldn’t that take you into profitability in the second quarter if OpEx is coming down? Am I doing something wrong?

Savneet Singh: It certainly could. We’re putting out guidance to make sure we can hit it. As I said, we’re doing our guidance, assuming the hardware business, doesn’t get better. So like I said, we feel really — I mean, the software business is clicking. The margins are growing. You can see how efficient we’ve gotten sales and marketing. R&D is working its way there. And so we feel really good about it. So could we — I think it’s possible, but I want to make sure we hit what we tell you. And specifically in Q1, Q1 is always a challenging quarter because there are what I would call one-time items that can’t be adjusted out, things like bonus accrual adjustments, Canadian pension, insurance payments that for some reason don’t get amortized.

We can spend an hour talking about that offline. And so, I would say the Q1 number is not apples-to-apples compared to Q4, as an example. So in summary, I think we feel really good about getting there in Q3. As I said, I think it’s continued to be meaningful acceleration. The part, that I — the real part I was trying to push on the call was we’re not adding any heads within the core products of Brink, Punchh, Data Central, and Payments. Really holding this expense flat. The only heads we added were Wendy’s and Burger King. And as I said in the call, we expect the OpEx to actually come down, organically, so excluding Stuzo even. So it’s the core business driving meaningful profitability. Stuzo we’ll add, and then obviously when we roll in TASK, that’s another, call it, 6, 7, 8 annualized.

Adam Wyden: But would you expect, I mean, obviously in the quarter you had about a, I think I calculated about a $3.5 million gross margin headwind, which probably a lot of it’s EBITDA. I mean, would you — I’m just basically taking the point from the first quarter. Are you expecting additional headwinds in hardware sequentially? Because it was a pretty big decline year-over-year. I mean, you wouldn’t – I mean, that sort of is already in the cake. So, I mean, you’re not expecting additional declines in hardware, sort of from the level where you are in Q1. Is that right?

Savneet Singh: I’m not. I’m not. And as I said, I think the second half when we announced some of these wins that we’ve had that we haven’t, when they get public, I think we’ll claw some of that. But I’m not expecting Q1 — sorry, Q2 over Q1 to be meaningfully worse by any means. And in fact, I think we are only expecting a little bit better.

Adam Wyden: Right. So, like, just again, going back to sort of the analysis I’m doing, if you expect similar organic revenue in the second quarter and you’re holding OpEx flat, if anything, down, right, and you get — I mean, what was the contribution from Stuzo in the quarter on EBITDA? It must have been only like a couple weeks, right? I mean, you didn’t get very much of it, right?

Savneet Singh: We got a little bit less than three weeks of Stuzo in the quarter, so not really in there. And we get the benefit of that full in Q2.

Adam Wyden: Right. So, you get a full quarter of Stuzo. You get hopefully some declines in OpEx in the second quarter because there was obviously some layoffs that were online and whatnot. And obviously, hopefully, some of the implementation comes down. And if you add organic — now, how do you — last question. How do you think about adding organic revenue? So, when you say OpEx is flat, how should we think about the incremental dollars of revenue against a statement of OpEx flat, right? Are you talking about 100% flow-through, or are you talking about a flow-through at your gross margin rate?

Savneet Singh: A flow-through at our gross margin rate. That obviously depends on the product, right? So, when we — like one of the things we’ve seen is that we are really getting much, much better at stapling Data Central into brink deals. Data Central is an incredibly high gross margin product, and so that gross margin flow-through is higher versus MENU, which today is lower. So, it depends on the product. So, I budget internally, let’s assume gross margins just stay flat. That’s what drops down. As you know, and we’ve talked about, we expect that number, the gross margins to grow as well.