3Par (PAR) Q3 2021 Earnings Call Transcript

3Par (PAR -1.36%)
Q3 2021 Earnings Call
Nov 09, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the FY 2021 third quarter financial results conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your first speaker today, Chris Byrnes, vice president of business development.

Sir, please go ahead. 

Chris Byrnes -- Vice President, Business Development

Thank you, Peter, and good afternoon. I'd also like to welcome you today to the call for PAR's 2021 third quarter financial results review. The complete disclosure of our results can be found in our press release issued this afternoon, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the investor relations page of our website at www.partech.com.

I also want to be sure all participants today have access to our earnings presentation and business review slide deck to better communicate the momentum in our software business. Individuals on the webcast should have access to the deck when they logged on to the call this afternoon. For those just dialing in on the conference call this afternoon, the presentation can be accessed again on the investor page of our website, and we also included as an attachment on the 8-K we filed this afternoon. At this time, I'd like to take care of certain details in regards to the call.

Participants on the call should be aware that we are recording the call this afternoon, and it will be available for playback. Also, we are streaming the conference call today on the Internet, so please be advised, 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 afternoon and in our annual and quarterly filings with the SEC. Joining me on the call today is PAR's CEO and president, Savneet Singh; and Bryan Menar, PAR's chief financial officer. I'd now like to turn the call over to Savneet for the formal remarks portion of the call, which will be followed by general Q&A. Savneet?

Savneet Singh -- Chief Executive Officer and President

Thanks, Chris, and thanks, everyone, for joining us to review PAR's third quarter results. There's a lot we want to share with all of you today in our prepared remarks, so let's get started. As a company, we delivered strong -- we delivered a strong third quarter. We reported total Q3 revenues of $77.9 million, a 42% increase from one year ago.

This revenue was motivated across all business lines and specifically around our software recurring revenues resulting in $82.5 million of live ARR at quarter end and year-over-year growth of 35% when compared to Q3 last year, which includes Punchh performance from Q3 2020. This increase was driven by a 46% growth in ARR by Punchh and 29% from Brink from Q3 last year. What's very encouraging is that contracted ARR now totaled approximately $97 million as of September 30. Our strong results this quarter were driven by a high level of execution across the business and continued demand for PAR's unified commerce cloud platform.

We have established strong momentum and have continued to build on that throughout 2021. In Q3, we activated 1,739 new Brink sites, a single quarter record for PAR. On a net basis after churn, Brink's active store count now totals nearly 14,900, a 35% increase from one year ago. Brink bookings totaled 780 stores in the quarter as we manage supply chain issues plaguing the industry today.

We expect bookings rebound in Q4 and ARR growth to continue to accelerate sequentially as well. In Q3, we were successful in activating some of our oldest backlog, many of whom were legacy price customers, which modestly brought down ARPU across our network of customers, both offset by very strong activations. We expect this impact to balance out next quarter as new customers are signed at higher subscription rates. Now turning to Punchh.

We continue to outperform at Punchh and added more than 4,500 live sites in the quarter that now totaled more than 52,900, a 54% increase in the last 12 months. We signed 14 new customer logos in Q3 that included over 3,000 stores and went live with Jack in the Box and their network of restaurants. New mobile experience and pickup products are seeing traction from customers and I also want to relay that we are beginning to see momentum within the C-store segment as the industry seeks out a more robust loyalty solution. We added six important new integration partners in the quarter and our business outlook and pipeline remained very strong.

Data Central added 168 stores in Q3, and we're beginning to see renewed interest in our leading back office application. Active sites now total almost 6,200 and ARR is at $9.1 million at the end of the quarter. PAR payment services pipeline grew significantly in the quarter, and we expect to announce new wins in our next quarterly call. We're seeing payment success broadly in Brink, Punchh and nonexisting PAR customers.

Our product and hardware business -- our product hardware business continues to perform well in a difficult and challenged environment. Product revenues in the quarter continued to strengthen year over year and improved sequentially as well. Product sales were reported at $30.3 million in this recently ended quarter, a 48% increase. the capital purchase environment for restaurants is always tricky, and that has been even more so with the pandemic and the global supply chain difficulty stressed upon several end markets.

As I mentioned last quarter, we're not immune to these challenges around supply chain, and we've experienced some margin impact with the costs associated with the current realities, including the dramatic growth in shipping charges. We're taking direct steps to mitigate these issues, including price increases and other actions already reported and already reported product margin improvements in Q3, which I expect to continue in Q4. Regarding the supply chain specifically, we'll continue to diligently manage our partners and vendors throughout any shortages, price inflation and increase in freight charges. Now to briefly report on our government business.

In the quarter, we reported revenues of $18 million, a 3% increase when compared to Q3 last year. Last week, we announced the largest award in our company history by eight times. The U.S. Air Force Research Laboratory Information Director awarded a single award of $490.4 million IDIQ contract for counter small unmanned aircraft system work on software hardware and technical documentation.

This award has a contract term of six years and an additional two-year period -- a two-year order of performance beyond the original six years. We will recognize revenue as task orders are assigned and -- but we are seeing immediate impact upon contract backlog that grew to $192 million at the end of Q3, a meaningful $51 million increase from three months ago. We are gratified by the confidence the Air Force has shown in PAR with this award, and we have always prided ourselves on the critical role we play in supporting our operational customers and their requirements. Let me now talk a bit about where we see things going forward for the business -- from a business perspective.

Last week, we spent time meeting with dozens of customers and partners. I love hearing directly from our customers and users, which we call our voice of the customer sessions because it helps us to validate and sharpen our strategic plan, as well as providing the PAR team with direct feedback on the transit issues our customers are seeing today. The foundational belief of our thesis is built on the idea of creating a unified commerce platform, one that delivers power back into the hands of the restaurant. Today, we see many restaurant tech companies winning at the expense of restaurants rather than in service to them.

We believe technology should be built to serve operators and their end customers. But today, in our industry, it's become extractive. The challenge is rooted not in something dubious, but from a structural flaw in the restaurant technology stack, the absence of an integrated platform. dozens of different disparate applications are being cobbled together in the hope of building a simple and beautiful experience.

But unfortunately, that premise has challenged the experience of operators and their customers' experience is suboptimal. As a result, the job of the restaurant CIO today has become one of getting dozens of different products to work seamlessly rather than focusing on growing market share and delivering differentiated guest experiences. What's perhaps worse is that all the operational and customer data insights that might otherwise be available to the brands is being trapped in the silos of these disparate applications. This is the problem PAR is working to solve and the greatest opportunity for our clients.

We're moving from a world of bodies to bits. Historically, every challenge of a restaurant was solved by the addition of more labor. If you have too many cars in your drive-thru lane, you send out a line buster. If you have too many orders, you had a line chef; too many quality issues, you add a spot checker.

Every challenge can be solved with more bodies. But in a world, the restaurants are expected to not only deliver great in-store experiences and also deliver Amazon-like digital experiences off-premise. The model running multiple platforms breaks down. Enterprise restaurants need a truly unified platform to make this work, and this is what we are building at PAR, one that natively brings all transactions in-store and off-premise along with all customer data into a unified open cloud platform with enterprise scale.

Our goal is to be the foundational technology that provides our customers the organizations we are built to serve with the ability to fill their own technology destinies and to build differentiation and competitive advantage through unique experiences. Such technologies remain open to working with other vendors and allow our clients to choose which features to turn on and off to build their own proprietary capabilities and to manage and support their own implementations. We're at the inception of this vision. Our new CPTO, Raju Malhotra is driving this platform vision, and I have immense confidence in his ability to deliver on transforming PAR Punchh and Data Central.

Alongside this internal development is a highly focused M&A program, narrowing in on a couple of key gaps we are looking to fulfill in short order as witnessed by our recent capital raise. While all markets are competitive, PAR occupies a very unique place. We service a customer base above the size of where most of the venture capitalists flow into restaurant technology. On a daily basis, we compete against more traditional competitors, from those that are still building on-premise to those who believe that a platform is the equivalent of a bundled solution.

Our ability to grow in this market is completely supply driven, not demand. Our ability to grow account level is almost -- our ability to grow account levels is driven by store count. Today, we're at around 15,000 stores of a TAM that's almost 30x the size. Yet our ability to grow at higher rates will be driven by the deployment of new products.

This is the next leg of our transformation and our major focus in 2022. In closing, I'd like to thank the entire PAR team for their contributions. At par, we live by four values: one, speed, we like to say we look for those who don't wait for the elevator; two, ownership, we look for those that are owners and not renters of PAR, people who treat PAR like their own car and not a rental car; three is focus. We always try to remember that 80-20 wins; and four is winning together.

This is the belief that all stakeholders of PAR must win, our team, our customers, our suppliers, our community and our shareholders. We take these values seriously and every day we work hard to develop and hire on these values so that we can deliver for all stakeholders. With that, I'd like to hand it off to Bryan, who will review our financial performance in greater detail. Bryan?

Bryan Menar -- Chief Financial Officer

Thank you, Savneet, and good afternoon, everyone. Total revenues were $77.9 million for the three months ended September 30, 2021, an increase of 42% compared to the three months ended September 30, 2020. Net loss for the third quarter of 2021 was $31.9 million or $1.23 loss per share compared to a net loss of $33.7 million or $0.20 loss per share reported for the same period in 2020. Adjusted net loss for the third quarter of 2021 was $9.3 million or $0.36 loss per share compared to an adjusted net loss of $2.4 million or $0.11 loss per share for the same period in 2020.

Product revenue in the quarter was $30.3 million, an increase of $9.8 million or 48% from the $20.5 million reported in the prior year. The strong growth was primarily driven by hardware refresh investments by our domestic and international Tier 1 accounts, in part from delayed hardware refreshes in 2020 due to COVID -- 19. Service revenue that includes revenue streams from our subscription software was reported at $29.5 million, an increase of $12.6 million or 75% from the $16.9 million reported in the prior year. The increase was primarily driven by revenues from Punchh of $9.7 million and an increase of $1.8 million for other software revenue and $0.8 million for repair services.

The company continues to expand our recurring revenue base, which includes both software-related services and hardware support contracts. In total, the recurring revenue streams contributed $11 million of the increase in service revenue. Of the $29.5 million of service revenue reported in Q3 2021, $25 million is comprised of recurring revenue contracts as compared to $14 million in Q3 2020. Contract revenue from our Government business was $18 million, an increase of $0.5 million or 3% from the $17.5 million reported in the third quarter of 2020.

The increase in contract revenues was driven by a $0.7 million increase in our ISR solutions product line, partially offset by $0.3 million decrease in our product services product line. Contract backlog, as Savneet mentioned, continues to be significant, noting a total backlog of $192 million as of September 30, a $51 million increase from Q2 of this year. Now turning to margins. Product margin for the quarter was 24.8% versus 21.9% in Q3 2020.

The increase in margin was primarily due to favorable product mix and favorable absorption of overhead costs due to increased sales. Service margin for the quarter was 29.6% compared to 33.3% reported in the third quarter of 2020. The decrease in margins was driven by an increase in amortization expense for acquired developed technology of $2.9 million recognized as a result of the Punchh acquisition and incremental costs incurred while transitioning our field operations organization. Service margin during the three months ended September 30, 2021, included $3.7 million of amortization of acquired intangible assets compared to $0.9 million during the three months ended September 30th, 2020.

Excluding the amortization of acquired intangible assets, service margin for the three months ended September 30th, 2021, was 42.3% compared to 38.5% for the three months ended September 30th, 2020. Government contract margins were 10.9% compared to 9% for the third quarter of 2020. The increase was due to improved margins in both ISR and Mission Systems product lines. GAAP SG&A was $21.7 million, an increase of $5.9 million from the $10.5 million reported in Q3 2020.

These numbers include stock-based compensation, and the increase was primarily driven by $7.2 million in total Punchh operational expenses, of which $1.9 million is stock-based compensation. Other drivers included increase of $2 million in corporate expenses, $0.6 million of variable compensation and $0.4 million for sales and marketing. Net R&D was $10.1 million, an increase of $5.9 million or 140% from the $4.2 million recorded in Q3 2020. The increase is driven primarily by $2.2 million for Punchh and $2.7 million related to additional investments in our existing product development organization.

Net interest expense was $5.4 million compared to $2.2 million recorded in Q3 2020. The increase is primarily driven by the [Inaudible] term loan. Net interest expense for the quarter included $2.1 million of noncash accretion of debt discount and amortization of issuance costs compared to $1.1 million for the same period last year. In Q3 2020, we recorded a loss on extinguishment of debt of $11.9 million as a result of a repayment of the Owl Rock term loan.

There was no loss on extinguishment of debt during Q3 2020. Now to provide information on the company's cash flow and balance sheet position. For the nine months ended September 30, 2021, cash used in operating activities was $43.6 million versus $14.4 million for the prior year. Cash used for the nine months ended September 30, 2021, was primarily driven by an increase in net loss net of noncash charges and additional net working capital requirements driven by an increase in accrued compensation and an increase in other current assets.

The increase in other current assets reflects an increase in our prepaid assets as the company took advantage of repricing opportunities with key strategic partners. Cash used in investing activities was $381.1 million for the nine months ended September 30th, 2021, versus $6.9 million for the nine months ended September 30th, 2020. Investing activities during the nine months ended September 30th, 2021, included $374.7 million of cash consideration in connection with the Punchh acquisition. Capitalized software for the nine months ended September 30th, 2021, was $5.5 million, was associated with the investments for various restaurant software platforms versus $6.4 million for the nine months ended September 30th, 2020.

Cash provided by financing activities was $444.3 million for the nine months ended September 30th, 2021, versus $48.7 million for the prior year. On April 8, 2021, we received net proceeds of $155.7 million from the private placement of our common stock to PAR Act 3 LLC and certain funds and accounts advised by T. Rowe Price Associates. In addition to net proceeds of $170.7 million from the Owl Rock term loan.

On September 17, 2021, we received net proceeds of $256.8 million from our offering of the 2027 notes and $52.5 million from our equity offering. We used approximately $187 million of the proceeds of these offerings to repay the Owl Rock term loan in full. Repayment of the Owl Rock notes in exchange for our convertible debentures will result in a $5.5 million annual reduction in cash interest. During the nine months ended September 30, 2020, we received net proceeds of $49.5 million from our offering of the 2026 notes, which reflects our use of $66.3 million to repurchase a majority of the 2024 notes.

Inventory increased from December 31st, 2020, by $12.4 million. We increased our inventory on hand to mitigate supply chain shortages and delays while ensuring we can meet our enterprise customers' demand for installations. Accounts receivable increased $5.9 million compared to December 31, 2020, due to increased sales volume. Days sales outstanding improved within restaurants and retail from 74 days at December 31, 2020, to 50 days at September 30, 2021.

This is tremendous progress and complements our team's hard work and management's focus on operational excellence. Days sales outstanding increased within government from 51 days at December 31st, 2020, to 55 days at September 30th, 2021. This concludes my formal remarks, and we will now move to Q&A.

Questions & Answers:

Operator

[Operator instructions] And your first question will come from George Sutton with Craig-Hallum. Your line is open.

Adam Kelsey -- Craig-Hallum Capital Group -- Analyst

Thank you. This is Adam on for George. Great results guys. Savneet, in the past, you've talked about PAR payments and the potential for it to potentially become one of your largest revenue segments.

Would love to get an update on your thinking from what you've seen early on and what the initial feedback has been so far.

Savneet Singh -- Chief Executive Officer and President

We're feeling very good about it. The pipeline grew tremendously in Q4 -- sorry, Q3. And I think on our next quarterly call, we also announced some of those logos that we expect to sign. So we feel really good about momentum there.

And then I think we've just started the push of using our payments product within Punchh customers. And so we're seeing one or two test customers, I think should lead to quite a bit more. And then I think, surprisingly, we've actually found a couple of nonexisting Brink customer -- non-Brink customers, excuse me, who we expect to come on to our payments product that will also be a good shoe in for us to then sell Brink or Punchh to. So pipeline grew across all three of those categories.

And on the next call, I think we'll have some exciting announcements.

Adam Kelsey -- Craig-Hallum Capital Group -- Analyst

And then with respect to 2022 being a year focused on product, I would love to get your updated your thoughts post raise on internal versus external development and then how the digital order management project is going And what else you think might fall in that internal road map.

Savneet Singh -- Chief Executive Officer and President

Great. Yes. Digital order management is coming out in Q1. Very, very excited, and we've got a pilot customer already lined up.

So it will have great feedback and be able to iterate quickly to drive revenue. And that's our big new release, which is really the beginning of the -- our foray into building the platform I talked about in the call. We'll certainly look to be acquisitive. We raised money on that premise, and we've got a couple of key holes we're looking at.

And so we've got a very, very active M&A team that works on this. And so we will build both organically and inorganically. And our goal is really to have the sketch of the platform done by the end of next year, but start selling the platform in advance of that.

Adam Kelsey -- Craig-Hallum Capital Group -- Analyst

Great. Thank you.

Operator

And your next question will come from Stephen Sheldon with William Blair. Your line is open.

Pat McIlwee -- William Blair -- Analyst

Hi. This is actually Pat McIlwee on for Stephen. But I wanted to ask how the recent Air Force contract you won impacts your thoughts on what you plan to do with the government business over the near term and just your thoughts on that going forward.

Savneet Singh -- Chief Executive Officer and President

Obviously, I can't say anything specific, but I'd say it certainly makes the business more attractive, which gives us an optionality on what we want to do and certainly makes the business more valuable.

Pat McIlwee -- William Blair -- Analyst

OK. OK. And then I also wanted to ask about the PAR phase hardware POS that you recently announced and just how that ties into the general hardware software strategy and how it might be complementary to the existing Brink offering.

Savneet Singh -- Chief Executive Officer and President

Yes, absolutely. So it's the next version of our internally designed terminals. It's gotten really strong customer feedback so far. And I think the tie here is twofold.

One is Brink runs on really anything that's out there, any windows device at is, I think we're fantastic. But we do think that Brink on our own devices works a little bit better, particularly on design. If you look at the phase, it's a beautiful product. It's not sort of a copycat product.

And Brink works really elegantly there, but it also allows us to service it better. So you've got a challenge with the product. You can ship it back, advanced exchange, warranty, so on and so forth. It allows us to give our customers the full solution, which more and more of them want.

I think what we're finding is, similar to our thesis on software, our customers don't want to -- there's not enough value in them having a different hardware vendor if they have different hardware contracts, so and so forth. And so you're seeing movements to things like hats, hardware as a service put together. So I think it helps, and obviously, when you have new product to market, it helps build excitement with customers because while enterprise customers are different, there's still that excitement of getting new device just like when new products come out for consumer things.

Pat McIlwee -- William Blair -- Analyst

It's very helpful. Thanks, Savneet. 

Operator

[Operator instructions] Your next question will come from Samad Samana with Jefferies. Your line is open.

Unknown speaker

Hey guys. This is actually Jeremy Saylor. I'm on for Samad. So a question on activations.

You guys are coming off like a record high number of activations in Q3. How should we think about the shape of activations going forward? Does the company need to invest in more capacity to bring on new bookings? Or how should we think about that?

Savneet Singh -- Chief Executive Officer and President

So I think like we said in the remarks, bookings will come back in Q4. Some of this is supply chain dependent, but we feel pretty good about that right where we are now. A lot of the years in building up the pipeline for next year. So I do think we'll see strong bookings in Q4.

And I think as it relates to activations, we activated in [Inaudible] stores in Q3, and we didn't really expand the team. And so I think we feel pretty good from a capacity perspective, our ability to handle spikes in activation volume.

Unknown speaker

And so now that we have a little more clarity on kind of the reopening following the pandemic, is there any change to your internal forecasting or targets? Or kind of can you provide any more color on that?

Savneet Singh -- Chief Executive Officer and President

We don't give great guidance or guidance at all. So I guess that's not great guiding because there's no guidance. But I think that, from an internal perspective, we just feel really convicted in the belief that our vision of unified commerce platform is the way that the industry is going. And so I think a lot of our success will be driven so much more by our customers adopting this idea where it's sort of an easy to tell, which is talk to any restaurant CIO and they'll tell you their life is managing vendors.

It's not about building great experiences, and we're really trying to give that power back to them. And I think that's actually what's driving -- will drive our internal forecast. But without question, we are not living in the world where the Delta variant spikes and activations fall a cliff. We feel like we're kind of at a level where we've got great visibility.

But that can all change and that's what we've learned in the last year.

Unknown speaker

Gotcha. Great guys. Thank you and congrats on the quarter.

Operator

Your next question will come from Anja Soderstrom with Sidoti. Your line is open.

Anja Soderstrom -- Sidoti and Company -- Analyst

Yeah, hi, thank you for taking my questions and congratulations on the strong quarter. I'm just curious for the Punchh, you mentioned you had 14 new logos. Is that new logos to PAR technology? Is that new logos for Punchh and a result of the cross-selling?

Savneet Singh -- Chief Executive Officer and President

It's a mix, Anja. I mean I don't have the break on top of my head, but it's definitely a mix. We absolutely saw -- had customers that we brought from Brink over to Punchh and then we had net new logos. So it's a very healthy mix.

Anja Soderstrom -- Sidoti and Company -- Analyst

OK. And then also what are you seeing in Magic and now when we this inflationary environment and labor cost going up and everything and food prices are going up, you would think there would be a stronger demand for the companies to -- or the restaurants to run that more smoothly.

Savneet Singh -- Chief Executive Officer and President

Yes. We are seeing that. And you're going to -- and I think that's why we saw a good rebound here that I think will continue. It's just making it more of a priority.

It also allows us to sell more within Restaurant Magic. There are parts of Restaurant Magic that modules that specifically address labor efficiency, even though like scheduling that we don't sell today or sell a lot of. And so it will create some more module expansion for us there. But I think, Anja, the rebound we see in Restaurant Magic is completely driven by the point that you mentioned.

That's really what's pulling it through.

Anja Soderstrom -- Sidoti and Company -- Analyst

OK. And then just lastly on the supply chain. Seemed like you built up some inventory to be able to continue on the pace you're doing with installments. But how much of a -- what are you seeing in the supply chain currently? Is it easing? Or is it becoming worse or ...

Savneet Singh -- Chief Executive Officer and President

I would say, honestly, we had thought a few quarters ago, it would be better by the end of the year. I would say we're -- it's not getting worse, but it's kind of flatlined to this area where -- if you said, hey, I need to install 500 stores in December, we'd say, that's going to be very hard for us to get that to you. Our orders are now being -- or installs and particularly for large customer orders are now Q4 was normally -- sorry, excuse me, in mid-Q1 because of the visibility. Early on, the challenges around shipping, getting cargo capacity.

Later, it was around chips. Now it's around LCD screens. So it sort of continues to be a challenging environment. But I think one of the smartest things we did this year from a capital allocation perspective as we advance purchase and put deposits down.

And I think we're the only company in our state to do that, which allowed us to fill a lot of the products -- the product sales that you saw, that great growth when others weren't -- didn't have supply available. But from our standpoint, from Q2 to Q3, we saw no change in -- when I mean no changes, no visibility of it getting better or worse.

Anja Soderstrom -- Sidoti and Company -- Analyst

OK. Thank you. That was all for me.

Operator

[Operator instructions] And your next question will come from Adam Wyden with ADW Capital. 

Adam Wyden -- ADW Capital Partners -- Analyst

Hey guys. Thanks for taking my call. Just kind of revisiting the government contract. It sounds like you guys are talking about the backlog increasing by $50 million.

I mean how do we think about that incremental profitability? I mean this is -- do we expect to earn similar margins? I mean is it fair to assume that this contract over time kind of doubles the government business? Or how should we think about it?

Savneet Singh -- Chief Executive Officer and President

Yes. So the margin of this contract should be very similar to our existing direct, indirect labor margins. So we don't expect it to swing margins any which way.

Adam Wyden -- ADW Capital Partners -- Analyst

I noticed on your profitability, obviously, you took some adjustments for the banking deals, but you guys lost about $4 million in the quarter, which given the scope of SaaS and the growth, I mean it looks like you guys are going to be profitable a lot sooner than the market expects. I mean I remember a time when I was buying shares. Government was worth more than the entire market cap. I mean it seems like the business has gotten scale that between hardware and the SaaS that you guys could probably divest this.

And I read something in terms of record M&A multiples, 13 times for defense contracting businesses. I mean why would you guys wait? I guess, is what I'm saying? Like, I guess, you guys have communicated that you guys had to get this contract under your belt, and this is something you guys have kind of been waiting for, for the last two years or so. I mean, obviously, you're not going to give it away, but I mean is there any reason today why you wouldn't move with it given that the contracts behind you and multiples are at record highs?

Savneet Singh -- Chief Executive Officer and President

So I won't say anything forward-looking, but I would say, in the past, we've talked about wanting to win this contract. And so I sort of go to those comments we've said in the past, which is -- and I think we sort of -- I think people understand now kind of why we had some pause given just the enormous scale of this contract. But I would say the forward looking that say, we've kind of communicated in the past that this was an important part of our process.

Adam Wyden -- ADW Capital Partners -- Analyst

Right. And I guess you guys feel more confident. I mean, obviously, from a profitability standpoint, you guys are probably ahead of schedule. So that would probably make it easier in some capacity, would it not?

Savneet Singh -- Chief Executive Officer and President

Yes. I don't think we've ever looked at it as do we need the profitability. I think we've always looked at it as what's -- it's a business that has very little management distraction. And let's get -- if we're on the verge of a large contract, it would be silly for us to sell given how valuable that one contract is, right? This one contract could grow our backlog beyond the existing backlog, right, in a very short period of time.

And so it's sort of -- as much as it doesn't make sense for us to be under as a sort of giving money away and so we didn't think that made sense. We look at our business very cleanly. And I don't think the profitably restaurant business would have any impact. We've got plenty of liquidity, and liquidity to also execute on our M&A strategy.

And so we've kept it not because we want to be cash flow but because there was a -- we'll be leaving a ton of money on the table.

Adam Wyden -- ADW Capital Partners -- Analyst

Sure. So just going back to it, I mean, if you look at the business kind of pre-COVID Q1 2020, you guys did call it -- you guys were on pace for like doing close to 1,700 activations and -- or 1,800 and you kind of got through that, and that's really powerful and exciting. I mean, today, you're still burdened, I would think, from some COVID restrictions in states and being able to get in and obviously from the semiconductor shortage and supply. I mean I know you don't give forward-looking guidance, but I mean, I guess the question is like -- what would -- could you communicate a little bit about what the organic growth you expect out of these assets in kind of a normal environment and something that would be suitable to you, so people can kind of think about a multiyear kind of growth trajectory in terms of like what your expectation is.

I mean, obviously, COVID can happen. Things can happen. But I mean, kind of like what your cost of capital is from a growth perspective when you acquire assets, you operate assets.

Savneet Singh -- Chief Executive Officer and President

So there's a lot in that question. So I think from a cost of capital perspective, right, we're very conscious that we've used our stock to acquire businesses or raise capital by businesses. And we are sensitive to that. It does change the deal dynamics if we don't feel that there's a win there.

And so we're pretty careful there. From an activation perspective, we're -- I say we feel like we did a great job this quarter. And we expect to continue to do a great job. I don't think these double overnight, I think -- but we feel really good about how many we pulled due this quarter.

And I think it's exciting about next quarter is that this quarter had a significant amount, as we mentioned on our transcript, of our legacy deals, deals signed in 2016 or '17 at very favorable pricing. And as we go forward, we're now moving into our deals that are sort of our traditional price point or higher. So we'll see the benefit of that as well.

Adam Wyden -- ADW Capital Partners -- Analyst

I mean without getting too kind of ambitious, I mean if COVID continues to abate, do you think that -- the Punchh obviously is different. But I mean do you think that Brink can return to doing a couple of thousand a quarter? Is that unreasonable? I mean if the kind of supply chain, semiconductor stuff abates and kind of the COVID restrictions kind of cool down, I mean, is that an unreasonable outcome?

Savneet Singh -- Chief Executive Officer and President

I don't think it's unreasonable an outcome if we've got these restrictions and particularly supply chain. And we continue to build a pipeline, which we feel pretty good about. So I expect this to continue to grow at these rates or more for the next couple of years, exclusive of M&A. And I do think that as we look at M&A, we very much do focus on something that's accretive to growth.

So that probably gives a little color, too.

Adam Wyden -- ADW Capital Partners -- Analyst

Last question, and I'll let you go. If you read TOS S-1, they basically talk about the investment in the restaurant industry of about $80 billion to $100 billion. And if you think about that, not that much of that is being spent annually on hardware because hardware lives a long time. And so you kind of like -- TOS kind of has a back of the envelope calculation of somewhere between $60,000 and $80,000 of software spend per store.

And obviously, we haven't captured that. I mean is -- I mean when you think about the TAM, I mean, is that unreasonable that long term that  that's kind of the addressable market for PAR within their existing verticals?

Savneet Singh -- Chief Executive Officer and President

I think what we've always said is that our TAM of enterprise, call it, Tier 1, Tier 2, Tier 3, to our fast casual is about half the restaurant market in the United States. Whether that's 700,000 or 800,000 restaurants is to be debated. And we've always believed that, going back a couple of years ago, from Brink being at the time $2,000 per year, that there is a clear path for us to get from 2,000 to 10,000 based on based on what we see in front of us, right? And so we've taken it up from 2,000. We added Data Central, which is about 1,500.

We added Punchh, which is 1,000 to 1,500. And then we come out with digital order management system, a couple more of our product enhancements acquisitions and payments and your -- you can really clearly go up 10,000. But for me, what's exciting, a lot of what I was suggesting in the remarks on the call is that we're at the inception of this transformation of the restaurant. All of a sudden, restaurants have this unfair proposition of like having a great in-store experience, and then you're like, hey, we also want to be on amazon.com.

And that is a really tough thing without a lot more product, a lot more software and without a unified platform. And so today, that's how we look at it, but I wouldn't be surprised if it changed a lot given how fast the market is moving, and that would certainly probably mean a little more spend sense.

Adam Wyden -- ADW Capital Partners -- Analyst

Right. Yes. Have you guys explored -- you guys talk about hitting -- pinging your API? I mean have you guys explored adding a transactional element to it where other people plug into your point of sale and you start paying for ping per transaction? I mean, I just -- there's so much -- people are accessing our systems so much. I just -- I wonder if there's more in terms of either selling back the data or charging to access the API because you look at a $2 million restaurant, if -- charging $40,000 a store across all subjects doesn't seem that crazy if it brings people the efficiencies.

I mean, clearly, the software is driving a lot of efficiency at the restaurant. So I'm curious how you think about other kind of revenue mechanisms.

Savneet Singh -- Chief Executive Officer and President

Yes. So listen, in the short run, we've got a couple of interesting levers, right? We've got new product IT management systems. We've got payments, which I mentioned, we're going to have, hopefully, some announcements come out. But we've also put through our first price increases on Brink in 10 years, and so we'll have our ability to drive price.

And as we've talked about on other calls, we are have a new API product launching that is transactional. So the way I look at PAR is we are not in a demand constrained environment. We've been in a supply constained environment where we, as PAR, have been unable to fulfill all the demand of our customers yet. And so we've solved that first through M&A, but now through organic product build.

And that's sort of like the engines get us all excited because, I'd say, we're two and a half years into this journey, maybe a little more on that now. And the first year and a half plus was just getting the product stable, getting the trust of our customers. The next year was getting the motion together and then COVID kind of threw a curveball. And now it's about monetizing at the benefit of our customers.

The key part of the unified commerce platform is not that we're trying to extract and bundle a bunch of products and cram it down your throat. We're actually trying to give you a platform to take that back. And I think we're taking a left turn when the industry is turning right, where restaurant tech companies have gone to complete other way. It's like bundle, bundle, bundle, extract, extract, extract, but they haven't actually built something that the restaurants value.

I challenge anybody on this call anywhere to go find a restaurant manager, a restaurant CEO who says their job is better, who says the ROI is better and says that the lifestyle of their restaurant employees is better now than it was in a [Inaudible] of technology. It's extremely hard to find that case. And so the technology has become extractive. It hasn't been built to serve the actual constituents.

And so while at the meta point, it's what we believe in and that if we can build that. And so much of this journey is about giving them that platform. So it's a long answer, but it's a little look at the world.

Adam Wyden -- ADW Capital Partners -- Analyst

All right. Last thing, I'll get last one in. With Toast recently going public, a lot of people have said what is the difference between PAR and Toast. And obviously, I've studied in developed relationships across the ecosystem.

I mean can you comment about -- a little bit about NCR abandoning their Aloha product and basically that no large enterprises put out an RFP and actually given it to anybody else. I mean, because I think it's clear to a lot of new people to the story that, like you said, that this is a supply constraint, not a demand constraint. And then the large logos that aren't integrating Brink, it's not like they're going somewhere else. It's just they haven't elected to kind of cross the rubicon yet or PAR hasn't prioritized them.

I mean, it'd be really important to kind of explain to people the technical moat that the PAR universe has built.

Savneet Singh -- Chief Executive Officer and President

So I think -- I won't talk about everybody specifically but I'll talk about categorically, which is we occupied this very special space, which is all the dollars that have flown into this space and primarily focused on small business, the restaurants down market. It makes a ton of sense, right? You can cram a bunch of payments and product to a small restaurant. They don't really know, and you're making $10,000 a box. We are in the enterprise market where it's PAR and then primarily legacy products.

These are products, like I said, that are almost half of them are on-premise, right? So they haven't really cut up the time or they sort of have been -- get extracted to their customers where the trust is not there. And so we've been very lucky that we kind of swim in this pool where our competitors are not Silicon Valley yet. I'm sure they're coming, but they're not Silicon Valley yet. And so we've been able to take share and continue to grow partly because of good product but also because the competition is quite weak.

Now what's exciting about our end market is that they are not a $10,000 a box yet, but it's coming because they are the ones who could use this technology. Today, they are single -- there are restaurants that exist, large restaurants are outspending median restaurants by so much that it's creating massive disparity. And so technology is going to sort of create disparity there. And we'll sort of fill that void.

But to answer your question specifically, they are amazing companies in restaurant technology. Very few of them are in the category that we play in. And very few of the ones that are in our category are actually looking to grow and expand and make the commitment to R&D that we are.

Adam Wyden -- ADW Capital Partners -- Analyst

Right, which makes you guys attractive as an M&A player because you can buy these little companies and give them the resources and the sales and distribution. I mean, if you look at Punchh and Restaurant Magic, I mean, these are companies where you can deploy resources and help leverage your 40 years' worth of relationships.

Savneet Singh -- Chief Executive Officer and President

Exactly, right? And that's what we've done. And we're just at the beginning, right, because now we've worked through a lot of the challenges that have slowed us down, and we sort of feel like we're hitting that momentum acceleration.

Adam Wyden -- ADW Capital Partners -- Analyst

Good. Well, look, I've owned this thing for four years, and I look forward to owning it for the next 40 years. So keep up the good work.

Savneet Singh -- Chief Executive Officer and President

Thanks, Adam. Thanks, everybody.

Operator

I'm seeing no further questions at this time. I will now hand it back over to Savneet Singh for any closing statements.

Savneet Singh -- Chief Executive Officer and President

Thank you, everyone, for joining. Look forward to updating you on our Q4 results next quarter. Thank you.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Chris Byrnes -- Vice President, Business Development

Savneet Singh -- Chief Executive Officer and President

Bryan Menar -- Chief Financial Officer

Adam Kelsey -- Craig-Hallum Capital Group -- Analyst

Pat McIlwee -- William Blair -- Analyst

Unknown speaker

Anja Soderstrom -- Sidoti and Company -- Analyst

Adam Wyden -- ADW Capital Partners -- Analyst

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