Toast Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 12 speakers on the call.

Operator

Good afternoon. My name is Paulie, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast's Third Quarter 2024 Earnings Conference Call. Today's call will be 45 minutes. I'll now turn the call over to Michael Seno, Senior Vice President of Finance.

Operator

You may begin your conference.

Speaker 1

Thanks, Polly. Welcome to Toast's earnings conference call for the Q3 ended September 30, 2024. On today's call, our CEO and Co Founder, Amal Mering 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 Act and the 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 profitability and margin outlook, anticipated impact of our restructuring plan, warrant repurchase and share repurchase program, expected growth and business outlook, including our financial guidance for the Q4 and full year 2024. Forward looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward looking statements. 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, including, but not limited to, non GAAP subscription services gross profit and non GAAP financial technology solutions gross profit, which we refer to collectively as our recurring gross profit streams. These are the basis for our top line guidance.

Speaker 1

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. 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, the press release can be found on the Investor Relations website at investors. Toastab.com.

Speaker 1

After the call, a replay will be available on our website. And with that, let me turn the call over to Ivan.

Speaker 2

Thank you, Michael, and thank you everybody for joining us this afternoon. We've delivered another strong quarter. We added approximately 7,000 net locations. Our recurring gross profit streams grew 35% year over year. Adjusted EBITDA came in at $113,000,000 and our GAAP operating income was $34,000,000 I'm really proud of the team and I'm confident we're well positioned to finish out the year strong and bring this momentum with us into 2025.

Speaker 2

Our mission at Toast is to help restaurants delight their guests do what they love and thrive. We proudly serve nearly 127,000 locations today And our long term ambition is to scale this impact across new geographies, new market segments and new verticals. As we think about not just the coming years, but what's possible over the next decade, I firmly believe we can serve many multiples of our current customer count by both increasing market penetration in our current market segments and continuing to expand our addressable markets over time. Over the past year, we've been focused on making disciplined investments that align with our most important priorities and support our long term vision. And we have so much to be proud of.

Speaker 2

While the progress over the past 10 years has been tremendous, we're still early in unlocking the full potential of the opportunity that lies ahead. We've increased our outlook for the full year based on our performance in the Q3 and we remain focused on the 4 strategic priorities we laid out earlier this year. Number 1, scaling locations and market share in our core business. Number 2, expanding our offering for restaurants with products customers love. Number 3, expanding our addressable market into new adjacencies.

Speaker 2

And finally number 4, setting up the company to deliver ongoing operating leverage as we scale. 1st, scaling restaurant locations and gaining share in our core business. Over the past 3 years, we've more than doubled our market share in the U. S, including recently signed mid market brands, Metro Diner, Giordano's Pizza and Earl Corporation. We're still only at 14% penetration.

Speaker 2

Our purpose built restaurant platform and local go to market engine creates a flywheel effect as we increase density in local markets, driving approximately 7,000 net adds in the quarter. Our customers continue to choose Toast as they expand locations, solidifying our position in the market as a choice for growing successful restaurants. Here's a story that speaks to this momentum. Cultivate Food and Coffee is a full service restaurant and coffee concept in the Atlanta area that recently opened their 3rd location with Toast. Cultivate uses a variety of Toast products to increase speed of service and reduce errors across their locations.

Speaker 2

For example, servers are able to process orders in half the time with 80% fewer errors using our TOSCO handhelds. And even though Cultivate's new location has more complex payroll needs than before, Managers are able to save time and process payroll in just minutes through Toast. These time savings add up. We heard from Cultivate that the efficiency gains from Toast free them up to create a positive environment for staff and memorable experiences for guests. It's stories like this that inspire us and our team to keep innovating.

Speaker 2

All right, moving on, our second priority is expanding our offering for restaurants with products and experiences customers love. To help our customers drive demand, we recently released 2 new products to help restaurants reach their guests, branded app and SMS marketing. First, our new branded app allows our customers to build best in class native app experiences for iOS and Android, including integrated digital ordering, delivery, loyalty and more. This helps our customers level the playing field with much larger brands at a fraction of the cost and has been particularly successful with our multiunit SMBs and mid market customers. This build on our website product released earlier this year as we round out the guest facing products included in our essential premium and pro tiers of our digital storefront suite.

Speaker 2

With multiple offerings at various price points, we now provide options for a variety of different businesses and show our customers how they can expand with us as they grow. And our customers are already seeing increased guest loyalty through our branded app powered experience. For example, guests who order through the app are 4 times more likely to be repeat customers than those who order through a restaurant's website. Peetah Way, a fast casual Mediterranean restaurant with 37 locations across the Midwest, So orders from their newly launched branded app make up almost 15% of the digital sales since they've launched. 2nd, we added a highly requested capability in SMS marketing to our marketing suite to help our customers reach their guests directly and generate more revenue.

Speaker 2

Our customers will be the 1st to tell you SMS marketing just works. Spaghettini, a full service Italian restaurant in California, attributed over 11,000 in sales to SMS marketing in its 1st month alone. It's a critical tool when business is slow. For example, during a quiet period, Segatini sold out their surf and turf special after promoting it with the tax campaign. But we're not just expanding our offering by releasing new products.

Speaker 2

Our vertical SaaS strategy goes deep and focuses on a wide range of unique Restaurant First capabilities, what we refer to as our 1,000 little things. This fall alone, we released over a dozen updates across products like Toast Now, benchmarking, kiosks, Toast tables and payroll in response to direct customer feedback. Switching gears, our 3rd priority is expanding our addressable market into new adjacencies including food and beverage retail, international and enterprise. These new verticals represent meaningful TAMs where we see a right to win. And our investments in these areas position us to drive sustained location growth over the long term.

Speaker 2

We continue to see great signal across these market segments, which has given us even more conviction to increase our investments in these areas as we head into 2025. In Food and Beverage Retail, we've expanded product functionality to now accept EBT SNAP benefits, which opens up more of the grocery and convenience store TAM. We're proud to be able to serve the over 42,000,000 Americans who rely on SNAP, including customers at Gangnam Market, a 28,000 square foot market in Chicago that does over $10,000,000 in sales annually and manages over 15,000 SKUs. Gangnam's Markets owners knew Toast would be able to meet their needs of this new concept because they had already used Toast in their restaurants in the past. Next in International, we're continuing to see momentum with our month over month gains in attach for our guest products that we rolled out early this year, which is helping us drive our unit economics and sales productivity.

Speaker 2

Customers in the U. K, Ireland and Canada can now also access Toast Now, our mobile operator app, where they can view real time data about their restaurant. As we continue to invest internationally and see the attach rates of our products improve, we have even more conviction in what international markets represent for Toast as long term growth drivers. And within enterprise, I'm excited to announce we've won Potbelly SandwichWorks and we'll be deploying Toast across their 400 plus locations in the U. S.

Speaker 2

Our pipeline entering 2025 is really strong and we continue to make progress across our rollouts with Marriott, NTY Group, NBC and many others. And lastly, our 4th priority is to continue to deliver ongoing operating leverage as we scale. In 2024, we reshaped our cost structure, positioning us to invest behind our priorities we've laid out to drive durable growth over the long term, while continuing to expand our margins towards the target we presented at our Investor Day. I'm confident in our team's ability to make the right trade offs and set us up for the future. As I wrap up, I'm so confident in our team, the plan we have in place and the opportunity ahead of us.

Speaker 2

Thank you to every toaster for your dedication and passion for our mission. There's no question we wouldn't be here without you. Thank you to our customers. It's an honor to serve you. And to our investors, thank you for continuing to believe in us and our potential.

Speaker 2

Now I'll turn the call over to Lena to share more about this quarter's results.

Speaker 3

Thank you, Iman, and thank you to everyone for joining. I also want to thank our employees whose hard work and consistent execution led to another successful quarter with top and bottom line results exceeding expectations. In the Q3, ARR increased 28% and total fintech and subscription gross profit our recurring gross profit streams grew 35%. Our strong top line growth is complemented by our efficient and disciplined approach to scaling the business, resulting in adjusted EBITDA of $113,000,000 a 30% margin on our recurring gross profit streams and GAAP operating income of 34,000,000 dollars 3rd quarter results came in above our expectations, driven by strong top line results, including a higher contribution from Toast Capital and upside to SaaS revenue. We added approximately 7,000 net locations in Q3, increasing total locations to nearly 127,000, up 28% year over year.

Speaker 3

The combination of our purpose built platform and localized go to market motion continue to drive our momentum. With our strong performance year to date, we remain on track to deliver more net location adds in 2024 versus 2023. SaaS ARR grew 33% year over year, driven by strong location growth and a 4% increase in SaaS ARRPU on an ARR basis. Subscription revenue increased 44% year over year, growing faster than SaaS ARR due to ongoing focus across the organization to improve our ARR to revenue conversion. Part of that improvement is sustainable going forward.

Speaker 3

And part of the increase in subscription revenue was a onetime benefit. Payments ARR grew 23% and FinTech gross profit increased 27% in the 3rd quarter. GPD was $41,700,000,000 growing 24% year over year with GPD per location down approximately 3% versus last year. Net take rate was 56 basis points with a core net take rate of 45 basis points. We made targeted payment pricing changes for a small cohort of customers in September.

Speaker 3

It had minimal impact in the quarter and we expect a small benefit to net trade grade in Q4. As we've discussed, we are building a motion for ongoing small targeted price adjustments and view pricing as one lever to complement our primary growth drivers over the long term. Gross profit from non payments FinTech solutions increased to $43,000,000 driven by healthy demand for Toast Capital. Defaults remain in line with our expectations and due to continued optimization and the addition of forward flow, bad debt associated with Toast Capital is down relative to prior year even as we scale the program. Let me share one story that shows how customers value the fast, low friction access to capital to grow their business.

Speaker 3

The Baum Group, which owns the popular Speakeasy and Ice Cream Shop, UES in New York City, used Toast Capital to help with early operations for a new concept called Champagne Problems they opened earlier this year. The quick and seamless access to funding allowed the owner to maintain strategic control of her business while avoiding the time and complexity associated with traditional loans. The bond group considers Toast to be an ideal partner for growth given Toast's unique visibility into their financials and business operations and plans to use Toast Capital to help with future expansions. Shifting back to the P and L, total operating expenses including bad debt and credit related expenses increased 11% year over year in the Q3, accelerating versus the first half of twenty twenty four due to the planned investments in our highest priority areas. Sales and marketing expenses were up 25% year over year in Q3 as we made targeted investments across our TAM expansion areas, upsell and U.

Speaker 3

S. Go to market channels to increase market share gains. R and D increased 5% year over year in the Q3, reflecting investments aligned

Speaker 4

with our product strategy.

Speaker 3

As Aman mentioned, we recently announced SMS marketing, branded app and over a dozen new features across our platform, reflecting the continued innovation to further differentiate offering and provide more value for our customers. We're also investing behind our

Speaker 2

TAM

Speaker 3

expansion areas. In retail, we're adding more product integrations like accepting SNAP EBT payments in our grocery and convenience segments and deepening our retail inventory management offering. Internationally, we're rolling out more products, including ToastNow, gift cards and expanding third party integrations. Excluding $18,000,000 of bad debt and credit related expenses, G and A declined 8% year over year. We expect to continue operating leverage in G and A as we maintain a focus on driving efficiencies, including through automation and global diversification of our workforce.

Speaker 3

Adjusted EBITDA was $113,000,000 in the quarter and margins expanded 17 percentage points year over year to 30%. The strong Q3 results reflect a healthy top line growth and our commitment to prudently scaling the business, while balancing investments in more nascent areas like food and beverage retail, international and enterprise to lay the foundation to deliver durable growth for years to come. Our Q3 margin also benefits from typical payment seasonality. GAAP operating income was $34,000,000 in Q3, reflecting our strong operating performance and disciplined approach to managing stock based compensation expenses and free cash flow totaled $97,000,000 in the 3rd quarter. Moving to capital allocation.

Speaker 3

Year to date through the Q3, we repurchased over 2,000,000 shares for $56,000,000 for an average price of $23 per share. Early in the Q3, we also repurchased a warrant representing 5,000,000 shares, reflecting our focus on reducing dilution. We will continue to be opportunistic based on market conditions and act judiciously in support of building long term shareholder value. Turning to guidance. For the Q4, we expect total subscription and FinTech gross profit to grow in the 32% to 35% range year over year and adjusted EBITDA to be $90,000,000 to $100,000,000 The sequential decline in adjusted EBITDA and margin compared to the 3rd quarter reflects typical seasonal decline in the Q4 of GPB per location as well as our planned ongoing reinvestments to set ourselves up for sustained healthy growth in both 2025 and over the long term.

Speaker 3

For the full year, we now expect 32% to 33% growth in FinTech and subscription gross profit and $352,000,000 to $362,000,000 in adjusted EBITDA, representing a 26% adjusted EBITDA margin at the midpoint, marking approximately 20 percentage point improvement in margin versus last year. Thus far, in 2024, we have delivered meaningful adjusted EBITDA outperformance and significant margin expansion after resetting our cost structure at the beginning of the year and aligning our investments with our highest priority areas. As we exit the year, our strong financial profile enables us to invest in the business to position us for both a strong 2025 and long term durable growth. We will focus on balancing growth with modest margin expansion as we march towards the 30 to 35 medium term goal we laid out at Investor Day. To wrap up, we are executing across the board and extremely proud of what we have accomplished so far in 2024 and in our position heading into 2025.

Speaker 3

Now I will turn the call back over to the operator to begin Q and A.

Operator

Thank you. And your first question comes from the line of Josh Bae from Morgan Stanley. Please go ahead.

Speaker 5

Great. Thanks for the question and congrats on a nice quarter. Question is on location growth ahead. Your TAM is expanding, execution strong, you benefit from more efficiency in your density markets. And you're talking about bringing the momentum from this year into 2025.

Speaker 5

Does that mean that you can add more locations in 2025 versus 2024? Is it a similar number? Just wondering how you're thinking about the trajectory of location additions?

Speaker 2

Hey, Josh. Look, I'll start by saying we've had a great quarter and we had 7,000 net adds. I think overall for the year, we've got strong net adds in 2024. It's really led by our flywheel markets and our core business. These flywheel markets continue to drive strong productivity and stronger productivity than our other markets and number of flywheel markets continues to increase.

Speaker 2

In parallel, we're seeing good early momentum in CPG retail and our Horizon 1 international markets And that does give us more conviction to invest more in those businesses next year. We also had a great win in top billing enterprise, continue to see momentum there as well, steady momentum. And if you just zoom out and think about the next decade before next year, like we recognize that it's critical like to both scale and drive market share in our core U. S. Business now while expanding our TAM across new verticals and new market segments.

Speaker 2

And so overall, we're confident in our ability to continue to drive location growth into next year.

Speaker 4

Okay, got it. Thank you.

Speaker 2

Thanks, Josh.

Operator

Your next question is from the line of Samad Samana from Jefferies. Please go ahead.

Speaker 6

Hi, good evening and thanks for taking my questions. Great to see the strong results. Maybe first I'll start on some of the newer items that you mentioned, so the branded app and the SMS marketing. Other ways for you guys to continue to add value that are not just kind of core inside of the restaurant. Just how are we thinking about the upsell or cross sell motion of those products?

Speaker 6

Is it a different type of sale? And how should we think about maybe attach rates? And then just Elena, is there a different gross margin profile for those revenue streams?

Speaker 2

Yes. Thanks, Ahmad. I can start and Laina, you can jump in after. The branded app and the SMS marketing tools, they're really nice additions to our guest suite to help our customers drive loyalty and demand. And the early feedback from customers has been great.

Speaker 2

And we're seeing especially our mid market and our multiunit SMB customers really pick it up. I think as we think about our longer term growth strategy, it's both driving locations. That's what we're talking about driving locations in our core business as well as expanding the TAM and continuing to invest in our product innovation and continue to make the existing products better. And so this is just one more step to help us continue to make our guest suite an even stronger product in the market.

Speaker 3

Yes. Samad, to the point on the gross profit for those products, it's too early. But I can just tell you the discipline that we've seen that you've seen us really execute against and the focus on unit economics and payback periods, that doesn't change as we add more products to our platform. So we'll keep an eye on it, but nothing to report. It's too early.

Speaker 6

Great. And then just a follow-up on the price increases. You guys let us know very clearly that it was going to be very targeted. And I think there's some chatter out there on the different magnitude that maybe some people have experienced. I'm curious how long we should think about that rolling through the whole base.

Speaker 6

Is this something that will take several quarters? Is this something that will take several years? And when should we any kind of expectation on what the tailwind will be when it's fully baked into the installed base?

Speaker 3

Thanks, Ahmad for the question. So just to frame how we think about pricing. You know, Man alluded to it a little bit just a minute ago, but as we think about the growth algorithm of the business, right, we think about locations and ARPU as the 2 primary growth levers and pricing really complements that alongside. And the way we think about it is we're going to make targeted pricing adjustments and build this muscle over time. And so what you saw us do in Q3 was make very targeted price changes for a small cohort of customers, went into effect in September.

Speaker 3

So that's why we comment minimal impact in Q3, some small impact in Q4. But I would think about pricing as something that is going to be with us for a long time. Think about it more of as a long term strategy and, occasionally we will make targeted pricing adjustments where it makes sense.

Speaker 6

Great. Thank you again.

Speaker 2

Sure. Thanks, Matt.

Operator

Your next question is from the line of Stephen Sheldon of William Blair. Please go ahead.

Speaker 6

Hey, thanks. And also big congrats on the strong quarter. So wanted a really encouraging win with Potbelly's and Enterprise. So just curious how that enterprise pipeline is building. I know it usually takes a lot longer to convert, deals there.

Speaker 6

And for customers that you want upmarket, what are some of the bigger factors that have helped you win versus competitive solutions?

Speaker 2

Thanks, Stephen. Potbelly is a great win for us. I've actually got one down the street from me in Massachusetts, where I live. I've always loved their food and their bottled peppers. So it's a great brand, excited to partner with them to get them rolled out.

Speaker 2

As we think about just our enterprise pipeline, I think every year the thing that I see is we continue to build on the previous year, which is a really good sign in terms of just the scale we're getting, the types of opportunities we're seeing, the scale of the opportunities. And that's really a testament to, of course, our go to market execution, but even more importantly, the investments we've been making in our product to continue to support and build out the capabilities upmarket, whether it's enterprise config management, some of the capabilities we offer above store for to help restaurants manage at scale. And I think the other piece of it is just there's some custom capability that each of these has and so building out that capability as well is something we're working on. The way I think about it, this is enterprise as we think about the next decade is an important growth vector for us, but it's going to be steady alongside some of the other growth vectors we've talked about in international and enterprise, international and retail and of course our corporate U. S.

Speaker 2

SMB business.

Operator

Great. Thank you.

Speaker 4

Thanks.

Operator

Your next question is from the line of Dominic Ball of Redburn Atlantic. Your line is open.

Speaker 7

Hello, Aman and Elena. Great job as usual. I mean, really impressive on software ARPU expansion. Can you speak a little bit more towards where the such sharp acceleration quarter on quarter has come from? And then going forward into 2025, how does this also change as you start to win even more retail, international and larger merchants?

Speaker 3

Yes, sure. So the comment, to answer your question is what happened with the step up in SaaS revenue, this quarter. So really proud actually of the team's execution here. There was a focus in the organization to improve our ARR to revenue conversion. The team focused on more specifically improving the billing infrastructure and looking at the end to end quote to cash process.

Speaker 3

And so that resulted in more ARR converting to revenue. And as I commented, some of that is a one time benefit. We'll see some a little bit more in Q4 on a onetime basis. But the way you should think about the future is in Q3, we saw ARR revenue conversion higher than we've seen historically. So we won't we shouldn't expect it to be as high as Q3, but certainly higher than historical levels.

Speaker 4

Yes.

Speaker 2

And Dominik, just to build on that, you asked about some of the new segments and what they mean. We've seen slightly higher ARPU so far in CBG Retail than our core U. S. SMB business and smaller ARPU in international markets. But across both of these businesses, Elena and team and all of us are really carefully looking at the economics and contribution margins as we scale them.

Speaker 2

And if you just look at this here, one of the things I'm really proud of is we've been able to grow these businesses while driving margin expansion this year. Just because there's so much overlap across the core platform and what these new market segments need.

Speaker 7

That's great. Thank you so much. If you don't mind me just asking one more. I mean, can you give us any numbers on terms of location wins for international and retail

Speaker 2

for this quarter? Yes. Just continued momentum really from our Investor Day. We I think we had shared some numbers then. And the progress we're seeing across both has been really positive.

Speaker 2

In CPG retail, we're seeing good progress across all of the whether it's grocery or convenience or bottle shops. And then international, we're continuing to add more and more of the products, which is improving our unit economics and our productivity. And so just continue to see really good momentum going to next year. And next in 2025, we expect to invest more in these businesses, based on what signal we're seeing so far this year. Cool.

Speaker 2

Thank you. Thank you.

Operator

Your next question is from the line of Timothy Chiodo from UBS. Please go ahead.

Speaker 8

Great. Thanks for taking the question. I want to dig in on Toast Capital a little bit. So this business is a key advantage of you being the system of record and it's not just about the SaaS and the payments, but clearly this is another advantage that you have. You're in sort of that pull position.

Speaker 8

This topic has become more topical with investors given Clover is somewhat leaning into their Clover Capital business. Square Capital has been delivering good growth for Square. So with all that as a backdrop, when I look at your volumes as a percentage of GPV, it's sort of in the below 1% level. And the program is still relatively nascent compared to Square Capital. Clearly, that's a very different business, right, different vertical distribution, merchant size, etcetera.

Speaker 8

But they're more in sort of the 2.5% range. And I just wanted to see if we could talk a little bit about where you think you might sit longer term. Is it in that 1% to 2% range? Could it possibly be higher? And there are certainly good arguments on both sides.

Speaker 8

Thanks.

Speaker 3

Yes. Thanks, Tim, for the question. It's a fair question. Like, first of all, let me just start by saying the team's execution here, has been excellent. And I think the demand for the product is very clear, right?

Speaker 3

Customers are valuing the fast, low friction access to capital. And you saw the performance this quarter getting And the best thing is we continue to optimize the program. Default rates are where we expect them to be. So all in all, it's a really healthy program. As we think about the long term, we're going to continue to grow it in a balanced way.

Speaker 3

Other companies have different profiles of customers, so you got to take that into consideration. But over the long term, there's no reason why we couldn't grow the program through more attach. I think we just want to make sure we do that in a very balanced risk adjusted manner. But we feel really confident where the team is executing today.

Operator

Great. Thank you. Your next question is from the line of Dan Dulles from Mizuho. Please go ahead.

Speaker 4

Hey, guys. Really amazing results here. Just want to ask like kind of bigger long term strategic question in terms of sort of next year. I know you had the Analyst Day, but is there in your discussions, have there been any sort of reprioritizations into the different initiatives that you're going to take, whether international or any other products, given the recent involvement of the last few months? Thank you.

Speaker 2

Yes. Dan, I think a lot of it's consistency with what we outlined at Investor Day. We've seen a really good year in terms of progress against all of our efforts to drive location growth and ARPU growth, and that's continuing to get more markets into flywheel and continuing to expand our product portfolio in ways that has impact for customers. And that's really the foundation. As we think about all the future growth opportunities we have, scaling in our core business and driving towards market leadership is foundational.

Speaker 2

That's the most important thing. As we think about the future, one of the most important things over the next decade is in addition to scaling our core, investing to open up the TAM in areas where we see really good opportunity where there's right we think where there's a right to win and where we think there's great economics and overlap with our platform. And so I think the team has done a great job of finding some of those areas, right, like with international, with some of the key markets there, with CVG retail. And we're going to invest some more go to market capacity in those areas next year. We're going to keep investing in enterprise business and also keep investing in product expansion to make the products that we have better to drive attach rates.

Speaker 2

And so really the strategy is consistent with what we outlined at Analyst Day. There are also a few things that we're doing that are further out, right? So we do take some part of our investment in our R and D product in our R and D portfolio. And we're looking we're investing in things that are further out. We're looking to see is there any signal.

Speaker 2

And those are things that will where the team is learning, whether it's other categories, other sub verticals, other international markets. And we'll share more as and when it's appropriate.

Speaker 4

Got it. Well, great results on amazing stuff.

Speaker 2

Thank you. Thank you, Dan.

Operator

Your next question is from the line of Andrew Bausch from Wells Fargo. Your line is open.

Speaker 9

Hey, guys. This is Conan on for Andrew. Congrats on the strong quarter. I had a quick question on SAS ARPU. On your own metric, it was up 4% year over year.

Speaker 9

And just looking at subscription revenue, it was up 12%. Can you go a little bit into what the, I guess, differences between the 2?

Speaker 3

Yes. Sure. At the highest level, there are differences at times between ARR and revenue based on timing, based on concessions or credits, things like that. And so that's the primary driver between the 2. When we talk about SaaS, ARPU, we're talking about on an ARR basis.

Speaker 3

So just keep that in mind. And in terms of the 4%, the execution of the team has been strong. And we view ARPU, as Aman mentioned, as one of the key growth levers alongside locations. So that's how we think about it.

Speaker 9

Great. Thanks.

Operator

Your next question comes from the line of Will Nance from Goldman Sachs. Please go ahead.

Speaker 2

Hey, I

Speaker 10

appreciate you taking the question. A lot of calls going on tonight, so I'll just ask one. But I wanted to ask about the retail push. It's really exciting. We kind of seen it out in the wild, have heard some great feedback on it.

Speaker 10

And I'm just curious if you have any incremental thoughts on just how you're thinking about structuring go to market, How you're kind of weighing the benefits of on the one hand getting scale out of the existing sales force versus having a more verticalized or kind of specialty sales force for that product? Thanks for taking the question tonight guys and nice results.

Speaker 2

Yes. Thanks, Will. Yes, as you said, we continue to see great momentum in retail across all the subcategories we're playing in. And if you look at 2025, it's giving us more confidence to invest. And I think part of it's, yes, like investing strategically with a team that is very focused on retail.

Speaker 2

But part of the benefit that we also have is we've got all the sales reps throughout the country that can help drive top of funnel and lead flow. So we're thinking through what is the best approach to maximize growth, and that's something we're tweaking and testing. But at the highest level, thinking of the progress and the signal we've seen so far, this gives us conviction to lean in and invest more next year to see if we can build on the momentum from this year. And thank you for the report that you shared. Our team appreciate that.

Speaker 10

Thanks guys. Appreciate taking the questions.

Speaker 2

Thanks Will.

Operator

Your next question is from the line of Nick Setyan from Wedbush. Please go ahead.

Speaker 4

Thanks for taking the question and congrats on a great quarter. The restaurant industry trends seems to have crossed in July and we've seen an uptick month over month all the way through October here. And so the question is what could that potentially be for the GPV per location? Could that have crossed in Q3? And could we see could we expect to see an improvement going forward?

Speaker 3

Yes. Thanks for the question. So GPV per location was down 3%, consistent actually with Q2. And it's been relatively consistent over the last several quarters. As we head into Q4, it will be in the same range.

Speaker 3

And that's what our guidance reflects. And we're monitoring obviously always monitoring the macro. It's a tight band. We always say it's going to stay within a tight band. We still continue to believe that.

Speaker 3

And as we consider the kind of over the next couple of quarters, we expect it to be in that similar trend.

Speaker 4

Thank you. We will

Operator

now take our last question from the line of Jason Kupferberg of Bank of America. Please go ahead.

Speaker 11

Hey, this is Melissa on for Jason. I wanted to just ask about the net new adds of 7,000 this quarter. Are they fairly balanced between new restaurant openings and competitive takeaways? Or what can you tell us about the mix there? And a quick question on churn.

Speaker 11

Is it still in the slightly above 10 percent range on an annualized basis? Or are there any updates to that metric? Thanks.

Speaker 2

Sure. I think with the 7,000 net adds, it's largely been consistent in terms of the trends we've seen in the past, good mix of new openings as well as existing restaurants that are switching as they upgrade. And the great thing is our store marketing team does a great job in either case. We've got some reps sitting for the with more NROs and new openings and some with existing restaurants and so can compete either way. And in terms of churn, it's largely aligned with what we've shared historically.

Speaker 2

When we do see churn, it's typically smaller restaurants. And so the impact of ARR is smaller and our churn metrics are just in

Speaker 3

Yes, similar range, yes. Yes. There's a

Speaker 2

little update there.

Speaker 4

All right.

Speaker 3

Thank you, everyone.

Speaker 2

Thank you, everybody.

Operator

This concludes today's conference call. Thank you for joining.

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Key Takeaways

  • Toast delivered a strong Q3 with 7,000 net location adds, 35% year-over-year growth in recurring gross profit streams, $113 million of adjusted EBITDA (30% margin) and raised its full-year guidance.
  • The company’s four strategic priorities—scaling core U.S. restaurant locations (now 14% penetration), expanding product offerings, entering new adjacencies and driving operating leverage—remain on track.
  • New guest-facing products branded native apps and SMS marketing are already driving engagement, with app users 4× more likely to reorder and restaurants reporting thousands in incremental sales.
  • Addressable market expansion is progressing via Food & Beverage Retail (now accepting EBT/SNAP), international roll-outs of Toast Now and enterprise wins like deploying across 400+ Potbelly locations.
  • Operating leverage continues with disciplined cost management (G&A down 8% ex–bad debt), ongoing share and warrant repurchases, and margin improvement toward long-term targets.
A.I. generated. May contain errors.
Earnings Conference Call
Toast Q3 2024
00:00 / 00:00