Earnings Call Transcript - PAR Q4 2021

Operator, Operator

Good day and thank you for joining us. Welcome to the Fiscal Year 2021 Fourth Quarter Financial Results Conference Call. All participants are currently in a listen-only mode. After the presentation, there will be a question-and-answer session. I would now like to turn the conference over to your speaker today, Mr. Chris Byrnes. Please proceed.

Chris Byrnes, Speaker

Thank you, everyone. I'd also like to welcome you today to the call for PAR's 2021 Fourth Quarter and year-end financial results review. The complete disclosure of our results can be found in our press release issued this afternoon, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations and News section of our website at www.partech.com. I also want to ensure all participants today have access to our Earnings Presentation and Business Review slide deck that we will use during the call to better communicate the momentum in our software business. Unfortunately, we're experiencing a minor technical difficulty that should be resolved in the next few minutes to access the slide deck. The presentation and slide visuals have been furnished in the 8-K that we filed this afternoon. Individuals on the webcast should have access, for those just dialing into the call this afternoon. Sorry, one second. At this time, I would like to cover certain details regarding the call today. Participants on the call should be aware that we are recording the call this afternoon and it will be available for playback. If you ask a question, it will be included in both our live conference and any future use of the recording. I'd also like to remind participants that this conference call includes 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 statements may be relied upon and is subject to the Safe Harbor statement included in our earnings release this afternoon and in our annual and quarterly filings with the SEC. 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 Singh, CEO

Thanks, Chris. And thanks everyone for joining us to review PAR's fourth quarter and year-end 2021 results. As always, there's a lot we want to share with all of you today in our prepared remarks, so we'll kick off now. During the fourth quarter, we continued to drive growth in our strategic recurring revenue platform and saw continued margin expansion as we began to realize the benefits of scale. As a company, we delivered a strong fourth quarter with reported total Q4 revenues of $81.6 million, a 39% increase from one year ago. The revenue growth is driven across all business lines, specifically around our software recurring revenues resulting in $88.2 million of total annual recurring revenue at quarter end, and a year-over-year growth rate of 35% when adjusting for the Punchh acquisition. This increase was driven by 47% growth in ARR coming from Punchh and 30% from Brink. Contracted ARR now totals more than $111 million as of December 31, paving the way for strong 2022. It's pretty important as we scale our ARR that we have been able to drive significant improvement in gross margin within our subscription services revenue. When new management stepped in a little over three years ago, recurring revenue gross margins were well below 45%. At the end of Q4, we're now at 70% and expect it to continue expanding over time. This growth has been driven by an intense focus on ROI-driven engineering and improved Brink architecture and economies of scale. Our strong results this quarter were driven by high levels of execution across the business and continued demand for PAR's Unified Commerce Cloud Platform. We've established strong momentum and have continued to build on that throughout 2021. In Q4, we activated 1,075 new Brink sites, a very solid number considering the two significant holiday periods in the quarter during which little, if any, deployments occur. On a net basis, after churn, total store count now totals nearly 15,830, a 35% increase from one year ago. Brink bookings totaled nearly 1,200 stores in the quarter and saw improved cadence in Q4. Brink continues to report extremely low churn, and this quarter was no different as churn was 3.2% annualized. Turning to Punchh. We continue to outperform with Punchh and added more than 3,200 sites in the quarter, bringing our total to more than 56,000 sites, a 36% increase in the last 12 months. We signed eight new customer logos in Q4 that added to our impressive contracted store list. Digital loyalty programs are critical to the future of restaurant marketing. Applications like Punchh make it easier for brands to connect with their most loyal customers and increase customer lifetime value where it counts most. The National Restaurant Association suggests that if restaurants focus on increasing order flow through phone or tablet—whether it's delivery, online ordering, or even tableside POS—those restaurant businesses will struggle to compete. With the rapid growth in digital ordering during the pandemic, the demand for a leading loyalty app has become even stronger. As the number of channels expands, the need to understand customer lifetime value expands, thereby increasing demand for Punchh. Restaurants are moving to understand individual customer lifetime value versus interval store unit profitability. We are also beginning to see momentum within the convenience store segment as the industry seeks more robust loyalty solutions from traditional restaurants. PAR Payment Services in the pipeline grew significantly in the quarter, and we were extremely pleased to recently announce the selection by Smoothie King to use PAR's payments engine in all 1,000+ stores. We continue to see increased interest across the Brink and Punchh customer bases. I'm confident that additional upsell and new customer opportunities will accelerate this year as more enterprises seek an integrated payment offering from a trusted technology partner that offers competitive and transparent pricing. PAR has all of those things and more. Although still early in our payments initiatives, we've seen notable acceleration in our customer wins during 2021 and believe this revenue stream will be meaningful to our future financial performance. Moreover, it's given our team confidence in our ability to upsell new products. Our product business continues to perform well in a challenging environment. Product revenues in the quarter strengthened year-over-year and improved sequentially as well. Product sales reported at $32.2 million in this recently ended quarter, a 48% increase. The capital purchase environment for restaurants is always tricky, and that has been even more so during the pandemic and the global supply chain difficulties faced by several end markets. As I mentioned previously, we are not immune to those challenges around supply chain, and we experienced some margin impact due to current realities. However, because of our operations and procurement teams' strong efforts, we were actually able to expand margins over the year. Regarding the supply chain, we will continue to diligently manage our partners and vendors through shortages, price inflation, and increased freight charges. We believe we are uniquely positioned to create a greater diversity of supplier sources while simultaneously leveraging technology to manage supply inventory effectively. We anticipate continued volatility in our sourcing channels and expect to closely monitor real-time upstream and downstream visibility across the supply chain to help us predict and prepare for adverse events. Now, briefly on our government business. In the quarter, we reported revenues of $18.8 million, a 2% increase compared to Q4 of last year. Given our large new contract announced in November, we anticipate acceleration in revenues in 2022 as task orders are assigned. As a reminder, the U.S. Air Force Research Lab awarded a single award of $490.4 million IDIQ contract for counter-small unmanned aircraft system work on software, hardware, and technical documentation. The award has a six-year ordering period, with an additional two-year performance beyond the original six. We will recognize revenue as task orders are assigned, but we are experiencing an immediate impact on our contract backlog, which grew to $195.3 million at the end of Q4, a direct result of the new contract award. In addition to accelerated revenue growth in 2022, we'll continue to seek out additional contract opportunities where we can leverage our decade-long experience and performance excellence, specifically in value-added revenue contracts that include direct labor and high-tech work within our Intel solutions service line. Let me now discuss where we see things going from a business perspective. Looking back on my time at PAR, there has been significant progress in driving operational improvement and an accelerated focus on meaningful growth and innovation. We believe that for our business to benefit all of its stakeholders—employees, customers, suppliers, shareholders, and communities—it must win. Winning, to us, is driving a very profitable business long-term. While we're in an aggressive investment period given the terms we serve, we're also continuously focused on driving operational leverage on every expense line of our recurring revenue cost items. This focus has led to dramatic growth in gross margins and demonstrable efficiency across our sales, marketing, and R&D lines. In addition, we are solidifying our senior leadership team, adding individuals with proven track records of delivering efficiency improvements, cost discipline, and growth. We have reorganized and integrated our product engineering teams to bring needed focus to our Unified Commerce Platform, while also better structuring the organization to address customer needs swiftly. These changes are designed to foster collaboration across our entire product portfolio and establish critical linkages to bring innovative new ideas to market quickly and cost-effectively while ensuring we align with our customers' needs. As we continue to implement these organizational changes, we recognize the need to maintain our focus on operational discipline and accountability while achieving sustainable, long-term revenue growth. As I mentioned earlier, a key part of this focus is on driving profitable growth, specifically within our subscription revenue streams. Our goal is not only to grow ARR consistently, but to drive operating leverage within every line of our P&L every single year. A great example of this is with Brink, where in 2021 we grew ARR in excess of 30% while SG&A remained nearly flat—excluding our acquisitions. Combining this focus with a formulated revenue model, we expect new customer signings, along with upsell and cross-sell opportunities to deliver consistent 30% to 40% year-over-year ARR growth, which will help define PAR as an industry leader. While we've grown ARR significantly in three years, we're very aware that we are still at the very beginning of our transformation within the industry we serve. Our aim in building our Unified Commerce Platform is not just to create a bundled solution; rather, to deliver a product that puts power back in our customers' hands. We hope our platform allows our customers to stop focusing on vendor management and instead concentrate on delivering a unique customer experience. In closing, I and the PAR team want to send our support to our team members based in Ukraine and the broader community. Our primary concern is their safety and that of their families, and we are closely monitoring the situation and are in contact with them to offer assistance. I'd also like to thank all of PAR's employees for their dedication and efforts over the past quarter. We've gotten a few key items right and a few wrong; however, our continued focus on winning together has allowed us to move quickly when we veered off course and concentrate on our future. It's not been easy, but it's worked because we've accomplished it together. With that, I'd like to hand it off to Bryan, who will review our financial performance in greater detail.

Bryan Menar, CFO

Thank you, Savneet and good afternoon, everyone. Total revenues were $81.6 million for the three months ended December 31st, 2021, an increase of 39.4% compared to the three months ended December 31st, 2020. Net loss for the fourth quarter of 2021 was $25.6 million or $0.95 loss per share compared to a net loss of $13 million or $0.60 loss per share reported in the same period in 2020. Adjusted net loss for the fourth quarter of 2021 was $9.8 million or $0.36 loss per share compared to an adjusted net loss of $11.7 million or $0.54 loss per share for the same period in 2020. Product revenue for the quarter was $32.2 million, an increase of $10.4 million or 48% from the $21.8 million reported in the prior year. The strong growth was primarily driven by hardware refresh investments by our domestic Tier 1 accounts. Service revenue reported was $30.6 million, an increase of $12.3 million or 67% from the $18.3 million reported in the prior year. The increase was primarily driven by revenues from Punchh of $9.4 million, which included SaaS and related recurring services of $0.2 million and other services of $0.2 million. Total SaaS and related recurring services reported in Q4 2021 was $19.2 million compared to $8.3 million in Q4 2020. The company continues to expand our total recurring revenue base, which includes both software-related services and hardware support contracts. Of the $30.6 million of service revenue reported in Q4 of 2021, $25.6 million is comprised of recurring revenue contracts compared to $14.7 million in Q4 of 2020. Contract revenue from our government business was $18.7 million, an increase of $0.4 million or 2% from the $18.4 million reported in the fourth quarter of 2020. The increase in contract revenues was driven by a $0.4 million increase in our product services product line. We expect the $490 million IDIQ contract announced in Q4 of 2021 will help drive significant contract revenue growth in 2022. Contract backlog continues to be significant, noting a total backlog of $195.3 million as of December 31st, 2021, compared to $150.5 million as of December 31st, 2020. Now, turning to margins. Product margin for the quarter was 23.4% versus 17.4% in Q4 of 2020. The increase in margin was primarily due to favorable product mix and favorable absorption of overhead costs due to increased hardware revenue. We continue to monitor our pricing to properly reflect changes in core structure. Service margin for the quarter was 32%, compared to 12% reported in the fourth quarter of 2020. The increase in margins was driven by non-recurring charges taken in the fourth quarter of 2020. Service margin during the three months ended December 31, 2021, included $5.2 million of absorbed amortization of identifiable intangible assets, compared to $1.6 million during the three months ended December 31, 2020. Excluding the amortization of intangible assets, service margin for the three months ended December 31, 2021, was 48.6% compared to 20.8% for the three months ended December 31, 2020. This growth in margin was driven by our expanding software margins as Savneet commented earlier. Government contract margins were 6.7%, as compared to 8.3% for the fourth quarter of 2020. The decrease was due to build rate adjustments within our ISR business line in the fourth quarter of 2021. We expect contract margins to be more consistent with historical trended margins looking forward into 2022. GAAP SG&A was $24.9 million, an increase of $10.6 million from the $14.2 million reported in Q4 2020. The increase was primarily driven by $10.3 million in total Punchh operational expenses, of which $3.9 million is stock-based compensation. It's worth noting that almost the entire growth in SG&A came from the acquisition of Punchh, and as Savneet mentioned, our intense focus on profitable growth allowed us to expand Brink revenue year-over-year with minimal incremental investment in SG&A. Net R&D was $10 million, an increase of $4.4 million from the $5.6 million recorded in Q4, 2020. The increase is primarily driven by $3.1 million for Punchh and $1.3 million related to additional investments in our other existing products. Net interest expense was $5.6 million compared to $2 million recorded in Q4 2020. The increase is driven by non-cash interest charges related to the 2027 convertible notes. Net interest expense for the quarter includes $3.7 million of non-cash accretion of debt discount and amortization of issuance costs. That's compared to $1.1 million for the same period last year. Now to provide information on the company's cash flow and balance sheet position. For the 12 months ended December 31st, 2021, cash used in operating activities was $53.2 million versus $20.2 million for the prior year. Cash used for the 12 months ended December 31st, 2021, was primarily driven by an increase in pre-tax net loss, net of non-cash charges, and additional net working capital requirements caused by an increase in inventory and an increase in both other assets and current assets as a result of the Punchh acquisition. Cash used in investing activities was $383 million for the 12 months ended December 31st, 2021 versus $9 million for the same period in 2020. Investing activities during the 12 months ended December 31st, 2021, included $374.7 million of cash consideration in connection with the Punchh acquisition. Capitalized software for the 12 months ended December 31st, 2021 was $6.9 million, associated with investments in various hospitality software platforms, versus $7.9 million for the 12 months ended December 31st, 2020. Cash provided by financing activities was $443.6 million for the 12 months ended December 31st, 2021, versus $180.7 million for the prior year. On April 8th, 2021, we received net proceeds of $155.7 million from the private placement of our common stock, in addition to net proceeds of $170.7 million from the term loan. On September 17th, 2021, we received net proceeds of $256.8 million from our offering of the 2027 notes and $52.5 million from our equity offering. We used approximately $183.6 million of those proceeds to repay the term loan in full. Refinancing allowed us to save over $5 million in annual cash interest. During the 12 months ended December 31st, 2020, we received net proceeds of $49.5 million from our offering of the 2026 notes, which reflects our use of $663 million to repurchase a majority of the 2024 notes. We received net proceeds of approximately $131.4 million from our public stock offering in the fourth quarter of 2020. Inventory increased as of December 31st, 2020 by $13.5 million. We strategically increased our inventory on hand to mitigate supply chain shortages, which resulted in a historically high demand for hardware revenue. This proved to be a smart investment as we were one of the few companies to successfully fill customer demands while operating in the supply chain and challenging environment. Accounts receivable increased $1.8 million compared to December 31, 2020 due to increased sales volume and the Punchh acquisition offset by a reduction in days sales outstanding. Days sales outstanding improved within restaurants and retail from 74 days at December 31, 2020 to 58 days at December 31, 2021. Days sales outstanding for government increased from 51 days at December 31, 2020 to 55 days at December 31, 2021. This concludes my formal remarks and we will now move to Q&A.

Operator, Operator

Please stand by while we compile the Q&A roster. The first question comes from Mayank Tandon from Needham. Your line is now open.

Mayank Tandon, Analyst

Thank you. Good evening and congrats on the quarter. Savneet, I wanted to see if you could share some thoughts on the trajectory in 2022? Maybe reconcile the ARR numbers that you shared with us? And even though you're not giving formal guidance, how should we think about the growth between the various segments and how we should think more in terms of hardware, software, and services on the restaurant and retail side?

Savneet Singh, CEO

Sure. On the subscription and services side of what we do, we expect to grow 30% to 40% a year this year, and every year going forward, and there's lots of opportunities for that growth to exceed even those figures. That's where we're confident and we expect to be. We expect that to be in that range for Brink. Punchh will grow more slowly given that we are coming off of that base. In total, we expect SaaS to grow 30% to 40% on the services side. On the product side, which is the hardware business, last year was a refresh year so I don't anticipate massive growth on the hardware side. But given last year was a refresh year, that's expected. On the remaining set of services, we'll anticipate single-digit growth. But the key point is that SaaS continues to grow nicely at 30% to 40% and margins are expanding as we talked about in the call.

Mayank Tandon, Analyst

Just to summarize, is it fair to say the total restaurant business can probably grow at least at a healthy, low double-digit pace? Maybe I'm understating it, but I want to get some sense of what we should be modeling as we look into the rest of the year.

Savneet Singh, CEO

Yeah, of course. We don't look at it so much as the restaurant segment as we see our recurring revenue base growing versus the hardware side of it, given that we think that they're very different businesses. If you combine the two, absolutely, yes.

Mayank Tandon, Analyst

Got it. And then just as a quick follow-up in terms of investments, could you talk about what the priorities are for you this year? And maybe a timeline on the EBITDA profitability. When do you expect to hit breakeven or potentially profit on the EBITDA line?

Savneet Singh, CEO

Absolutely. From an investor perspective, for us it's pretty clear that if you look at the P&L, it's obviously an R&D focused company that's building and shipping product. I'd expect in 2022, investment in R&D to be coupled with strategic M&A, which we've mentioned in the past, and we expect to pursue this year. From a break-even perspective, we expect to hit it next year. As I said, we have all the levers to turn on very quickly, but the goal is to continue to invest and grow while getting there. Given the cash we have on our balance sheet, we're in a comfortable position to keep investing. However, we are all focused on growing ARR while improving efficiency on every line of the P&L. We expect to achieve that this year and it’ll contribute to where we want to be in 2023.

Mayank Tandon, Analyst

Savneet, to be clear, are you referring to EBITDA profitability for all of 2023 or would that be more of an exit target?

Savneet Singh, CEO

Before the exit of 2023. It wouldn't be for the full year, but within 2023.

Mayank Tandon, Analyst

Got it. Thank you so much.

Operator, Operator

Next one on the queue is Stephen Sheldon from William Blair. Your line is now open.

Stephen Sheldon, Analyst

Hey, thanks guys. First here, congrats on the Smoothie King payments plan. It seems like a big win for you guys. You talked about some of the prepared remarks, but how are conversations going there with other potential enterprise clients to potentially adopt the payments solutions? Does this win potentially give you more leverage to go after that opportunity?

Savneet Singh, CEO

Absolutely. I think when we've talked in the past, we never thought we'd be in the market for the enterprise accounts for something this large. We feel really good about the economics. It's certainly given us the confidence that we can sell our solution, not just to smaller concepts, but many large concepts that we work with, and it pushes us to be more aggressive. It’s given us a lot of confidence to push even more down market where margins are even better for us in payments. So, we feel really good about the payments business, and we've always been cautious here, but given that win, it has encouraged many other clients to reconsider our offerings. We were very competitive, and our entire solution proved to be attractive, which should be appealing to many other customers.

Stephen Sheldon, Analyst

Got it. Yes, good to hear. And that's really helpful color. Maybe shifting gears, I'm curious about the shift in focus among restaurant owners and operators from predominantly front-of-house solutions over the last few years to potentially adding back-of-house solutions like Data Central. Our growth for that segment has been a lot lower than Brink or Punchh. What are your thoughts on Data Central in 2022 and 2023 given what you're seeing?

Savneet Singh, CEO

It's early. We've achieved some good wins in the first two months of the year, and we've brought in a great new leader who has been driving change there early on. Back-office for restaurants hasn't been nearly as innovative as front-of-house solutions, and the pandemic has highlighted that gap. I expect organic growth here, but we're also considering inorganic opportunities, as we believe there's substantial room for growth. It's too early to predict whether it will be a breakout year, but we see signs of increased focus with revenue growth returning in Q4 and some solid wins we've achieved, that it should be a good year. We will have a clearer view after we report Q1 in April.

Stephen Sheldon, Analyst

Great. And then just one more quick one. I think you may have provided contracted ARR for the first time this quarter. I believe you've provided it for Punchh before, but can you confirm if that is for all three SaaS businesses combined? How should we interpret the $111 million contracted ARR?

Savneet Singh, CEO

That's exactly right. That is truly under contract. So, it's not just prospects, but signed deals across all businesses, which makes us very excited. You can underwrite a very decent growth rate, even if we didn't grow at all year-over-year.

Operator, Operator

Next one on the line is Samad Samana from Jefferies. Your line is open.

Samad Samana, Analyst

Hi, great. Thanks, guys for taking my questions. As a follow-up on guidance, I appreciate kind of putting some guardrails there. But Savneet, does that include— I know you said it's based on your contract revenue—but does that include payments contribution, or would payments be incremental to that 30% to 40% ARR projection?

Savneet Singh, CEO

Payments stay within there, and could be the lever for us to reach the high end of that range or surpass it. We're very conservative in projecting our payments revenue since we're new to it. Based on what we've observed, it should be driving our contracted ARR number growth continuously month-over-month.

Samad Samana, Analyst

Okay. That's helpful because you answered what was going to be my follow-up, which is what's the delta between the 30 to 40 in the range? Given the unpredictability in the world, it sounds like the 30 has a fairly comfortable line of sight just on the software part of it, and if we layer in payments, you may have a better demand environment that could turbocharge it towards the high-end of the range. Is that an accurate representation?

Savneet Singh, CEO

Yes, that's a simple way to look at it, and I think that's the right perspective.

Samad Samana, Analyst

Great. And then I was wondering, is there any type of seasonality we should be aware of regarding how software gross margins may move from quarter to quarter? How should we think about the trajectory of that? I know there were differences from 2019 to 2020 because of timing of customer launches and the revenue mix, but based on where we exited Q4 with a 70% margin, how should we feel about that going forward?

Bryan Menar, CFO

There's no seasonality in the actual margins throughout the year. What we experienced during the last year was significant margin improvement, especially with our Brink business as we managed costs per site effectively. We exited this year strongly, and we expect margins to continue to improve, particularly due to shifts in our product mix towards SaaS growth within the subscription services. This trajectory will reflect improvements in costs as well, but there is no expected seasonality.

Samad Samana, Analyst

Great. And just one last question from me, when thinking about core subscription ARPU, how do you see ARPU for standalone deals for PAR, for Brink versus Punchh? What might the comparisons be on a consolidated basis when doing a multi-product type of deal versus historical ARPU?

Savneet Singh, CEO

Great question. So, on the Brink side, we did raise prices in the lead-up to 2021, which resulted in double-digit increases. We didn’t disclose specifics, but there have been price increases on the Brink side. Importantly, we've also been able to close deals across all products now. Generally, we're not bundling just to offer discounts; rather we package for accelerated deployment. However, we’re versatile in structuring deals for clients who contract renewals over time, and we've seen great examples of that. We're in the business of delivering value for costs, and we should keep seeing continued success. Across the lines, Brink has seen the most significant price increases, followed by Punchh, and lastly Data Central.

Samad Samana, Analyst

Great, very helpful and thank you guys.

Operator, Operator

Next one on the queue is George Sutton from Craig-Hallum. Your line is now open.

George Sutton, Analyst

Thank you. We're nearing a year since you acquired Punchh and one area of enthusiasm when you did was that they sell at a headquarters level rather than at the regional and franchise level for POS. I'm curious if you can give us a sense of how that combination has begun to support your cross-selling efforts. Additionally, can you update us on the sales cycle for both sides of the business relative to this ownership?

Savneet Singh, CEO

To answer your question about selling at the corporate level versus a franchisee level, it’s been an amazing experience. Winning a deal means we can roll it out within six months and do not require further calls. So, it’s promising. Brink remains successful in winning corporate accounts and converting franchises. The shift will occur when we complete the release of our unified platform, which will be a new product in itself that comes as one. Until that happens, engagement will continue as is. But as I noted earlier, our ability to communicate the combined value of our solution is increasing opportunities.

George Sutton, Analyst

Secondly, I’m happy to inform you if you haven't heard, we're moving from a pandemic to an endemic situation. That means we're returning to dining in restaurants, and you were prepared to launch your table service offering a couple of years back. Can you please share an update on that opportunity?

Savneet Singh, CEO

Yes, all those potential developments are in our sight. We are exploring solutions to address challenges such as mobile ordering and seamless payments to enhance our offerings within that market. We agree, it's a great opportunity for growth. As the economy may face potential slowdowns, we recognize that our existing base has advantages. The QSR market typically captures more share in challenging times, which allows us to invest in more technology. We feel strongly positioned on both sides to capitalize on these shifts.

George Sutton, Analyst

Great. Thanks guys.

Savneet Singh, CEO

Thank you.

Operator, Operator

Next one on the line is Adam Wyden from ADW Capital. Your line is open.

Adam Wyden, Analyst

Hey guys, a couple of questions. Building on what Samad mentioned earlier, when I first invested in this company, the previous management made some missteps regarding pricing. I won't identify a specific Tier 1 chain, but I noted paid $50 a month. Can you discuss how you’re addressing the previous management's issues in relation to pricing? How do you plan to bring these customers up to current market value?

Savneet Singh, CEO

Sure. I understand your entire question. The first point about pricing—I completely agree it's an important lever for us this year. In 2021, we faced challenges with the low-priced contracts enacted previously. Consequently, our activation ARPU was lower due to these deals. But in 2022, we introduced significant price increases for new customers. Every deal is processed through a formal CPQ process, and we are confident in our ability to raise prices. The key to raising pricing is demonstrating value. Brink is stable, and given our product's performance and notable growth in Brink margins, we can confidently approach existing customers with requests for price adjustments. We've initiated discussions and faced no resistance because our product offers substantial value.

Adam Wyden, Analyst

Just to clarify, as you raise prices based on the demonstrated value you provide, it was difficult to raise prices when the net promoter score was down. Now that you've invested significantly in your technology stack and shown the product is working, the distance between our average ARPU and that of competitors like NCR at $68,000 for cloud point of sale allows substantial room for upward mobility. You’re actively working on the process now?

Savneet Singh, CEO

Yes. I also realize that your second question related to how we focus on growing size accounts. We see the Tier 2 market as extremely valuable for us. It's a sector where we excel, allowing us to upsell multiple products—Brink, Punchh, and Data Central—while offering an attractive payment product that offsets hardware CAPEX. We see a robust opportunity while remaining engaged with larger Tier 1 enterprises, but we want to be particularly active in the Tier 2 segment, where there’s plenty of demand.

Adam Wyden, Analyst

This is my last question, but when you consider the ecosystem of restaurant software modules, I think of Brink as the brain, and then all the modules underneath that. You see Brink as Microsoft Windows, and then products like Excel or PowerPoint need Windows to run. The irony is that pricing power and ARPU on applications like Excel tend to be substantially higher than existing Brink pricing. Can you discuss the internal development of these modules, as Brink can be difficult to acquire but good to cultivate existing customers with value-added modules? What organic and inorganic initiatives do you see to bridge this gap?

Savneet Singh, CEO

Absolutely. This perspective reflects a vital part of our company strategy. As noted earlier, we are looking at expanding both organically and by investing in additional products. This will allow us to grow at a comfortably scheduled 30% to 40% each year. Our potential for improvement in the back-office, kitchen area, and even team management becomes increasingly apparent. As we further our product line, I believe it will become easier to sell additional products to current customers. We are committed to enhancing our offerings, and our fast-growing payments sector has illustrated the additional upsell potential within the customer base.

Operator, Operator

All right. Next one on the queue is Anja Soderstrom from Sidoti. Your line is now open.

Anja Soderstrom, Analyst

Hi. Thank you for taking my questions. Just wondering about the installments. You indicated that it slowed down somewhat in Q4 due to the holidays. Given that you had a particularly strong Q3, what should we expect from the first quarter and the subsequent quarters?

Savneet Singh, CEO

It's a bit early to provide exact expectations, but generally, Q4 is often an activation quarter due to the holiday period, where installations slow down. We expect Q1 to be a strong quarter for activations while also focusing on ARPU growth, as emphasized by previous callers. With these combined factors, we anticipate higher results than our previous estimates and continued upward trends thereafter.

Anja Soderstrom, Analyst

Thank you. Additionally, you mentioned in terms of M&A opportunities that you are observing the market. What are your thoughts on opportunity assessment and current valuations?

Savneet Singh, CEO

The market is very dynamic. It's true that with the recent downturn in SaaS stocks, M&A has become slightly more complex, but it remains feasible. We've been transparent in building a strong M&A team. We feel confident about our successes with Punchh, reflected in both the numbers and team culture. We believe PAR is an excellent home for businesses, especially with how many companies transition from a capital intensive VC structure in uncertain economic times. We hope these changing conditions will provide beneficial opportunities for PAR.

Anja Soderstrom, Analyst

Okay. Thank you for that insight.

Operator, Operator

All right. There are no further questions in the queue, sir.

Bryan Menar, CFO

We would like to thank everyone for participating in today's call and wish you a good evening. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.