PAR Technology Corporation (NYSE:PAR) Q3 2022 Earnings Conference Call November 9, 2022 9:00 AM ET
Company Participants
Chris Byrnes – Vice President-Business Development
Savneet Singh – President and Chief Executive Officer
Bryan Menar – Chief Financial Officer
Conference Call Participants
Sam Salvas – Needham & Company
Stephen Sheldon – William Blair
Adam Wyden – ADW Capital
Jeremy Sahler – Jefferies
George Sutton – Craig-Hallum
Anja Soderstrom – Sidoti
Operator
Good day, and thank you for standing by. Welcome to the Fiscal Year 2022 Third Quarter Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker for today, Chris Byrnes, Vice President of Business Development. You may begin.
Chris Byrnes
Thank you, Towanda, and good morning, everyone. I’d like to welcome you today to the call for PAR’s 2022 third quarter financial results review. The complete disclosure of our results can be found in our press release issued this morning, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details along with the slide deck on the earnings, please see the Investor Relations page of our website at www.partech.com.
At this time, I’d like to take care of certain details in regards to the call today. Participants on the call should be aware that we are recording the call this morning and it will be available for playback. If you ask a question, it will be included in both our live conference and any future use of the recording. I’d like to remind participants that this conference call includes forward-looking statements that reflect management’s expectations based on currently available data. However, actual results are subject to future events and uncertainties.
The information on this conference call related to projections or other forward-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.
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
Thanks, Chris, and thanks to everyone for joining the call this morning. Momentum continues to build for our unified experience strategy and the underlying products that make up that solution. That momentum is delivering new logos and a nice upselling motion to existing customers.
In preparing for today’s call, it became apparent how important this opportunity was for us to lay out what’s behind the numbers, how we allocate dollars for meaningful return, and our commitment to driving to profitability quickly. We at PAR understand that every dollar we invest pay ourselves and team members is not our own, but yours, our shareholders. We don’t take the responsibility lightly and want to earn the right to continue to manage your investment.
I’m going to break today’s call into three sections, a review of our recent quarter results, second, a review of our capital allocation policies that should shed light into our decision making process for investments, and third, a review of the macroeconomic impact and the resilience our business is showing, which is allowing us to dramatically slowdown spend yet maintain growth, and create a clear path to profitability next year, which we’ll walk you through.
First, our results. I’m convinced that ARR remains the best metric to measure our success. As we believe underneath each dollar of ARR is considerable future cash flow. At the end of Q3, ARR reached $106.6 million, delivering a 29.2% year-over-year increase demonstrating the continued growth and scaling of our subscription services engine.
12-month contracted ARR is reported at $118.3 million, a $15 million increase from the end of 2021. Today, we have five key products that make up our Unified Commerce solution, Brink POS, Punchh, Data Central, PAR Payments, and now MENU. In order to simplify our reporting and to align our internal tracking of these businesses with our external, we’ll be reporting them in three distinct ARR streams.
This classification is how we track the business internally and should help shed light on the return on investment within each of these areas. The first is Operator Solutions, which encompasses Brink in our payments business. Given these products are sold together and run by the same team, this is a natural grouping as we often use one to help bring in the other and the continuation of how we already report it.
Second is Guest Engagement. This includes Punchh and MENU, our front of house offerings. While MENU is still very small, in time it’ll become a strong portion of the space. And third is Back Office, which today is our Data Central offering. Operator Solutions ARR that includes Brink POS and PAR Payments services grew 32% in Q3 when compared to the same period last year and reported at $38.9 million.
During Q3, 985 new stores were activated and new bookings total approximately 1,140, churn continues to be extremely low at 4.8% annualized. We continue to raise subscription prices on every renewal and have been able to attach payments to a majority of our new customer wins in 2022.
We saw strong traction in all rollouts – in rollouts of our Tier 1 customers in Q3 including Dairy Queen, Culver’s and others. PAR Payments services continues to outperform our internal plan and we expect an acceleration in Q4 as our large Tier 1 deal gets rolled up faster and we begin to see the impact from our higher margin partnership deals.
As we are already six weeks into Q4, we have strong visibility in the quarter and as of right now, we see a very nice sequential bump in activations in front of us. One of the significant benefits of having a payments offering is it allows us to have another tool during renegotiations to help increase bring subscription rates, but still bring down the total cost of ownership for a customer by giving them a more attractively priced payments product.
Moving to guest facing ARR that includes Punchh and the newly acquired MENU, at ARR growth of 31% in Q3 when compared to Q3 2021. ARR was reported at $57.5 million. We added approximately 5,700 sites in the quarter. While MENU is still very early in its go-to-market motion and not yet delivering meaningful revenue, the product is receiving rave reviews from customers and the bundle approach – bundled approach with Punchh gives us instant credibility.
The acquisition allows us to provide end to end digital ordering, customer engagement, loyalty, and now the newly launched subscriptions product for enterprise restaurants and C stores. Back Office and Data Central as we have previously messaged continues to turn around with strong leadership in a market more focused on cost control.
Reported ARR of $10.2 million in Q3 was at 12.3% increase from last year’s Q3 number and a more notable 11% sequential improvement from Q2. In Q3, we signed a large multi-brand enterprise organization, 13 separate brands in over 200 restaurants on the strength of our team and Data Central ability is seamlessly handled multiple concepts in the same database providing consolidate roll up reporting for the entire organization.
We had a nice jump in activations of nearly 370 stores and 360 new store bookings. We continue to see evidence that restaurant technology spend is being directed on the back of house to control the two largest variable costs at the restaurant food and labor, and thereby improving their margins and profitability as inflation, labor and supply chain issues continue.
In addition to our financial results, our product team had a very productive Q3. As you’ll hear shortly when I discuss our capital investment policy, the most significant change at PAR is that our growth in R&D spend up until now has been focused on customer retention and fixing historical issues, not new product.
Over the last couple of quarters, we’ve been able to reallocate spend from technical debt within Brink to new product and shortly new revenue. This will allow us to ramp up our new product development in 2023 without adding new employees, but by moving resources from fixing issues to new product. Said differently, we don’t intend to increase R&D spend after this year, but internally we’ll have more resources focused on new revenue generations.
In Q3, we saw the results of some of this work. Brink released new drive-through features to support the increased traffic that our brands have experienced. Punchh released three new features powered by machine learning, feedback sentiment, smart segments, and spend time optimization. These machine learning algorithms utilize the massive transactional data available in the Punchh system to help brands improve their guest experience.
Data Central delivered a redesign of the line check module for operational task management, optimizing the flow and ease of use and will continue enhancing that module to better support store audits. Equally important, we’ve done tremendous work integrating our products to deliver our customers the one plus one equals three impact on why buying more from PAR is a win for them.
As an example, we released insights by Data Central, a feature for early adopter Brink customers to use Data Central’s advanced analytics right from the Brink interface. Another good example is the piloting of new features that simplify campaign workflows for Punchh customers using Brink, a huge time savings for our customers and a benefit received only if you have both PAR products.
Moving on from the results, my second goal of this call is to talk about how we look at investments and give you the math around those investment decisions. As you heard earlier, we are in the fortunate position where we do not expect to increase the dollar spent in R&D in 2023, but by the reallocation of resources we can still build new revenue generating products.
This will provide tremendous operating leverage as we will see the benefits of revenue growth without growing R&D dollars after this year. I’d like to shed light on how we look at this investing those fixed set of dollars. Let’s start with looking at sales and marketing efficiency. If we look at the last 12 months, we’ve added roughly $24 million in new ARR to PAR.
During the same period, we estimate – we spent roughly $25 million in sales and marketing for those subscription services. So for approximately every dollar of sales and marketing, we’ve added $1 of ARR. If we assume that our gross margin on that ARR is around 70% and our annual churn is around 5%, our payback period on this investment is 1.5 years.
The problem of the payback period on off of gross profit is that ignores incremental R&D and G&A needed to support this customer. So let’s assume for that $1 of incremental revenue, we also need $0.20 of incremental R&D and G&A. This is completely incremental to our existing expense base as I mentioned.
And as I mentioned, we are not adding incremental R&D or SG&A, but for argument’s sake, let’s assume we do. The result is that the $1 of sales and marketing spend drove $1 of ARR and $0.50 of operating profit when you subtract out $0.30 for COGS and $0.20 for incremental R&D and SG&A. Simplistically, that is a two-year payback period, but we don’t look at it as a payback period. We look at it in terms of return on investment.
If we assume that the $0.50 of operating profit degradates every year because of 5% churn, the IRR of just as one customer is in excess of 40% on the original $1 of sales and marketing investment, but I think that’s actually an understatement because our goal is to take the 5% churn and turn it into a 100% net retention, thereby taking the IRRs well beyond 50%.
To make this a real example, let’s look at our payments initiative. In 2022, we estimate that we will have spent $5.3 million inclusive of all G&A allocations on our payments business. I’m including all costs here, not just sales and marketing, to ensure that we look at IRR covering all investments made.
By the end of 2022, I expect our payments ARR to exceed $5 million. So for our upfront investment of $5.3 million, which includes not just sales and marketing, but R&D and G&A allocation will return $5 million of ARR with low churn and long-term growth. What’s more is that next year the incremental investment needs to double the size of this business is minimal, increasing the efficiency of any sales and marketing investments.
In making the termination of what to invest and what not to invest in, we try to obsess over the return, but also the likelihood of that return. Every PowerPoint pitch for a new product has a great IRR, but the key for us to determine which of these opportunities can we actually drive that return.
In 2023, we’ll be launching a set of new Unified Commerce products. In deciding to make this investment, we’ve spent significant time with our customers to ensure that we – when we get the product on store shelves, that product will sell. We chose those these products because when weighing the ability to build and the ability to commercialize these products cleared our highest of ours.
While the sale cycles will be long, the ROI should be similar to our payments initiatives. What makes 2023 so attractive to us is that in coming to market with these new products, we are also committing to not grow R&D or sales and marketing expense after this year. So we should see nearly all the gross profit from new ARR drops straight to the bottom line, so every new product and all new customer revenue drops straight down.
Part of our ability to continue product investment without growing total spend is due to the expansion of our India R&D team. Over the last three quarters, we have embarked on building out additional R&D capacity in India that is beginning to pay dividends. We now have 250 plus employees in our [indiscernible] offices focused on Punchh and Brink product development and technical support.
This investment has significantly better efficiency in terms of cost for employee and also improves our developer productivity globally. The shift is going to remain a central part of our strategy to achieve our profitability goals.
Finally, let me turn to the macro environment. There’s no doubt the macro continues to change in front of us. At PAR, while we see changes in our customer outlooks, our customers continue to buy as they have in quarters past. While we see signs of slowing traffic in restaurants, orders continue to come in and our customers continue to message a desire to grow spend with PAR. I believe this resiliency comes from the end market we sell to. It’s often said that restaurants are terrible businesses, but what this misses is that enterprise restaurants are incredible businesses. They have high returns on capital, strong unit economics, and maybe most importantly, price and elasticity.
While almost all retail businesses have seen volumes or traffic decline, on average, our customers have been able to make up for this shortfall with price increases. Of course, price increases can’t last forever. What I think is proven is how durable this end market is during that times. Additionally, our focus on becoming a unified experience for our customers should help us weather the coming storm. During tough times like this, restaurants tend to consolidate vendors, they look to bundle and make investments in areas that can have immediate ROI.
All our attributes built into the relationship with PAR today. If we can deliver on that promise, we should be able to take share during this time. Alongside this customer focus, we’re equally focused on driving to profitability and long-term shareholder return. For the last three years, we’ve ramped up R&D expense to deal with our historical technical debt and catch up on years of under investment.
Today, we’re not only seeing the benefit of that work, but we’re also able to bring our spend in line to long-term targets. We can do this, because we’re shifting resources internally from fixing issues to now building revenue generating products. So while we’re not adding new people, we’re seeing more new product development than we ever have before. In addition, we’ll see efficiency with our sales expense. This quarter, we combined our sales account management teams, which allows us to cover our customers via one account executive and thereby expand our sales growth without additional headcount and expense.
This also streamlines marketing activities and accountability for total customer P&L. The plan is simple, continue to grow revenues at the rates we are growing and end 2023 without additional sales and marketing R&D expense than we end in 2022. We want every dollar of new gross profit to flow to the bottom line in 2023. And by guess, Investors should begin to notice this change in the upcoming Q4 quarter and continue to track profitability quarter-by-quarter from then on out.
I’ll now turn the call over to Bryan, who’ll discuss our financials in more detail and I’ll end later with some closing comments. Bryan, over to you.
Bryan Menar
Thank you, Savneet, and good morning, everyone. Total revenues were $92.8 million for the three months ended September 30, 2022, an increase of 19.1% compared to the three months ended September 30, 2021 with growth coming from both restaurant retail and government segments.
Net loss for the third quarter of 2022 was $21.3 million or $0.79 loss per share compared to a net loss of $31.9 million or $1.23 loss per share reported for the same period in 2021. Adjusted net loss for the third quarter of 2022 was $11.9 million or $0.44 loss per share compared to an adjusted net loss of $9.3 million or $0.36 loss per share for the same period in 2021.
Product revenue in the quarter was $31.3 million, an increase of $1 million or 3.5% from the $30.3 million reported in the prior year. We continue to see strong hardware sales both in our Tier 1 legacy customers and across our Brink customer base. Service revenue was reported at $37 million, an increase of $7.5 million or 25.3% from the $29.5 million reported in the prior year, driven by subscription services revenue from our operator solutions and guest engagement.
Total subscription services revenue reported in Q3 2022 was $25.3 million, an increase of 34.6% compared to the $18.8 million in Q3 2021. The annual recurring revenue rate of subscription services exiting the quarter was $106.6 million, an increase of 29.2% compared to the Q3 2021, driven by 32% growth in operator solutions and 31% growth in guest engagement.
Our recurring revenue base, which includes both software related services and hardware support contracts continues to expand. Of the $37 million of service revenue reported in Q3 2022, $33.8 million was comprised of recurring revenue contracts as compared to $25 million in Q3 2021.
Contract revenue from our government business was $24.4 million, an increase of $6.4 million or 35.3% from the $18 million reported in the third quarter of 2021. The increase in contract revenues was driven by a $5.1 million increase in our ISR solutions, a $0.8 million increase in mission systems and a $0.5 million increase in product services. The increase in ISR solutions was driven by task orders resulting from the Air Force Research Lab counter-small UAS contract awarded in 2021.
Contract backlog as of September 30, 2022 was an historical high of $345 million, an increase of 80% compared to the $192 million backlog as of September 30, 2021. Total funded backlog as of September 30, 2022 was an historical high as well with $95 million, a 150% increase compared to the funded backlog as of the third – compared to the $38 million for the prior year.
Now turning to margins. Product margin for the quarter was 18.8% versus 24.8% in Q3 2021. The decrease in margin was primarily driven by a $1 million charge for excess and obsolete inventory. Product margin, excluding the excess and obsolete charge was 22% for Q3 2022 in line with our expectations. Service margin for the quarter was 35.1% compared to 29.6% reported in the third quarter of 2021.
We are proud of our ability to continue to drive margin improvement over multiple periods by improving hosting and support service costs in addition to a higher mix of SaaS software. Service margin during the three months ended September 30, 2022, included $5.9 million of amortization of identifiable intangible assets compared to $5 million of amortization during the three months ended September 30, 2021. Excluding the amortization of intangible assets, total service margin for the three months ended September 30, 2022 was 51.1%, an increase from 46.5% for the three months ended September 30, 2021.
Margin for the quarter was down sequentially from 55.6% reported in Q2 2022, primarily driven by professional services that support hardware and software and the inclusion of menu and PAR Payment Services, which are early phase subscription service products. As we ramp up volume to critical mass for menu and payment services, we expect their margin percent contribution to fall in line with our existing products.
Government contract margins were 10.4% as compared to 10.9% for the third quarter of 2021. Both periods represent favorable margins compared to historical averages. Contract margins for Q3 2022 included increased volume in our higher margin product services product line and higher margin contracts within our mission system product line.
In regards to operating expenses. GAAP SG&A was $26.5 million, an increase of $4.9 million from the $21.7 million reported in Q3 2021. Backing out menu, the growth in SG&A is $4.1 million or 19% compared – primarily driven by sales and marketing investments.
Net R&D was $12.8 million, an increase of $2.7 million from the $10.1 million recorded in Q3 2021. Backing out menu and onetime adjustments, the growth in R&D is $1 million or 10%. As Savneet referenced in his remarks, our incremental investment of R&D and sales and marketing has peaked and we do not expect net growth in 2023 compared to our 2022 exit rate. Net interest expense was $2.1 million compared to $5.4 million recorded in Q3 2021. It decreases driven by the refinancing of the owl rock loan with the issuance of the 2027 notes in September 2021.
Now to provide information on the company’s cash flow and balance sheet position. For the nine months ended September 30, cash used in operating activities was $33.6 million versus $43.6 million for the prior year. Operating cash needs were primarily driven by net loss, net of non-cash charges and additional networking capital requirements due to a $6.7 million increase in inventory and a $5.8 million increase in accounts receivable related to increased sales.
During the quarter, cash used in operating activities was reduced to $2 million as the Government segment made substantial improvements reducing its accounts receivable balance. Our focus of the next two quarters will be to reduce the inventory balance by $5 million to $7 million. Cash used in investing activities was $64.3 million for the nine months ended September 30 versus $381.1 million for the prior year.
Investing activities during the nine months ended September 30 included $40.1 million for the purchase of short-term U.S. Treasury bills and notes to be held to maturity. $18.8 million of cash consideration for the Q3 2022 menu acquisition and $1.2 million of cash consideration for the Q1 2022 drive through tuck-in acquisition.
Capitalized software for the developed technology cost for nine months ended September 30 was $4.7 million. Cash used in financing activities was $2 million for the nine months ended September 30 versus $444.3 million for the prior year. Financing activities for 2022 was driven by stock-based compensation related transactions.
Days sales outstanding decreased within restaurants and retail from 58 days as of December 31 to 46 days as of September 30. Days sales outstanding within Government segment as of September 30, 2022 was 55 days and consistent with the 55 days as of December 31.
I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A.
Savneet Singh
We at PAR are not new to tough times. A few years ago, we were a broken company living off of a tiny credit facility with less than $10 million of ARR, a challenged culture and a very challenged product. We climbed through each valley of challenge stronger and more convicted that we were in the right business at the right time with the right team.
More importantly, we came out of that convinced that our customers needed us to. While today’s times are certainly difficult, we believe we possess the right character to withstand today’s challenges and grow. Growing with scarcity is the environment – many of us at PAR are used to and grew up in. Every leader here comes with a chip on their shoulder with an intense focus on winning no matter what stands in front of us. Today is the first time in our history, we actually have financial flexibility, the ability to track the world’s best and the ability to actually build new revenue streams, but we still won’t stray from the learnings of our past.
Every dollar will be earmarked for return and I’m confident that as you see our results in 2023, every quarter will build upon the previous quarter where we are no longer burning cash. This change will give us more options to win, open up more M&A, create the opportunity for buybacks and so much more.
In closing, I often say to our leaders at PAR that there’s no such thing as a money losing business. Businesses exist only because they can sustain on a profit to invest in their people, products, community, and customers. We don’t believe that you can be a business if you aren’t profitable. No business should depend on the largest of anyone outside of itself. You must be profitable and you must be able to make tough decisions based on the expected long-term return.
We are committed to delivering this value and do not take it lightly that we are stewards of your capital and we must earn the trust to hold your capital going forward. I’d like to thank our customers and our partners for putting their trust in PAR. Our customers continue to invest more deeply with us and our unified experience in expanding our partnerships with them. As always, I’m incredibly grateful for our employees all over the world, who bring customer obsession to work that we do every single day.
Thank you, and I’ll turn it back to the operator.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Sam Salvas with Needham & Company. Your line is open.
Sam Salvas
Hey guys, I’m on for Mayank today. Thanks for taking the questions and nice results here. I wanted to start out on ARR. Good to see the 29% growth there. And I know you guys mentioned last quarter, you guys were still confident in being able to hit that 30% to 40% range for the full year. I was just wondering if that’s still intact and given increased visibility whether you guys might be able to hit towards the lower end or the midpoint of that range or just what your thoughts are around that. Thanks.
Savneet Singh
We’re still shooting to hit the range, obviously, it’ll be towards the lower end of that range. A lot of it will depend on our ability to turn on our payment sites, which have been the challenging part while we’ve booked a lot of business, getting it rolled out has been harder, primarily because the lack of payment devices. So we’re still shooting for it. And it is worse. That’s revenues built up for next year, but we’re still doing our best to hit that.
Sam Salvas
Got it, thanks. And then just a follow-up – just wanted to touch on gross margins, which were a little soft and I know you guys mentioned a few of those one-time charges there. And obviously, government and hardware revenue comes at lower margins, but it also looks like subscription margins gift quite a bit sequentially. Could you guys just talk more about some of the puts and takes in the gross margins and maybe how we can think about that in the fourth quarter and heading to 2023?
Savneet Singh
Yes, absolutely. So it’s pretty simplistic, which is the core of gross margins on Brink continue to be excellent, data central excellent, punches the strong. The addition is that – because we ramped up payments revenue and menu for the first quarter, you’re seeing the impact of that on the subscription side. The bigger impact though is the one-time stuff on the hardware side. Bryan, why don’t you walk through that? But on the subscription side, we feel very confident that we’ll continue our trajectory from 70 and up from there. But this is just a ramp up of two new products that are lower gross margin today, but once they get to some more scale, they’ll be aligned with the rest of our products.
Bryan Menar
Correct. And that’s on the – and then also within service itself, besides subscription services is – our professional services that support the software and hardware. And then those – we had – an inventory we had there, we had a charge, so that brought down those margins, but that’s a one-time that was about 500,000. And then in addition on the product side, we had a $1 million charge on the inventory that brought that down.
And so on the product you take out the E&O reserve that I mentioned of $1 million, it gets you back to a 22% margin for product of which we expect, which a low-20s is what our actual range ranges in that product area. So we expect subscription, our service margin to get back in line to where we saw as of middle of this year for Q4 and same with our product margin being back into the 20% range for Q4.
Sam Salvas
Great. Thanks guys. Appreciate it.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Stephen Sheldon with William Blair. Your line is open.
Stephen Sheldon
Hey, good morning guys and really appreciate all the commentary this quarter. That was really helpful. But just to start here kind of – it’d be good to get an update on what you’re seeing in terms of cross-selling activity between the three main product categories. Are some of those cross selling motions going better or worse than you would’ve expected when you acquired some of these assets? And should that activity pick up as you better incentivize and integrate these solutions? Because it sounds like you’re maybe starting to do that a little bit more than you have in the past. Just any color there.
Savneet Singh
Yes. So I think it’s – so answer is going well. I mean, it’s really, really early on menu, right? It’s too hard to have an opinion I would say on menu, the feedback from customers on the product has been tremendous and so I suspect that will be a very strong motion for next year. Obviously, that’s a longer sales cycle product requires integrations, but that seems very strong.
This quarter, we combined our Brink account management and our Punchh account management teams into one. And the reason we did that was because we were seeing momentum in the ability to cross sell and upsell to that base. Obviously, that has a nice cost savings element to it too, because you don’t have two people covering the same account. But more importantly, it creates the ability to own the customer in totality. And we believe that will continue.
Alongside all of that though, as I mentioned in my remarks, one of the most interesting things that’s happened is now we are finding ways to connect our products such that the customer gets a unique value they couldn’t get if they had two distinct products. So if you have our POS and our loyalty, you get features and functionality you couldn’t get if you had somebody else’s loyalty or POS.
And so that should dramatically help that, but we are really committed to that cross and upsell. I also think that’s the reason why, while obviously we read all the headlines that you read, we still feel very good about revenue growth this year and next year. And I think we’re probably offsetting that with some really nice cross sell and upsell opportunities.
Stephen Sheldon
Got it. That’s helpful. I guess, switching – thinking about back office solutions and with Data Central, you’ve been talking about some potential big deals coming through there. Sounds like you had one this quarter. Is there more to come on that side as you think about the fourth quarter and in the 2023 and are you seeing customers focus a lot more on back office efficiency in this environment with rising labor costs and supply chain costs?
Savneet Singh
There’s no doubt. I think we see real momentum that end. It’s obviously – the move to immediate ROI and the buying decision of the restaurants is probably the biggest change we see, where the restaurants want to know the ROI today and Data Central is a product that can deliver ROI literally the week you install. And so we’re seeing tremendous momentum and as you know and we’ve talked about the product is so flexible and so beautifully built that it can do a lot more than other products.
And so we’re seeing a lot of momentum. The pipeline is very strong. In fact, as I mentioned, we’re not growing sales and marketing expense next year. We’re not growing R&D expense next year, but we’ll certainly have more heads focused on Data Central because of that momentum. It’s actually quite exciting and we really feel energized by that business, by the leadership of that business. And there’s – I think there’s more to come fingers crossed.
Stephen Sheldon
Very helpful. And then just one quick last one, I think on payments. I think you’d mentioned reaching $5 million in ARR, I think cash whether that was – what you might think you’d be able to do this year or maybe it’s harder for next guess just where are you at with that business? What was the $5 million in reference to?
Savneet Singh
This year. So the point I was making, which – that I think is interesting for investors is, if we sit here today, we’ve been very vocal that we don’t want to grow R&D expense and sales and marketing after this year. And part of that is because we’ve seen how high ROI is within our existing products by reallocating resources. So this year we spent 5.3 – we estimate we’ll spend $5.3 million on sales and marketing R&D and G&A on payments and in return we think we’ll end the year greater than $5 million of ARR.
And so that payback period is incredibly fast. And next year, we think that business has the ability to double and without anywhere near the doubling of sales head count if you will. So I was referring to this year, obviously, I hope we can clear it and candidly the entire ending revenue mark of that product is a little bit dependent on Chinese supply chains. I feel very confident with that five. Can we hit six or seven is going to be dependent upon the supply chain coming from China.
Stephen Sheldon
Great, thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Adam Wyden with ADW Capital. Your line is open.
Adam Wyden
Okay. Can you hear me guys?
Savneet Singh
Yes, fine.
Adam Wyden
Okay, perfect. I just wanted to go over a couple housekeeping items. So the way I heard you describe this on the call is that at the end of Q4 2022, you expense – you expect your expense structure to be effectively flat, which the way I read that is G&A flat, sales and marketing flat, R&D flat. And so it’s not a flat margin percentage, it’s a flat dollar. So just humor me for a minute. If you guys are – if you take $115 million of ARR at the end of 2022, which is effectively what you added in the third quarter and bring bookings are up and you have payments, So $115 million feels like a conservative starting point and you say, okay, I’m going to grow 30%-ish percent next year, which gets me to $150 million of ARR.
Now that’s $35 million of incremental ARR. Now obviously what do you call it menu has had a lower gross margin and your other comp – your other assets are having increasing gross margins. So take your 70% to 75% incremental gross margin on those sales. I take 35 times 70, that’s not – that’s $25 million of incremental EBITDA, but like presumably it’s probably more like 75, because you’re leveraging scale, right? Like you look at menu and it’s lower gross margin, because it’s lower sales base. So I mean, your incremental margin should be like 75% on that in – on those incremental dollars. I mean, is that sort of your – how you’re thinking about kind of getting to cash flow positive in 2023? I mean, is it flat expenses for one year? Do you think you can do it for two years? I mean, walk me through sort of that incremental margin math.
Savneet Singh
So short answer is everything you said is correct. So we want to exit the 2022 spend base in dollars to be a no higher – 2023 should be no higher than 2022, when we exit both years. And so your math is exactly right, exactly right, which is we want the gross profit from that new ARR to drop straight to the bottom line. So it should add, I can’t – I haven’t talked about guidance yet. We’ll do that on our next call, but whatever you assume our ARR is, I think your math is exactly right. So that’s our hope and that’s why we feel incredibly confident in our ability to get to profitability, because we’re not growing the expenses. And so it’s – we have a lot of control over that.
The second part of your question I think was what happens in 2024? It’s too hard to say now, but there’s no way we sort of – you’ll see a crazy ramp in expenses any year going forward. This big ramp we’ve had in R&D has been focused on, let’s call it, customer satisfaction dealing with a lot of the scenes of the past. And we’re kind of beyond that now. And as you heard my final point, which is – as an organization, we do want to control our own destiny and the only way you control your own destiny is if you can find yourself and grow yourself. And that gives you more opportunities to do M&A, buybacks and we feel very confident we’re going to get there. And so that is the marching orders that we have as an organization.
Adam Wyden
Okay. That’s helpful and that makes sense. I mean, look, obviously, this company has lots of different products and all of them are sort of going in lockstep. And so when I look at what I would call best in class enterprise software companies like, Clearwater Analytics, I mean, that business has a 30% EBITDA margin on $300 million of ARR. It’s not even that big. I think it might be helpful sort of in this kind of framework for people, I know you’ve alluded to sort of keeping expense structure sort of flat in 2023 and hopefully in 2024 to some degree.
But I mean, I think it might be helpful to sort of give people a framework quarter like what we think steady state free cash flow margins are, because I mean, I think a lot of companies, as you said, there’s been a lot of imposter companies in technology, a lot of low gross margin transactional SaaS, low molded SaaS. And so I think one of the things that appeals to us is that our growth – the growth curve in this business is sort of not procyclical.
So you don’t necessarily throw a lot of dollars and grow 200%, but the idea is if you can grow 30%, 40% or even 25% and have a 30% to 40% EBITDA margin, you can get to rule of 40 pretty easily on margin. So I’d be curious to sort of – and this isn’t really necessarily in 2023 or 2024 event, but like sort of how we think about steady state margins in the business, because that’s obviously going to inform how you make investments in all these different modules in the rest.
Savneet Singh
Yes, absolutely. So here’s the math that we’re targeting for our long-term. We want to get to 80% gross margins on subscription services. We want to spend 25% to 30% of that revenue on R&D and 20% on sales and marketing, which should get you to, I think you said 30%, which is what we’re targeting. So that’s exactly where we want to get to. And I think we’re going to be pretty close to that on sales and marketing next year. I actually think we might even be there by next year. And so it just continues to be our ability to be a really efficient R&D organization leveraging our India base so that we can pull the gross margins and R&D in line. And so I think we’re going to be there pretty quickly on our business there. And that’s our long-term target. So your math is roughly in line.
Adam Wyden
And so – okay. And then – so obviously there’s a nice ramp over this year, because you sort of invested in advance. You talked about your unified commerce platform. Can you talk a little bit about UCP and your go-to-market with MENU and sort of like what – how you think about your sort of go-to-market on that? I think a lot of – when I look at the business that I owned or still own, but the business that I owned when I bought it, the first time, it was effectively Brink as you said, a low gross margin, high technical debt business that had a in some cases a long sales cycle as a function of hardware.
Now, when I look at the business mix today, it looks very much like a vertical software offering where you can take one or all, so you have Punchh, MENU, Restaurant Magic, Brink, payments, and now Unified Commerce platform, which is some multitude of products. Can you talk to me a little bit about how you’re thinking about go-to-market? Because each product itself is a Trojan horse and obviously an environment where if franchisees want to spend less money, they don’t have to necessarily make a hardware investment.
And so how do you think about go-to-market with these other things that are like payments for example, which has no economic cost, right? You send them a thing, you show them a little sheet and you say, okay, I’ll switch your payments out. I’ll give you the terminal for free and they don’t have to spend any more money. That’s a freebie. So I’m just curious about how you think about go-to-market sort of on the six kind of line items and also like I’d be curious to hear how you’re engaging with these corporates because these corporates do have this marketing fund, which is about 3%, and I know Punchh comes out of that, but like corporate gets paid based on royalties.
I mean, what initiatives have you sort of penciled out such that you lower the sort of the economic burden into the franchisee and shift more of it to monies that are sort of already being spent? Because I think people think this has macro sensitivity and I think it doesn’t have enormous macro sensitivity, but there’s also levers for you to pull that are sort of non-seen by the customer.
Savneet Singh
Sure. So let me ask the first part of the question and as which is on the go-to-market motion we are go-to-market as one team. And so it’s the big change we have internally, as I mentioned, is the consolidation of our sales account management team. And we wouldn’t have done that if we didn’t feel extraordinarily confident that that team can drive more sales on less bodies.
And it’s powerful because when you have one customer owning that P&L, that customer of that individual one, excuse me, one team member at PAR owning the P&L of that customer, you have complete accountability. And our products work very well together. So while we have a suite of products, they integrate very beautifully together and the customer’s now seeing that when I mentioned that one plus one equals three, it truly is that if you have Brink and Punchh, we want you to have a differentiated outcome.
You can buy whatever you want, but you want to buy PAR because you’re going to have that differentiated outcome. And then you’ll have the benefits of having one support, one sale, so on and so forth. And so I feel very good about that. This year – sorry, 2023, we’re launching our Unified Commerce products.
As I mentioned it’s a suite of products coming out. We’re incredibly excited. These our first true, I think game changing products that we don’t think others have and we’re leveraging our existing sales account management team to upsell that. And so I feel very good about that. And then on your second part of your question, and then we – unfortunately we got a long queue today, so I’m going to jump to the next question after this is absolutely we are looking for ways to be sell our products together such that we are – have less and less burden upon the franchisee.
And the benefits of having multiple products and payments is that we can not only increase their ROI, we can hopefully lower their total cost of ownership. And offices part of that will be doing by leveraging our – the Punchh relationship with the MDF [ph] and other parts of that organization.
So a lot of momentum there, but having these products truly connected allows us to change that conversation from here’s a different conversation for POS, here’s a different one for loyalty and opposed to having one consolidated conversation, which will again tie up to our account management consolidation.
So with that, let’s jump to the next question because we’ve got a long queue today.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Jeremy Sahler with Jefferies. Your line is open.
Jeremy Sahler
Great. Thanks guys for taking my questions. So I’m on for Samad Samana. So first off, you guys had the highest Punchh net add since second quarter of last year, and I think the highest sites added ever. The ARR growth still kind of ticked down sequentially. What would it take to kind ramp this up again?
Is low-30s kind of how we should look at growth going forward? And then I guess since MENU is kind of combined in here now, how are you thinking about ARR growth for MENU in the future? I know it’s early now.
Savneet Singh
Yes. So I’ll do – I’ll answer backwards. So a MENU, the revenues not really there yet. It will come the – I suspect next year we’ll start to see by middle of next year real revenue coming from that business. The reviews on the product have been beyond what we expected, and I say that with no hyperbole [ph].
And the team has been far better than expected. It does take time to get the product in because you need to integrate with all sorts of products that the product has not been integrated into. That’s everything from Uber’s and DoorDash to other U.S. products that the products isn’t there for. But the core functionality is answering the need of our customers. And so we’ll see that really come next year. So today the majority of almost all that is Punchh.
On the Punchh side, I suspect Punchh and our hope for Punchh is to kind of continue to hit around the rate we’re growing now. Can the business grow 50% next year? Probably not given where we are, but as we add new modules, the goal is that the collective suite of PAR products continue to grow at the pace that we’re growing now.
And so – and this sort of ties to the last question, which is in the end our customers I don’t think will be saying give me Punchh separately then Brink and this that the idea is can we get them to buy it together and change that conversation to being this platform for their organization. And so that’s kind of how we’re looking at today. Punchh continues to grow at rates faster than its competitors. And I think our subscriptions product is a nice way to have, create a new upsell product as well and so lots of work and focus on that.
Jeremy Sahler
Understood. Thank you. And then one more for me. So Brink activations I see still below 1,000. I know the goal there is kind of above 1,000 per quarter. Is there anything specific kind of causing a little bit of weakness here that maybe supply chain or…
Savneet Singh
So I think you’ll see it make up a lot for that. We’re six weeks in and we see a really strong – it’s been very strong so far. So we’ll end the year, I believe in excess of the average across the four quarters. And so I think we’ll be fine this year. At this quarter, we’re at right around 1,000. We’ll be well above that in Q4.
Jeremy Sahler
Got you. Thanks for taking the question, guys.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of George Sutton with Craig-Hallum. Your line is open.
George Sutton
Thank you. First, I appreciate the ROI walkthrough and the new segmentation that’s helpful. So relative to combining the account management teams, I’m curious about the reality that Punchh was selling at a headquarter level and Brink was largely selling to a franchisee group or to regional offices. Can you walk through kind of how you bring that part together?
Savneet Singh
Sure. So today, loyalty solutions in the broader market – customer engagement is generally done at a corporate level out of something called the marketing development fund, which is funded by franchisees, but allocated by corporate. And it’s sort of the beauty of the Punchh business model, which is you sign the corporate deal and then you rollout usually in totality within six months. So it’s a nice enterprise software deal.
On Brink, it’s done at the corporate level, you sort of win the approval in a mandate, but then you’ve got to convert region by region. We’ve gotten really good and our team has been incredibly impressive of shortening that time. We’ve got some great examples where historically something that would take us three years or four years is now one year to two years. And what we’re hoping for is that we launched these new unified products, they become not a decision of should I turn on a region, but should I turn them on across our entire organization.
So I’ll give you an example. Next year, we’re launching a product that allows the restaurant to slot and throttle orders. So when your restaurant’s incredibly busy and you’ve got lots of people in the store, and then you’ve got orders coming from online ordering, and then you have orders coming from UberEats Reads and DoorDash, and then you got people in the drive-through and QR code ordering and all of that, our software will allow you to throttle and slot those orders in there.
It’s a brand new product that I suspect that if a – if we make that deal with our customers, that’ll be hopefully done at the corporate level because that is a really, really revolutionary product that you want to impact across all your customers so that all your restaurants and customers have the same experience. And so it’s an example of our new products not necessarily being a franchisee decision, but being a decision at the corporate level.
George Sutton
Got you. Perfect. Just one other clarifying question. You mentioned that a majority of your new wins in Brink have included payments. You just put a little more specificity around that. That’s an encouraging perspective.
Savneet Singh
It is, it’s probably been one of the most – maybe the most exciting thing of the year. I would say three out of every four Brink deals we sign direct, we’re able to attach payments. And it’s way out of expectations, now as we sign the next big large enterprise customers, which we expect, we do, we may not or probably won’t have payments on that deal up front, although we’re trying very hard.
We’ll – but I believe that in sort of our – the market – that sort of mid-market that we are in, we should be able to attach payments on the vast majority of deals. And so far, really in year one, we’ve proven that already.
George Sutton
Great. Thanks, guys.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Anja Soderstrom with Sidoti. Your line is open.
Anja Soderstrom
Hi, and thank you for taking my questions and congratulations on the good progress. I’m just curious for the payments you mentioned in an earlier question that, that it’s been a bit slower due to lack of payment devices. Is that due to the supply chain? And if so, what do you see in terms of that listening up?
Savneet Singh
I don’t have a good answer on the ladder. We work with a couple vendors, one in particular, and the messaging we get from that, that vendor is, the shutdown in Asia for the reason may be is now pushing things out, one month, two month. We’ve worked really, really hard. We’ve done everything from prepay to pay more to search for eBay and all over the place reality of different customers to get the revenue live.
This will get better. As we look for dual, as we sort of expand from dual sourcing to try sourcing this will get better and as we get more sophisticated, we’ll get better. But I suspect it’ll decide in the next couple months here. But as our business continues to grow at our rates and others can – I see slowing down, that probably will also free up some of their pipeline to allocate back to PAR.
Anja Soderstrom
Okay. And so it’s just a matter of that revenue bookings being pushed up, it’s not really affecting your ability to sell it in or closer deal?
Savneet Singh
No, no.
Anja Soderstrom
Okay. Thank you. And then in terms of MENU, I understand the margins, it’s a bit lower now due to the lack of scaling, but when do you think that’s going to be in line with overall margins?
Savneet Singh
I think in payments, we’ll get there next year, I think on MENU, we’re probably – I’m guessing a year or so away, just depends on how fast we turn the revenue on. So it’s a little hard because I think also depends on the product mix. We’ve got sort of four or five key products within the MENU suite. We’re trying to beachhead with one of the products and then expand from there. But I think give me a quarter or two and we should be able to give you some guidance on that.
Anja Soderstrom
Okay. And that – thank you for that. And then in terms of closing remarks, you said you’re setting yourself up for or you well-positioned for tougher times, but how do you see your customers, do you see any impact among them and I mean given where you are servicing them and helping them being more efficient and maybe you even see an acceleration in the digitization of the restaurants or what are you seeing?
Savneet Singh
So I’ll break in two parts. So our customers have been incredibly resilient. So I think this data is widely reported and our data ties to it, which is every restaurant and pretty much every retail business has declines in volume, in traffic. So order counts are down across the industry. Revenues continue to hold because they’ve been able to pass price through.
And I think that shows the durability of this end market. We serve QSR and fast casual, which are lower priced relative to the average restaurant. And those businesses do well in tough times, they take share. Secondly, in tough times like this, restaurants look for this immediate ROI. They want a product and they want ROI fast. And our products, we believe provide that.
In addition, when you consolidate vendors they’re roomed for cost savings and simplicity. I suspect that as restaurants deal with a slowdown in their business, they’re not going to want to have 15 different vendors because that requires more staff to manage. They’re going to want fewer and fewer vendors, just like we at PAR are always looking to do that.
And we – I think stand to benefit there because we are, I believe the only solution in the enterprise that can actually give them that. Today, as I said on the call, the resiliency of our customers has held and the resiliency in our revenue. So we continue to see the demand. We have – we haven’t had the, oh my God moment and, but we’re ready for that. Our goal, as I stated, is to be a profitable business by next year.
And so whether our revenues are slower than expected or faster than expected, we will hit that number because we believe that we’re setting up the cost structure to deal with that. And so but today we feel really good. I mean we haven’t seen that drop off happen, but when it happens we’re sort of preparing for that to happen today.
Anja Soderstrom
Okay. Great. Thank you. That was all for me.
Savneet Singh
Thanks, Anja.
Operator
Thank you. I’m showing no further questions in the queue. I will now like to turn the call back over to Savneet for closing remarks.
Savneet Singh
Thank you, everyone for joining the call. We appreciate your support and as I mentioned, we truly believe we are stewards of your capital and thank you for that trust. We’ll see you next call.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
Be the first to comment