Toast Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 12 speakers on the call.

Operator

Good afternoon. My name is Cole, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Toast Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I'll now turn the call over to Michael Senno, Senior Vice President of Finance.

Operator

You now may begin.

Speaker 1

Thanks, Cole. Welcome to Toast's earnings conference call for the Q3 ended September 30, 2023. On today's call, our CEO, Chris Comparado COO, Aman Narang and CFO, Elena Gomez, will open with prepared remarks, which will be followed by our Q and A session. Before we start, I'd like to draw your attention to the Safe Harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward looking within the meaning of the Securities and Exchange Act.

Speaker 1

All statements other than statements of historical facts are forward looking statements, including those regarding management's expectations of Future financial and operational performance and operational expenditures, location growth, future profit and margin outlook, Expected growth and business outlook, including our financial guidance for the Q4 and full year 2023. Forward looking statements reflect our views only as of today and except as required by law, we undertake no obligation to update or revise Please refer to the cautionary language in today's press release and our SEC filings for a discussion of the risks And uncertainty that could cause actual results to differ materially from our expectations. During this call, we will discuss certain non GAAP financial measures. These non GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release and SEC filings for detailed reconciliations of these non GAAP measures to the most comparable GAAP measures.

Speaker 1

Unless otherwise stated, All references on this call to cost of revenue, gross profit and gross margin, sales and marketing expense, research and development expense And general and administrative expense are on a non GAAP basis. Finally, both the press releases and a replay of this call, including the accompanying investor presentation will be available on our Investor Relations website at investors. Toastab.com. And with that, let me turn the call over to Chris.

Speaker 2

Thank you, Michael, and thank you, everyone, for joining us this afternoon. Our focus has been on delivering durable and efficient growth, and our Q3 results reflect execution on that objective. We added over 6,500 net locations in the quarter and ARR grew 40% year over year. We continue to balance top line growth with driving efficiencies as we scale the business and adjusted EBITDA totaled $35,000,000 in the quarter. The execution against our focused strategy to drive location growth, serve all segments of the restaurant industry And bold product innovation to better serve our customers and open up new segments of the market is both driving strong results and has us well positioned to sustain this momentum going forward.

Speaker 2

As we announced in September, Aman will take over as CEO at the start of 2024. Looking back over my 9 years as CEO, I am incredibly proud of the accomplishments of the Toast team. Together, we've scaled to serve nearly 100,000 restaurant locations With over $1,200,000,000 in ARR, we've built a company culture with strong values and an employee base that embraces our customer centric mission to be the trusted restaurant technology partner. At the same time, we've built a scalable, durable business that's generating sustainable, positive adjusted EBITDA And free cash flow. Our innovation mindset and our products have also expanded significantly over that time period As we deliver on our mission, we've broadened the types of restaurants that we serve and have made inroads across the entire U.

Speaker 2

S. Restaurant TAM. We have also evolved into a multi product platform company with solutions to help restaurants drive growth, Build deeper connections and experiences with our guests and improve operations and manage their costs. Toast has been on this journey for over a decade And we proudly serve an industry that has navigated many ups and downs. There's no better example than over the last few years.

Speaker 2

Restaurant operators responded to unprecedented changes quickly expanding their service models to meet evolving consumer demands. Through it all, restaurants remain a central part of consumers' daily lives. More recently, we've seen consumer spend moderate And I'm confident restaurants will navigate the uncertain macro environment with the same resiliency and tenacity they always do And this battle tested industry will continue to thrive well into the future. Toast is side by side with our customers every step of the way And is often one step ahead helping restaurants adapt and thrive no matter the circumstance and we're just getting started. The SMB TAM remains a large opportunity for us.

Speaker 2

Enterprise restaurant groups are in the early days of adopting cloud technologies And a big international opportunity lies ahead. We are better positioned than ever before to expand and continue to build adjacent growth opportunities As we capitalize on the generational opportunity to be the technology platform for restaurants and transform the industry. I've known Aman for 17 years, having worked with him before I joined Toast. 1st and foremost, as a co founder of Toast, He brings a strong founder's mentality to the CEO seat where he will continue to raise the bar on execution and innovation. He intimately knows our customer base and has shaped much of the company through his many roles across the organization from overseeing product to sales and customer success.

Speaker 2

So I'm confident that as Aman steps into the CEO role, he'll lead Toast to new successes And he is surrounded by the most talented leadership team that I've had the opportunity to work with across my career. To wrap up my last quarterly earnings call, thank you to our toasters and to our customers. We've accomplished a lot as a team. The enthusiasm you bring to our mission sustains our momentum and I'm excited for what lies ahead. Now I'll turn the call over to Aman.

Speaker 3

Thank you, Chris. Toast wouldn't be what it is today without your leadership and passion for the business, our customers and of course our team. I think I speak for all Toasters in saying, you'll be missed. And your friendship and support over the past 17 years that we've known each other has meant a lot to me personally. As Chris mentioned, We are excited about the opportunity ahead of us to grow the business and continue to be a great partner to the restaurant community.

Speaker 3

With just over 10% of the U. S. Market on Toast, We have significant runway ahead of us. Our passion for this industry, a strong focus on innovation to help restaurants thrive And a world class go to market and customer success team gives us confidence in our ability to drive sustained aero growth while planting the seeds for future growth initiatives. We're incredibly happy with our performance in Q3 and the results represent strong momentum across our business.

Speaker 3

ARR was up 40% year over year to $1,200,000,000 driven by strong execution across location acquisition and ARPU expansion. We are confident in our ability to continue to grow ARR across both these dimensions over the long term. Revenue increased 37% year over year And adjusted EBITDA increased to a record $35,000,000 in Q3. Toast had its 6th consecutive quarter exceeding the rule of 40 measuring FinTech subscription gross profit growth, our recurring revenue streams plus adjusted EBITDA margin. This consistent execution is a testament to our team who have prioritized both revenue growth and operating leverage as the business has scaled.

Speaker 3

We added over 6,500 net locations in the quarter, Approximately 20% more than Q3 last year. Our local go to market approach continues to help drive strong momentum in our SMB business as we increase the number of FIVO markets with high customer density and market tender. While the SMB business is still the primary driver of location growth, We're making progress across the broader market opportunity as well. Let me share a few customer stories from the quarter that speak to this. The Mariano Restaurant Group switched its 4 full serve restaurants in Massachusetts and New Hampshire to Toast and 3 of them are already live in Q3.

Speaker 3

They purchased 9 products to help streamline their business across both front of house and back of house and noted the simplicity and ease of use of an integrated all in one solution. In addition to our core offerings, they're also leveraging our newer platform capabilities, including Toast Tables and catering and events. With Toast tables, they can more easily estimate guest wait times, gain visibility into how far along a table is in its service and help with seating guests evenly across service areas to help employee workloads keep them balanced. In addition, the integration between Toast Stables and our employee scheduling product Helps managers better staff throughout the week. Using our catering and events product, they've also been able to streamline a manual paper dependent process with a digital first approach.

Speaker 3

We're excited to work with Mariana Restaurant Group and support their growth plans over the coming years. In mid market, we expanded our relationship with crave worthy brands and are excited to partner with them as they grow. We signed 50 locations across their multi concert fast casual and QSR portfolio for a total of 93 locations on Toast. And in Enterprise, we're thrilled to extend our relationship with Nothing Bundt Cakes. They became a customer in 2019 and currently have over 500 locations live on Toast.

Speaker 3

We've been working with them to improve bakery productivity, drive higher digital conversion and streamline processes for their corporate team. To support their expansion plans and franchisee count, we've signed an additional 300 locations across Nothing Bundt Cakes and expanded the set of products available to the franchisee community including employee scheduling, payroll and catering. This expansion creates an opportunity to double Nothing Bundt Cake's associated ARR over time and we're excited to partner and support their growth plans. Shifting gears to product. We're focused on building products that can both help our customers thrive and run a great business.

Speaker 3

Our vertical focus on restaurant continues to be an advantage as we open up deeper parts of the TAM and expand our approval by building differentiated products for the industry. Product innovation has always been foundational in Toast's DNA and you should expect us to maintain that focus moving forward. Last week, we announced Toast Now, an app for restaurant operators that provides real time insight into performance data, Allows operators to manage things like kitchen volume, adjust menus and communicate with staff on the go on their mobile device. This is something our customers have been asking for and allows us to build an even deeper connection with restaurant operators. We're pleased with the early adoption levels with approximately 20% of locations already on Toast Now a week after its launch.

Speaker 3

In addition, we recently announced Toast for cafes and bakeries similar to Toast for hotel restaurants and Toast for quick service. We're building solutions for different restaurant types that better serve deeper parts of the TAM. Toast for Cafe and Bakeries brings together product capabilities geared to help coffee shops and bakeries grow revenue, speed up service and create more repeat guests. Cafes and bakeries serve a variety of customer needs from a regular morning coffee to lunch catering or an on the go snack. It is a segment of the market that we're excited about and represents a meaningful growth opportunity for Toast.

Speaker 3

As part of the Cafe and Bakery launch, we also announced Restaurant Retail, which provides unified restaurant and retail POS systems to manage retail SKUs, things like wine selections or packaged coffee and more, Directly within Toast, providing a one stop shop for customers to manage foodservice and retail together. We've seen restaurants embrace more service models, Especially during and post pandemic, and this is yet another example of our continuous focus on meeting the evolving needs of our customers. This is a good example for how our product innovation can help serve deeper parts of the TAM, drive incremental GPB through Toast and support ARPU growth. One customer I'd like to highlight is 320 Market Cafe, a family owned gourmet market with 2 locations in Pennsylvania includes a pizzeria, a cafe, a retail area offering prepared foods, craft beer and wine as well as a catering business. Before they joined Toast, 320 took catering orders via phone or email and wrote orders in paper, which often got lost in the kitchen.

Speaker 3

And on the retail side, The process of adding a new retail SKU took over 20 minutes. This slowed down their ability to serve guests and generate revenue. Now with Toast, 320 Market Cafe supports a growing business with quicker inventory management, faster checkouts and a way to take catering orders digitally, all in a single integrated platform. They can now tag a new product and have it on the retail floor in minutes, track sales data in real time and take down their corporate order of paper catering orders in a digital system in place of a digital system they can manage from anywhere. With catering, retail, Online ordering, gift cards and more.

Speaker 3

320 Market Cafe has up leveled their business with Toast and saved their employees about 8 hours per week of manual work, equivalent to a whole shift. As we continue to broaden our products for our go to market team to serve a variety of customer types and endpoints, Our upsell team becomes increasingly important to drive growth and adoption of our platform across our customer base. As we approach 100,000 locations and beyond, our upsell team's TAM gets bigger and we continue to see this as a big opportunity for growth To wrap up, as Chris mentioned, we're excited about the opportunity in front of us. We are focused on being a strong partner to our restaurant community and we are well positioned to drive sustained aero growth into the future while building an efficient, Durable business that can generate long term value for customers and shareholders. As I think about the opportunity ahead of us, I'm energized and motivated by the momentum we have.

Speaker 3

It goes without saying that none of this will be possible without the tireless efforts of our employees. A special thank you to all Toasters. I'm excited to lead this group of talented individuals as we transform the restaurant industry. And with that, thank you, and I'll pass it over to Lena.

Speaker 4

Thanks, Saman, and thank you, everyone, for joining. Also want to thank our incredible employees for another quarter of great work. Our team continues to execute at a high level, Driving 40% growth at over $1,000,000,000 in ARR and delivering significant margin expansion. With a differentiated business model, scalable go to market engine and innovative all in one platform, we're well positioned to continue driving efficient growth At scale going forward. The 40% increase in ARR was on the back of strong location growth and continued ARPU expansion, Translating to 37% year over year revenue growth.

Speaker 4

Our recurring gross profit streams, FinTech and subscription, Totaled $280,000,000 up 39% year over year. Adjusted EBITDA was $35,000,000 representing a margin of 13% on our recurring gross Profit streams with over 22 percentage points of margin improvement year over year. Growth in our recurring gross profit Streams and adjusted EBITDA margin are the basis for how we calculate Rule of 40 and this marks the 6th consecutive quarter We exceeded the rule of 40. We sustained our go to market momentum in Q3 adding over 6,500 net locations. That was primarily driven by the flywheel effect from our localized go to market motion.

Speaker 4

As rep tenure and local market share increase, So has rep productivity contributing to a solid year over year increase in SMB restaurant location adds. Our goal has always been to serve the entire restaurant TAM over time. We are increasingly making progress across segments Supplementing our momentum in SMB with incremental growth both up and down market and internationally resulting Same location growth of over 30% even as we approach 100,000 locations. Our primary focus remains on the core SMB segment. As we broaden and deepen penetration across the TAM, including smaller SMB customers, enterprise customers and expanding internationally, Our customer mix will evolve and have different SaaS and GPV dynamics.

Speaker 4

Our focus is to maximize ARR growth, which is our North Star metric, while maintaining the same healthy unit economics overall. We plan to manage the portfolio to the same payback period in the mid teens Number of months, ensuring that growth is efficient as we expand and drive incremental profit. In the Q3, SaaS ARR grew 47% year over year driven by strong location growth and a 9% increase in SaaS ARPU. We're capitalizing on the location acquisition momentum we have while continuing to balance ARPU growth. We plan to exit Q4 with SaaS ARPU growth in the mid to high single digits, reflecting lower ARPU for new go live cohorts as we continue to optimize our upfront sale to balance sustained location growth velocity as well as some impact from mix shift.

Speaker 4

Our long term growth algorithm remains the same. We have a long runway to increase ARR through both locations and ARPU. With just over 10% of U. S. Restaurant locations on the platform, a proven differentiated SMB go to market motion and growing traction Across the full breadth of restaurant segments, as well as Green Chutes internationally, we're well positioned to sustained Healthy growth location for years to come.

Speaker 4

Similarly, as we scale customer count, we have conviction in our ability to drive healthy SaaS ARPU growth Over the long term through pricing and packaging, scaling and refining our upsell motion and delivering ongoing product innovation to enhance Moving to FinTech Solutions on a year over year basis, 3rd quarter revenue and gross profit both grew 36 Percent to $856,000,000 $182,000,000 respectively. GPV increased 34% to 33 point $7,000,000,000 in average annualized GPD per processing location was down slightly year over year. Similar to Q2, The year over year change in GPV per processing location was impacted as we lapped the inflation tailwind and from a slight mix shift as we extended to more segments of the town. In addition, in the back half of the third quarter, we saw a modest slowdown in same store transaction volume, which resulted in a decline in GPV per processing location in the quarter. Trends have remained stable since then.

Speaker 4

Given the broader macro environment remains mixed, we're planning for GPV trends to remain at current levels in the near term and for GPV per processing Our non payments FinTech solutions led by Toast Capital Contributed $34,000,000 in gross profit in the quarter as demand for the offering remains healthy and default rates remain steady. We continue to take a balanced approach to growing Toast capital and our unique position with real time access to POS data allows us to monitor the health of restaurants and Prudently balance risk, while helping our customers grow with fast, flexible access to capital. Net take rate was 54 basis points. Core net take rate was 44 basis points with other FinTech products contributing 10 basis points. This quarter included a one time cost accrual true up, while the prior year benefited from a credit.

Speaker 4

Absent those one time impacts, core take rate was approximately flat year over year. In Q4, we anticipate core and total net take rate to be in a similar range on both a quarter over quarter and year over year basis. Turning to customer acquisition costs. Hardware revenue increased year over year due to both location adds and existing customers adding more hardware. Hardware margins improved year over year primarily due to lower shipping costs.

Speaker 4

On the sales and marketing side, expenses grew 17% year over year. We're making targeted investments in our go to market team and continuing to grow our upsell team, while staying focused on maintaining healthy unit Economics and Driving Operating Leverage. We manage our customer acquisition costs using a dollar based payback period, which takes into account incremental recurring gross profit across both new business and upsell. Paid back periods remain within our targeted level of mid teen months for the portfolio. Shifting to R and D, our Toast for cafes and bakeries launch, including the restaurant retail offering, is another example of leveraging product investments to drive deeper location penetration by super serving the unique needs of our different customers.

Speaker 4

It also highlights how our product innovation locks more revenue streams for customers and drives incremental transaction volume to Toast through Toast. G and A grew 12% year over year in the Q3. Excluding $19,000,000 of bad debt and credit related expenses in the quarter, Primarily related to reserves for Toast Capital, G and A was flat year over year. We've seen meaningful leverage in G and A as a result of our focus on efficiency and disciplined headcount management. Excluding bad debt and credit related expenses, G and A as a percentage of our recurring gross Profit streams was 16% in the quarter, a 600 basis point improvement year over year and we expect to continue driving operating leverage on our overhead cost going forward.

Speaker 4

In total, adjusted EBITDA was $35,000,000 in Q3 And margin as a percentage of our recurring gross profit streams increased to 13%, marking the 7th consecutive quarter of margin expansion. That's a result of our healthy top line growth and diligence in efficiently scaling the business. Overall, we expect to continue building Leverage as we march towards the long term target margins we previously laid out. Free cash flow was $37,000,000 in Q3, roughly in line with our As a reminder, working capital will fluctuate based on GPV trends and the timing of payments. But over time, Free cash flow should largely follow a similar trajectory as adjusted EBITDA trends.

Speaker 4

Now let me turn to guidance. For the Q4, we expect revenue to be in the range of $1,000,000,000 to $1,030,000,000 representing 32% year over year growth at the midpoint. Adjusted EBITDA is expected to be in the range of $5,000,000 to $15,000,000 In addition to the seasonally lower GPB per location in Q4, The sequential decline in adjusted EBITDA compared to the Q3 also reflects our expectation for slower year over year GPV growth and investments we're making to strengthen our position heading into 2024. For the full year, we continue to expect revenue to grow 41% at the midpoint of our guidance and now expect adjusted EBITDA to be in the range of 38 to $48,000,000 representing an approximately $160,000,000 improvement in adjusted EBITDA versus last year at the midpoint. To wrap up, we are extremely proud of the work that the Toast team has accomplished thus far in 2023.

Speaker 4

We're scaling the business in a durable manner as we capitalize on the opportunity ahead of us to build a generational business that delivers significant value to our customers and shareholders. And we are well positioned to continue delivering long term growth while driving operating leverage throughout the business and executing on this long term opportunity that remains ahead of us. Now, I'll turn the call over to the operator to begin Q and A.

Operator

Thank you. We will pause now to compile the Q and A roster. Our first question is from Tim Chiauti with UBS. Your line is now open.

Speaker 5

Great. Thank you for taking the question. I want to touch on your thoughts on your ability or potential to take pricing within the core subscription portion of the business. So with a few competitors that have taken pricing in different ways over the past Year or so Square, Clover, Shopify and others, was hoping you could give us an update on where you think you stand in terms of that potential. Thank you.

Speaker 3

Thanks for the question, Tim. I'll start by saying As I said in previous calls, our customers understand that product innovation requires investment and that prices will increase over time. What we've seen is our new customers that are coming on to Toast are coming on at higher pricing. And we've also looked at the distribution curve across Confident that we can drive an increased pricing over time. We also see opportunity in terms of how we package our products across both software and fintech and see that as an important lever as well, to drive ARPU and price.

Speaker 3

We're also aware that we're if you look at the opportunity in front of us to gain market share across both locations and target tax rates, We want to make sure that we're offering transparent value based pricing to our customers. So I think in the long term, we're confident in our ability to increase prices And we're walking through it.

Speaker 5

Great. Thank you. And the brief follow-up is just more of a numbers question around And tech take rate. So I believe that the gross take rate ex capital would have been up slightly, maybe one basis point year over year. And you mentioned that ex some of The accruals and whatnot that if we would normalize it, the net take rate was roughly flat on a year over year basis.

Speaker 5

Could you just talk about Looking forward, the potential to see a little bit more of leverage on the FinTech COGS line, maybe whether it be with payment processors or Some of the other non payments related items in there, whether it be support or data center or other costs that are in the FinTech COGS line? Thank you.

Speaker 4

Yes. Thanks, Tim. It's a fair question. Look, I think over the long term, we have an opportunity to gradually increase our Or take great either through investing in our payments infrastructure and just driving operational excellence as we're trying to drive down cost per transaction. And That's both working with our partners and negotiating.

Speaker 4

And then there's obviously, we can Impact the price, of course, that's also at our disposal. And then just leveraging our scale as we get bigger, I think we'll have we'll be in a position to Negotiate even further. So I think there's an opportunity both on the pricing side of things, but also as we optimize our cost structure over time.

Speaker 6

Thank you.

Operator

Our next question is from Stephen Sheldon with William Blair. Your line is now open.

Speaker 6

Hey, thanks. And first, congrats on all you accomplished at the helm, Chris, and congrats to Aman as well as on taking over as CEO. Just on the guidance, it assumes a slight sequential step down in revenue in the Q4 versus the number you just put up in the Q3. And I think you said that's mainly GPV per location That's expected to be down some. So can you just talk about how much of that maybe normal seasonality in restaurant revenue versus Weakening consumer spending, if you have any visibility into that?

Speaker 4

Yes, sure. So most of it, Stephen, it's a good it's a fair Question. So, the GPV per location, which I commented in the script, is really something we saw late in September and continuing into October. So that was the primary calculus. But also remember, seasonally GPV is lower GPV per location is lower in Q4.

Speaker 4

So both of those factors played a role, but the reason the primary reason is the trends we're seeing most recently in same store sales.

Speaker 6

Got it. Okay. That's helpful. And then just on the sales force investments you're making, I guess, do you need to keep adding significantly to the sales force to keep location growth? When you think about sequential additions of last few quarters, You have to keep adding sales headcount to keep location growth where it's been in recent quarters.

Speaker 6

And maybe talk about the mix of investments you're making there between Yes, new location wins and maybe the upselling team.

Speaker 3

Yes. Good question, Steven. Look, I think If you look year over year, our net location adds are up 20%. And so a lot of our investments in sales and marketing are calibrated with that. Back to what Lena mentioned in terms of making sure that we're tracking towards Quebec periods.

Speaker 3

I think we're trying to be strategic in terms of where we see opportunity to invest, Whether it's on new business or it's on upsell, to continue to gain market share and continue to grow the business, but we're always trying to be balanced in terms of Making sure that we're managing to unit economics across the board. There are some new areas we're investing in. We've talked about before whether it's upmarket, enterprise, international, Right. Where, we are still earlier, but overall, I think the bulk

Speaker 7

of the growth in the business is coming through our core SMB business.

Speaker 4

Yes. I would just add, look, we're set up to have a strong Q4 and on track to our expectations. And Just to build on what Aman said, that consistent execution, thanks to our sales team, is really showing through and we've got a healthy pipeline As well. So when you put that all together, I think we're going to continue that acquisition momentum into 2024, which will be a big driver of our ARR growth.

Speaker 6

Great. Thank you.

Operator

Our next question is from Will Nance with Goldman Sachs. Your line is now open.

Speaker 8

Hey guys, appreciate you taking the question. I also wanted to ask a question on the subscription side or on the You made some comments related to the TPV per location, putting the macro stuff aside. It Sounds like there's a little bit of mix shifts going on. And if I'm interpreting that right, it's kind of smaller locations coming on, weighing down on GPV per location. Is there a similar trend playing out on the software ARPU per location, I.

Speaker 8

E. Like smaller location using less software? And I guess maybe in prior quarters you provided some color on sort of what front book ARPUs are looking like. Any color on where that's trending now? And then just Your thoughts on how that progresses from here?

Speaker 4

Yes, fair question. So, look, our S and B remains our core segment, The highest level and our success in SMB is opening actually, frankly, more opportunities across the entire TAM. So as we're Leveraging our product innovation, we're going after those opportunities. And we're seeing really good progress in segments like ecom or international, Right. And so as we get into those segments and extended to that TAM, we're going to see both different GPV and ARPU dynamics.

Speaker 4

But at the highest level, just kind of zooming out, ARR continues to be our North Star metric and we'll always be balancing Location and ARPU growth on an ongoing basis. And right now is a great example of us capitalizing on that location acquisition momentum. Delivering $200,000,000 in SaaS ARR year over year balancing those I think 23% is a great example. To your question on the front book, I'd actually reframe you back to ARR, because as we're trying to optimize our land and expand motion and We've talked a lot about the upsell team. And as we're extending it to different parts of the TAM, like I mentioned, international and ecom, The mix is less comparable than what we shared a couple of quarters ago.

Speaker 4

So for us, our North Star and how we operate the business is really on Hey, Karim, ARR basically. And that's through and through. So and it's also the most reflective Performance, but also how the reps are comped like rep goals are all around ARR goals. Our Company bonus program is all in our growth. So it's truly how we manage the business as well.

Speaker 8

Got it. It makes total sense. And then I guess just on the macro point, as we think about softening same store sales, which broadly consistent with other companies in the space, So, yes, I kind of get that point. How are you thinking about the reaction function from merchants, I guess, particularly on the go to market side, if you have conversations with prospects, Is there how are you thinking about like the potential for some business to say, hey, we're going to take 2 handhelds instead of 3, Maybe buy a little bit less hardware upfront, things of that nature. I mean, do you expect sort of like the initial sale to get more difficult in an environment where Where same store sales are softening and any strategy you have to combat that?

Speaker 3

Hey, Will. We haven't seen that in our core SMB business. And as we mentioned in our guidance, we talked about Q4 net location adds being in the 6,500 range and we continue to be confident. And as you look at the pipeline and top of funnel and our win rates, we haven't seen anything materially different. And we continue to believe That our growth is really tied to our execution in getting more of these markets in our core SMB business into Live will status, which is really just growing customer density, growing the rep tenure in these markets.

Speaker 3

And so we haven't seen anything in our pipeline to suggest That customers are less receptive to purchasing Toast or looking to buy less of the platform.

Speaker 8

Got it. Super helpful. Appreciate taking the questions.

Speaker 3

Thank you.

Operator

Our next question is from Tien Tsin Huang with JPMorgan. Your line is now open.

Speaker 7

Thank you and all the best to Chris here. A follow-up to Will's question just on the Toast Capital side is if you haven't seen any Customers changing their behavior here. Are you changing maybe your appetite to extend credit given what you're seeing on the consumer moderation side?

Speaker 4

Yes, it's a fair question, Tien Tsin. Thank you for the question. And so and we're seeing healthy demand from our customers. So we don't have plans to change our program at the moment. It's a very healthy program and

Speaker 3

we're managing the risk very

Speaker 4

well and have a lot of controls. The risk very well and have a lot of controls in place around the program. That said, if the macro were to turn, We also are confident in our ability to quickly move and throttle the originations if we needed to. But overall, the program is very healthy and meeting our expectations all

Speaker 3

the way around. Okay. Great to hear.

Speaker 4

And if you don't

Speaker 7

Okay, great to hear. And if you don't mind, it's the competition question. It doesn't sound like it, but We get a lot of questions around some of your competitors changing their strategies, really to look a little bit more like Toast, whether it's verticalizing or forcing payment monetization, That kind of thing. Are you seeing any change in competitiveness at all on the ground?

Speaker 3

Yes. Thanks, Tien Tsin. Look, we've had we've built up a strong competitive program within the business since we track a lot of this data carefully. And I'll just go back to like this has always been a competitive market. And to what I just said earlier, We really do believe our growth is more tied to our own execution with anything else.

Speaker 3

And we're tracking the pipeline every day. That being said, we're tracking pipeline, the top funnel win rates, The productivity of our team, by competitor. And I think if you go back and just look at our confidence in terms of net adds in Q4 And it really just speaks to the performance of our go to market team and just our own execution

Speaker 7

as a business. Understood. That's fair. Thank you so much.

Speaker 3

Thanks, Jason.

Operator

Our next question is from Jason Kupferberg with Bank of America. Your line is now open.

Speaker 9

Thanks guys. So just on revenue, obviously the growth rate here is still robust, but We didn't see the kind of upside, if you will, that we've been accustomed to seeing on revenue from Toast. And you talked about Some slower SaaS ARPU, you talked about some slowdown in same store sales. I mean, maybe on that latter point, Can you quantify how much the same store sales slowed down late in Q3? And just any other callouts that you might have seen in the quarter, Parts of the business that perhaps weren't quite as strong as you might have envisioned?

Speaker 4

Yes. So, let me take your question sort of In the there's lots in your question, but at the highest level, the guidance that You're seeing for the balance of the year really reflects the macro that we talked about. So GPD per location coming down in September in particular as we start see that trend. It's continuing into October. And so our guidance reflects, the macro playing a role.

Speaker 4

But just zooming out, the momentum in the business that we have exiting the year into Q4 Still remains healthy regardless of the macro. So as we think about the next year, if I just give some color on that, we're growing healthy. We've got a great operating leverage story. So as we enter into 2024, we're going to go in with the same discipline, focused on growth And as well on cost discipline. And we've delivered healthy growth alongside driving this operating leverage over $160,000,000 in a year.

Speaker 4

So Really proud of that. So despite the macro, of course, we're paying attention to it, but that doesn't change the sentiment of this management team about the opportunity ahead of us. The one thing I'll say is we're going to continue to invest obviously in the core business, but we've got some investments in some of our emerging businesses as well, which will help us Really position us for long term growth.

Speaker 9

Right, right. That makes sense. And then just coming back to the upsell team, I think you mentioned they're going to become an even more critical Part of the growth story going forward, anything you can share just in terms of the size of that team now and what sort of Productivity gains you've perhaps seen there and to the extent you still see headroom in their productivity?

Speaker 3

Yes. Thanks, Jason. Good question. Look, I think as we've mentioned in previous calls, the Team that's going after new business, new locations is a lot more mature. It's been around for 10 years plus and the upsell team is newer And we continue to refine and build it out.

Speaker 3

We do see it as an opportunity for us. We think there's headroom there in terms of Everything from growing that team to continue to optimize the motion and how we partner between the new business team that's lending restaurants, How we expand ARPU over time. And as I mentioned in the script, long term, we see this as An important part of our growth story over time.

Speaker 9

Thank you.

Speaker 3

Thanks,

Operator

on your telephone keypad to join the queue. Our next question is from Josh Bair with Morgan Stanley. Your line is now open.

Speaker 10

Thank you for the question. I was hoping you could double click on the GPV per location commentary. If you could provide any data or insights into what you're seeing as far as the number of diners or ticket items on the ticket or trading down other consumer behaviors just as it relates To restaurant sales.

Speaker 4

Yes, I'll take that, and feel free to jump in, Aman. So average ticket has actually held pretty steady Over the last several quarters, so that's not as much a factor. I think it's really same store sales. And really, I would say towards the end of the quarter is when we saw that and into October. So there's and we haven't yet seen trade downs either as We're looking at the data.

Speaker 4

Obviously, we're paying attention to that. And maybe in past recessions, that's been a factor, but we're not seeing that yet in our data.

Speaker 10

Great. And then a follow-up sticking to GPB, just given your position in the industry Your expertise wanted to ask you about GLP-1s and your view on the near term, longer term impacts. Thank you.

Speaker 2

Yes. Hey, Josh, this is Chris. Good question. We're not seeing anything that indicates a change in consumer behavior Due to GLP-1 or Ozempic, we don't expect it to have a significant impact and we remain laser focused on giving the industry the best Technology platform to manage their business. So we're confident dining at restaurants will remain a cornerstone activity for Consumers.

Speaker 2

And again, not seeing anything related to it.

Speaker 10

Great. Thank you.

Operator

Our last question is from Dave Koning with Baird. Your line is now open.

Speaker 11

Yes. Hey, guys. Thanks so much. And to follow-up a little On Tien Tsin's question about Toast Capital, you've had tremendous success. You've grown probably 2 to 4 times over the last handful of quarters.

Speaker 11

But this quarter was a little slower sequentially. And I guess I'm wondering, do you expect that to grow a little closer to the core Business going forward instead of kind of the massive growth going forward?

Speaker 4

Yes. I just want to remind you that Over the last year, we added a 3 60 day loan product. So it was just be mindful of that in your comparisons. But I would say in the near term, I would expect Toast Capital staying in the similar range as a percentage of GPB is probably a good proxy to the way to think about it. But the demand is healthy.

Speaker 4

We're seeing a lot of customers come back and renew their loans. And so we're not seeing any concern about the growth of the program At all.

Speaker 11

Got you. Okay. Thanks. And maybe just as a follow-up, I just want to make sure I understood right. Did you Say subscription ARPU going forward in the mid single digit to high single digit year over year growth?

Speaker 11

And if so, Is that what you expect in Q4 as

Speaker 4

well? Yes. My commentary was actually around Q4, To be in the high ARPU up to the mid- to high single digits. And that was really just to zoom out to give you some texture On that, as we optimize what we've land with customers upfront and some of the impact from customer mix, we expect that to be gradual. But overall, we're optimizing for ARR, which I commented on earlier.

Speaker 4

And as we're getting to 100,000 locations, we want to continue that momentum. So That's how I would characterize

Speaker 11

that. Great. Thanks so much.

Speaker 4

One thing I would add to that as I'm thinking about your question, is just thinking about ARPU over the long term. As we think about it, what is the terminal value of ARPU or what's that level going to look like? There's a couple of things we think about which may help frame for the group. Today, we have more than 10% of our customers paying us over 10 ks in ARPU and we see that growing steadily. Then just zooming out and you think about all the opportunity we have to grow ARPU, whether that's continued innovation, which Raman talked about in his script, Whether that's our upsell team, which is very early, whether it's pricing and packaging, just there are several levers that we can put together over the next Several years to drive that ARPU expansion.

Speaker 4

And so we're very confident as we exit 2023 that we're going to continue to grow ARPU And have healthy SaaS ARR growth over time.

Speaker 11

Thank you.

Operator

We have no further questions. So I'll pass the call back to the management team for any closing remarks.

Speaker 2

Thank you and thank you all for your thoughtful questions. I appreciate your well wishes. Thank you to our toasters and more importantly to our customer base. And my last point is you're in strong hands with Aman and Elena moving forward and have a great day. Thank you.

Speaker 2

Thank you, Chris.

Speaker 3

Thanks, Chris.

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Key Takeaways

  • Toast delivered 6,500 net location adds in Q3, driving 40% year-over-year ARR growth to $1.2 billion and $35 million in adjusted EBITDA, marking its 6th consecutive quarter exceeding the Rule of 40.
  • Leadership transition announced: Founder Aman Narang will succeed Chris Comparado as CEO in early 2024, as Toast targets continued expansion across its core SMB segment plus mid-market, enterprise and international markets.
  • Product innovation ramped up with the launch of Toast Now (a real-time operator mobile app) and tailored offerings like Toast for Cafes & Bakeries and Restaurant Retail, achieving ~20% adoption within the first week.
  • FinTech momentum continued, processing a record $33.7 billion in GPV (up 34%), with a net take rate of ~54 bps and $34 million in gross profit from Toast Capital, while maintaining disciplined risk and default rates.
  • Guidance for Q4 projects revenue of $1.00–1.03 billion (32% growth) and adjusted EBITDA of $5–15 million, with full-year revenue growth expected at ~41% and adjusted EBITDA of $38–48 million.
A.I. generated. May contain errors.
Earnings Conference Call
Toast Q3 2023
00:00 / 00:00