Toast, Inc. (TOST) Earnings Call Transcript & Summary

All right. Come on in, everyone. Thanks for joining. This is the Toast session. My name is Tien-Tsin Huang. I cover the payments, IT services sector, and I was just telling the team, really grateful to cover Toast. We've learned a lot getting to know of the sector, understanding the software and of course, it's very tangible, which is what I love about it. So with us from Toast, we've got Chris Comparato, the CEO. We've got Elena Gomez, also the CFO. Michael's here, [indiscernible] from IR. And got a lot of questions from the investment community. We'll take some questions from the portal, but I think we'll be able to get through a lot of the key questions that people threw into me. So thank you for that.

But I thought we'd just kick it out, keep it easy, if you don't mind, favorite Toast restaurant in the local area. You guys are local. I know, Chris, you're local. So let's start with that, your favorite Toast restaurant in the local area.

Usually, my favorite toast restaurant is my last restaurant that I've been to. But locally, I'd say, Bar Mezzana, very good in the ink block. Jefferson is a great operator. Heather, great GM. It's a really good team, great hospitality, great food. So check out Bar Mezzana. But then the last great Toast customer I went to was -- I was in D.C. this weekend. And on Thursday night, I went to Zaytinya. So if any of you are from D.C., Zaytinya, great spot. ThinkFoodGroup is the hospitality group, Chef José Andrés is the chef and Mediterranean Tapas. You can order with a Toast Go device. You could do menu and pay at the table. And it's an amazing experience. So definitely put it on your list, Zaytinya, and I'd love to get them up here in Boston.

Yes. My favorite restaurant, not local because I'm on the West Coast. So I'll give you a restaurant in Sacramento, it's a Mexican restaurant. And I happen to be there for a family event, there was 20 of us, and we were all able to order with our QR code. And I could see what the teens were ordering down the way. And they were not ordering margaritas, so that was good.

That's good.

But I was also able to pay as I was -- as we were leaving with my phone. So it was great. Great experience.

I will definitely have a margarita when we're done with the conference. So thank you guys for that. Again, thank you all for being here. So I thought we kick it off with just a generic question here on restaurant software, right? We think of that as very complicated, right? It's a fragmented space. You've done a terrific job of talking about that and educating us on that. How did Toast break through, right? Breaking through is tough, whether it's in software or payments. How would you explain that?

I mean we've certainly broken through. But as a reflection, I'll remind everyone, we're still only 7% market share in the U.S. for what we do. So I remind the Toast team pretty much every day that there's 93% of the restaurants out in the U.S. are not using Toast and let's get after it because it's a pretty large TAM, and the majority of restaurants are not using our platform. But I think in the course of the past 10 years, we've done 3 things consistently well. First and foremost, building a restaurant-specific platform with depth and breadth to serve restaurants of all different types. Often, I talk about democratizing technology so that the platform could be nimble enough so that restaurants have different types can leverage the platform. So you could be an FSR, a QSR, you could be a food truck, you could be a large brand. But going -- being restaurant-specific and solving customers' problems, that's number one, and we've consistently done that. Number 2 is we've built a distribution engine or a hyper local go-to-market engine in markets dedicated to customer success, and that's always been the flywheel of the company. It started in Boston. We then went Boston, New York, Chicago, D.C., Miami, but now that flywheel continues so putting teams in markets to build relationships and then cultivate those markets into what we call flywheel markets has been the number two competitive moat for us. And then number three is, as you're doing those first 2 moves, consistently placing seeds into the platform that innovate on top of the platform that we've already built. And that's always been a consistent pattern, where we continue to just innovate around the corner and look around the corner of what's coming next. So what's a good example of that? We started Toast, mobile dining back in 2019. A lot of people think QR codes are new and QR codes were a pandemic dynamic. We put that team into motion in late 2018, early 2019 because we felt that consumers wanted a remote control to our platform via their phone. So constantly thinking about innovation has been a very good pattern. So those 3 things have allowed us to execute extremely well and breakthrough as you talk about it, but yet in many ways, we're just getting started.

Great. So I guess, I first got to know Toast a little bit as a private company, prepandemic. And I've been thinking about how Toast has changed prepandemic versus today. And of course, there's been a big shift towards mobile, order ahead, I fully understand that. But just maybe go back to basics. How is the company different either culturally or from a product-focused standpoint today versus prepandemic?

Well, let me first talk about what's consistent, and you mentioned the word culturally. We've always had the mission to empower the restaurant community to delight their guests, do what they love and thrive. And our culture is driven by our mission, and we came up with that statement several years ago to dedicate ourselves to the restaurant community, which has been a difficult business to run. Like if you think about restaurants, running your average restaurant, it is extremely complex. So that mission has always led us, but how have we adapted around that mission? In the early days of Toast, we called it an all-in-one platform. So many of our first customers wanted not just POS and payments, but they wanted POS payments, online ordering. They wanted digital gift cards and loyalty. And it was kind of like a set of modules or a set of products and they were somewhat interconnected, but certainly not a platform. So in the early days of Toast, it was sort of an all-in-one set of solutions, and restaurants love that because they have never seen that before, especially in the cloud. Fast forward to 2018. We became what I call, multiproduct. And this is where we started to see sections of our products dedicated to certain stakeholders. So guest-facing functionality with its own road map dedicated to consumer; Employee-facing functionality such as payroll, dedicated to the employee stakeholder. Now fast forward, supplier-facing functionality dedicated to the chef and suppliers. So 2018 to 2020, I'd argue we were multiproduct. And now fast forward 2020 to 2022. We've really evolved into becoming a unified platform. So it has a consistent look and feel, consistent interconnected functionality. We can now sell the entirety of the platform upfront. We can cross-sell modules that customers aren't using downstream, and it's become a much stronger platform. And now the whole company orients itself around, well, how do you make sure that, that platform gets better and better. We still have lines of business in GMs that are sprint and after their road maps, but they're looking for these interconnected use cases that allow the platform to grow over time. And I think that this phase of Toast is now here to stay, which is making sure that we execute on this platform vision. And we're seeing the results of that. So as customers use more and more of our modules, that tells us that we're on the right pattern for platform usage.

Yes. No, for sure. So given those phasings and you're at what, 62,000 locations today, what's the sweet spot in terms of type of restaurant size, et cetera?

So we see a lot of pull from multiple segments. So I would argue today, there's no specific one sweet spot like reps in certain markets can go after certainly SMB 1 to 10 units. They can go after regional mid-market chains anywhere from 1 to 50. So here in New England, reps can go after, Bar Mezzana, the Barbara Lynch Hospitality Group, but they can also go close, be good as a mid-market chain. So reps have plenty of runway within their TAM to penetrate that market. So we're seeing a lot of pull into several different segments. Traditionally, we've been strong at SMB. So traditionally, in SMB across the U.S. is the majority of the TAM for restaurants across the U.S., probably 5 or 6 out of 10, our SMB restaurants anywhere from 1 to 10 units. But we're seeing pull across multiple segments at the moment. Some of our earliest customers were mid-market enterprises, enterprises like Susie Kate's, Beach Hut Deli, Pappa Geno's. So our reps tend to see pull across these segments, but certainly SMB -- I'd say SMB leaning towards full serve has traditionally been a sort of a fast lane for us. But now we're seeing much more of a multi-threaded approach to TAM acquisition.

Good. So thinking about moving upmarket, let's say, into enterprise or even very micro casual merchants, we get this -- or restaurants, we get that question a lot. Importance of moving upmarket or even down, down market, is that a priority?

Absolutely. Again, if you look at the U.S. TAM, we're not in 93% of the restaurants out there. And we want to be the platform that powers the entire restaurant industry. So we're going to continue to adapt this really robust platform to be agile enough and almost think of it as being personalized towards certain segments. So a good example. What's a good example? QSR. QSR is probably at least 1/3 of our business. And a few weeks ago, we announced a Toast for QSRs. What is that? Well, that's basically taking this powerful platform, adapting the pricing, the packaging, the configuration so that we can even go faster within QSR, take Toast for Hotel Restaurants. For years, customers were telling us, "Chris, we want you to power the restaurants within our hotel property." Finally, we've got PMS integrations with 6 or 7 different property management systems. So now we can go fast after 40,000-plus restaurants within hotels. So you're going to continue to see us adapt the platform and configure the platform to go faster into these subsegments. And it's not just downmarket or upmarket, it's also much more tailored to the type of restaurant that an operator is running. Certainly, going downmarket is important. We want to make sure that platform's really intuitive, easy to price, easy to use, easier self-service. So that serves us downmarket. But then upmarket, making sure that as restaurants scale and as brand scale, we have really good above-store reporting, above-store APIs. So again, it comes back to democratizing the platform so that you can adapt it to restaurants of all different types but I'd argue, we want to be strong in all segments over time, over the course of the next 10 years. Certainly strong in all segments, but be measured about how you're tackling these segments as you go.

Yes. No, understood. You're doing something right because you added, what 5,000 locations in the most recent quarter. It's a record level nominally as we look at that KPI. Is that sustainable, that number? Can you build off of that? And there's always a question of who are you displacing? And so maybe I don't know if there's a chance for either of you to go over to your go-to-market strategy and what's working in that front as well.

Yes, sure. I'll take that. So at the highest level, we're seeing sort of a secular shift to digital and restaurants. I think all of us are seeing that in our day-to-day experiences. I think the record number of locations was a testament to the sales team and to what Chris talked about, which is they're getting really comfortable positioning the platform, having a ton of success doing that. The top of funnel, strong all the way through. And so that's why we believe the momentum is there for us to continue to sustain that growth. In terms of the competitive landscape, we see the usual players in a few categories. One is the legacy players, the other is sort of the horizontal tech players and then some of these point solutions that you sort of have to string together. Regardless of the competitor, we do well. Healthy win rates are a testament to that. And that's really what you saw in the 5,000 locations we had in Q1. As it relates to our go-to-market motion, restaurants are hyper local, and we've known that from day 1. And so we've positioned our go-to-market to be hyper local, and we're really maniacal about how we do that in terms of TAM per rep and the opportunity. And you saw -- hopefully, some of you saw some of the work in our IR deck, which really explained our go-to-market motion in terms of the economics and how we think about it. When you look at a couple of key cities that we've displayed, you can see that as we get deeper into a market, we get this flywheel effect, which takes hold. And so you can imagine how we're thinking about that and the footprint across the U.S. to replicate that. We have emerging territories, of course, and so we had to balance the payback periods and all that, of course. But at the highest level, if we can replicate what we've seen in some of these major markets, that's a massive opportunity for us.

Good. It does seem like it tends to be matters, like if I see one Toast restaurant [indiscernible]

It's true.

You see a bunch.

Absolutely. Absolutely. I was just talking to a restaurant owner on Friday, and he said, he did a bunch of due diligence before he switched from a competitor to us. And I said, what ultimately made you choose? And of course, it was the breadth of the product and he had outgrown the other solution, but he said he talked to his buddies basically who own restaurants, and that's what made the difference.

Yes. No, word of mouth matters. So let's shift gears to product, if you guys don't mind. The one thing that stood out, and maybe, again, I'm a payment processing nerd. So payroll stood out to me, I think 30% of new took payroll. And so when I think of payroll, payroll is hard. We had ADP here and a bunch of other payroll guys. That's all they do. So my question for you is why would they choose Toast to do payroll? And does that inform you in any way of attaching things that are more tangential from a servicing standpoint? And you mentioned breadth in your opening remark. So how does that inform your strategy here?

Sure. I mean customers for years were telling us, in order to improve their productivity and streamline operations, we ought to do more for not just POS and payments, but also for the employee value proposition. If you think about employees within a restaurant, anywhere from 70% to 75% turnover and how do you engage and retain your employees after you've spent time and energy training them. So 2018, we started to look at the employee value proposition. And we recognize that we can move the needle, if we make it much easier on that employee value chain to help restaurants onboard, perform labor management, schedule management, tips management, payroll, and then even things like benefits over time. So that was the vision. Back in 2018, we acquired StratEx, which was a restaurant-specific payroll provider out of Chicago. But now we've been on this path for 3 years of building what I would call interconnected tissue across that employee value proposition. So instead of a horizontal payroll provider just performing payroll and then the restaurant has to manage multiple vendors, we said it should really be an embedded piece of the platform and a restaurant should be able to subscribe to our platform, turn on those modules and then start to engage their employees. And employees were already clocking in and clocking out of Toast and managing their schedules through Toast. And we say, "Well, geez, payroll is just one aspect of the last mile to pay them." So what's a good example of this interconnected system? Well, if we're managing clock-in, clock-out schedules, and then issuing payroll, well, what else is complex about that value proposition? How you manage tips that's very restaurant-specific? How they perform business rules around tips. It's a very manual process at the end of every shift. Walk into a restaurant at 10 or 11:00 at night, they're performing these functions manually. And they're trying to figure out who do we distribute money to and do we pay the chef? Do we pay the runners? Do we pay the hostess? So being able to set and configure business rules around tips management and have that distributed right into payroll made a ton of sense. Okay. Well, then what beyond that? Early wage access. What if you're a bar tender and you need to pay your rent tomorrow? Making sure that restaurant employees have access to early wages was important. We announced that in November, still very much an early product for us. But again, this interconnectedness, which starts with how do I record my time and how do I get paid for it. But much more widely, what's the employee value proposition so that when an employee works at a Toast restaurant, they never want to go back to a non-Toast restaurant. And we're seeing that. They're telling us, we're retaining employees. They're paid better, they're treated better, and they could manage more tables and they're more productive. So that tells us we're on the right path with employee cloud.

Yes, yes, that probably drives word of mouth as well.

Absolutely. And it's a transient audience, so they're going to go work at their next restaurant and they're going to say, "Oh, my God, I wish this restaurant -- I was at a restaurant in D.C. on Saturday night, Italian restaurant. And there was 2 wait staff managing the second floor, and we're staring at 2 legacy terminals on the wall. And literally, our waiter, Casey, was begging me that night, and I'm with family, begging me to pitch the GM Toast. Because he's like, "Listen, I've worked at a Toast restaurant, and this is like this is really tough." So that's a good example. And I won't name the restaurant because I want to be polite.

I got to go back and see if you were successful.

I'm going to try.

All right. Let's see. I'll come back and follow up one day. Good stuff on the payroll side, employees. I know there's what, 11 million employees, Elena, I think, is what you guys have talked about? So there's a lot of potential to touch there. But let's talk about just overall attach. I think I wrote down 60% use for 4 or more products, I think what you guys called out?

Yes.

So talk to us about what elective products are selling well and where can that go, that metric.

I can start and you...

Yes, go for it.

The most popular products that are bundled upfront that customers tend to use right out of the gate, certainly, the Toast Go device as the commerce platform. The Toast Go device allows wait staff to do more with less and handle more tables and have that sort of POS in their pocket. So that's certainly popular. Then I'd say our guest modules, online ordering, inherent to the platform,, allows them to take in orders off-premise and online. That's very popular. Loyalty and e-marketing has certainly been popular. Now payrolls starting to crack into that mix of 4-plus products. So we're encouraged with the progress that we're seeing on employee cloud. So I think you'll continue to see contribution from payroll in the 4-plus mark. And then xtraCHEF is relatively new. We just armed our entire sales force with xtraCHEF in Q1. So Q1 was the first time that they could take it into market. They blew away our internal goal. So we're seeing a faster uptick with xtraCHEF in the first quarter versus what we saw with payroll years ago. So it's very promising, but still very low contribution. So I think we're going to continue to see that 60% use in 4-plus go up over time as long as we continue to execute with good unit economics and sell the entirety of the platform upfront.

Yes. So Elena, do you want to talk about ARPU here and [indiscernible]...

Yes. I mean it's -- I was just going to say that, the proof point we have, which we talked a little bit about on the earnings call is the fact that at booking, we're seeing about 6,000 of ARPU at booking, which is doubled from 2 years ago. So to Chris' point, our reps are getting really good at positioning the entirety of the platform. And that's just one example. There's another example we've been sharing, which is a brewery in Ohio, where they've used 10 products not 4, 10. And the ARPU there is mid-teens, well north above 10,000, just on the SaaS ARPU. So just another example of how a rep can position that whole platform. And in that case, that use case, and this was a regular -- it's like a restaurant processing maybe 1.3, 1.5 million in payment volume. So you get both the benefit of the integrated -- the payments but also SaaS. But we're really, really proud of what the reps have been able to execute to.

Okay. Yes. So ARPU obviously is a -- it's a KPI, we will keep tracking. You mentioned payments.

Yes.

And of course, we look at GPV and across a lot of different companies that we cover. When we did the simple math and look at Toast as a pay fact, you would rank as a top 10 merchant acquirer. So you have a lot of scale on the payment side already. I didn't appreciate that until we actually just ran it against the rest of the group. How do you benchmark yourself on payments, whether it be on the pricing side, performance? Is there more that you can do there? Is that a touch point that restaurants consider when they're looking at or evaluating the service overall?

Yes. I mean I think the value of the platform, for us, is really the integrated model. So it's payments, but also obviously, the software that we offer and the depth and breadth of the platform is really an important part of our narrative with our customers and, obviously, to our financial profile. And then beyond take rate, we have the ability with the payment rails to do more strategically to offer to our customers. And Chris was just talking about the pay card as an example of that, where we're offering same-day sales. Hopefully, that translates to those Toast employees wanting to work in that restaurant, but also getting more GPV onto our platform. So that's just one example of what's possible. And then as it relates to pricing and the take rate, that's something we're always paying attention to in terms of optimization as well. So there's a few different angles of how we approach it.

Good. I know the answer because you kind of suggested that I'll ask it because people ask me, investors ask me, which is, would Toast ever unbundle? Would you ever just do payments or just do the software? I know right now, you have to buy the whole thing, including the hardware element. So what is the thinking around that?

Yes. I mean when we walk into a restaurant, it's interesting, it's -- if you're not in the industry, it's easy to walk into a restaurant and look at hardware, software and payments as these disparate, disconnected systems. When we walk into a restaurant, we see this interconnectedness across the 3. And we see a restaurant owner-operator who wants to do more with one partner and less with multiple partners. So what's a good example? I don't know how many of you are local, but like take Turner's Seafood up in Salem, Mass. I'll walk into Turner's, sit at a table and they may start my order on a Toast Go device, okay? So the wait staff has the Toast Go device. I'll get out my phone and scan a QR code, and I'll continue to add to the order. Okay? So now hardware is interplaying with software quite closely. I'll then finish my meal and I'll seamlessly pay with my phone and walk out, like I'm not -- or I'll split the check with friends and walk out. So these systems are very much interconnected and interconnected in many ways, not just at the software layer, but also think about the data. And now what you can do with that data to understand, well, geez, what devices are online versus offline? How many devices are they using? How many transactions per hour are going through that device? Well, by the way, what are the line items on every one of these orders? How can we tie that back to guest information? Did the guests sign up for loyalty at the end of that experience? So we very much see this interconnectedness across these systems that allow us to really tell the platform story and then drive those insights back into Turner's Seafood, so that Kathy, the owner can say, "Well, geez, how many -- how much staff should I have on Friday night on Memorial Day weekend when we're going to be slammed. So I think the bundling is here to stay. I think change management is occurring on how restaurants and brands purchase software. And we've seen, at least in the customers that adopt Toast, 99-plus percent attach rate on the bundle. Like we don't see customers telling us disconnect payments or disconnect hardware. And we actually see brands saying, well, no, this is the buying pattern of the future. Now certainly, way upmarket, that's a big debate. And way upmarket, will they purchase payments separate from integrated payments, but we believe that change management is a float and these systems are very much interconnected.

Yes. No, very clear. Very clear. All right. We've got what, 7 minutes left. So I can feel the energy of the audience saying we got to ask about the macro, so I'll ask it here. We all know the stories of, okay, what's going on with the recession, inflation, consumer discretionary spend. So what are you seeing on the ground today? And how recession-ready is Toast?

Yes. I mean, I think consistent with what sort of we shared at the earnings call, we really haven't seen any signal yet that our restaurants are somehow changing their patterns or anything. The data tells us, in fact, that consumer -- their demand is high, and that's what resulted in the quarter we have. So that's one point. And in terms of Toast in this environment actually is incredibly valuable if you think about the value proposition of Toast and helping customers be just more efficient. And a great example is xtraCHEF, right? Someone who's really maniacal about managing their costs, that's a valuable part of our platform. And so there's elements of the -- in fact, I would argue that in a rising cost environment, Toast's value goes up. So that's one angle. And then from the company angle, we're doing everything we can, and we're somewhat battlefield-tested having come off of COVID, of course. And so there's a lot of learning there. But also, we're doing everything we can to make sure that we've got that lean cost structure, so such that if the macro were to change in a way that we're not seeing today, we're able to adapt very quickly.

Good. And for what it's worth, right, we've had Visa and a lot of the merchant players that also play in this category, and they're seeing a lot of strength from the consumer. Another topical question, just on the supply chain being a challenge. You have the hardware element. Any issues navigating that?

No, we're really -- we're actually really proud of how the hardware team has really navigated through what has been a super dynamic environment. So first, of course, we're seeing elevated costs on our product side, which is expected with the dynamic. But we also made a decision last year to bring on more inventory. Like our guiding principle was let's not ever let hardware get in the way of our growth. We've been able to execute to that really well. But by putting that inventory on hand, it's allowed us to sort of be insulated for any short-term dynamics, which is great. And we have plenty of visibility through the year and into the next year. So we feel good about that. Shipping costs, obviously, have gone up. You guys saw that in Q4, but we'll continue to navigate it, but I think we can manage it.

Okay. Good. And I know there's always this question around profitability, path to profitability, and there's a lot of growth. I know, Chris, you've said this so many times, a lot of growth ahead of the company. That's very, very clear. So just the balancing act between profitability and growth and margins. I think on the call, you did note more disciplined focus on high ROI investments. Can you maybe just elaborate on that?

Yes. Yes, sure. I mean, I think, of course, we're definitely not tone deaf to the backdrop that we're seeing. And this company has always been, just to be clear, very focused on unit economics and payback period. But in this backdrop, we're continuing to watch pretty -- very surgical, all the hiring, very much paying attention to discretionary spend. But all the while still pointing investment to growth areas, proven ROI initiatives that we have. And then anything new, we're making sure -- and international is a great example of this, where we've made a seed investment, if you will, in international. And as we continue to learn from that investment before we invest more, we're going to have -- there's high hurdles before we continue to invest. So there's a lot of operational hygiene you guys maybe don't see that's going on in the background to make sure we're, in fact, taking this opportunity and leaning in. But at the same time, doing it a very smart, disciplined approach.

Good. And how does that play into inorganic, thinking about ROI. Now that you raised a lot of capital so...

Yes. Those are great questions -- yes. No, it's a great question. I mean -- and of course, the valuations are a little different than they were 6 months ago. But we are always canvassing the market for opportunity. And opportunistically, if something is going to get us to market faster or it's going to complement our product road map, that's -- that piques our interest, we'll take a look at it. But all the while making sure it really does make sense. It's solving a customer pain point and that we have the ability to absorb the asset, should it be something more significant.

Okay. Good. We've got a couple of minutes left. Let me fire off 2 last ones. I think we started out asking around when you guys were private, prepandemic and the journey to get to this point, what about ahead here, Elena or Chris, just talk to us what excites you? Is it the product side of things? Is it the cohesion, the operating system, international? There's a lot of places to go. What do you prioritize?

So I tend to prioritize our mission, which is we have a lot of unfulfilled mission ahead of us, and I spend a lot of my time and energy with customers. So I get excited about taking some of those customer problems and really turning them into solutions and making sure that as we do that, we execute really well on that journey. So like I said earlier, 93% of our opportunities ahead of us and let's stay focused on that mission, and make sure that each and every type of restaurant has a fantastic Toast experience. And that excites me because when we see it, restaurants tell us, it's certainly a very vocal community, and they let us know when we're doing well or not so well, but I get excited about hearing the stories. And the question is, how can we make sure that we execute and go faster so that, that 93% translates into more acquisition?

Yes. Great. We got a minute left. I've enjoyed the conversation. I wish we had more time. But let's end it with one of my go-tos. I always ask this, right? You've been meeting with a lot of investors and the investment community. What do you think is most misunderstood or maybe underappreciated about Toast amongst the investment community?

My opinion is, I don't think people realize how much runway we have, both in the U.S. and globally. Like I just think we're so early. And to Chris' point, there's so much more innovation we can do on our platform. But to me, that's the biggest thing that's misunderstood.

Terrific. We are out of time. Thank you both for it. I enjoyed the conversation.

Thank you.

Thank you.

Hopefully, catch up soon again.