Par Technology Corp Q3 FY2024 Earnings Call

Good day, everyone, welcome to PAR Technology Fiscal Year 2024 Third Quarter Financial Results Conference Call. Please be advised that today's conference is being recorded. Now I will pass the call over to the Senior Vice President of Investor Relations and Business Development, Christopher Byrnes. Please go ahead.

Thank you, Carmen, and good morning everyone and thank you for joining us today for PAR Technology's 2024 third quarter financial results call. Earlier this morning, we released our financial results. The earnings release is available on the Investor Relations page of our website at partech.com, where you can also find the Q3 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 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 is subject to the safe harbor statement included in our earnings release this morning, 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?

Thank you, Chris, and thank you all for joining us today. Our Q3 results made available this morning represent the seventh consecutive quarter in which PAR has delivered greater than 20% organic growth with limited operating expense. This continued sequential growth, upscaled and demonstrated operating leverage efficiency, has enabled PAR to achieve a positive adjusted EBITDA for the quarter, a first since the company began disclosing this metric earlier in management's tenure. Our performance this quarter reflects the continued validation of our products as best-in-class standalone and even better together. This strategic focus on delivering a unified solution is improving user experience, furthering customer stickiness, and expanding sales opportunities beyond that of a single product. The flywheel we've talked about is working and has generated the financial return we reported today. Digging into our results, subscription services continue to be the growth engine of our company. Q3 exit ARR totaled more than $248 million and subscription services revenue for the period grew 91% when compared to Q3 last year. This revenue expansion was driven by 25% organic ARR growth compared to Q3 last year and contributions from our EBITDA-accretive 2024 M&A activity, including the company's acquisition of TASK Group which closed in July. Critically, our M&A activity is expected to continue to accelerate our overall growth trajectory into the future by unlocking new verticals and multi-product attachment. Operator Cloud ARR grew 41% to $93.4 million in Q3 when compared to the same period last year. This growth was driven by multi-product attachment of Data Central and PAR Payments and continued ARPU improvement, which increased 11% from the same period last year. Observed ARPU improvement was driven by price increases and PAR Payment service attachment. Our opportunity for new Tier 1 deals continues to be strong, and we believe that we are well-positioned to win and grow through both new logo signings and the upsell of Data Central and Payments. Our POS has a robust backlog, and we have high confidence and visibility into consistent growth rates for years to come. Turning to PAR Payments, Q3 was a strong quarter marked by focused pipeline execution and the signing of several new concepts, including Acropolis Greek Taverna, Burgerville, Brooklyn Pickle, and Fat Boy Pizza, all of which are set to go live in the upcoming quarter. Q3 also marked the company's first full quarter since the launch of Punchh wallet, a product we've seen gain strong market momentum and resulted in customer wins with notable brands. Additionally, we executed our first payments-funded hardware deal, which helps reduce capital expenditure pressures on merchants. Looking ahead, we're expanding our opportunities with the launch of QR code pay-at-the-table capability in Q4, with customer go-live expected before the end of the year. Turning towards Data Central, we see a strong product pipeline and anticipate the conversion of this pipeline will accelerate. The momentum is real and we believe Data Central will be a strong growth driver as the PAR POS plus Data Central combination is becoming the go-to operator solution. PAR is uniquely positioned in the enterprise space with both market-leading POS and back office solutions, which is mirrored by our pipeline. We're excited to continue to see our operator cloud products gain traction with our largest customers. A combined POS plus back office deal is worth almost 2x a project with only one product. It has taken time, but our vision of the connected operator suite is proving out, and we're looking to double down on this in the coming months. Moving to Engagement Cloud, Q3 results have reflected our strongest year-over-year organic growth since 2022, driven by the go-live of Wendy's. Total Engagement Cloud ARR grew by nearly 150% from the same period last year, when including PAR retail and the Plexure division of TASK Group, and now totals $155 million. Year-over-year, ARR growth for Engagement Cloud was nearly 17%. Our Engagement Products Suite continues to prove its market leadership with Punchh out front onboarding over 12,000 new locations and three major Tier 1 clients in the last 12 months. With its growth, Engagement Cloud site count now stands at an impressive 118,000 sites. While we are winning and launching major new brands, we continue to invest for the future with new innovations, including Punchh wallet, which enables seamless earning, redeeming, and payment, as well as new C-Store functionality with gamification and in-store customer interfaces. This past quarter saw significant new customer growth, with nine new brands launching on the Punchh platform and 12 upsell deals to existing customers. In early July, we went live with Wendy's, a deal we first announced in Q1. This go-live represented a record timeline to take a Tier 1 enterprise customer live on Punchh with over 7,000 Wendy's stores and reflects the urgency with which our people are empowered to operate. Looking ahead, we expect Punchh to be a strong profit contributor to PAR. PAR Retail, formerly Stuzo, now operates in over 25,000 convenience stores and fuel stations and provides a beachhead to cross-sell additional products including payments and back office. PAR Retail is gaining sales momentum and picked up a large Tier 1 customer win in the quarter. We also extended our relationship with a major oil customer by adding over 400 sites and extending the current contract by 2 years. With more and more consumers utilizing convenience stores for prepared food and meal delivery options, we are seeing our investment thesis play out in real time. Brick-and-mortar formats are colliding, and this is playing out even faster than we expected. PAR is uniquely positioned to benefit from both convenience stores and QSR. We recently rebranded menu to PAR ordering and are seeing momentum in winning deals within the Punchh space, most recently adding 115 clean eat stores. In connection with this rebrand, we also combined go-to-market teams to position PAR ordering in every Punchh deal and increase our sales capabilities. We've made the necessary investments to build tighter integrations, and the outputs are driving new customer wins. PAR ordering is rapidly achieving scale, and as we've crossed over the 1 million transactions per month threshold, while achieving 99% order health, a key milestone that demonstrates product strength to prospective customers and the industry. Moving to hardware, Q3 revenue grew 13% quarter-over-quarter. We expect hardware to continue to stabilize as our team works to upgrade our legacy base of long-term hardware-only customers and pursue even higher attachment rates with our POS customers. Stepping back to review our consolidated results, today's announcement of delivering 25% year-over-year organic ARR growth and positive Q3 adjusted EBITDA of $2.4 million is an important milestone for us. Efficiency metrics continue to impressively scale with our focus on organic growth and EBITDA accretive M&A. Subscription sales and marketing expenses as a percentage of subscription services revenue this quarter was 14%, a 400 basis point sequential improvement from 18% in Q2. Subscription R&D expense as a percent of subscription services revenue was 26%, a 500 basis point sequential improvement from 31% in Q2. And organic R&D spend again decreased year-over-year as we remain committed to spending in areas where we can improve ROI. We take pride in today's milestone, but today remains day one. Crucially, the combined scalability of our products and the continued flexibility in our operating leverage ensure that our financial metrics will only continue to improve over the years. Bryan will now review the numbers in more detail.

Thank you, Savneet, and good morning, everyone. Q3 was a successful quarter for PAR. Subscription services continue to fuel top line growth while we stayed fiscally responsible, managing our operating expenses. As a result, adjusted EBITDA for the quarter was a positive $2.4 million, indicative of an inflection point, driving growth with profitability. Before moving forward, and as stated in our Q2 earnings call, all 2024 and comparative 2023 results that we will discuss this morning exclude any contributions from PAR government, as those results, including the gain on the respective sale of PAR government, have been isolated within our discontinued operations results. Total revenue was $96.8 million for the 3 months ended September 30, 2024, an increase of 41% compared to the same period in 2023, driven by Subscription Service revenue growth of 91%, partially offset by a decrease in hardware revenue of 12%. Net loss from continuing operations for the third quarter of 2024 was $20.7 million, or $0.58 loss per share, compared to a net loss from continuing operations of $19.2 million, or $0.70 loss per share reported in the same period in 2023. Non-GAAP net loss for the third quarter of 2024 was $3.1 million, or $0.09 loss per share, a significant improvement compared to a non-GAAP net loss of $9.7 million, or $0.35 loss per share for the same period in 2023. Adjusted EBITDA for the third quarter of 2024 was $2.4 million compared to an adjusted EBITDA loss of $6.6 million for the same period in 2023. Now for more details on revenue. Subscription Service revenue was reported at $59.9 million, an increase of $28.5 million, or 91% from the $31.4 million reported in the prior year, and now represents 62% of total PAR revenue. Excluding PAR Retail and TASK, organic subscription service revenue grew 28% compared to the prior year. Annual recurring revenue exiting the quarter was $248.1 million, an increase of 93% from last year's Q3, with Engagement Cloud up 149% and Operator Cloud up 41%. Excluding PAR Retail and TASK, total organic annual recurring revenue was up 25% year-over-year. Hardware revenue in the quarter was $22.7 million, a decrease of $3.2 million or 12% from the $25.8 million reported in the prior year. Sequentially, compared to Q2 this year, Hardware was up $2.5 million or 13%. The continued interest from our legacy hardware customers, as well as the continued high attachment of hardware sales within our expanding software customer base, gives us confidence that our Hardware business will continue to contribute meaningful revenue and margin. Professional service revenue was reported at $14.2 million, an increase of $2.7 million or 23% from the $11.5 million reported in the prior year. We are pleased with our team's ability to continue to grow Professional service revenue during a period of hardware revenue contraction. The growth was driven by recurring revenue service contracts. $8.9 million of the Professional services revenue in the quarter consisted of recurring revenue, a 23% increase versus prior year. Now turning to margins. Gross profit was $43 million, an increase of $17.9 million or 71% from the $25.1 million reported in the prior year. The increase was driven by subscription services with gross profit of $33.1 million, an increase of $17.3 million or 109% from the $15.9 million reported in the prior year. Subscription service margin for the quarter was 55.3% compared to 50.6% reported in the third quarter of 2023. The increase in margin is driven by a continued focus on efficiency improvements with our hosting and customer support contracts, as well as accretive margin contributions from recent acquisitions. Excluding the amortization of intangible assets, stock-based compensation, and severance, total non-GAAP subscription services margin for Q3 2024 was 67% compared to 69% for Q3 2023, and sequentially improved from Q2's 66%. Hardware margin for the quarter was 25.5% versus 25.3% in Q3 2023. Professional service margin for the quarter was 29.2% compared to 23.8% reported in the third quarter of 2023. The increase primarily consists of increases in margins for field operations and installations substantially driven by improved cost management and reductions in third-party spending. In regards to operating expenses, GAAP sales and marketing was $10.5 million, an increase of $1 million from the $9.5 million reported for Q3 2023, with the increase being driven by inorganic costs related to our acquisitions, while organic sales and marketing was flat year-over-year. GAAP G&A was $27.4 million, an increase of $9.8 million from the $17.5 million reported in Q3 2023. The increase was primarily driven by non-GAAP adjustment items for M&A transaction fees and stock-based compensation, as well as post-acquisition costs. GAAP R&D was $17.8 million, an increase of $3.2 million from the $14.7 million recorded in Q3 2023. The increase was primarily driven by post-acquisition expenses, while organic R&D expenses were flat year-over-year. Operating expenses, including non-GAAP adjustments, was $47.7 million, an increase of $10.3 million, or 28% versus Q3 2023. And excluding inorganic growth, organic operating expenses increased a modest 7%. The organic increase was primarily driven by variable compensation and benefits. Now to provide information on the company's cash flow and balance sheet position. As of September 30, 2024, we had cash and cash equivalents of $105.8 million and short-term investments of $12.6 million. For the 9 months ended September 30, cash used in operating activities from continuing operations was $2.4 million versus $27.9 million for the prior year. The improvement was driven by a $10 million improvement in net loss net of non-cash adjustments. Cash used in investing activities was $178.1 million for the 9 months ended September 30 versus $4.8 million for the prior year. Investing activities included $293.6 million of net cash consideration in connection with our recent acquisitions and capital expenditures of $4 million for developed technology costs associated with our software platforms, partially offset by $92.1 million of cash consideration received in connection with the disposition of PAR government and $24.9 million of proceeds from net sales of short-term health maturity investments. Cash provided by financing activities was $279.3 million for the 9 months ended September 30, compared to cash used of $1.8 million for the prior year. Financing activities were substantially driven by private placement of common stock to fund the Stuzo acquisition and a credit facility entered into to fund the TASK acquisition. I would like to take a moment to reiterate and thank our PAR team. I'll continue to successfully execute our operating plan while managing the integration of both PAR Retail and TASK, in addition to completing the smooth divestiture of PAR Government. As a result, we have driven significant improvement in key financial metrics with 25% organic ARR growth and 93% total ARR growth, flat to modest growth in organic non-GAAP operating expenses for a seventh consecutive quarter, culminating in Q3 positive adjusted EBITDA of $2.4 million. But to be sure, this is day one and not a finish line. We are excited about the opportunity in front of us to continue to deliver outcomes that drive value for all our stakeholders. I would now like to turn the call back over to Savneet for closing remarks prior to Q&A.

Thanks, Bryan. We continue to see PAR as 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. Put simply, our products are winning on a standalone basis, but we continue to see a growing desire in the market for vendor consolidation. We believe the environment is ripe for continued M&A activity and PAR has shown itself uniquely capable of consolidating in the enterprise space while driving higher growth and profitability. We are delivering an impressive better together platform and are smartly investing to continue that track record, balancing our need for both growth and profitability. We look forward to sharing more about our longer-term vision and strategy at our Investor Day on November 25th. Thank you to all PAR employees for your dedication and effort over the past quarter. Across the organization, our people have stepped up to ensure we deliver the outcomes our customers demand while embracing the hard work necessary to build a company capable of delivering long-term shareholder value. And as I said earlier, we're still at day one. Chris?

Carmen, that concludes our formal remarks this morning. Can we now open the call to Q&A?

Thank you, Chris. One moment for our first question. And it's from the line of Mayank Tandon with Needham. Please proceed.

Thank you. Good morning. Congrats on the quarter. Savneet, I wanted to just focus on the large deal activity. I think when we came into 2024, you’d called out record RFP activity and I believe there were seven large deals. I think you logged one or two, if I’m keeping count correctly. I just wanted to get sort of a status update on the other ones. Do you think you could still land a few more? What's the status on that? And if you were able to do it, could that potentially help accelerate your organic ARR growth? I know you've said mid-20s. Is that something that's conceivable if you were to win some of these larger opportunities in the pipeline?

I think we have a good shot of closing more before the end of the year. As far as accelerating our growth, it’s hard to say. It depends on the rollout of these deals. It certainly won’t hurt it. So I think our plan is built without even needing these mega-deals, but if they come, they certainly would accelerate us. But it’s hard to sequence the timing of a signing and a rollout.

Understood. Maybe I'll switch over to the M&A. It's good to hear that the progress on the acquisitions of Stuzo and TASK has been good. Could you give us a little bit more color in terms of what's surprised you positively and even negatively? And maybe it would be helpful to get any data points on your ability to cross-sell into these accounts and win new logos. I know it's early, but any additional color beyond what you said in your prepared remarks would be helpful.

Sure. On the PAR Retail side, the experience with Stuzo has been fantastic. We've seen great receptivity by the end market for PAR's involvement. I think at the same time, we've been able to add some go-to-market heft to the area. And most importantly, I think we're really excited about the product delivery we can push into that market. I’m just crazy excited. As we mentioned, we signed our next large customer in the quarter, and we think there's a lot more to come. Importantly, when we made this acquisition, it was a bit contrarian. The idea of convenience stores becoming food service businesses was still not a thing. And if you look today, it has become a narrative, it's become consensus, that convenience stores are growing their food service businesses double digits across the industry. And for them to continue to compete with restaurants, they need tooling like we provide. I think we'll have the same playbook in this vertical as we did in restaurants, and obviously, it's great because we can leverage what we've done in restaurants in that market. We feel really good and really excited about that long-term place for us to be. On the TASK Group side, we are very early. We're a few months into it, but the platform is special. It’s one of those products when you demo, jaws drop, but the enterprise version of that. We’ve seen really strong interest, not just in restaurants, but in these adjacent verticals, call them shoulder markets, like sporting stadiums, hotels, casinos. I’m not saying we’re going to go into that, but it certainly gives us suspicion of doing more than what we do today. Importantly, as we've talked about, it gives us that international arm that we've never had before as our big United States customers are almost all growing more internationally than domestically. So, we're really excited for that as well.

That's helpful. Congrats again. Thank you so much.

Thank you. One moment for our next question. That is from the line of Samad Samana with Jefferies. Please proceed.

Hey, good morning. Thanks for taking my questions. And maybe we'll start first with Savneet. On the rollout of Burger King and Wendy's, I know they're adopting different products, but maybe what have you observed or learned from now that you're implementing at these larger customers, what the organization and the product is capable of? Is there anything that you've seen that maybe you could do better that they're asking for as you're rolling it out, or something that's gone particularly well, and how does that maybe inform you as you think about targeting additional large customers?

That's a great question, Samad. So, on the Wendy side, that's an enterprise rollout of Punchh. Our major learning is doing these at scale and getting it out. As we mentioned, it was our fastest large rollout ever and honestly, I think it just gave us confidence that why can't we do that again? From a business perspective, I think it's shown us that we can operate in these large enterprises. This gives us a lot more creative ideas on how to structure our deals with these large Tier 1 brands, rather than offering a cookie cutter process we’ve had for the last decade or so. I think it hasn’t changed how we operate, but certainly given us confidence in thinking about how to structure future enterprise deals. On the POS side with Burger King, we’re still relatively early. The major exciting takeaway is that our experience has fully convinced us that just doing POS is not the end game. We’ll see more and more in these large rollouts saying, hey, I know I said I wanted to upgrade my POS, but why don’t we do POS in back office and XYZ all at once? That’s a major takeaway there. Obviously, there are tons of learnings around the logistics and coordination of such a huge rollout, but those are all things I think you'd expect us to learn.

Great. And I don't want to front run the Analyst Day too much since it's only in a couple of weeks, and I suspect you'll go through some of these strategic views there, but you've demonstrated the ability to get to EBITDA positive for the core business. You're also talking about a very robust pipeline, good demand, and M&A. Is there any thought on maybe hitting the gas on hiring or investments that you've shown the market that you can be profitable? I'm just curious how you think about that.

Yes, I think we're going to have to continue to invest because the opportunity is there. We wouldn't invest if we didn’t think the opportunity was there. As an example, as I mentioned, we brought down R&D expense again. That obviously can't continue forever. And so, we'll certainly need to continue to invest as we deliver on this revenue growth. As I observed, there are very few software companies of our size that are still growing in the mid-20s. We really feel we're at day one of this very, very large opportunity. You'll see us continuing to invest, and candidly when that opportunity is not there, you'll see us stop, and you'll see the cash spigot accelerate tremendously. So we are trying to balance the trade-off, and we think this quarter was important to show you that we could still grow in the 20s while delivering nice EBITDA. Our current mandate is not a trade-off; we need growth, and we need profitability. We push ourselves to get there, but we will certainly need to continue to invest because, as you've suggested, there's a lot of pipeline, and we don’t want to be penny-wise, pound-foolish just to deliver an optical number. We want to build something that’s there for the long run.

Great. Congrats on all the success, guys.

Thank you.

Thank you. Our next question comes from the line of Will Nance with Goldman Sachs. Please proceed.

Hey, guys. Appreciate you taking the questions. Nice results today. Savneet, I wanted to follow up on some of the earlier commentary you had on Data Central. I thought it sounded fairly upbeat, and I think you mentioned in your response to one of the prior questions, being more aggressive about trying to attach it to POS deals and sell more of a unified experience. So, just kind of wondering, how are you guys – how has the go-to-market changed? What's led to the success that you've seen in driving more attractive Data Central to these deals, and you mentioned doubling down on the strategy, I think in those prepared remarks, what do you kind of have in mind from that perspective over the next year or so? Thanks.

Yes, and you definitely read that through well. So, we are really excited about what we’re seeing at Data Central. To your question of what's driving it, it’s two things. One is product. Being able to access Data Central reporting within the Brink platform is a really big unlock. Cutting two reporting systems down to one gives our customers a huge advantage. It provides them a lot of confidence in the data, not having to go from one system to validate the next. I think that connectivity of the platform is really powerful. The second part is, that allowed us to consolidate into one sales and marketing team. By going to market as one rather than two, we were able to prove that out. The other part of it, I’d say now we have demonstrable customer success showing the beauty of having both products at once. We’re excited because we’ve proven it to ourselves, we’ve proven it to our customers, and in our pipeline, it’s quite remarkable how many deals we’ve been able to go into and say, hey, I know you’re focused on point of sale. We will absolutely deliver the best-in-class solution, but if you add Data Central, it will be better together. Our track record of proving that has resonated with many customers, excuse me.

That's great to hear. I appreciate that. And then just maybe more of a modeling question. The 25% organic ARR growth is super impressive this quarter. As we think about looking out over the next couple of quarters, folding in some of the recent acquisitions into the base, I know those were growing a little slower. Is low 20s still sort of the right range to be thinking about absent an acceleration and sort of large deal activity that you referenced in an earlier question? Thanks.

Yes, I think we've sort of said for the last few years that our goal is to grow greater than 20%. When we buy a business, we want to create a plan to get there. What’s exciting is that in every deal we have done, we have been able to accelerate the business, first starting with pipeline and then deals. I already see it happening on the PAR Retail side, and soon we’ll see it on the TASK side. That’s our hope, and like I said, the market’s still really strong. We’re not seeing these deals push out, so we’re very hopeful.

Awesome. Sounds great. I appreciate you taking the questions, Savneet.

Thank you. Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed.

Hey, thanks. Really nice work here. First, can you just talk some about the pipeline with convenience stores? It's really nice to hear about another Tier 1 win there. Could it make sense to put even more sales resources towards that opportunity given the growth runway and some of the secular tailwinds you've been seeing?

We have. Short answer is we have. It’s actually, I think, in our go-to-market team, the only space where we have planned growth for next year. We’re planning to grow the go-to-market team there. We completely agree in adding resources. When we did this deal, people were a little confused. Now, it’s so consensus – that the greatest threat to restaurants in America is convenience stores. The greatest opportunity for convenience stores is restaurants. These formats are colliding, and we get to be a little bit of an enabler.

Got it. And then just now that you’ve reached positive adjusted EBITDA, can you talk about your expectations to reach positive free cash flow and any rough sense of when you think that could happen?

Yes, absolutely. What we’ve been telling people is we expect roughly a quarter lag. It may not be perfectly scientific. As you see, this quarter we were operating cash flow positive, and the main delta will just be the interest expense. As you know, we took out a note to fund the TASK acquisition, but we don’t have lots of traditional debt, and so I think there will be roughly a quarter-plus lag between the two.

Very helpful. Thank you.

Thank you. One moment for our next question. It comes from the line of George Sutton with Craig-Hallum. Please proceed.

Thank you. Savneet, you had mentioned that the U.S. quick service restaurant brands are growing faster internationally. I'm curious if you can give us an update now with TASK under your belt a little bit. What kind of benefit do you see for driving those U.S. brands into the TASK system?

We're really early. We've started the connectivity, if you will. Just the announcement of the closing of the transaction led to several inquiries about potential partnerships in that area. What I can say is that our customers and not just our customers, other big U.S. brands are looking for a solution internationally. Now, we’ve got to prove that we can deliver on that going forward.

Got you. One other thing on the large brand opportunities in the U.S., obviously, with you rolling out, can you talk about your conversations with other brands as you're talking about really scaling up and scaling down that implementation capacity? I'm just curious if you’re convinced you can take on other large opportunities like that?

We are right now, and I think that what I know for certain, we can scale down expenses. Ramping it up, we feel like we did a really good job for Burger King and potentially could, but given the pipeline we have, we're likely to keep that going because I think we’re going to have more to roll out over time and hopefully this is our continued cadence.

Thank you. Our next question comes from the line of Charles Nabhan with Stephens. Please proceed.

Good morning and congrats on the quarter. Just a quick one on subscription gross margin based on the disclosure. If I look back over the past few quarters, sequentially it's been increasing in the mid-single-digit range. I'm just curious if you expect that trajectory to continue, and if you could remind us what specific products are accretive to that margin. I believe you’ve said in the past that Punchh is accretive, Brink is in line, payments and menu are slightly below. If you could just remind us of those drivers, it would be helpful.

Sure. Everything you said is correct. Essentially what's happening is Brink is getting in line or close to getting in line, and I think over time it even has the potential to improve further. Punchh is accretive, Data Central is very accretive. PAR Ordering and Payments are currently below that. What we're balancing is that PAR Ordering and Payments are the fastest growing part of the business, currently at lower gross margins. So that hurts margin, but the larger products are seeing more efficiencies come out, which is evident in the balance. All of our acquisitions this year have been wildly accretive to the operating income side. As we get more disclosures out there, you'll see their impact on the gross margin side. Overall, I think over time, that number will move up. Quarter-to-quarter it’s a bit hard due to the different growth rates for different products at different times.

Got it. And if I could follow-up with that on that topic. If I recall, when you acquired Stuzo, you indicated that their average ARPU was a bit higher than that of your existing product, suggesting potential uplift from taking a competitor out of the market. It might be early, but have you started to see some of that benefit from the Stuzo acquisition on Loyalty ARPU?

Yes, so it's not yet; it’s too early. The benefit is more about converting Punchh product customers to the Stuzo platform, called Open Commerce. Over time, we expect to market what we believe is the best solution, and then we think we can convert them to more products over time.

Got it. Thanks again. Appreciate the color.

Thank you. One moment please for our next question. It comes from the line of Adam Wyden with ADW Capital.

Hey, guys. Congrats on a great quarter and reaching the milestone of $2.5 million of EBITDA. I think I remember in 2018 sitting in my office with Chris Byrnes and talking about how as hardware sales go down, you're going to lose a lot of money. It’s just an entirely different business now today than it was six years ago. As you sort of said over the last few quarters, it’s not about hardware. It’s about building 80% to 90% gross margin software and letting that tell the story of profitability. I just had a couple questions. One is on Burger King. It doesn't, at least from where I'm looking at it, feel like you really started ramping up Burger King a lot. Can you sort of give us an update on the Burger King rollout and then sort of how that relationship is evolving?

Sure. We're really limited on what we can say. While we're a vendor to a business, there’s not a lot I can provide in specifics around that. I would say the relationship is really strong. We are very close to the team both personally and at a business level. I think we understand each other well. We have a long way to go and so the opportunity is great, not just with Brink, but with other products down the road. That’s a major excitement I have coming out of this partnership. We can't say a lot without approvals.

Okay, yes. Now that’s sort of my read through. You’re sustaining this 25% growth with not a ton of Burger King, which means that it makes me more optimistic about your ability to sustain the growth rate. You talked about hoping to have some more announcements on other Tier 1s. Can you talk to me a little about M&A? I mean, you’ve done TASK and Stuzo, and things have gone well. How do you think about being able to add on more modules? You've sort of, with Stuzo, had about eight months of it, and it’s gone nicely. I’m curious about your appetite for some bolt-on acquisitions next year.

The M&A focus is definitely more on the modules, the tuck-ins, the bolt-ons than it is on a platform. We are really focused on that because I think we can now prove to ourselves that when we've got one, we can push it through the distribution pipeline with limited to no cost. Companies in the private markets are stranded, have pretty nice products, but lack the distribution you do. We are definitely interested in the potential of accessing this market.

Adam, we got others in the queue. Okay. Last one.

I'm good. Just wanted to say that, to the extent that you guys can get your Tier 1 customers to be your advocates and allow you to announce it, having happy customers publicly advocating for you is the best sales engine. I know historically these customers have had a hard time letting you press release and what have you. Hooters has done a phenomenal job and Jeff Kaplan, if he’s on the call, we appreciate all the missionary work he’s doing for PAR. But to the extent that you can get your customers to speak on your behalf and release these announcements, it could help give everyone a sense that our original thesis of this company is playing out perfectly. We see you guys as a one-on-one competitive asset with no competition. So, the extent that others can see that and you can allow your customers to speak on your behalf and put out these press releases, it could accelerate your cause. This is great and congratulations.

Thanks, Adam.

Thank you. One moment please for our next question. It comes from the line of Anja Soderstrom with Sidoti.

Hi, and thank you for taking my questions. Congratulations on the nice performance here. Most of my questions have been addressed already, but can you just speak a little bit about the M&A environment and if you see any changes there?

I think that it’s a little bit what we just talked about, which is our focus on the M&A environment is on these bolt-on, tuck-ins, modules that we can push to our platform once fully integrated into one of our products. From an environment perspective, it's very robust. There seem to be more companies for sale than ever historically. Definitely, some larger transactions have happened. What we haven't seen is a lot of the smaller and medium-sized transactions come through just yet, and I think that's next.

Okay, thank you. That was all for me.

Thank you so much. And our last question, one moment please. It comes from the line of Mark Palmer with The Benchmark Company.

Yes, thank you for tucking me in here, and very nice job in the quarter. My question is about TASK Group and the potential of that platform. The initial thinking with regard to the acquisition of TASK was that it would enable PAR to follow its existing customers in the U.S. internationally, especially because there's more growth there. But are there any other benefits for TASK that you foresee, especially in terms of landing new customers beyond the ones that you're able to accompany in their international forays?

Certainly. We talked to a brand this week that we've never had a robust conversation with prior to who thinks of the TASK product as very unique and special in international markets, and hopefully, we can bring that forward for U.S. relationships over time. So absolutely, I think the TASK Group has delivered for customers that we don't have relationships with, and it will also deliver in markets that we're not in, like stadiums and casinos.

Thank you. And this concludes our Q&A session for today. I will turn the call back to Christopher Byrnes for closing comments.

Thank you, Carmen, and thank you to everyone for joining us this morning. We look forward to updating you further in the coming weeks. In closing, we look forward to seeing everyone at our upcoming Investor Day on November 25 at the New York Stock Exchange. As space is limited for those intending to attend in person, please register via email at ir@partech.com. We kick off at 1 p.m. that day and we will also be webcasting our presentation with an accessible link on the Investor Page of our website. Have a great weekend, everybody.

And thank you all for participating in today's conference, and you may now disconnect.