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

Good afternoon. We'll get started here. Welcome to the session with Toast. For those who don't know me, I'm Stephen Sheldon. I'm one of the -- main sectors. I cover William Blair as restaurant technology. Required to inform you that a complete list of research disclosures and potential conflicts of interest is available at our website at williamblair.com. So it's really great to have Toast here. We have -- from the company, we have CEO, Chris Comparato. We have CFO, Elena Gomez. And we also have Michael Senno and I think Andy Ellner from the Investor Relations side in the audience. So Toast completed its IPO in September 2021. It's delivered really strong growth, really exceptional growth over the last few years. In our view, it's probably the most comprehensive end-to-end SaaS platform for the restaurant industry, and we continue to get even more optimistic on the growth outlook for the company. So we're going to do more of a fireside chat today versus a formal presentation. And just so you know, the breakout after this will be held in the Adler room upstairs on the second floor. So thank you guys very much for being here with us today. Really appreciate it.

But just maybe to start, and maybe this is for you, Chris. It's your first time at our conference. It'd be great just to get a high-level overview of kind of what solutions that Toast provides to restaurant owners and operators.

I thought we were going to start with Celtics versus Warriors. Okay. All right. So let's dive in. So Toast -- our mission at Toast is to empower the restaurant community, to delight our guests to what they love and thrive. And often, when I talk about empowering the restaurant community, I'd point at all of the stakeholders within the restaurant value chain. So from the consumer and the guest to the GM or owner, to the employee waiting tables or driving the kitchen, to the chef, to the suppliers, maybe even to the accountant. And we fundamentally believe that there is an opportunity to put in place a digital backbone or a digital platform that empowers the entire functionality of this restaurant to be successful. And by doing that with a restaurant-specific platform, we could drive more revenue into the restaurant. We could drive more productivity per employee. We could drive more efficiency in the back office, and we can connect the dots on the data layer and then drive those improvements back into the business. And as many of you know, running a restaurant is an extremely difficult and complex business. And there's use cases that restaurants tend to peanut butter all over the place through point solutions or other products. And we fundamentally believe that a unified digital platform can empower this industry to be successful moving forward. So that's in a nutshell what we do and why we do it. And we do it for restaurants of all different types. It could be an SMB restaurant. It could be a mid-market enterprise. It could be a QSR. It could be an FSR. So we often aim to democratize the technology so that restaurants of different types can benefit from those innovations. So it may be a restaurant that's a fine dining, full-serve restaurant leveraging the Toast Go device to turn tables faster, but then you can walk into a cafe bakery, and they're using the same Toast Go device to line bus with a line out the door. So we tend to look at the technology and then understand how do we leverage it across different concepts.

Got it. That's helpful. And maybe for Elena, maybe talk about the revenue model. How does it work on the SaaS side? How does it work on the payment side? Just more detail on the model itself.

Yes. Happy to. So just zooming out the metric that we pay attention to the most is ARR. And the way to think about that is really it's the combination of locations and then ARPUs or revenue per location effectively. And so let me double click on -- and also -- this is mic. Is that working? Okay. Is this work? Yes. Much better. Okay. So let's just double click on -- and actually, the other thing I would say is the power of both having a SaaS model, but also a payment model is really important, right? So the SaaS element is very predictable. And then the payment side of the house, we grow as our customers grow. So just double-clicking on the SaaS side of things. It's a monthly subscription. And Chris talked a little bit about some of the products we offer. So the breadth of our platform allows us to monetize that like any other SaaS company. And as we continue to innovate, then we have the opportunity to position the platform. And you heard me talk in our earnings call a little bit about how our reps are getting really good at positioning the platform. So we'll talk about that a little bit later. Then on the payment side, obviously, we drive payment volume, and we have a margin on that payment volume. And so that's the other side of the house. So as our payment volume grows, then our revenue grows as well. And that's when I say as our customers grow, we also grow. And then the other thing that maybe isn't completely obvious is we power the payment rails for these restaurants. And the more that we can do around that gives us an opportunity to go even deeper with our customers but also monetize it as well. So an example of that is Toast Pay Card, which you maybe have heard us talk about, and that's really a product that allows our employees at Toast restaurants to get their wages faster. We put their wages on a debit card. They use that debit card. So it just gives you an example of the power of being the payment processor and how we can innovate, if you will, and drive more volume to our platform. Hope that helps.

Got it. Yes. It's perfect. I guess double-clicking on the kind of the software side, where do you see the biggest opportunities to drive software ARPU higher if you think about the next 3 to 5 years? Are there certain modules where you're starting to see some notable traction? What do you -- just how are you thinking about the traction on the software side?

Yes. So I'll start and feel free to chime in, Chris. So today, let me zoom out and just talk a little bit about where we are today, and then I can talk about where we're going. So today, a new customer comes to us on the SaaS side of things, the ARPU is about 6,000. Our average for our entire installed base is 4,000. The reason we talk about that is because we've seen that ARPU at new booking improve over time. In fact, it's doubled from 2 years ago. So that's a testament to a couple of things. One is our go-to-market team is really good at positioning the platform, which we're enabling them to do that. We're asking them to do that. They're having very solution-oriented conversations with restaurant operator. So that's one element of it. The other element is really where we focus on innovation. And so we've been able to continue that innovation on our platform, add more control points, which allows our reps to position that as they're talking to restaurant operators. So that's where we are today. That number continues to steadily grow, and we believe it has -- we believe we're still early. And so I'll give you a couple of data points, which I shared actually earlier this morning. One is when you think about the percentage of spend on restaurant, spend on technology, as a percentage of their sales. We see that today in the 2.5% to 3% of their sales. And so if you just take the Toast construct right now, and you say an average Toast restaurant drives somewhere between $1 million and $1.3 million, same volumes. So I'm just going to keep it simple. If I just use $1 million in payment volume, and you assume 3% of that restaurant operator of their sales is being spent on tech, and our ARPU is 6,000, you can see that, okay, 3% of $1 million, that's $30,000. Like why couldn't we be in a position to capture more of that ARPU over time? And we believe we're going to continue to innovate so that we can capture more of that over time. And by the way, I think the 2.5% to 3% probably grows over time when you compare us restaurants to other industries, which we talk about at a later time. So that's one way to think about it, which is we've still got some room to grow as long as we continue to innovate. The other example -- the other data point is I'll just give you an example of a restaurant. We -- I think it's a brewery. In Ohio, they added 10 modules. And we offer, call it, 15-ish modules, 10 modules, and their SaaS ARPU alone, just the SaaS element of it is in the teens. So it kind of paints the picture of what's possible. I'm not saying every restaurant on Toast is going to take every module, but it gives you a glimpse into what's possible. And that's just one example. We have many examples like that. I used donut shop last time as well. So I think I like donuts and beer, but those are the examples I use, but it kind of paints a picture of what's possible.

That's really helpful. One of the biggest issues, I think, is facing restaurants right now, it's the labor challenges has been publicized. A lot of the concepts have talked about it. What has that meant in terms of demand for your platform? What is that creating a tailwind to adopt more solutions that can drive efficiency? Just what does that meant for you?

Yes. So first off, the labor challenges across the restaurant industry are very real. And if you look at the past 2 years, certainly, restaurants have been battle-tested through COVID to adapt and adapt to how do they drive sales, how do they engage their employees, how do they run an efficient business. And they're forced to do more with less. And every restaurant that you all walk into is thinking about how do we drive employee engagement and happier employees and then retain those employees? And we tend to think there's a flywheel within the restaurant where a happier employee who's more productive creates a better guest experience. And we all see it when we're working with happy wait staff or happy bartender or a happy chef. That happier guest experience drives loyalty and drives better restaurant engagement, maybe it drives a better ticket size, maybe it drives better tips. And there tends to be this flywheel between employees, guests and owners to make sure that this restaurant is humming at the next level. So we focus on 2 things on the employee front. Number one, how do we make sure that the employee can be as productive as possible? So we look at how are they taking orders today? What's the operating system and rhythm within that restaurant? And how can we drive productivity? So a good example is allowing them to have the Toast Go device to turn tables faster. And even though we don't recognize that as a guest, the wait staff is turning tables faster because they're managing more tables. So they're handling more tables with less staff. The second thing that they're doing is when you complement the Toast Go device with our mobile dining solution, which is basically the QR code that allows customers to have almost a remote control to Toast through that QR code, the ability to open up a tab, order off the menu, pay your check and leave. That also complements the same productivity. So now you have a double benefit of the wait staff not just turning tables faster, but handling many more tables and much more surface area within that restaurant, and they're more productive, and they're happier doing it, and guests are actually having a happier experience. So that's number one. The second thing that we do is we offer in our platform a much better employee value proposition to clock in, clock out, schedule their time, manage their tips. At the end of every night, restaurants are spending half an hour to an hour to figure out how to distribute their tips. Well, all of that could be restaurant-specific and automated within our platform. So now by turning on these modules, you're allowing the restaurant to not just manage tips, but then distribute payroll and then turn on same-day pay so that the employee is having a much better value proposition through their use of the software. And that's only the start of where we can go on this employee life cycle. So we tend to look at this picture and say, okay, we can help you solve these labor challenges by creating a happier workforce that's more productive, that's earning more and treating guests at the next level. So -- but a lot more to do on that front, but we tend to help restaurants navigate those real challenges that they're going through.

That's great. I wanted to ask about consumer behavior. And if you like, through your platform, you get pretty good visibility into how consumers are dining in person, how they're engaging digitally. I guess what -- kind of what trends have you seen in the cadence of in-person and digital spending by consumers if you look back over the last few years and maybe expectations going forward?

Yes. The most important thing -- I mean if you look at the past 2 years, the most important thing has been to enable the restaurant to capitalize on the omni-channel opportunities. So not just the dine-in experience, but what can happen off-premise. So certainly, back in Q2 of 2020, every restaurant was forced to adapt and cater to off-premise order. So how can the platform sort of unlock that potential? Well, we could unlock that potential through integrated online ordering, integration with all of the third-party marketplaces and driving takeout. So that immediately opens up 3 channels off-premise that the restaurant can now adapt and say, okay, orders are coming into the kitchen. This is great. Over the course of the past 2 years, though, now things are starting to flip back to dine-in. We published our restaurant trends report, I think, 3 or 4 weeks ago. And if you look at year-over-year on a GMV basis, dine-in is up 46% from Q1 of 2021. So that shows us that restaurants are now adapting back to dine-in. So it's making sure that restaurants are prepared with Toast Go, mobile dining, kiosk and everything that it takes to offer a great consumer experience within the 4 walls of the restaurant itself. But zooming out, as an owner-operator of a restaurant, you want to be in a position where you can drive these revenue channels, but then analyze the performance of each of these channels and then optimize your operation around that channel performance. So through utilities like the Performance Center within Toast, we can now look at margins and productivity by channel so that the restaurant can really adapt, like is tomorrow night going to be a rainy Friday night in Chicago? And guess what, we should really push third-party ordering and make sure that we downsize our staffing, and we cater to off-premise. Or is it going to be a beautiful sunny night in Chicago? And I want to go sit on the patio. Let's make sure that we staff up and optimize that channel. But we're putting these businesses in a position to really analyze their business and become knowledge workers and then drive those channels that are tailored to the specific setup that they're faced with.

Got it. That's really helpful. I want to talk -- ask a little bit about sales efficiency. It's usually a lot harder to be efficient on the sales side when you're going after SMB. And I know you guys are going after now restaurants of all sizes, but maybe talk about the sales efficiency trends you've seen. What does the go-to-market look like? Just any detail there.

Yes. So first, let me step back and describe the model a little bit, and we believe it's very much a differentiator for the company. We put teams in local markets. So these are hyper local markets across major cities and geos in the U.S. And these teams are like we're in the hospitality business. We want to build relationships with restaurants in person, not just over the phone, and that's what they're used to. So we put teams in markets. This started back in 2012 with Boston, then New York, then D.C., Chicago, Miami. Now it's across the U.S. But these teams within hyper local markets build relationships and has to become more productive. We look at their rep pacing based on productivity and ARR, and they create a flywheel within these markets. So over time, we see that our sales reps become actually more efficient as we become more tenured in that market. What are they doing? They're driving more leads and referrals through happy customers. And our churn is extremely low. So that allows the reps to leverage referrals and crosschecks with their customer base as they sell more restaurants within that market. That creates this flywheel that allows them to be much more productive over time. And then we're constantly analyzing what is the TAM per rep and how many reps can allow us to be in as many decisions as possible across these markets. Our motivation is to make sure a market becomes a flywheel market sooner rather than later. But that's why we look at sales enablement, rep pacing, rep productivity, ARR, and they're actually selling more and more of the platform upfront. So that's a very good signal to us that they're on the right path and the market is maturing over time. No different than -- I look at Boston today. Boston -- we're probably 12% to 15% market penetrated in Boston. So we still have a lot of TAM ahead of us in Boston. So we're starting to add more reps to make sure that we're in as many decisions as possible as markets turn over. But that efficiency is critically important, and it's how we think about the business. We look at the unit economics, the CAC payback periods. We look at the rep tenure, but a lot of different analytics behind that model, but we feel like it's a competitive differentiator for us.

Got it. Very helpful. On the location growth -- I mean you talked about Boston. You've continued to put up very strong location growth. How big of an opportunity is it for you to continue adding locations in the U.S.? And is there also a concept in your base where you kind of grow with your customers? Your customers may be adding new locations and maybe that being a component of location growth over time.

Yes. No. I think -- so first of all, I think there's a big opportunity. We talk about the TAM opportunity, which is around 860,000 restaurants. And so we're really early in that journey, 7% penetrated today. And then when you look at it in terms of dollars, we're about 1% penetrated. So we definitely think there's an opportunity to continue, and that's why you're seeing us invest into that opportunity. And as we invest, we see these flywheel investments happen and so on. And then we continue to invest. And so we believe we'll continue to -- and we have strong win rates, and the competitive landscape is changing dramatically. So we see our ability to continue to grow those locations. And then the last thing I would say is that we've deliberately said our #1 priority is to go after that market share. And that's what you see in our investment profile. But over time, we're going to continue to invest in innovation so we can then grow that ARPU over time as well.

Got it. And as I kind of said, you guys have historically at least focused on the SMB space. We're starting to move up a little bit more upmarket or at least talking about it more. I know we had some bigger customers there. How do you think about the upmarket opportunity? What does the competitive environment look like as you move upmarket? Just any detail on it.

Yes. I mean I think upmarket is an attractive TAM. And again, we've been upmarket for years, what I would call the mid-market space. In our early days, it was SusieCakes. One of our largest customers is Jamba Juice, part of Focus Brands. But it's been measured. And we've been pretty methodical and measured about going upmarket because what we don't want to do is be in a situation where we bring on a large brand, and we're doing a ton of custom work in the road map. So we want to make sure that the platform unlocks the ability for brands to do their business easily, which means let's make sure that we invest in above-store reporting, above-store publishing, APIs that allow enterprise architects to have Toast at the core of their infrastructure, but then APIs that allow them to stitch in other technology partners on top of us. And then a lot of functionality around security, reliability and scale, everything that you would expect an enterprise CIO or CTO to be looking at. So it's pretty methodical, and we continue to chip away at certain brands that we're winning over time, but we're not trying to go too fast. We're trying to make sure that it's very measured and not that the platform has what these enterprises need to be successful. But I also think in the larger upmarket space, they haven't really moved to cloud yet. So I have a lot of conversations with some of the largest brands in the world. And over time, they see themselves move into cloud, but they are also being measured about how to adopt cloud technologies across all of their properties in a way that allows them to be successful. So I think you'll continue to see us announce wins in the space but be pretty measured about how we're going after that part of the market.

Makes sense. Wanted to ask about international. There's one of the bigger announcements this year that you're going to start pushing the investments at least on the international expansion. So maybe talk about what investments you need to make, what milestones you're looking at achieving over the next couple of years and maybe what that business could look like if you think 3 to 5 years down the road?

I'll take that. So the highest level one thing I want to put it in context, our investment in 2022 is really a seed investment. So it's mid-teens, somewhere between $10 million and $20 million. So I would say it's not disproportionately taking management attention, simply because we've got such a massive opportunity in the U.S. that that's really what we're going after. But what are we doing in international? Well, one is we understand the competitive landscape. We're understanding the go-to-market motion that'll work. Chris described our go-to-market motion here. I think what we're trying to test is, will that work in these countries that we're going in? And we're going to English speaking countries first, and just really understanding what will the steady state of this business look like over time. And before we continue to invest in international, we want to make sure it reaches certain hurdles. So that's what I would say. It's a learning year. We've got 1 or 2 customers that we're learning from, which is great. And so far, that's been really good feedback for us. And then the conviction about going to international, it's a multiyear journey. So 3 to 5 years, we'll be talking more about the impact to our financials. But in between now and then, it's really a journey. And that's how we think about it early at this point.

Got it. Makes sense. Wanted to ask about hardware. It's still a critical component of what you guys are doing? How have you been managing through the current supply chain challenges? How much risk is there, I guess, in terms of being able to source hardware that supports your offerings? Any detail on the hardware side?

Yes. Now hardware is definitely important to all our restaurants so they can run effectively on our platform. So it continues to be an important part of our offering. We made a decision last year right around -- actually probably September, right around the IPO. When we started seeing signal that supply chain was going to be important, something we need to pay attention to, we've made 2 decisions. One is let's never let hardware be the reason we can't grow. And so the guiding principle was we've got to have enough hardware to never let it impede our growth. So that's number one. Number two, related to that, we said, let's get more hardware on our balance sheet so that we can insulate ourselves from any short-term supply chain dynamics. And so that's played out. We, of course, are seeing rising costs and product costs and freight, which we've absorbed, and it's reflected in all of our guidance. And I feel like we have pretty good visibility at this point to what those costs will be. They peaked sometime at the end of last year, and I think we've gotten better visibility. I think that situation in general is going to be fluid. I think we're going to still have to pay attention to it. That said, I'm not worried about our ability to deliver hardware to our customers, which is really important.

Got it. Maybe a few quick hitters. I know we're close to out of time. But first one, you haven't said any real discrete profitability targets. How should investors think about near-term trends and margins? Where they could go over time? And how important is it you to make progress towards positive free cash flow?

Yes. No. Definitely -- you wait until 27 minutes and then ask that question, but great. Now look, it's a top priority for the management team, absolutely. And hopefully, you see that reflected in the tone of our guidance where we're positioning the company for consistent margin expansion over time, a really important priority across the company. So it's not just in the G&A function, but it's in how we go to market. It's in our R&D efforts and how we think about that investment relative to ARPU. So it's really a tone in the company of how we're approaching it. And we've come out and said over the near term, we're going to get our way towards profitability.

Got it. A lot of discussion on the macro environment, potential for recession. What are the implications to Toast if we head into a slower period or a recession?

I think my first comment would be restaurants have truly been battle-tested in the past 2 years. So you could best expect every restaurant, no matter what size, to be thinking about this and thinking about what levers to pull if there's additional pressure. They're already pulling the lever of price increases, how much can the consumer absorb. So they're doing what's possible today. We're keeping laser focus on the unit economics and the dynamics that we see and the signals that we see from the market. And right now, we don't see any material weakness in the industry. And if anything, we see restaurants as busy as they've ever been in the past 2.5 years, and we love to eat a lot. And we see it firsthand. And the restaurants that we're walking into are super busy and trying to optimize their revenue and optimize their productivity. We're keeping a close eye on it. We know that the platform is on the good side of helping them adapt. So we're coaching restaurants to be ready and be ready to drive revenue, be ready to drive productivity, be ready to do more food cost optimization in the back office through tools like xtraCHEF. But at the moment, we continue to execute and not really lose sight of the opportunity at 7% market share. We believe our platform should be in every restaurant to allow them to be successful, and we're still very much in our early days of doing that.

Got it.

And the only thing I would add is that we looked back at the data at recessionary times back in 2008, and restaurants are really resilient. And so we're using that as a -- I realize it's a different time but still a data point that gives us a bit of confidence. And then, of course, we're, like any good CFO doing right now, just doing all of the scenario planning should that get -- should we get ourselves into that situation. But for now, the signal is that we haven't seen that in our restaurants.

Got it. Sneaking one more in here. You completed 2 acquisitions so far. You also have -- and xtraCHEF being one of them. You have $1.2 billion, give or take, on the balance sheet, cash and equivalents. How do you think about using M&A to continue rounding out the product portfolio?

Yes. I mean I think it's important. So we're definitely always canvassing the market for the opportunity out there. There's so much innovation happening right now all around food tech. And so we're paying attention to that. The criteria we're looking for really is -- it goes back to the customer. Like what are the control points that we believe a customer needs to run an efficient operation. And I think if it's a natural extension of our strategy and something that is really going to be relevant for the customer just like xtraCHEF and payroll, then that's something we would consider.

Got it. Well, I think we're out of time.

All right.

Chris, Elena, thank you so much for being here.

Thank you.

And the breakout again is in Alder upstairs.