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

Yes, it's a very fair question. So a couple of things I'll just set context for just to remind our [ MAD goal ] is always ARR growth. So we really look at both growth levers, locations and ARPU, and we're talking about ARPU. But what's important is, as we get more of that market share, that's a massive opportunity for us to go and sell back into those restaurants. That's number one. But when you look at the context of the last couple of years, there's a couple of things that played into this massive growth. One is we were enabling reps and actually helping them position the breadth of the platform. So we moved into a multiproduct platform around 2019, 2020. And so we started positioning the breadth of the platform. That was really important for us. And then two, we added an upsell team over the last 18 months. That's still a newer motion for us, but encouraging what we're seeing, but we're seeing that get into our run rate now. And then we had a slew of products payroll Sling that all came during this time. So when you put that all together, that's really what drove that 59% growth over 2 years. So when you think about that, you say, okay, that's not sustainable, of course. But there's a lot of great learning that we got through the last couple of years. One is, how our customers want to absorb the platform may be different than us selling the entirety of the platform upfront. Some customers do. I think we gave an example on the earnings call of a customer who adopted 13 modules all upfront. That's a unique case, but we see that. We see customers who are ready to adopt the platform upfront, and we see other customers who really want to change out their core POS first and then maybe later at, let's say, payroll as an example. So all those learnings are really helpful to us. The one thing I said on the call, and I'll remind everyone here is, as we think about our ARPU over the next -- for the balance of the year, we will end somewhere in the plus or minus 10% in Q4, and we feel that's an incredibly healthy growth rate. And then when we think about the longer-term opportunity, whether it's the products we have today or continued innovation, which we've proven we can continue to have a ton of product velocity. We have a lot of excitement about what's yet to come about driving that ARPU over the long term as well.

Okay. Good. No, I know that this depth versus breadth conversations. It's a fun way. I know you've been giving a lot more statistics around the different modules, which is great. But I know you mentioned that upfront Toast Tables and sort of that opportunity and that is pretty heavy ARPU as well. But it sounds compelling. So tell us how big that could be and maybe how that ranks with some of the other products that you guys have released?

Yes. So we started this project roughly 2 years ago. It was a small team, again, in heavy conversation with our customer base. Customers don't love managing point solutions across waitlist, reservations and then the interface with their current platforms and guest data. So they were saying, "Hey, can you jump into the space and simplify it and make it much cleaner." Consumers tend to do search and discovery on things like Google, they call the restaurant to make a reservation. They go to the restaurant's website or they go to another platform. And restaurants wanted us to simplify that. So we said, okay, we could -- we can envision this as part of the all-in-one platform and then have tentacles to platforms like Google, certainly a native online interface to reservations if you go to their website. So we felt like 2 of those 4, we can more cleanly sort of clean up and make sure that the restaurant could turn on a reservations and waitlist capability as part of our all-in-one value proposition. That allows them to just simplify their operation because we're already managing all the tables. We're already managing all the guest data of their favorite consumers. So it made a lot of logical sense. So we put a small team on it. And within a couple of months, that small team had a prototype up and running with a handful of customers. And then over 2 years, scaled it to a few hundred customers and then more recently, several thousand customers. And we said we ought to announce this to the public. But we're excited about it. It's early days, just like some of our other modules, but we think it's going to be an important play for us downstream because it's part of our mission to allow the merchant to delight their guests and have a much better experience in-house, but then also a much better consumer experience. So we're excited about it. It's -- but again, still early days. It will move the needle on ARPU. I think we put out the stat, it's roughly about $2,000 if you use the more mature module annualized. But we're excited about it. The sales team is super excited about it. Our customer base is starting to adopt it. And then we'll have the same motion that we have for payroll and xtraCHEF and commerce, which is to just continuously improve it over time. And yes so that's Toast Tables.

And just to put that in context, just as -- if you just think about the long-term ARPU opportunity, Toast Tables is one example. There's other products, of course, whether it's Payroll or xtraCHEF. But just putting that $2,000 in context, if 10% of our customers are paying us more than $10,000 in SaaS ARPU, you could imagine that there's a few products that could really move the needle. But what we're seeing is there's multiple ways to drive that $10,000 or $20,000 ARPU. It could be a restaurant who's got multiple handhelds. It could be a restaurant that uses Toast Tables and uses payroll and users Sling. So there's a host of different ways where we have conviction on that long-term opportunity because not only what's in the bag today for the reps to sell but the different combinations that really meet the needs of the restaurant versus landing the entirety of the platform upfront, for example.

Good. I know there's a lot of products, payroll, xtraCHEF, we went through so a lot of that. So from an R&D perspective, the pace of product releases from here, should we see that maybe step up? Or could we see more focus on existing products and the sell-through and enhancements on that? What's the balance?

I think you should expect it to be pretty consistent. Even looking back at 2019, we started the Order & Pay at the table project in early 2019, then COVID hit, and we launched it within restaurants. So that maturity of looking at the product pipeline and then figure out what are the hurdles that these products are going through to get more investment from us is a pretty consistent pattern. I'd say there's probably 3 areas of products that we prioritize the most. The first is unlocking more TAM. And location growth is the top driver when we look at growth levers. So if we can unlock more TAM, then we're going to do that through products. So that's a good example. Toast for Hotels. We started that project a while ago because hotel and hospitality owners were telling us we can't run the restaurants within our hotels. Can you help us? So doing things like PMS integrations was a natural fit. But that's a clear example where you can unlock tens of thousands of restaurants by pushing that product forward. So one pillar is product focused on unlocking TAM and that includes hotels that includes enterprise, international would fit into that. I'd say the second pillar is product road map that supports the key stakeholder across the restaurant value chain. So is that the operator GM, is it the employee within the restaurant? Is it the guest or consumer? Toast Tables, for example. Or is that the supplier and accounting? So you think of xtraCHEF. So we have GMs that run those portions of the platform and each of them have their own road map. That represents the second pillar because then we prioritize those bets against each other. So is Toast Tables a better bet than maybe doing something within Payroll? And we're constantly looking at that portfolio, placing those bets and then holding the GMs accountable to execute that road map. That's the second pillar. And then the third pillar is really all of the infrastructure that sits beneath all of those elements. Those include APIs, just much cleaner, simple APIs for our partners. That includes APIs for our internal team. So when you look at fintech, if we're monetizing any money movement in and out of the restaurant making sure that that's really clean and teams at Toast or our partners can benefit from those fintech rails. But the infrastructure is probably the third pillar to just make the platform ready to support not just tens of thousands of restaurants but hundreds of thousands of restaurants. So those tend to be the 3 pillars that we play off of each other. And I think they consistently execute in a certain pattern.

Need to get ChatGPT to make a picture of...

Well, I mean we could talk about that for another hour. But certainly, AL, both traditional AI as well as generative AI come into play, but now the GMs are all starting to insert those plays into their road map on where can this fit over the course of the long term. But I think this is why we're still in the early innings of where this industry is going to go because there's a lot of tech to be built.

No. I was kidding. I was thinking..

I know.

Clean way that actually put that into pictures everything you said that will make my life easy, but that was good. I appreciate you're going through that. So let's rapid fire a few I want to hit, Toast Capital, right? So I know we've been talking about this thesis of merchant and consumer platforms, wanting to bank their users and Toast Capital is a great fit for that. It looks like you lend out about 70 basis points of your GPV today. So the same question I've asked you guys many times, right? Your risk appetite here, how would you like to scale that up? And maybe for those in the audience, just a reminder of the risk model.

Sure. Yes. No, it's -- risk is important to us. Let me give some context on the -- just on the program itself and kind of why we're in the business. So if you think about restaurants, they're typically underbanked, and they're looking for capital to redo their patio or get new kitchen equipment. And so we found this unique opportunity because we see their data, their payment volume on a daily basis that positions us to really understand the credit worthiness of the customer and their patterns, et cetera. So that's sort of the thesis of like why are we in this business? First of all, it's to solve a customer pain point, and they've been coming to us asking for this product. When you think about the risk profile, that data advantage, which I talk about, is really important because we get that understanding of the customer, the credit worthiness, et cetera. And then we also collect the payment through their payment volume. And so that also gives us predictability. It allows us to keep default rates low. And then you layer on the fact that we're not the ones actually issuing the capital. We work with a partner to do that. And so then you say, well, then what is your risk? And at the highest level, we've got a 15% maximum risk, if you will, on the principal balance of the loan. We're not anywhere close to that, by the way, but that's just sort of something we have a stop gap, if you will. And then when you think about that -- and then we also have a team, a team very much focused on fraud, on counter-party risk, all the things that you would expect, a high-quality risk team focused on. So when you put that together, I feel pretty good about our ability to manage that risk, and we're being relatively prudent about how we roll out the program. And the default rates have been pretty much in line with what we've expected. So we feel pretty good about where we are. We have a lot of customers that come back for a second loan, which has been great to see. And then if you think about your question on the outlook, how do we think about this program over time? As we grow our customers, as we grow our GPV, of course, we're going to add more capital, but we'll do it in a very prudent way in managing that risk of the entire time. And the last thing I would say is, at any point in time, we could obviously just not shut down the program. We did that during COVID. Actually, during COVID, we relaxed the program and sort of stopped loaning for a while to see what was going to play out. We could do that at any time.

I mean the data advantage does seem real. I mean, you're already seeing all the sales. And if you start to get into Payroll and you see the supplier activity, I mean, that is data that's very...

Yes, the context around the customer are really important

Okay. Good. Now we'll be tracking. I'm glad you shared the gross profit on that explicitly. It's good for us. So on the -- just to round out on the fintech side, so you rank as a top 10 merchant acquirer, given the scale of sales that run through your system. So I have to ask about the pricing angle of that, right? That gives you share advantage to get better economics. And I know the take rate has some complexity to a bit, depending on payment tight, but maybe share a little bit more on...

Yes. No, you're right on point. I mean, there's many factors that impact the take rate, of course. A couple of things that we think about. First of all, over the long term, we're focused on driving that net take rate up over the long term. So how will we do that? There's a couple of levers we have. One is just our payment infrastructure and optimizing that on a per transaction basis. And we're constantly looking at that scale. Just as we grow, we should be able to leverage some of our scale. And then pricing, to your point, is another one that we can think about. And we're always looking at and testing different pricing and packaging all really centered around value. So if we can drive value to the customer, that earns us the right to consider a price change. And so one example of that, that we've been testing most recently is on digital online ordering. Could we consider a guest fee related to online ordering to our digital products? And some of the premise on that is, a, it's standard practice. We're not the only ones that would do that. But more importantly, we drive value with that change if we were to do that. So we've been testing some models like that. And so I would say, over the long term, we have room to move that take rate up. In the near term, we've said it's going to be in the mid -- within the low 50s for the balance of the year.

Okay. Good. No, thanks for going through that, time flies. So we've less than 90 seconds to go. So I'll try and bundle some of the questions together. So you have focus on profitability. We've seen that move forward. And you've been talking about high ROI investments and there's worry around recession and discretionary spend. The usual kind of question, I'm sure you're feeling all day here. So how does that all come together for you, right, the need to want to invest to deliver on the profitability as well, but be ready to protect the bottom line to the extent that things might get weaker. How does that all come together?

Yes. Now you're hearing -- hopefully, you're hearing from us a lot of momentum in the business. And so we want to invest into that. But we want to do that in a very balanced way. And that DNA actually around unit economics has been with the company for a very long time, and we're continuing to do that in every -- as we expand in parts of the TAM, we're going to continue that DNA. But we gave out some long-term margins on gross profit. And over the long term, we haven't changed our conviction about driving that profitability, around 30% margins on that gross profit, which is SaaS and fintech. And that's really -- the timing is in our control. Like on one hand, we have this massive opportunity to invest. But the focus on efficiency and the focus on unit economics is really what's going to drive that long-term efficiency. And that's across the entirety of the business, whether it's in our G&A functions and finding automation opportunities and low-cost locations versus how we serve our customers, how we serve our customers more efficiently through self-service, et cetera. So we have various levers that we're looking at. And then we're just being incredibly prudent about any new investment, whether that's international, whether that's enterprise, really looking at signal before we double down. So just how we operate.

No, that's great. I'm glad you powered through that really quickly. I know we're out of time, but I can't get you out of here without asking at least one question, what you're excited about, Chris, here as we leave you other than eating good food, what's fun coming up?

Yes, I'd say for me, I love seeing sort of the edges of the TAM and where it can go. So I'm spending more time with the teams and more importantly, the customers that are in these new markets on where we could be doing more to help them out. That's what we love doing. And that's sort of the new frontier in those markets. So I think that's super exciting, whether it was the trip to international, whether it's enterprise, whether it's hotels, we're seeing some interesting opportunities, and those dialogues are really rich. And those dialogues inform the rest of what we're doing. So I think that excites me over the course of the next year.

Yes, for me, it's just the scale that we're operating in. And so we talked about record locations in Q2 and getting closer to that 6,000 in the back half of the year versus 5,500 a year ago. Operating at that scale, consistently, that's just -- to me, that excites me because that tells me we can -- not only are we resonating getting different parts of the TAM but we have our ARPU opportunity with those customers as well. So you put those 2 together, and you can see this company growing for a very long time.

No, it's exciting. So thank you for going through it all. .

Yes. Thank you.

Thank you.