PAR Technology Corporation (PAR) Earnings Call Transcript & Summary

All right. Let's get started here. We are delighted to have Savneet Singh here, President and CEO, of PAR Technology, also President of ParTech, here in person to discuss the business and general trends we're seeing across the restaurant industry. PAR has been a leading supplier to the enterprise QSR space since the 1980s, working with a number of household names in the QSR space. Since joining PAR, Savneet has led the company's transition towards offering a suite of software offerings to the enterprise QSR space. He's remixed the business towards subscription offerings with the acquisitions of Brink, Data Central and Punchh and most recently, MENU. So everyone, please join me in welcoming Savneet to the stage.

Thank you.

Maybe we can start off with just a company overview. I think it's a really interesting kind of journey that the company has been on since I think 1968 was when it got started. Could you maybe talk around how you got to be where you are today?

So the best way to probably answer that is to give you a little history of PAR because it wouldn't make any sense. The company was founded in 1968 ironically as a defense contractor doing IT services. The company's name was PAR, it stands for Pattern Analysis Recognition. It was in many ways Palantir before Palantir. The founders had this idea they'd use data to predict the future basically and that's what they did. In 1978, they invented the point-of-sale terminal, the modern day point-of-sale terminal on behalf of one of their mothers who was a McDonald's franchisee. McDonald's adopted that terminal in 1980, and then the company went public in 1982 off the success of that McDonald's business and McDonald's mandating that every store had to switch to this PAR system. The next 5, 6 years, the company was a success. It sort of grew from hundreds of employees to thousands of employees, dozens of countries. And then I'd say the next 25 or 30 years, it really sort of unfortunately kind of went very slowly downward. And it was primarily because the company didn't build the DNA and musculature to build and ship software and so it became swimlaned as a really high-quality hardware and services company. And so you'd buy your software from someone else, and then you'd bundle on PAR's hardware to sort of -- PAR did the hardware and the service and install. And the company, I think, knew for a long time that was a much more challenged business than selling software. And so in 2014, the company acquired a small SaaS product called Brink, which was point-of-sale software for the enterprise. So the big distinction here is that there are lots of really cool cloud software companies selling to restaurants and coffee shops in retail that are down market, the single-store coffee shop, the prototypical Square customer. But no one had really focused on the enterprise, which is a million times more complex than the small business. And so they found a product called Brink, which was really built perfectly for that. And that was at the end of 2014. And fast forward 4 years in 2018, when I joined the Board of the company, Brink really had exploded under PAR's stewardship. It went from being in 300 stores to 6,000 or 7,000 by 2018. And I joined the Board of PAR in April of '18 as a director with no intention to run the company, really no intention at all, but to sort of bring some growth DNA, some energy and some, I think, understanding of, hey, how do we run a software company, we were running a hardware company for 40 years. 8 months after being on the Board, I jumped in as CEO really out of crisis, not really out of desire. And I think the company, while it was growing the software business very quickly, the business was going off the rails. Our NPS with customers was like negative 60, our employee NPS is like negative 55 -- or am I flipping those. We were out of money. We had a ton of just SEC challenges, DOJ challenges, culture. I mean it was kind of a mess. And so when I came in, it was trying to sort of see, can we sell the company, what can we do? And a few months in, I got very convicted on this idea that PAR was perfectly situated to build the enterprise platform to run your restaurant. And it came off with a very, very simple theory, which is restaurants are like any one of digital transformation, every restaurant is slowly being eaten by software. And that sort of digital transformation you've seen in all these other industries is happening now. A really amazing example is that back in 2019, you couldn't order online from McDonald's or McDonald's had launched a loyalty app that you could order from until 2021. Think of any other business that didn't have an e-commerce store by 2020. I mean, just like literally, there's probably none. Restaurants were like that last bastion of that digital innovation. And so we realized that we had this opportunity as a point-of-sale system to be this platform and tie these disparate systems. So today, at PAR, we offer the point-of-sale product, which is the ERP system, really the system of record, really is [ what ] matters. We have the largest loyalty solution in restaurants called Punchh, which is in 50 of the top 100 U.S. restaurant chains. We have a back-office solution, which is sort of inventory scheduling and then we just acquired an online ordering company. And together, these products create a unified experience where an order off-premise is the same as an order in-store. And we think it's in a massive competitive advantage for us to be able to give you a complete view of your restaurant where today, you literally have a completely different ordering system for online orders, a complete different one for loyalty orders, a complete different one for in-store and everything else. And so we think it's not about sort of giving them a suite of products, but actually giving them a unified experience.

Makes sense. I mean it seems like a huge shift to transition the company from a point-of-sale hardware/defense business to a very fast growing, I think, 35% ARR growth software company. What has that been like to kind of shift the corporate culture or maintain the corporate culture as you've kind of made that pivot over the last couple of years?

So I think the beginning was probably a little bit shock and awe. I was -- obviously, I didn't look the part of the average CEO coming in. When I became the CEO of PAR, I was 35 years old, the prior CEO was like 73. He never showed up to the office. It was a very different sense. And so in many ways, it was a little bit natural. It was the identity of the people coming in that sort of pulled forward. And the coolest thing about it was not all but most of the PAR welcomed it with open arms. I think there is an inherent like desire to be productive of most human beings. And so when your NPS is so low, employee NPS is so low, you kind of get -- I mean the bar was really low, to be honest. But one of the things we did early on was sort of identify what do we want to be. And so one of the things I take immense pride in at PAR is that we've lost -- within these last couple of years as a Great Resignation, we really haven't felt that at Par. We have never lost a senior executive that was involuntary. There's no one we lost and be like, oh, my god, we lost that person. Now we fired -- we've had to fire a lot of people and done all that. And I don't know if there's another software company in the world that can attest to that. And we've done that because I think we've done a really good job of identifying our culture, which sort of stands on 4 values. The first is speed, just it's very hard to succeed at PAR if you don't move fast. Our second value is ownership. We believe in owners, not renters of PAR. We want you to treat like is your car, not a rental car. Our third value is focused, which is 80/20 always moves the needle. And we obsess over the things that really matter, and the best way to sort of screw over a great talent is give them too much stuff to do. And then our last value is winning together. It used to be winning effing matters, but we've since changed that. And that's it. We have 4 values. And the reason why we obtained these 4 values is they are very specific. They are very acute. And so when you come in an interview and you're like, oh, the values of your company are speed, focus, ownership and winning, like you kind of know it's not the place to hang out and have like a bunch of cold brew coffee. Like you should figure out like, okay, we're trying to build something really ambitious. And I think because we were so specific and we were so harsh that it allowed us to filter people really, really quickly. And I remember some of the other people that left, I remember we had a head of sales and marketing, we were sort of changing the old guard, they weren't leaving because they didn't like me or the team. They were like, you guys are running really hard, and I'm not sure that at my stage of my career I want to do that. And so by defining the culture we wanted and the value that we subscribed to has allowed us to do it. And I always do this with when I -- I challenge investors all the time when they say, well, why do these values matter. I say, go look at all these amazing companies and look at the values on the wall, the 10 values, the 12 values, tell me 1 you wouldn't fit in. And it's hard because when you have 10 values on the wall and like 8 of them make a lot of sense and 2 -- you're like, yes, I'd be a good fit. And with us, we didn't want that. We actually wanted to repel people from PAR and focus on the ones that would fit. And so it was chalked on at the beginning, we really were like these are the things that matter and we don't really care about everything else, everything else is secondary to that. And then we recruited very aggressively. And the last thing I'd say, which is something I think gets lost is we also respected the past. We didn't come in and say in the past, there was a bunch of bozos. We really focused on things. There's great stuff that happened. And any company that survived 50 years, that's pretty darn successful. And so we sort of tried to take the best from the past and then bring in this new energy.

So all that makes sense. I think a lot of public investors are very familiar with kind of the down market restaurant space. I don't know if there's been as much focus at least in the kind of like the payment software space on the enterprise space.

Yes.

Can you talk a little bit about how the upper part of the market differs from maybe the places where Toast, Lightspeed, Clover, Square tend to show up?

It's funny, they're drastically different market. It's kind of like when I came in, I was very naive about how different they were. But I always use an example. So imagine you were running a restaurant, like you had your family restaurant, your family's Italian restaurant or something, you had a point-of-sale system, you had a payroll system, labor system. And now imagine you were the CEO of a 1,000-store restaurant chain, just imagine how different your job is. When we work with the enterprise, our products are integrated into Snowflake, Brave, all the cybersecurity products, then it's into SAP and their ERP systems, the ability for that product to be extensible. And not to mention, when you've got a small restaurant, you don't really need robust loyalty, you don't need segmentation, you don't need AI and machine learning. Like you need a system just to run the store that you're living in. And so that's why I try to explain to investors, it's such a different end market, like they're truly incomparable. And we really like that market. Like part of it is it's a market -- and part of the excitement we had when we came into the company was that it was sort of not paid attention to because down market, which is also a great market, it's easier to sell to, right? The sales cycles are a month or 3 months. Our sales cycles are a year plus, but we like that because that's the moat, which is it's really hard to get in, but once you're in, you're stuck there for a long time. And then you have the ability to drive value for a long time. And today, down market is a bigger market because you can go to that customer and sell them $6,000, $8,000, $10,000 of software day 1, whereas the restaurant, you start with $2,000 and you work your way up. But over time, enterprise restaurants are where I think more spend will happen because they will need all the innovation that we talk about every single day at these conferences, which is -- they need all of that and they will sort of be the adopters over time. But they're really, really distinct markets.

That makes sense. I'm going to stay with the competitive environment. Can you just walk through that 1-year sales cycle? What does an RFP look like? And then who are your biggest competitors?

So the process is generally, we get an ERP -- now if we've done our job as a sales team, we have already interacted with that customer extensively, hopefully the RFP is in many ways like rigged for us to win because we said like these things really matter, and they look at our RFP and they're like, oh, they said these things really matter and we have them. That sort of -- [indiscernible]. So you get the ERP, you fill up the ERPs, these are really extensive. These can be 300 questions, sometimes 1,000 questions of stuff. A lot of it is focused on the functionality you have in the store, the functionality you have above the store, which you can think of that as reporting, API, stability. And then it's about your future road map, what's happening with your road map. And then it's about your support system, right? Can you support 500 franchisees if they had 500 franchisees. Can you support 10,000 stores, how are you going to service, all that stuff. And sometimes they hire a third party like an Accenture or a more specialized restaurant technology company. And so after the ERP, they'll usually pick 1, sometimes they'll pick 2 vendors and they'll put us into a beta. Essentially, what they'll do is they'll put it into a lab, which is a fake store. Most large restaurant companies have a fake store built in the basement of their headquarters. And it's sort of like here's look a fake store, put your technology in, let's see how it works. And a big focus is on integrations of all these other tools. And then if you do a good job there, they'll get into a pilot where you're in like 1 or 2 real stores and then you win the mandate after that. And the beauty of it is it's so robust that like the best product wins. You can have the best sales team in the world, but the best product wins because you've really flushed all that out along the way.

Makes a lot of sense. Maybe we can hit on just some of the macro stuff. I mean there's several different revenue stream, very different revenue streams within the business. So when you think over kind of the next year, between sort of the fast growth software, the slower growth product and then maybe the defense business as well, how do you think about how the macro environment impacts each of the disparate businesses?

So I think if I just focus on restaurants, which is the majority of all of my focus, restaurants, I think, will do relatively well in this environment. Now let me explain why. We went through the pandemic at PAR in 2020 and there was no greater existential shock than the pandemic. And at the worst point of the pandemic, so 6 weeks after the pandemic hit this country, 13% of our stores were closed, i.e., 13 of them temporarily churned. That was the worst it got during the pandemic, okay? And by the way, half of those came right back 6 weeks after that. And so we really didn't have a ton of churn in the pandemic. Now small restaurants, I think like we just talked about, are really different. Most of our competitors that sell down market, half of their customers went out of business 6 weeks after. For us, it was 13% and half of those -- so it was really 6 or 7. And so the market is really defensible. Now why is that? I think for one is restaurants are crappy businesses. Everyone knows that. But QS enterprise franchise restaurants are great businesses. The return on capital is like 20%, like 35%. You're a franchisee of McDonald's, you're a franchisee of Arby's, these are really high IRR businesses. They're relatively underlevered because the corporates mandate sort of like what leverage ratios you can have. And so they don't want their franchisee getting over levered, so they're not super levered. They're really like durable businesses. Again, not your local Italian restaurant, which is a family that's feeding their kids out of it. And so one is, I think the end market is relatively durable. We have a test of this with the pathetic and they've sort of done and you can go back to the data there. Two, and I don't know how long this is going to happen, but restaurants have been able to push the inflation on to the customer. If we look at our -- across our restaurant base today and which we track very closely, restaurant volumes are declining. There's no debate that the restaurant -- number of people going into stores, the number of orders in a store are coming down. Revenues are still up. And so we look at sort of an aggregate across our chain, and if we look in July and look in August, we're like, wow, revenues are still up, but volume is going down. So they seem to have some inelasticities to what they're selling and customers [ seem ] that. Third, I think, it's just the nature of the products we sell. All of our products have relatively high ROIs. We can tell you -- part of our sales pitch is going to our customers and saying, here's an example of customers like you, and this is their sort of ROI pre-Brink, post-Brink; pre-Punchh, post Punchh. And so it's that. And I think in a market where you're scared of losing customers, things like loyalty become more important, things like online ordering become more important, things like more efficient back office. And so I think that -- there. That said, as an organization, it's funny, we did a fundraise in, I think, September of 2021. And the reason we did the fundraise literally was we're scared inflation is coming. And so [ as a result ], we've been ready for this and preparing for it to be there. But it's -- to date, we haven't felt like -- I haven't seen a big deal get pushed out yet. I haven't seen a customer come back and say, hey, we're slowing down a rollout because of economic conditions. I expect that to happen, just like we're not like naive that like it's not going to hit us. Of course, it's going to hit us. If we have a major recession, it's going to hit every business. But to date, we haven't really seen much of that.

Yes. Makes a lot of sense. I mean, we had Toast on stage, I think, 2 days ago, and they made very similar comments about transactions relative to pre-pandemic actually underperforming, but volumes actually significantly above. I mean do you see that as an opportunity for a rebound? Or do you think we're in some sort of consolidation phase in the industry?

I think without question, we're in some consolidation phase, but it's not consolidation for the reason you think, which is opportunistic companies like ourselves think we're like really special, and we can use the balance sheet. And Toast is obviously a million times bigger than us and could do the same. It's because the actual customer is overwhelmed. This is actually a great story. But when I go speak at these CIO conferences, I'll literally say like -- I see CIOs in the audience and say, raise your hand if today, you have a much larger budget than you did 5 years ago. And everyone raises their hands. And it's not like inflation is like usually this crazy doubling of budget. And I'm like, oh, that's amazing, you're a CIO, like you love having -- if you work at a big corporate, like having budget is sort of a sign of success, sadly. Second is, I'll say, raise your hand if you as a CIO of that restaurant chain have more FaceTime with your CEO and Board than you've ever had. And everybody raises their hands because what CEO of a restaurant chain doesn't care about their digital strategy, right? It's like the #1 thing investors ask about, it's the #1 thing driving growth. And I'm like, oh, wow, that's amazing. Like if I'm a C-level executive, and I get more time with the Board and see like, I feel like I did a good job. And then I say, raise your hand if your life is better now or 5 years ago, and nobody raises their hand. And it's sort of ironic, right, if you went to an old person and you said, you got more budget, you're getting paid away more, you get more time with your CEO and Board, like you should be like feeling happy about your job. And the reason why is that to solve all the pains of the restaurants today, restaurants have bought like tons of disparate software. They bought all these piecemeal products. Okay, I need a product to manage Uber and DoorDash. I need a product to manage my supply chain. I need a product to manage my voice order. And so they went from like having 5 or 6 products that they cared about to like 15 or 20 of them. And that's made their life miserable. I always say like the CIO has sadly become someone that's like a vendor manager. They're like, hey, PAR, work better with the loyalty company and the [ online ] company and fix this as opposed to creating an amazing guest experience, which is why they took the damn job. And so the consolidation, I think, is happening because the customer wants that too. And that's a little bit what we see, which is if we can upsell a customer a product, they'd rather buy it from us than adding another new vendor and going through the same processes [ as the rest ]. So that consolidation, I think, will happen there. And so I think it's partly driven by if we're in a recessionary environment, startups will have less funding, they may give an [ opportunity ], but I also think we're kind of solving the customer needs.

Makes sense. Maybe we can just -- it's a good opportunity to just dive into some of the portfolio of products that you guys have. I think would be helpful to kind of hear how they all fit together. You're targeting 30% to 40% growth in ARR, very attractive incremental margins. What are the main products just for the audience? And how do they kind of fit together for a kind of fully sold customer?

So our core product is point-of-sale. Point-of-sale is that thing that you see the cash you're typing on when you go into a McDonald's or whatever restaurant you go to. And the key thing to think about is it's not like the device that sits on the register. It is the product that connects everything else together. Pretty much every other product has to flow through the point-of-sale. So if you're ordering in the drive-through or you're ordering to Uber or at your DoorDash or the online or system or loyal system, all end up in that point-of-sale system. And that is the big sales cycle. That is the stickiest product. It is very close to being like an ERP type of a product. And our core market, we are selling primarily against the legacy guys that you know. We're not competing against Silicon Valley in many ways. We're not competing with the cool guys like Toaster. We're selling to like core. And we love that market because we think we are the cool kid on the block and we can grow. And the beauty of being the point-of-sale product, when you're the point-of product in that restaurant, you've built a layer of trust because that is like such -- if that thing goes down, it's really the only product in a restaurant. If the point-of-sale goes down, you can't run your restaurant. If your online order system goes down, your loyalty system goes down, like, okay, you'll lose orders, but you're still running the restaurant. If your point-of-sales system goes down, you were like you can't do anything. And so they really trust you. And so from that point, you can sell more because they trust you, they're like all right, we can -- these guys are like are so important. Our second product is loyalty. And loyalty in restaurants has become a really big deal because the use case is improved by like Starbucks and Chipotle. They've been so deliberate about how they build their loyalty programs and shared so much data publicly about how well it's working that every CEO wants a loyalty program. On our data, and this is just our data, loyalty customer is worth 5x as much as a non-loyal customer. And so it becomes an important investment to know who your customer is and how you can maximize that. And I think loyalty becomes more important over time because I'm not a restaurant investor, but if I was a restaurant investor, I would be looking at very standard metrics like what is the revenue per store. And the problem in the digital world is, well, should you be measuring your restaurants by AUV per store anymore. Because what happens to a digital order? Like last night, if I ordered Uber Eats breeds and there's 3 stores like 3 fills coffees around like who gets the credit for that store? And how do you measure that value, right, to the one down the street or the one that delivers my food, which has actually happen to go the farther store. And so loyalty becomes important because no longer are you measuring sort of like the revenue success of that store. You're like what is the LTV on this individual customer? And are we doing a good job? And so I think loyalty becomes more important over time, and there'll be all sorts of forms of [indiscernible]. And so our loyalty product, it has offers, promotions, CRM system, it's sort of everything. Our third product is called Data Central. It's a back-office product. And it's a product that I think has a ton of opportunity because the back office has sort of been the ignored part of restaurant technology so far. There's been so much focus on online ordering and things like that on the back office. And so that's scheduling, labor, inventory, stuff like that. And so it's a very durable product. It sells very well with your point-of-sale system. You kind of want to have those things being tight. And what's great about it is it's the tool that the franchisee uses to see how profitable every day is. And it's a good spot to be in, right? It's sort of like, I don't know, like if you're a trader, you want to look at your -- whatever your brokerage kind of rate is kind of like that for the restaurant. And then our fourth product was our recently acquired is an online ordering product called MENU. And this is sort of our probably most exciting new product, but it's effectively e-commerce for the restaurant. It's the ability to have a completely configurable e-commerce solution where you can place an order online, and that order can be on mobile. And it's the same software that's used on the kiosk. And so on our vision that an order anywhere is an order everywhere. This is the missing piece that we just brought in-house. And it really includes everything from like literally, here's the website that you can order there all the way to the managing your delivery drivers. It's literally got everything in between. So it's a really robust and amazing solution set. And those are our 4 core products. And then in between that, we layer a payments product, which sort of is it's sort of like a middleware we put in across all the products.

Got it. That makes a lot of sense. I think when we had to talking about the upmarket and some of the challenges there, they were talking about just how slow the enterprise part of the market has been to adopt cloud-based solutions and software, which you kind of alluded to as well. You guys seem to be driving a lot of that. So if you -- could you talk about how kind of mindsets are changing among the upper end of the restaurant space to adopt more technology, more cloud-enabled?

Yes. So I think it's -- the pandemic has been a huge driver of this. But I remember before the pandemic when I was first at the job, I would talk to CIOs and they'd be like, tell me why I should move to the cloud? Is it safe? Is it secure? It was still that sort of stuff from like a decade ago. Today, I think every -- there isn't a CIO, CTO, CFO, CEO of a restaurant company that doesn't expect their spend on cloud software to decrease. They all are sort of expecting the demand. And this is, I think, relatively standard in any industry going to digital transformation, whereas as more workflow moves to the cloud, you need more tools to manage that. And so hopefully, it's an endless cycle. I think that as we provide them more tooling to make a more efficient restaurant, the ability to say, hey, now we need this product will grow for a long time. And so we feel pretty good that the average spend per store will increase for a very long period of time. And the restaurant is driving it because it's an enterprise market, it's not like an SMB market where we can spend a bunch of money on Facebook ads and Instagram ads and say hey, buy our products. In the enterprise, these are people that take you long sales cycles. They'll hire consultants. And so the end market, I think, is completely aligned. And maybe this would be like entry study, but I'd be pretty sure that if you could graph the return -- the equity returns of the restaurant companies by the investments in R&D, it's probably linear because if you look at the best-performing restaurant chains, it's Starbucks, it's Chipotle, Chick-fil-A, which obviously is not public, it's the companies that invest in technology. And so the use case is there, which is like, hey, like these guys have all done really well. And what's like the corollary? Well, they all have invested a lot in R&D.

Got it. Can we put some numbers around just so Brink, Punchh, Data Central, MENU, the portfolio of software products that you have, what does the kind of fully cross-sold customer look like? How successful you've been in kind of fully upselling customers?

Our Brink product historically has been a $2,000, it's now moved its way up to $2,500 on the average sort of new customer. So let's just say $2,000 to be conservative. Our loyalty product, Punchh, is about $1,000 a year, and then our back office product is about $1,500. So those original 3 products are about $4,500 a year per store. Our payments product, which is a new product that's our fastest-growing product, that averages anywhere -- we'll see where the averages come out because it's our first year of selling it, but it's $1,500 to $2,500, sometimes $3,000 and [ facilitates ] another $2,000 of price. So that's about $6,500 of total ARPU per customer if they buy the full suite. And then of our recent acquisitions, I would say, depending on the modules that you buy, the average customer today that they have, which is a very small base, you shouldn't use this as the analog, is $120 a month, I would say the average probably $100 a month as we sort of start with the modules. And so I would say that if somebody bought all of our products today, you're probably spending $70 to $100 a year with us.

Got it. Makes a lot of sense. You touched on the payments opportunity. I mean in the SMB setting, this can be quite lucrative 50 to 75 basis points. What does the sales process look like for selling payments into the enterprise space where historically, spreads have been much lower? How do you guys kind of go after that problem?

So it's a true story. So in down market, you're still saying my rate is 2.75, here's like just take my -- and you make whatever spread you have depending on the credit card or debit card. In the enterprise, you can't really do that. They're very sophisticated on payments. And so what you're presenting to your customer is effectively by rate you're sort of saying, I'm going to charge you interchange plus a few pennies. And like I said, it sort of ends up backing into at the low end, $1,000 at the high end, $4,000, $5,000 a year of sales based on volume. And so it's more based off of volume than it is based on spread, but I would say if we back into a take rate, it's probably closer to 20 to 30 bps than it is the 50% that you find that market.

Got it. You mean transaction volume, right?

Correct. Yes.

Got it.

The way we win is relatively simple. The first way is because of the size of our organization, we can get a really good buyer rate. And so oftentimes, we can just save the customer money. And we really like that. The second reason, and I think this is like the really important reason is we really sell on being the clean sheet of laundry, like clean sheet and like a dirty back on laundry. There's not a restaurateur that would tell you like they know how much to reach to charge for their payments. The most common refrain is I know I'm getting ripped off by my payments company. I don't know how, but I know I'm getting ripped off somehow. We sell really hard on like we're going to be completely transparent what we're charging you so that you don't feel like you're getting ripped off. And so that's, I think, another big reason why I think they like us. We can also prove it because we have the point-of-sale data. So we can show you every transaction, exactly what we charge. It's pretty tight. The third reason is a growing reason, but it's the idea that many of our customers, when they buy our point-of-sale software, they're also buying hardware, they're upgrading their hardware and from our legacy hardware business. And that business, we can now say, hey, the hardware is on us, like no cost, but take our payments business, and we'll finance that with the payments business. And that's super attractive, particularly in a recessionary environment and saying, hey, push off that $10,000, $20,000, $30,000 of CapEx for an ongoing [ seat ], the vast majority of franchisees prefer OpEx to CapEx. It is the rule. And then the last one, that hasn't really come out yet, but we talked about it a bit is this idea that if we have your payments data and you can combine it with your loyalty data and your point-of-sale data, we should be able to deliver insights to you that you don't have about your non-loyal customers. And so that's going to come, but it's there, but that's our pitch.

Got it. Makes sense. MENU, I believe it was mostly based in Europe. Can you talk about just integration, how you bring that to the U.S.?

Sure. So the company headquarter is in Switzerland. The development team, which is the vast majority of employees are in Serbia. And then sort of the sales team was in Barcelona. The business is, like I said, online ordering, historically, almost all of their customer base and pipeline is European, although they have made some ways into the United States before us. From an engagement perspective, we've got a great integration team. M&A is suited PAR really well. There's a lot of art in sort of building trust, but there's a lot of science that helps build that trust. And so we've got a really, really high-quality M&A motion that's I think -- I really do think it's best in class. I mean we track everything from the very basic like slack and integrations to like a number of post on LinkedIn. They going down or up from like [indiscernible]. So the company integration has gone really well. They've got an amazing founders and team, that's going well. As far as getting it to market. So we are going to leverage the sales team we have now in the United States. There's no reason to build out a brand new team to sell to the same exact customers. So we'll be distributing aggressively in the United States. And in Europe, we're going to leverage their team to sell our products. So it's super synergistic in that way. And then I think you'll see a lot of those products start to -- we're starting to sell them now in our smaller customers in the U.S. and next year at our larger customers. A lot of is tied to when you bring a product from Europe to the U.S., you just have to get integrations into like Uber Eats, U.S. versus Uber Eats Europe and some of the stuff that happens in the store.

Makes sense. Maybe we could spend just a couple of minutes on the hardware business. How should we think about things like chip shortages, supply chain, macro? How does this impact and how you're thinking about the outlook for that part of the business?

It's been a challenge, I think, for everybody. We've weathered the storm pretty well. Now we weathered it by really early on in the pandemic, increasing our inventory so that we could deal with it. So we've done a really good job having inventory. And I think we're now at the point where we're going to burn down that inventory because we still feel comfortable that the shortages we dealt with have gone there. I mean it was watching the binging they're like we're on a chip. Then it was like we're at LCD screens and they're like, we're out of shipping containers, and then we're out of like this thing. We're not finding them. So today, we feel really good about the supply chain. You're going to see our inventories come down because we feel pretty good where we are now. So we're not really worried about it right now. The only place we have limitations are on things like payment devices, some of our new offerings, where there's just shortages in the world of these payment devices and unfortunately, there's only 2 or 3 companies that restaurants use. And so we have -- that is one area. But for our core hardware business, we feel pretty good about the supply chain situation, so much so that we're going to take down the inventory now that we boosted during the pandemic.

Got it. Can you talk about just the synergies between the hardware and the software businesses? I mean I know you had that kind of anchor at the very, very top of the QSR part of the market. When do you think it might be possible to start selling software into that upper echelon?

So the synergies are, I think, obvious in that many of our hardware customers have been our customers for decades. And so there's a lot of trust because it's not like they're using a computer from you. They're buying a computer servicing. And most of the time, we're staging the software that they need, plus all the call center support the stuff comes with it. So there's a huge decades of trust there. And we leverage that to serve say, hey, now we've got these great products. And here's all the other customers that use them. And so it really helps a lot. The second way that it really helps is that our ability to service hardware is a really big deal. Most of our customers, whether buying software or hardware, want us to service that hardware because these are like restaurants are crazy places. People still oil on the angry employees, break stuff. And so we can service that. So that's how we leverage it. As far as when we can sell to that upper echelon, I think it's just a function of time. I think most -- there are 3 or 4 restaurant chains that have built their own software. And I don't -- and I feel very confident that that won't be the norm going forward. Because it's -- it'd sort of be like running any other business and saying, okay, I'm going to go build a CRM system. It's like, no, you're going to use Salesforce or whoever you like, right? But restaurants, 20 years ago when, as an example, McDonald's, I think it was 20 years ago or 15 years ago and they did it, built their own point-of-sale system. It made a lot of sense because the vendors at that time, they can build a better product in the vendors that time needed. And technology was relatively static. Today, if you build your own point-of-sale system, it's not static. You can't -- just like you can't bring that investment back down because they're dealing with the same stuff we're dealing with every day you need a new integration. There's a new tool that comes out. The innovation cycles are so short that you just have to constantly invest in. So I think the ROI is really low to build your own software now. I just think it's too much time and money. And this is sort of when I talk to customers, I'm like, who do you think is going to recruit better developer? You guys are us. 20 years ago, like I'm sure the best developers want to Procter & Gamble and Walmart or whatever because people want to work with brands. But today, people that build great products. They want to work at product companies. They don't want to work at United Airlines or something. And so I think that it's -- that's the thing that's the bar that I would have as restaurant and like they're going to recruit better talent, they're getting -- they have data not just across my brand, all as their brands and so they'll actually end up building a better product.

Yes. Makes sense. We spend just a second on the government business. I mean, I think you guys have been very clear, this is a non-synergistic part of the business. How do you think about strategic options for that business? Can you kind of help people understand how you think about sort of the numbers and kind of where that could go over time?

Yes. So the business up until this year has been a nice sort of single-digit growing business and it sort of crosses -- there's 3 product lines. One is what we call ISR, that's like a healthy part, fast-growing part of the end market. That's really the sense that the government wants to invest in R&D and like unmanned air vehicles, cybersecurity, drone defense, things like that. Then we have Mission Systems, which is our legacy business, great cash flow, but like now the business is going to keep growing. And then there's a product bases where we build software and sell to the government or sell the partners of the government. The business, historically, we look to sell it, candidly, the prices were just, okay. You really felt like, wow, we're going to get this cash flow stream for that price. We could earn that back into that in X number of years. And then in September of 2021, we won almost a $500 million large contract. And so when people say, want to sell the business, I'm like, we just want a contract. That's literally 8x our entire revenue base. It would kind of be silly to sell it without getting credit for some of that. And so what we've told investors is we want to be able to demonstrate the revenue growth of that contract. And the first 2 quarters that have come through in better than we expected, such that if and when we sell it, we get credit as a growth multiple, not like a steady eddy business as we've been. But also so we get credit for the run rate revenues as opposed to the trailing revenues. And so the combination of a growth multiple plus the run rate number being higher, I think it makes sense for us to get that before we think of that vesting in.

Yes. It makes total sense. So it sounds like the first 2 quarters have been solid. How do you think about time lines or how those revenues kind of feed into the P&L?

I gave you a prescriptive about it. But I think as we continue to scale the software part of our business, we want a clean P&L that solve our focus. We don't like the distraction in our filings. And I suspect our Board will go through the same analysis I just did say like there will be the right time to sell it. And the business is almost a 0 distraction business. It runs completely independent. And so we don't have the issues of, is it distracting management time? Is it taking up capital like it takes -- distract us and it produces capital. So we have flexibility to time it at the right time, but these are really durable stable businesses. There's always a willing buyer.

Got it. I think one of the things that we picked up on is that the margin structures across the 3 sleeves of the business are very different. So I think it's -- correct me if I'm wrong, we're a high single or double in defense 25 on product and very high in the software business.

Yes.

So the software business growing north of 30%, how do you think about margin trajectory and ability to kind of reinvest some of that expanding gross margin into the business?

Yes. I mean it's beautiful. 3.5 years ago, when we stepped in, the gross margins on the software were sort of like low 40s. Today, they're sort of low 70s, mid-70s. So we've expanded gross margin significantly, and that will continue to happen. And then the beauty of software, as everyone in this room knows, is that it's the operating leverage on your OpEx is amazing if you're in the right end market, and we just talk about I think we're in the right end market. And so -- you just heard I said about our new acquisition, like we're not adding salespeople to sell it. We're just leveraging our same sales team, right? And so the leverage you get from sales and marketing as you have more products should continue to expand because you don't need 3 people calling on McDonald's. You need one person calling McDonald's and bringing the suite of products with them. And so you have great leverage on the sales and marketing side. Where you're going to see tremendous margin expansion from PAR is on the R&D side. Even though I'm very proud of the way that our gross margin has grown, I'm very proud that our -- we've gotten more efficient every single year. We're now at the point where the margin expansion will be significant because we've had to over-invest in R&D for the last few years to get our products to the point where they matter. When we took over Brink, it was really, really challenged. And so we overspent on R&D tremendously. In the early years of Brink, we were spending every dollar of revenue with every dollars going into R&D, the full dollar of revenue right now, cash the full dollar. And so I expect that given the end market we sell, the size of the revenue per customer, there's no reason we shouldn't have best-in-class software margins across what we do. And you'll see this quarter, you'll see next quarter and then really in 2023, just the trends expansion, we have a margin. And it's just programmatic. It's not like it's a guess. We're decelerating spend tremendously in R&D. Sales and marketing is not really expanding. And we've always been really good at G&A, this is a good case study. People ask me sort of how we're doing a margin expansion. So we've expanded gross margins by 3,000 basis points in 3 years, so from low 40s to low 70s. Our G&A over the last 6 quarters has barely grown. Adjusting for acquisitions, acquisitions at G&A because you take on their staff. But we've doubled the size of the [ ARR ] without barely growing our G&A the entire time. And so that leverage you saw there, now we're focused on effort on how do we do that in sales and marketing, how to do that in R&D those are the next level. And so we get the gross margins right, we have sort of like G&A now we've got to get sales and marketing R&D. And those are a little bit. We feel pretty comfortable we'll get there fast.

Great. Got about a minute left. You've been very acquisitive since you took over. How are you thinking about the role of M&A going forward? Is there still more deals to do? And how do you think about the cadence?

Yes, absolutely. I think M&A has been product-based. So the M&A we've done has not been market share base. We've bought new products that we could sell to our customers. And so they're not like we're sort of buying into it. What I think going to happen now or could happen now is that because we now have the scale, we now have the set of products, we can also buy competitors. And I think in this market disruption, the opportunity for us to combine with a competitor is far higher. And also the ability to go into new markets, our Punchh products being pulled into C stores now, do we want to expand in there. And so M&A has been a really powerful tool for us because we bought well and we've integrated well. They become part of our culture very quickly. And I think that has made us confident that it will be a tool for value creation for a long time.

Makes a lot of sense. I think with that, we're just about out of time. So everyone, please join me in thanking Savneet for his time today. Really interesting discussion.

Thank you.