Par Technology Corp Q1 FY2024 Earnings Call

Thank you for joining us. My name is Diane, and I will be your conference operator. I would like to welcome everyone to the financial results call for the first quarter of the full year 2024. I will now turn the call over to Christopher Byrnes. Please proceed.

Thank you, operator. Good morning, everyone, and apologies for the technical difficulties we were dealing with this morning. But I welcome you to PAR Technology's First Quarter 2024 Financial Results Call. We issued our Q1 press release a short time ago and furnished the related Form 8-K to the SEC. The press release, along with the corresponding slide presentation, can be found on the Investor Relations section of our website at partech.com. With me on the call today are Savneet Singh, PAR's CEO; and Bryan Menar, PAR's CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the operations and future results of PAR Technology that involve assumptions, risks, and uncertainties. If any of these risks and uncertainties develop or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements. On this morning's call, we will refer both to GAAP and non-GAAP financial measures. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding those measures. In addition, our acquisition of Stuzo, closing on March 11, 2024, 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.

Thank you, Chris. We had a strong start to '24, achieving 25% growth in ARR while closing one M&A transaction and announcing a second. Our subscription services business is thriving, 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; rather, it 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 '23. When we add Stuzo's contribution, 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 proforma basis. In Q1 '24, all of our products grew, and PAR achieved 25% organic year-over-year expansion without material contribution from large logos we've signed the past few months, notably Burger King and Wendy's. As I mentioned in the 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 going live. We expect the growth in ARPU to continue given current white space 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 received almost 1 billion API requests 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 installation velocity to start as of Q2. Payments continues to accelerate its growth and has more than doubled year-over-year. While Q1 is a seasonally slow period with lower processing volume, 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 a 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 PARPay across multiple PAR products. Looking forward, PARPay is becoming a native infrastructure across all 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 PARPay into new verticals, which will continue to drive deal volume, customer adoption, and materially higher margins. Data Central delivered a strong Q1. The quarter included the Go Live at Love's Travel Center. We continue to build out a robust pipeline of business opportunities for Data Central for 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, continued 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 investments are helping lower customer terms, improve customer satisfaction, and expand hosting margin. We also continued 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 a 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 in 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 the 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 value. 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 additional cross-sell opportunities for other PAR products into a new customer base with materially strong unit economics. Engagement cloud's 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 months 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 '24 will certainly be meaningful. We continue to see PAR's 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 in hardware, namely increasing 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 that use Brink who have not historically used our hardware, as well as current Brink customers that will benefit from 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 white space will continue to grow, and this is truly an issue of when, not if. Moving to expenses. Our non-GAAP operating expenses grew 7% compared to Q1 last year, excluding Stuzo. Almost the entire OpEx increase is associated with the Burger King and Wendy's rollouts that will have significant returns on investment, and that cost will then rationalize downward. In addition, earlier this year, we right-sized our go-to-market teams, 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 sit today, to be EBITDA positive by the third quarter of this year. What I'm most proud of, though, as I just mentioned, is that we also expect PAR OpEx excluding Stuzo to actually come down through '24. Said differently, I expect this 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 TASK, 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 complete 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 million to $8 million in 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 benefit 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. Bryan will review the numbers in more detail and then I'll come back to offer some guidance for the rest of the year.

Thank you, Savneet, and 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 subscription services and contract revenue, partially offset by decreases in hardware and professional service revenue. Net loss for the quarter of 2024 was $18.23 million or $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 $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 a 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 an increase in 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 significant 27% compared to the 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 31. 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 reported in the prior year. The decrease was substantially driven by the timing of enterprise customer hardware refreshes and timing of next-generation PAR terminal and headset rollouts. We continue to be optimistic about our hardware business as we address the growing demands from both legacy hardware customers and also 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 reported 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% compared to the $31.9 million reported in the first quarter of 2023. The increase in contract revenue was driven by a $4.5 million increase in the government's ISR solution product line. Contract backlog associated with our government business continues to be strong and is 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% compared to 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. The increase in margin is driven by a continued focus on efficiency improvements with our hosting and customer support costs for our operator cloud services, as well as improved margins stemming from Stuzo's operational post-acquisition. Excluding the amortization of intangible assets, total adjusted subscription service margin for the three months ended March 31 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 on 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 remained essentially flat at 7.1% compared to 7.2% for Q1 2023. In regard 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-acquisition Stuzo costs. 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 the 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 managed operating expenses last year. Now to provide information on the company's cash flow and balance sheet position. For the three months ended March 31, 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 31 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 investment activities was $151.9 million for the three months ended March 31 versus $1.8 million for the prior year. Investing activities during the three months included $166.3 million of net cash consideration in connection with the Stuzo acquisition and cap expenditures of $1.4 million for development technology costs associated with our restaurant and retail software platforms, which was all partially offset by $15.9 million of proceeds from net sales and short-term investments. Cash provided by financing activities was $190.8 million for the three months ended March 31, compared to cash used in financing activities of $2.4 million for the prior year. Financing activities during the three months ended March 31 were substantially driven by a private placement of common stock. I'll now turn the call back over to Savneet for closing remarks prior to moving to Q&A.

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 plans. 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 on the last call, whatever we don't install this year will quickly roll 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 including Burger King and Wendy's, along with our acquisitions, we certainly feel we are 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 focus on actual 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?

And our first question comes from George Sutton from Craig-Hallum.

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 of 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?

I think it's the latter. We obviously have to give transparency about what we're rolling out, and what we think we can roll out for potential new deals, but it's very validating. As I said in a couple of calls ago, we've never had so much deal flow on the Brink, Data Central, and payment side before, and we're looking forward to sharing more details on that as we win those deals through our 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. And 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.

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?

Historically, it's been a challenge, as you said, and I'd say a mark against us in the past. But I think 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 will execute just like we have for them in the U.S. We are really excited to rapidly integrate TASK into the PAR family. 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. So it'll work both ways.

And lastly, Bryan, could you clarify if there was any one-time SG&A spend in the quarter that wouldn't typically recur?

Yes, there were large amounts related to the M&A transactions that we did, transaction fees that were sitting in G&A. We did have some reorganization take place during the quarter too, which you can see in the severance. Most of what you see in the non-GAAP adjustment is all related to what happened within OpEx. When we look at what we did from a standpoint of organic non-GAAP, it was about a 7% increase in total OpEx year-over-year.

Our next question comes from a line of Eric Martinuzzi from Lake Street.

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

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 having spoken to our large customers and Stuzo's large customers, we feel that they're very excited about combining those functionalities. 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 on new deals with the Stuzo product so that we don't complicate the merging of the two products. 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 is that we think we'll see faster cross-sell of additional PAR products into this market than we expected when we acquired the business.

Okay. You mentioned two reasons regarding the hardware side. We experienced some challenges with unpredictability in enterprise customer orders, and there's also the next-generation PAR terminal and headset rollout. Traditionally, I've viewed the hardware business as roughly a $100 million annual business. Will we return to that level, did we see a rebound in Q2, or is this business now smaller?

I think the weakness is in our non-Brink base. So our Brink customers are attaching; they continue to attach. 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 is an incredible amount of opportunity for hardware to get back to that $100 million and then grow well beyond it. When we get there this year, I think it will be harder for us. It's certainly in the cards, but I don't want to tell you we're guaranteed. To me, it's a matter of if, not when. The hardware attachment on Brink is going to drive that business going forward, and given how large these Brink deals are that we're winning or in the 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 on when that comes in. So will we get back to $100 million? Absolutely. Will it be this year? I'm not counting on that, but I think there are people at PAR that say absolutely.

Our next question comes from the line of Stephen Sheldon from William Blair.

Regarding the Burger King rollout, can you update us on how it's progressing since you started in April? What is your level of confidence in having the right team in place to ensure successful implementation?

Stephen, 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 our Brink business will tell you there's only room for optimism here given our execution and their execution. We feel very good. Now listen, 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 staff, as I mentioned on the call; we're not expecting OpEx to grow from here. In fact, I think it will come down. We ramped up; we're rolling out, and I think that ramp-up is why the rollout's going so well, and we don't expect to add more support.

And then just on the adjusted gross margins, can you 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 for each kind of product?

Yes, all the products are between low 60s and mid-70s, with Punchh and Data Central at the high end of that and MENU at the very bottom of that. MENU is definitely a drag, but as you saw, MENU added 1,200 sites this quarter, which is a very large amount in this category. As the revenue gets live there, you'll have a good head start there. Payments has got to get to that margin too, but again, as Payments is growing so fast. So that's who will get there. At the very bottom is MENU. At the top end is Data Central and Punchh, with Brink in the middle.

Our next question comes from the line of Samad Samana from Jefferies.

This is Jeremy on for Samad. 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 what would prevent it from moving faster or slower and what would give you more visibility?

So the number one factor is our performance. That's the part I feel really strongly about. Our whole team feels that way, and I think BK would tell you the same. We’re executing as we've promised, committed to, and probably even better. The communication's excellent. The variable we don't control is on the other side because these are incredibly choreographed rollouts, and we have to work alongside our corporate partners. The only reason we wouldn't be way above where the midpoint is, if they need some time, or wanted to slow it down, the internal processes there. But I mentioned that we are both committed to a tier rollout, and we're equally incentivized to make it go as fast as possible.

That's really helpful color. And I wanted to ask about the Wendy's win that you announced a few weeks back. It's great to see another Tier 1 customer. Some of the little language in the press release maybe seemed a little bit different from other wins mentioned, with the Punchh enterprise support. Was this a full rip-and-replace for Wendy's, or is it something more complimentary? What was this deal like?

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.

Just help me with some math here. It appears that you guys added about $8 million of ARR organically. If I look at your minus $7 million of EBITDA in the period, obviously you have some Burger King implementation costs that will come down or are obviously non-recurring. Is there anything you can do to sort of give us some sort of parameters as to how much of that is implementation costs, whether it's Burger King or Wendy's that you expect to go down? I mean, obviously, there's one-time severance in transaction, but can you give us a little bit more?

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. The software business is clicking, the margins are growing. You can see how efficient we've got in sales and marketing, and R&D is working its way there. We feel very good about it. So could we? I think it's possible, but I want to make sure we hit what we tell you. 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 could spend an hour talking about that offline. I would say the Q1 number is not apples to apples compared to Q4, as an example. In summary, we feel really good about getting there in Q3. I think it's going to be meaningful acceleration.

But would you expect, obviously in the quarter you had about a $3.5 million gross margin headwind, which likely impacted a lot of your EBITDA. From what I gathered in the first quarter, are you anticipating additional headwinds in hardware sequentially, considering it was a significant decline year-over-year? That seems to already be accounted for. So, you're not expecting further declines in hardware from the level where you are in Q1, is that correct?

I'm not expecting Q2 to be significantly worse than Q1. In fact, I think we are currently anticipating it to be slightly better.

Yes. So, returning to my analysis, if you anticipate similar organic revenue in the second quarter and plan to keep operating expenses flat or possibly lower, what was the contribution from Stuzo in terms of EBITDA for the quarter? It must have been only for a couple of weeks, right? It seems like you didn't get much of it.

We got about a little bit less than three weeks of Stuzo in the quarter. So it's not really in there. We get the benefit of that full in Q2.

You will see a complete quarter of Stuzo. We anticipate some reductions in operating expenses in the second quarter due to recent layoffs and various changes. We also expect some implementation costs to decrease. Regarding organic revenue, when you mention that operating expenses are flat, how should we evaluate the additional revenue in relation to the flat operating expenses?

Yes. A flow through at our gross margin rate. That obviously depends on the product, right? 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 compared to MENU, which today is lower. It depends on the product. So, I budget internally, let's assume gross margins just stay flat. That's what drops down. We've talked about we expect the gross margins to grow as well.

Wouldn't your gross margins go up in your lower margin products as you drive better utilization?

Correct.

I mean, I guess if you're at a 60% gross margin MENU, wouldn't the incremental margin on a dollar of revenue be higher on MENU than a Brink? I mean, is that…

Once we clear the cost, yes. And remember, even when you add a MENU customer as an example, we're still firing up an Amazon instance; we're still launching a product. There are still incremental costs, but yes, over time, MENU should get to the same gross margins. I want MENU to get to Punchh gross margins, which are really exciting and growing a lot. Over time, yes, it should get there. But the actual revenue dollars have to come in. We've launched these six or seven customers this quarter, and in Q2, we get the full quarter of that revenue, which again is going to boost up those gross margins. I think what your point is, what is incremental gross margin of a customer? On MENU, it's a little bit hard because we're so early; we're $1 million, $2 million into this thing. We're not where I can say, oh, it's a 90% drop, but it should be no different than any other SaaS product because every incremental instance is higher margin.

Right. So it's a fair assumption that at minimum, our incremental gross margin should be around 70%, and hopefully, they should be higher as we drive utilization in our lower margin products, right? So if I take sort of 70%, where we are at $8 million, that's $5.6 million plus a full quarter of Stuzo plus lower OpEx. I'm seeing profitability in the second quarter. I guess you guys are just being conservative with your guidance. Is that a fair way to walk away from this?

On those assumptions, it is. Your math is generally pretty directionally accurate on everything.

And there are no further questions at this time. I'll hand the conference back to management for any further remarks.

Thanks, everybody, for joining our call. We look forward to updating you in the future and giving you more updates on our progress towards free cash flow profitability, but also some of these large great wins. Thanks.

Thank you all for joining the call today. You may now disconnect.