Earnings Call Transcript - PAR Q2 2025

Operator, Operator

Thank you, Lisa. Good morning, everyone, and thank you for joining us today for PAR Technology's 2025 second 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 Q2 financials presentation as well as in our related Form 8-K furnished to the SEC. During the call this morning, 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 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?

Savneet Singh, CEO

Thanks, Chris, and good morning, everyone. Thank you for joining us today. We reported $112.4 million in revenues in the quarter, an increase of 44% year-over-year. We also continue to expand our profitability. Adjusted EBITDA came in at $5.5 million. This number includes $450,000 of accounting charges for non-period deferred contract costs, which when further backed out, brings our EBITDA to $6 million for the quarter. Subscription services revenue increased by 60% in the quarter to $72 million from last year and 21% organic when compared to Q1 2024. We delivered ARR of approximately $287 million, up 49% year-over-year and achieved organic ARR growth of 16%, showing positive momentum across our platform as we just restarted our major rollout and are prepping for several multiproduct rollouts later this year and early 2026. These results reflect the growing demand for unified technology in the food service industry and the better outcomes our solutions can deliver for brands. Now to dig into our business with further detail. Total Operator Cloud ARR ended at $119 million and grew 42% in the quarter, with organic growth of 13% when compared to the same period last year. This growth is slower than our historical trend due to the mid-quarter restart of Burger King, which only hit scale starting in June. Crucially, we have significant committed rollout visibility through Q4, which will markedly increase POS growth in the second half of the year. As we mentioned on last quarter's call, in Q2, we restarted the Burger King implementation of PAR POS and initiated the rollout of PAR OPS to their stores. We continue to receive very positive feedback from corporate and franchisee stakeholders alike, and this successful partnership was ultimately crucial to us also contracting with Popeyes Louisiana Kitchen with PAR OPS. Outside of Burger King, we're seeing strong mid-market traction with 17 new direct POS logos signed in Q2 alone, continuing the trend from last quarter. All of these deals were multiproduct, proving the strength of our product and better together value proposition versus up-and-coming point solution competitors or SMB providers trying to crack the enterprise. Our thesis that delivering outcomes of efficient operations and higher sales is playing out quickly in the mid-market and beginning to gain traction in the enterprise with proof points like PAR OPS and RBI. Our back-office product suite, which we retitled from Data Central to PAR OPS earlier this year is proving to be one of the most exciting areas of innovation and growth at PAR. PAR OPS delivered a strong sales quarter with 3 new customer deals. We also kicked off our implementation with Popeyes Louisiana Kitchen and Burger King. We believe that a key better together enhancement has been the addition of the Delaget product suite, which we believe will drive our flywheel with strong multiproduct adoption. As an example of this, Coach AI, our AI-powered intelligent assistant pulls real-time POS data, drive-through timer information and voice of the customer guest metrics to give in-store operators actionable intelligence to maximize efficiency. It is a clear enhancement of both the POS and back-office experience. We're at the point where PAR OPS itself is becoming a hero product within the PAR portfolio that is capable of driving cross-sell. The PAR OPS product suite has a significant late-stage pipeline covering multiple existing and prospective Tier 1 and 2 customers, and we are trending towards both 2025 and 2026 being record years for this product line. Separately, with respect to our TASK POS platform, we have aggressively repositioned our focus to pursue global Tier 1 deals and realize the value that the PAR umbrella brand brings to go-to-market efforts. We have gotten extremely compelling feedback from the biggest and fastest-growing brands that our TASK POS platform architecture is the best in the world for global brands pursuing international expansion. Because of that, we've taken the important measure to add investment to this business while pausing projected rollouts to focus on building out the product for the slate of late-stage Tier 1 prospective customers. A recent example of TASK potential was the recent launch of Wingstop's inaugural store in Australia this past quarter. We believe the near-term trade-off of growth for product build-out will set PAR up for massive success in the future. We anticipate rolling out our accrued multimillion dollar backlog of tasks starting in Q1 2026. We believe our decision to run a double-pronged POS strategy with PAR POS for domestic brands and TASK for global brands will ensure we cover the maximum amount of enterprise concepts. There is no one-size-fits-all with point-of-sale software. And with our current portfolio, we cover both domestic and global enterprise QSR brands while also building a pathway toward continued expansion in other hospitality verticals. Now on to payments. In the second quarter, PAR's payment business started a major shift in operating model, moving from 99% card-present transactions to now accepting and selling card-not-present transactions with the cross-sell of our PAR wallet, ordering and retail solutions. Due to the shift in timing around the attaching payments with PAR POS rollouts, we saw a slower-than-normal quarter in Q2. The second half of this year should return payments back to growth as we've signed some significant 500-plus location card-not-present payment deals that we will announce very soon. We continue to see PAR payments as a key and strategic growth driver for PAR with a much larger and future total addressable market, given the addition of new sales channels and outlets. In short, Operator Cloud is uniquely positioned and hedged in the market to service both the dual need of revenue maximization and operational efficiency. While our business may not be consistent quarter-to-quarter, the 2025 pipeline keeps us very confident about long-term growth with nearly $50 million in prospective ARR within just POS and back office. Further, our point-of-sale products have over $20 million of ARR tied to already contracted rollouts, giving high future visibility and confidence. It's important to note that the aforementioned pipeline number does not even include two mega Tier 1 deals we are pursuing. Moving to the Engagement Cloud. In Q2, we continued to strengthen our market position, driven by robust customer demand and strong strategic innovation. We exceeded internal targets with engagement ARR increasing 55%, including 18.5% organic growth compared to Q2 last year. For enterprise restaurants, the growth trajectory of digital engagement and loyalty programs significantly outpaced traditional sales channels. Despite broader industry headwinds and consumer spending, brands remain committed to enhancing their digital strategies with PAR's Punchh ordering and wallet platforms being key focus points of investment. In today's competitive market, where customer acquisition costs continue to rise, loyalty programs have shifted from optional extras to essential tools. They're critical not only for driving repeat business, but also for building lasting emotional connections with guests. Our platforms powered by a better together approach, uniquely position restaurants to capitalize on these opportunities and drive superior outcomes. As a result, we have begun winning multiproduct deals at an impressive rate. In Q2, we signed 10 new engagement mid-market and enterprise customer deals. 70% of these deals included multiple products, including Punchh, ordering and payments. Let me reiterate that point: 70% of our deals with Punchh now include a second product when last year Q2, zero deals did this. This is an enormous change at PAR. Critical to this multiproduct evolution is the expansion of PAR ordering. We closed 6 new ordering deals this quarter, demonstrating momentum and growing demand for our comprehensive offerings. What's particularly noteworthy is that 100% of new Q2 ordering deals were cross-sells into our existing base. What largely drove that trajectory change in the cross-sell within the Engagement Cloud was our launch of a new suite of products, PAR Engagement, which unifies 4 central pillars: marketing, ordering, loyalty and data into one integrated solution. Even more exciting than our recent wins is our product momentum. The industry is ready to move beyond online ordering 1.0 and is actively seeking innovation. Our development team velocity underscores this. Storypoint commitments have doubled compared to last year, meaning we're now launching twice the product volume. The perfect example of this are the embedded AI-driven tools proven to boost check size via intelligent upsell and drive higher one-to-one personalization through Smart Segment Builder. We feel that our ordering product is now best-in-class versus the legacy peers focused on driving cash flow returns versus product outcomes. Similar to Operator Cloud, Engagement Cloud ended the quarter with a pipeline of over $50 million, providing strong visibility for future growth. Now turning to PAR Retail. PAR Retail delivered another strong quarter and is quickly becoming the second pillar of our multi-vertical strategy. Our flywheel in convenience and fuel is starting to accelerate. In Q2, we secured 4 high-value enterprise wins. Historically, in the C-store industry, deals are chunky. In an average year, we would close 2 to 4 total. Our speed this year highlights the growing trend amongst operators, a move towards consolidation with a single trusted technology partner. And we're building momentum and are actively engaged with 8 more enterprise opportunities with the potential to close in the back half of this year. Additionally, this quarter, we completed the integration of our new self-checkout product, Skip. This is adding an extremely healthy ARPU white space and tight synergy to drive better outcomes for our customers. Our largest customers are already in talks to expand their relationship with self-checkout. In comparison to restaurant, we see that while C-store deals move slower, they are highly strategic, long-term multiproduct relationships that drive massive future potential to higher ARPU and expand within the PAR ecosystem. Just as important as new customer wins in C-stores is the expansion among existing customers. A standout example is EG Group, one of the largest global forecourt operators. Since launching on PAR retail, EG has scaled significantly, currently performing at nearly 3x its original program metrics. More importantly, they are now actively evaluating additional PAR products, including self-checkout to drive further operational efficiencies and open new revenue streams. This kind of expansion, combined with the momentum we have winning new logos, demonstrates the beginning of our long-term flywheel in the convenience and fuel industry. We are clearly viewing the potential of this industry to becoming a meaningful driver of PAR's growth overall. Moving to hardware. We had a stronger-than-planned quarter in hardware revenues with an increase of 33.5%. Clearly, there are a number of our hardware customers who accelerated their purchase ahead of tariffs being assigned. The continued uncertainty around tariffs will increase volatility into global trade policies and supply chains. We will constantly evaluate the current environment, and we'll take the necessary steps to mitigate the impact on our business to the best of our ability. In summary, Q2 was a validation of PAR's platform strategy and market position. Q2 saw 27 new logos signed with PAR, of whom 19 were multiproduct. Across foodservice, we are seeing a definitive shift in buying behavior towards unified enterprise-grade solutions in an environment in which PAR is uniquely well positioned as an industry leader. While our quarter-to-quarter movements are never linear, our 2025 pipeline of new deals stands near $100 million, which gives us great confidence around long-term durable growth. What's more, we feel even more excited that when looking at pipeline, we exclude our largest deals from these accounts in order not to be over reliant on a deal or two, giving us even more confidence on our long-term potential. Bryan will now review the numbers in more detail, and I'll come back at the end.

Bryan A. Menar, CFO

Thank you, Savneet, and good morning, everyone. In Q2, we continue to execute to our plan of driving organic growth across our products and the verticals we serve while also driving incremental bottom-line improvement. Subscription services continue to fuel our organic growth and represented 64% of total Q2 revenue. The growth from higher-margin revenue streams resulted in a consolidated non-GAAP gross margin of $59.3 million, an increase of $20.8 million or 54% compared to Q2 prior year. We managed the growth while continuing to drive efficient operating expenses. As a result, we reported a $9.9 million improvement in adjusted EBITDA compared to the Q2 prior year. Now to the financial details. Total revenues were $112 million for Q2 2025, an increase of 44% compared to the same period in 2024, driven by subscription service revenue growth of 60%, inclusive of 21% organic growth. Net loss from continuing operations for the second quarter of 2025 was $21 million or $0.52 loss per share compared to a net loss from continuing operations of $24 million or $0.69 loss per share reported for the same period in 2024. Non-GAAP net income for the second quarter of 2025 was approximately $1 million or $0.03 income per share, a significant improvement compared to a non-GAAP net loss of $8 million or $0.23 loss per share for the prior year. Adjusted EBITDA for the second quarter of 2025 was $5.5 million, an improvement of $9.9 million compared to the same period in 2024. Sequentially, adjusted EBITDA improved by $1 million in the first quarter of 2025. Q2 adjusted EBITDA of $5.5 million included $450,000 of accounting charges for non-period deferred contract costs. Removing these non-period charges, adjusted EBITDA would have been $6 million. Now for more details on revenue. Subscription service revenue was reported at $72 million, an increase of $27 million or 60% from the $45 million reported in the prior year, and now represents 64% of total PAR revenue. Organic subscription service revenue grew 21% compared to the prior year when excluding revenue from our trailing 12-month acquisitions. ARR exiting the quarter was $287 million, an increase of 49% from last year's Q2, with Engagement Cloud up 55% and Operator Cloud up 42%. Total organic ARR was up 16% year-over-year. Hardware revenue in the quarter was $27 million, an increase of $7 million or 34% from the $20 million reported in the prior year. The increase was primarily driven by continued penetration of hardware attachment into our expanding software customer base. Professional service revenue was reported at $13.6 million, relatively unchanged from the $13.2 million reported in the prior year. Now turning to margins. Gross margin was $51 million, an increase of $19 million or 59% from the $32 million reported in the prior year. The increase was driven by subscription services with gross margin dollars of $40 million, an increase of $16 million or 67% from the $24 million reported in the prior year. GAAP subscription service margin for the quarter was 55.3% compared to 53.1% reported in Q2 of the prior year. Excluding the amortization of intangible assets, stock-based compensation and severance, total non-GAAP subscription services margin for Q2 2025 was 66.4%, consistent with the 66.4% for Q2 2024. Sequentially, the margin decrease from Q1's margin of 69% was primarily driven to favorable Q1 adjustments and Q2 product mix. We expect adjusted subscription service margin baseline to be between 66% and 67% for the second half of 2025. Hardware margin for the quarter was 27.3% versus 22.8% in the prior year. The improvement in margin year-over-year was substantially driven by favorable product mix as well as year-over-year reduction in expense as we aligned our hardware-related workforce with organizational priorities. We continue to monitor the uncertainties in light of continuing changes to global tariff policies, which may have adverse effects on our hardware revenue and hardware gross margin. We are continuing to evaluate and implement mitigating actions, including potential supply chain resiliency movements and cost or pricing measures if needed as the tariff environment evolves. Professional service margin for the quarter was 28.7% compared to 27.5% reported in the prior year. Increase primarily consists of margin improvement from field operations and repair services, substantially driven by improved cost management and reduction in third-party spending. In regard to operating expenses, GAAP sales and marketing was $12 million, an increase of $2 million from the $10 million reported in the prior year. The increase was primarily driven by inorganic increases related to our acquisitions, while organic sales and marketing expenses increased $0.6 million year-over-year. GAAP G&A was $32 million, an increase of $6 million from the $25 million reported in the prior year. The increase was once again primarily driven by inorganic increases, while organic G&A expenses increased by $1.5 million year-over-year, primarily due to certain noncash or nonrecurring expenses, of which $1.1 million are non-GAAP adjustments. GAAP R&D was $21 million, an increase of $5 million from the $16 million recorded in the prior year. The increase was primarily driven by inorganic expenses, while organic R&D expenses increased $2.1 million year-over-year. Operating expenses, excluding non-GAAP adjustments was $54 million, an increase of $11 million or 26% versus Q2 2024. But when excluding inorganic growth, operating expenses only increased $2.4 million or 6%. The organic increases was primarily driven by a continued investment in R&D expense. Exiting Q2, non-GAAP OpEx as a percent of total revenue was 47.9%, a 680 basis point improvement from 54.7% in Q2 of the prior year, as we continue to scale efficiently and demonstrate strong operating leverage. Now to provide information on the company's cash flow and balance sheet position. As of June 30, 2025, we had cash and cash equivalents of $85 million and short-term investments of $0.6 million. For the 6 months ended June 30, cash used in operating activities from continuing operations was $24 million versus $33 million for the prior year. Q2 cash used in operating activities of $6.6 million improved noticeably from Q1. We expect operating cash flow to continue to improve back to positive for the remainder of the year as we continue to drive incremental profitability and we reduce our net working capital needs. Cash used in investing activities was $8 million for the 6 months ended June 30 versus $73 million for the prior year. Investing activities included $4 million of net cash consideration in connection with the tuck-in acquisition of Go Skip and capital expenditures of $2 million for developed technology costs associated with our software platforms. Cash provided by financing activities was $11 million for the 6 months ended June 30 versus $192 million for the prior year. Financing activities primarily consisted of the net proceeds from the 2030 notes of $111 million, of which $94 million was utilized to repay the credit facility in full. As noted in our performance and remarks, we are pleased with the team's ability to continue to drive meaningful organic growth and incremental profitability while also making the appropriate investments for sustained growth as we move forward with the next phase of our transformation. Our focus on delivering best-of-breed products that truly provide exponential value when bundled together has allowed us to continue to build a healthy pipeline with both multiproduct opportunities as well as accelerated cross-sell penetration. I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.

Savneet Singh, CEO

As we conclude this morning, I want to discuss PAR's outlook for the remainder of the year. Our primary growth opportunity lies in POS. It is essential for restaurant operations, generates one of our highest average revenue per user products, has strong customer retention, and serves as our best avenue for cross-selling. However, the growth of our POS business has been slower than we initially anticipated for 2025. This delay affects our immediate revenue opportunities in POS and payments. We maintain high win rates, but the rollout of deals has been slower than expected, and the signing of larger agreements has been postponed, not lost. While economic pressures have affected the timing of adoption, they do not alter the eventual necessity for technological upgrades due to significant changes in restaurant software. Legacy systems are not equipped to handle AI-driven tools, and in the quest for efficiency, tech-savvy concepts will prevail. Put differently, revenue will materialize, just a bit later than anticipated. Additionally, our POS deals that have been signed but not fully rolled out are valued at over $20 million today. These are already secured deals, not prospective opportunities. We are very optimistic about our long-term growth prospects, supported by the strongest sales pipeline we have seen in five years. The combination of PAR POS and TASK positions us to address the largest total addressable market we have ever had. Currently, we are engaged in advanced discussions with three top 20 restaurant brands, two of which are amongst the global top 10. Winning any of these would significantly enhance our growth trajectory, alongside the previously mentioned $50 million operator pipeline. Our business continues to grow steadily and reliably at more than 15%. In summary, securing one or two Tier 1 POS deals will boost our growth from this base for years, in addition to the numerous multiproduct rollouts we have planned for later this year and in 2026. While we aim for 20% organic annual recurring revenue growth as our guiding principle, we expect to finish this year in the mid-teens, influenced by the slower POS and payment rollouts observed in the first half. Although the second half looks promising and Burger King is rolling out as scheduled following the June ramp-up, the slower performance in the first half will make it challenging to meet our target. There remains significant opportunity for us to recover and reach our goal for the year, but we want to manage expectations wisely. On a personal note, I want to share that I have been the CEO of PAR for over six and a half years. I take great pride in our achievements, yet I believe we are only as good as the future value we can create today. I understand that many of you have invested in PAR, but you have also placed your trust in me and my leadership team. We are reminded of this responsibility daily and are motivated to deliver based on your belief in us. This is something we take seriously. PAR reflects both myself and the team I lead, and I consider this responsibility not only a pillar of my career but also of my life. Our culture emphasizes relentless accountability, urgency, and ownership. We manage your capital as if it were our own. We recognize that every dollar we spend belongs to you, not us, and we never lose sight of that. Most importantly, we believe that shareholder return over the long term is the one metric that truly matters, and we consistently focus on that responsibility. We are a company founded on the principle that nothing is given and everything is earned. Our decisions are not dictated by quarterly results but rather consider long-term value. Whether it's through price increases, accelerating launches when multi-product opportunities are available, or imposing taxes on third-party systems, there are always options we decide not to pursue because we don't believe in the trade-offs. The long-term perspective always prevails. We wish to partner with investors who believe in our long-term vision and strategy, which is driven by determination and foresight—transforming a legacy hardware business that was losing money into a profitable enterprise software platform with substantial competitive advantages. We've achieved this by being patient for the right opportunities and acting when the time is right in the M&A market while building products from a long-term perspective. PAR is not concentrating on merging legacy companies that prioritize profit over growth, as this does not align with our philosophy of delivering top-tier products and achieving greater success together. Let me clarify: our foundation is solid and our future path is clear. Through contracted rollouts or advanced-stage Tier 1 opportunities, the outlook is promising. A game is not determined by its score at halftime, and we have a proven team of fierce competitors at PAR who are ready to maximize long-term value for shareholders. We view this opportunity as pivotal for defining our legacy. This mindset has fueled our progress over the last six and a half years and will continue to propel us forward. Thank you for your confidence in PAR. We aim to consistently validate your trust. Please open the line for questions.

Operator, Operator

The first question today is going to come from Mayank Tandon of Needham.

Mayank Tandon, Analyst

I wanted to start, Savneet, with some of the comments you made towards the end of the call regarding the growth ramp. So just to be clear, given the BK rollout timing, it's nice to hear that it's back on track and some of the deals that are now go-live, should we still expect subscription growth to reaccelerate from the first half? So any directional guidance you can provide on that would be helpful. And also any comments around what we should think about on the services and the hardware side, just so we have our models in a good spot.

Bryan A. Menar, CFO

Mike, this is Bryan. Thanks for the question. I'll take that first and then Savneet can finish it up. But in regards to the acceleration, yes, like when we talk about year-over-year growth and what Savneet was talking about at the end of the script there, it's because of Q1 and Q2 slowing down because of the rollouts, we have that ripple effect as you go through Q3 and Q4 because it's still in your metric. Year-over-year growth is actually a lagging indicator. Incrementally, right, if you go from quarter-to-quarter, we're expecting now we're seeing accelerated growth incrementally from Q3 into Q4. So hopefully, that answers your question there, and I'll let Savneet answer your questions on the services and hardware.

Savneet Singh, CEO

The second half of the year appears very promising, although we are beginning from a lower error base than initially anticipated. This means reaching the 20% target will be slightly more challenging, but there are several strategies we can employ to address that. I want to be realistic in managing expectations. As mentioned, we have a significant amount of contracted revenue that simply needs to be executed, so it largely depends on when that revenue is recognized and the timing involved. Regarding hardware, we observed a spike in the second quarter, likely due to uncertainty around tariffs, causing some clients to advance their purchases. I expect hardware sales to return to more typical levels in the third and fourth quarters. However, if there is renewed discussion about tariffs, we could see another spike as customers might rush to make purchases ahead of any changes. At present, it seems that there is some stability in the buying cycle for hardware. On the services side, I anticipate consistency with an increase in activity, as incremental revenue growth in the latter part of the year is considerably higher than in the first half. Therefore, we expect more installations and professional services work during this time.

Mayank Tandon, Analyst

Got it. That's helpful. And then as my follow-up, Savneet, again, great to hear about the multiproduct wins, the record number there. Could you maybe give us any thoughts around what are the scope and size of these deals relative to those single product deals? In other words, what is the ARPU uplift that you can typically capture from these types of wins?

Savneet Singh, CEO

It's a great question. So when they come from the Operator Cloud, and I'll give you the average at the end, but when they come to the Operator Cloud, you're usually taking a POS deal that's anywhere from $2,400 to $3,000 a year, and you're adding another $1,600 of back office. And if it's payments, you're adding another $2,000 to $3,000 as well. So it is, call it, a 60% to doubling of the revenue base depending on which product has been attached. So it's very, very impactful. We had an example of a small chain we signed in Q1. It's about 100 stores. Normally, 100 stores picking us for POS will be, call it, ARPU per store of around $2,500. This client will be $700,000 or $800,000 a year customer, right? So paying us $7,000 or $8,000 because they hit the full product suite. And so it has a meaningful impact. That hasn't flowed through our P&L yet. This has been a very new trend for us. On the Engagement Cloud, it's a little bit smaller. The average loyalty customer is, call it, anywhere from $80 to $100 a month, sometimes a little bit bigger than that and growing, obviously. And when they add ordering, it's around the same, depending on which modules they pick. So it's a doubling on that side. So it is a really, really meaningful impact to the P&L and again, something we're looking forward to having flow into the P&L at the end of this year and next year.

Operator, Operator

And the next question will come from the line of Stephen Sheldon of William Blair.

Stephen Hardy Sheldon, Analyst

So Savneet, you mentioned two mega Tier 1 deals that you're currently pursuing in the Operator Cloud. I know there are probably limitations on what you can say, but any more context on those, when decisions are potentially going to get made and what PAR solutions those brands might be considering? Is POS on the table for those considerations?

Savneet Singh, CEO

Yes, there are POS deals. We are working with three top 20 brands and two top 10 brands, all related to POS, and we hope at least one of them will involve multiple products, possibly two. The timing for two of these deals is expected in 2025, while one might be set for 2026, although the customer expects it in 2025. These deals are significant. The key point is that by adding TASK to the PAR platform, we can now engage in these global deals, which are positively influencing our pipeline. We have proactively halted most TASK rollouts this year, which has slightly muted our growth, in order to reinvest in the TASK platform. This strategy aims to secure not only these deals but also more global brands that we have not been able to engage with in the past. In summary, we anticipate two of these deals in 2025 and one in 2026, and they are all related to POS.

Bryan A. Menar, CFO

And I just want to add one thing, Stephen, to that, I just want to make sure from the remarks that we had in the script too, the amounts that we're talking about pipeline in there excluded these because we didn't want to kind of distort what we're talking about here. So we have a healthy pipeline across our products, across the verticals we're serving. And these are other additional actual jobs that are actually our focus for the long-term strategic growth.

Stephen Hardy Sheldon, Analyst

Got it. Yes, that's helpful. And then just looking at the active sites between operator and engagement, it seemed like both were maybe down just a touch sequentially. I mean any context on that, what drove that?

Savneet Singh, CEO

Yes, definitely. On the Engagement side, we will see a notable increase in Q3. We are finalizing deals and starting to collect revenue, although they haven't gone live yet, so it's really a timing issue. The Engagement side has shown very strong ARR growth, and you can expect to see those results reflected in the next quarter, which is very exciting for me. We experienced some minor churn there, which was actually necessary churn, consistent with historical rates, and we believe it was beneficial for us. Regarding the Operator Cloud side, the second half of the year usually sees significant activity as the sites get underway.

Bryan A. Menar, CFO

In the first half, it was really due to the rollouts being delayed that caused that issue in regards to what we saw for growth rates year-over-year.

Operator, Operator

And the next question is coming from the line of Andrew Harte of BTIG.

Andrew James Harte, Analyst

Savneet, I really appreciate the comments on Better Together. It sounds like the multiproduct sales cycle really starts with POS. But I guess, can you talk about what are the most common add-ons? I think something you talked about in your prepared remarks was PAR OPS having really great momentum. Do you see that as cross-sell or an upsell or net new? Just help us understand the sales cycle starting with POS and then what you go with from there.

Savneet Singh, CEO

That's a great question. Generally, in the Operator Cloud area, we focus on payments and back office. A lot of my enthusiasm for PAR OPS comes from how effectively we've integrated that bundle, which is always tied to our product offerings. Once we roll out product functionality, we can enhance our pipeline. Typically, this involves one of those two components. On the Engagement side, it's primarily about PAR Ordering, which is now a leading online ordering product and is poised to capture significant market share. Looking ahead, what's really exciting is the addition of more products, specifically product 3, 4, 5, and 6. We're preparing for that.

Andrew James Harte, Analyst

And then I would love to hear your thoughts on the online ordering space, especially with the Olo deal announced a couple of months ago. It feels like PAR has a great opportunity to effectively compete in online ordering with MENU as an upsell as you just kind of talked about. So would love to hear your thoughts on the online ordering space. And then maybe just your continued appetite to probably do M&A. It sounds like there was another tuck-in this quarter as well.

Savneet Singh, CEO

PAR Ordering has been a remarkable highlight for the year. Our product velocity is impressive, with shipments occurring almost every few weeks. We have strong confidence in being a leader in this area. It's been exciting to achieve this with a small team working quietly, and now we are seeing the results. We secured six new clients this quarter and anticipate significant wins in the upcoming third and fourth quarters. For the first time, we feel prepared to target larger competitors. The strong performance of PAR Ordering is evident from the number of deals we are winning. Our integration of PAR Ordering with our loyalty programs, as well as with POS and other components, gives us a competitive advantage that we believe others cannot match. With the largest loyalty program in the industry, connecting ordering to our services enhances our product offering. We expect substantial developments in this area, and while we are in the early stages, we are optimistic. Furthermore, the growth in PAR Ordering is also generating future payment revenue, which we see as an exciting income stream for later this year. We feel confident about our ongoing progress, and we plan to release several press announcements regarding new wins in the latter half of the year, featuring recognizable brands.

Bryan A. Menar, CFO

And then, Andrew, just I think in your reference to make sure I clear up for you on the tuck-in acquisition, it was GoSkip you referenced the cash flow section, which was a tuck-in at the end of Q1, and that is in our retail vertical.

Operator, Operator

And then our next question will be coming from the line of Will Nance of Goldman Sachs.

William Alfred Nance, Analyst

I wanted to come back to the ARR growth. I heard you on where you're expecting to end the year as some of the pushouts. But it sounds like on an incremental basis, you are expecting some acceleration. And so I was just wondering if you could kind of go through the puts and takes, Burger King restarting, some things getting pushed out. What does it sort of take? Or what's the line of sight? Do you have a sense for when we could see ARR growth kind of back in that 20% range? Like do we need to lap the first half of 2025 when things were going a little bit slower to kind of see the full acceleration? Or could we see it sooner?

Savneet Singh, CEO

The earliest we expect to see an improvement is in Q4, but it may be a bit later. There are many positive developments, but forecasting quarter-to-quarter remains challenging. Burger King is performing well, yet due to our current annual recurring revenue baseline, even with new additions, the comparison will appear lower since we are starting from a smaller base. The rollout we had planned, which includes over $20 million in contract revenue, is progressing slower than anticipated, likely due to macroeconomic uncertainties that caused some clients to delay the rollout by a month or two. These contracts are still secured, and we need them to accelerate. This has been the primary challenge we are facing. Additionally, we made a strategic choice not to implement TASK revenue at this time, opting instead to focus on securing these significant global deals. This means forgoing some short-term revenue opportunities in favor of potentially higher returns in the future with these Tier 1 contracts. Furthermore, our multiproduct deals, while advantageous in terms of economics for our shareholders, do slow down the sales of individual products. We believe that prioritizing multiproduct deals is the best course of action. To potentially achieve our goals, we can see rollout accelerations, which can happen quite suddenly. Delaget and PAR OPS are expected to finish the year strongly, with Delaget becoming organic by year-end. Lastly, winning any of the larger deals we have in the pipeline is crucial, with the hope of starting billing in 2025. There are several factors that could help us achieve our targets, but we want to proceed with caution. We are still aiming for our objectives, but I wanted to be clear about the slower first half due to issues on the POS side, prompting us to be cautious moving forward.

Bryan A. Menar, CFO

And what I'll just add to that, Savneet right and everything we just talked about there in regards from a business perspective. And I think, Will, what you're referencing is also the pure math of it. And you're right, when you're lapping in Q1 and Q2 of next year and over what happened in the first half of this year, the math goes in your favor at that point in time as well on top of what Savneet just laid out for you.

William Alfred Nance, Analyst

Got it. That's very clear. And if I could just follow up on the TASK side at the risk of asking a potentially dumb question, like why can't you do both on this? So it seems like you're delaying kind of implementations of clients already signed to focus on like go-to-market and people that are not signed. So what's sort of the connection there? And like why is it you can implement some of the book while you're going after some of these newer opportunities?

Savneet Singh, CEO

It's primarily debt capacity, right? When you're implementing a new deal, you're configuring, there's a ton of work upfront. And so when you're winning a Tier 1 deal, you're doing a bunch of work in advance to win that deal. You're setting up the menus, the labs, the back end. And so it's a small team. And we made a decision to have those really unfortunately tough conversations with customers and make those investments in the product. And so it's just about scaling up the team so that we can we can do both. To be honest, we didn't expect this to happen so fast. That's really the thing here. It's a wonderful problem, I guess, which is we didn't think this has come so quickly in these global deals. And as a result, we didn't have the team ready to do that. So we're adding more expense to grow that team. And then we just need to get the existing team to get hopefully crack on the Tier 1 deals. And then we'll go back and take that revenue live because I do think we'll still be able to roll out those deals, but we can't do both right now with the size of the team we have.

William Alfred Nance, Analyst

Okay, that's clear. I appreciate it. I would like to ask a quick question. Are these conversions from in-house to out-of-house, or are they competitive situations? I'm sure they involve competitive RFPs, but are they utilizing an existing vendor? Or is a lot of the industry still using in-house technology?

Savneet Singh, CEO

Everyone is primarily using legacy products. In our Tier 1 pipeline, there is definitely in-house technology being utilized, but I want to be cautious about what I say regarding that.

Operator, Operator

And the next question will be coming from the line of Samad Samana of Jefferies.

Samad Saleem Samana, Analyst

Maybe first, stepping back, Savneet, you mentioned macro conditions a couple of times and noted that payments were possibly a bit lower. Was this mainly due to insights from some of the QSRs discussing cross currents? Did that affect payments, or is there something else we should be aware of? I also have a follow-up question.

Savneet Singh, CEO

It's two things really. So one is POS going slower impacts payments because they're usually bundled together. So that's the big driver there. And the second is the point you mentioned, which is there's definitely a slowdown in sort of QSR. And so that's the second part. But the first part is the more important one for the first half so far.

Samad Saleem Samana, Analyst

Understood. The record $100 million pipeline is certainly impressive, and your growth is evident with more products than ever before. Can you provide context on how this compares to historical offerings? Again, $100 million is a significant figure. Additionally, regarding this pipeline, what does the next 12 months look like in terms of converting it into bookings or revenue?

Savneet Singh, CEO

Yes. So let's say in a few ways. So I'll first thing, which is the pipeline doesn't include what's already contracted to roll out. So as I mentioned, on the POS side alone, there's $20 million that needs to be rolled out that's contracted already. I don't have it off hand, but there'll be big numbers for loyalty, retail so on and so forth. So you've got a lot of coverage just from what's already contracted out. Generally, when we look at pipeline, you're looking at what you can sign within the next 12 months, and you're weighting it down over there. So it is a conservative view of our pipeline already because we want to make sure that they're there. So from a pipeline coverage perspective, so not only is the pipeline larger than it's ever been from a pipeline coverage perspective, i.e., coverage to hit your growth rates, it's also higher than we've had historically in the past. And the last thing, Bryan mentioned this, we've removed these sort of mega Tier 1 deals just because they make the pipeline looks almost too big. And so you've got that also as a nice tailwind.

Operator, Operator

Our next question will come from Charles Nabhan of Stephens.

Charles Joseph Nabhan, Analyst

I wanted to focus on your comments regarding the gross margin. I understand that some of the sequential decrease is related to certain one-time benefits from the first quarter. As we consider the range of 66% to 67% for the second half of the year and beyond, could you discuss the factors at play? Specifically, can we anticipate the fourth quarter to potentially be a bit higher, and how should we view 2026 as well as the effects of payments and MENU, which have historically impacted subscription gross margin?

Bryan A. Menar, CFO

Sure. I'll take this one. This is Bryan. Thanks for the question. You're correct, right? Part of the 69% and then sequential down, we referenced this, I think, in the Q1 call, right, about at least 1% of that, 100 basis points was due to some favorability one-timers in Q1 at 68%. And then the remainder of the majority is actually product mix of where the actual growth came from both ARR and subscription services revenue in Q2. That mix is not going to change noticeably in Q3 and Q4. That's why the range that was given for Q2 and Q4. But our longer-term goal of getting it back up closer to 70% is still out there, right? It's just at that baseline where we're at right now with the mix. It's going be tough to get there. So that's why we want to manage your expectations there for both Q3 and Q4.

Charles Joseph Nabhan, Analyst

Got it. Okay. As a follow-up, I wanted to get your perspective on AI. First, how do you see it as a disruptive force in the industry? Secondly, how do you view it as an opportunity? This includes enhancing your product offerings and value for customers, as well as improving your internal efficiency. Any insights on this would be helpful.

Savneet Singh, CEO

Absolutely. I mean I think if you'd ask anybody, any employee at PAR, PAR is all in on AI. I think lots of people say that. I think we have focused on being execution-oriented there. So instead of sort of processizing about how amazing AI is going to be, we really break it down into projects and what we can deliver. Every department leader at PAR has to deliver a plan on AI and what is an AI-first version of their organization look like and then working backwards, how do we get there from where we are today. So we're seeing meaningful success right now in two areas, which would be on the development side, our development efficiency, our ability to not increase development headcount while still shipping more product than ever before is crystal clear, whether you measure in story points or you measure it as commits, you're seeing tremendous, tremendous acceleration of velocity over there. And we are still not even halfway through what we want to get done on that side. The other part of the world we're seeing that is on support, where not only are we using tooling to make our teams better to understand types of calls, call volume, we're also building out our agents so that we can start answering in a more automated fashion. And we're there. What's amazing about that, though, it has also become an amazing tool for our internal team. So our sales teams no longer need to figure out a complex configuration or track down a hardware piece. It's all done through an internal AI PAR agent. So those are the two big areas we see meaningful ability to control costs and cut costs. Where you'll see it going forward, and I think the more important part of AI for us will be delivery to our customers. At PAR, AI is built in. It's not bolted on. We're building it natively within our products because we control the workflow. And I think having the workflow is going to matter because we've got proprietary data, you're already in our products. And so our ability to connect your restaurant and your systems through AI is far better than somebody coming in from the outside. And so I think we have an incredible advantage that we are looking to take advantage of. I mentioned on the call, one of our first products coming out later this quarter it's called Coach AI. And it's a great example of using AI to pull data across the POS, the back office, the drive-through to give actionable insights to the operators say, hey, do this, cut this, what about this? It's becoming the agent for the store. These are really, really big changes to the Operator. And so that's where we're most excited. But we started on the internal because we believe that we have to be AI in the internal in order to be external to our customers.

Operator, Operator

And the next question will be coming from the line of Eric Martinuzzi of Lake Street.

Eric Martinuzzi, Analyst

Yes, just from a macro perspective, been seeing some headlines about lower foot traffic at QSR. Just curious to know if you've seen any lift in the Engagement Cloud pipeline that you could say was kind of tied to that where people are saying, okay, I've got to pull whatever levers are available to me.

Savneet Singh, CEO

Yes, absolutely. We're seeing a lot of strength in the Engagement side pipeline. So we'll see if that converts. What's been exciting is the Engagement side of the business has been growing without that, but we certainly see a lot more interest in loyalty. What's critical about that is that the loyalty engagements we have today, it's not about, okay, let me go send a bunch of discounts to get you to come back in the store. It's about building these personal connections. And why I love that is that it actually ingrains the loyalty in the workflow of the customer, the customer being you and I as a customer of that restaurant versus us always selling tools to the internal. And why that's powerful is that then you can then connect in PAR Ordering, PAR Wallets and do so much more. So the simple answer is absolutely, there's a lot more demand for engagement in a world where there is absolutely a lot of volatility and short-term volatility from the macroeconomics in the QSR and fast casual space. But I think the long-term trend here is going to continue because the value of these loyalty programs in good and bad markets is undeniable.

Operator, Operator

And our next question will be coming from the line of George Sutton of Craig-Hallum.

George Frederick Sutton, Analyst

Savneet, you had mentioned that the point-of-sale process was slow. I'm curious how much is that driven by your actual focus on trying to sign multiproduct deals? Obviously, it's kind of a long-term gain for some short-term pain. I'm just curious how significant is that?

Savneet Singh, CEO

It's not a major issue, but there is some impact, around 10% to 15%, as we try to bundle the second product. I want to clarify that the challenge isn't on the sales side. The delay is in rolling out the deals, which involves capital expenditures for the restaurant, usually covering hardware and services. This process has been slower than we anticipated, and there have been some delays in sales as well. Ultimately, all these deals will eventually materialize. The slower pace may be related to the multiproduct approach you mentioned or broader economic uncertainty. What’s crucial to understand is that while the pipeline is strong, the signed deals exist; they just need to be executed.

Bryan A. Menar, CFO

And we have seen the acceleration of rollouts happen at the very end of Q2 in the last month.

Operator, Operator

And the next question is coming from the line of Andrew Harte of BTIG.

Andrew James Harte, Analyst

Savneet, I really appreciate the comments on Better Together. It sounds like the multiproduct sales cycle really starts with POS. But I guess, can you talk about what are the most common add-ons? I think something you talked about in your prepared remarks was PAR OPS having really great momentum. Do you see that as cross-sell or an upsell or net new? Just help us understand the sales cycle starting with POS and then what you go with from there.

Savneet Singh, CEO

That's a great question. In the Operator Cloud side, we focus on payments and back office. My enthusiasm for PAR OPS comes from our success in refining that bundle, which is always connected to product. Once we provide product functionality, we can build that pipeline. Typically, you're integrating one of those two aspects. For the Engagement side, it's primarily about PAR Ordering. We have an outstanding online ordering product that is set to capture significant market share. In the future, I'm excited about integrating additional products. That's our next focus, and we are preparing for that.