Toast, Inc. ($TOST)

My name is Tien-Tsin Huang. Thanks, everybody, for joining. Here to have Toast -- fireside chat with the Toast team. Aman Narang, the CEO and Co-Founder; and of course, Elena Gomez, CFO; and heavy IR team. Thank you all for being here. I always look forward to having this conversation.

Thanks for having us.

Thanks for having us.

Yes. So a lot to cover. We'll try and be efficient. But I thought just to kick it off with a big picture question for you, Aman, thinking about the quarter and what stood out to me. And you spoke with such convince and confidence about winning AI race and pivoting the company on the AI front. And you talked about revising your priorities and evolving Toast to grow. I wrote down here to grow a form a software platform to agentic platform. So I was thinking about that and thought you always do a good job of this. Can you explain to me how you would explain that to our restaurant client, especially one that loves Toast as it is today.

Sure, sure. First off, I think we've been working on our AI evolution, both internally and for customers over the past couple of years. And I'd say as you look at like where we're going versus where it came from, it's really an evolution. At the end of the day, if you look at what Toast has been working in the past decade plus is we've been growing locations, both in our core business as well as the new TAMs that we're working on. We continue to see really strong growth in our core. Our new TAMs are accelerating growth. That's why we've had net add growth every year that's been higher than the previous years. And we have a ton of conviction that we're going to do the exact same thing this year, right? As we look at the surface area of the products that we offer, we've seen steady ARPU growth in our platform. And that's because when you talk to our customers, the thing you hear consistently is they want to use Toast for more. They like the idea of an all-in-one platform, especially these SMBs, be able to use all of it in one place, manage all aspects that have their back of house or operations. And so we continue to see really good growth, both in terms of the number of customers using Toast, and what they're doing with it. Now one of the evolutions that we've been working on in the past couple of years. If you talk to our customers, what they'll tell you is think about the average restaurant tour, right? What they'll tell you is, we'd love to use more of your platform. But I'm just trying to keep my doors open, like make sure the service is good, the food is good. And so often, they will either like not have the bandwidth to leverage everything to offers, or they will outsource it. I'll give you an example. Marketing is a great example where most restaurants have some website. They may have some loyal program. They may have an online order... [Audio gap]

And understanding how you can free up time and resources to get them to do something they haven't done yet.

Yes, absolutely. I mean I think this is where with most restaurant tours, even in our retail business, you see the same pattern. The biggest thing they struggle with is time, right? They would love to use more technology, but think about a restaurant owner they're not a marketer, they're not apparel a tax expert. They're not a back-office accounting expert. Their activities and their passion is like great food and great service. And so the more we can help them leverage the Toast way to run a better restaurant, the better [indiscernible]

Okay. Good. So I'm sure we'll talk about AI a little bit more. But just coming back to the quarter, I know the the topic of the day, right, with the quarter coming through, I was really surprised by the reaction. It seemed pretty extreme. And it seemed like, tell me if I'm wrong here, it seemed like it was two issues. One was some concern around memory cost and supply, and what that might do for the outlook? And then secondly, some concerns around maybe competition picking up. So I thought maybe we could drill into both of those if that's okay. So thinking about the first one with memory. Just maybe on the [indiscernible] just go through the puts and takes there to help us think about memory impact to the P&L, not only this year, but also next year. I think you talked about that being a bigger impact next year. Can you just walk us through that?

Yes. Great. I'm happy to talk about that. So -- let me -- I'll get to your hardware question. I want to -- because hardware is one element of our P&L, so want to zoom out and talk a little bit about how we manage the P&L philosophically. And then I'll hit on your hardware question. But philosophically, our priorities haven't changed. It's really to deliver durable growth and continue to expand margins and deliver healthy margins. That's how we talk about it. And so let me just unpack what that means. In 2026, we're having an incredibly strong -- 2025 we had a strong year. 2026, we're on track to have another strong year. And in that, we're going to deliver strong growth and expand margins. You'll see the same exact playbook in '27, deliver strong growth and expand margins. And so that's just philosophically how we plan the business. And the discipline that you've seen us employ over the course of the last couple of years had not changed. We're looking at every account, we're looking at all the ways that we can drive efficiency. Now take what Aman just said about AI, and that presents even a greater opportunity to drive leverage in our business. And so when we think about that, we really think about our long-term margin opportunity. And we often have talked about the 40% long-term margin. We think that will be even higher. Just think about this AI opportunity. We're already seeing leverage in the business. I'm on touched on that. We'll touch on that a little bit later, but our confidence in our long-term margin continues, and we feel really strong and convicted about the opportunity to drive that even higher. Now let's get back to hardware. Hardware, like I said, is one element of our work Near term, there's this memory constraint where many companies are navigating that. Our team is doing a great job of navigating that. One of the principles that we started with when the hardware memory shortage became obvious to us that there was a constraint was let's make sure that we do not disrupt customer growth, right? We've been -- we've added more net adds to our platform in 2025. We're going to do the same in 2026, really important that we set ourselves up to support that growth. So what that means is as we've secured supply for both '26 and '27, there's going to be near-term pressure in our P&L, and that's what we talked about at the earnings call, both in '26 and '27. That said, we have a lot of confidence. We have many levers in the P&L to really manage that. We also are very confident that this will be near-term pressure, not something that structurally is going to change our ability to drive long-term operating margins. So we feel good about that. And finally, I would just say the hardware operations team is executing quite well. It's a very tenured team, a very seasoned team. They've been through supply chain constraints before, and they've just done a really excellent job of not only keeping us informed and working with the partners, but just navigating the complexity of the supply chain.

And then the phasing of it, Elena, just thinking about 26 into 27? I know there's trade-offs that you're making all the time.

Absolutely. Yes, so '26, what you'll start to see is as the year progresses, there'll be greater hardware pressure. That said, we're still going to expand margins. We're still going to have a really strong year similar with '27. We have a bunch of levers that we're all working to mitigate any constraints we have, any pressure we have. So we'll continue to do that. Part of that is a full year impact of it. But the other piece is just the way our inventory gets into our customers' hands, has to do with when finished goods, and that's what you're seeing in the dynamic between '26 and '27.

The bottom line is don't want to impact customer growth and customer impact. That's #1 priority.

Absolutely. That's a #1 priority. And the other point is we have many levers to manage the near-term pressure as well.

Okay. Maybe just to build -- just to build on what Elena just said, we're investing to drive durable growth in the 20s for a long time. This is why, like if you see the net add growth year-over-year in the new accelerating what's exciting is that those businesses crossed $100 million ARR last year. They're growing with hockey stick, really strong growth, and we're investing to open up those TAMs in a material way, while expanding margins despite the near-term impact of hardware. And so I think Elena and team are doing a great job pushing the team to make sure in our core business where we have scale to drive efficiency each and every year. AI accelerates that. And then we're reinvesting some of that for longer-term growth.

Yes. And I don't want to spend too much time on it. I know it's a transient issue, but had to go through it, so appreciate that. So on the other subject, just thinking about the core, I think last year, I asked you both, or I guess Aman you here last year, the growth algorithm for the core, does it feel different to you now as we think about the next 6 to 12 months, the growth algorithm? Are you seeing any changes in the competitive landscape? Because a lot of your peers are talking quite a bit about some product velocity changes and making improvements. What are you seeing?

Yes. The first thing I'll say is this comes from a place of humility, like there's no shortage of POS systems in the restaurant space, right. If you look at our ability to grow and to establish ourselves as a key leader in the space, that's really the strength of our product, our service team or support our go-to-market, which we have built over the past decade. And as we look at the competitive landscape, as we look at our win rates, as we look at our share that we're taking even in our most dense markets where we have the most share. So the flagging effect we've talked about in the past, whether we look at our churn, fundamentally, what we see in our business, right, is we're seeing more location growth each and every year. And we saw that last year. We expect to see that same thing this year. And so competitively, like, of course, our team is tracking it very quickly, and we're investing in a big way in our platform to continue to differentiate and add value for our customers, but we've seen nothing that has changed. Now as you think about the growth algorithm and what are ways in which we continue to grow. I think I hit on some of this earlier. Fundamentally, it's about location growth. As we think about the longer-term opportunity for Toast, whether it's in terms of the AI opportunities we have and the data that -- or the network opportunities we have. Both of those are predicated on location growth being a key driver because market leadership is so valuable for the second and third act. And so we continue to invest in a big way to drive location growth. We're seeing, as I just mentioned, really good signal there. And then the second piece of the outcome is ARPU growth. And so we've seen steady ARPU growth, where customers use more and more of our platform. I think if there's one thing that will change over the next 6, 12, 18 months. The potential of AI-driven revenue, right, has upside for Toast. Just like a couple of years back when we launched retail international enterprise to expand the TAM. If you look at our net add growth, there were a lot of questions about add growth for Toast has accelerated in the past couple of years, and why that's happened is because we've been able to excel at these new TAMs. And we even though -- and that has tremendous upside potential. Similarly, you look at Toast IQ Grow as an example. Customers pay for all of our platform, round numbers, about $500 a month, amusing round numbers. They may be $550, okay? For Toast IQ Grow, which is our marketing agent that's priced at $499 a month, right? And of course, there's an element -- human element to that, too, but we expect that to become more and more agentic over time. And so one of the areas of tailwind and iterate is as we build out these agenda capabilities, there is potential to accelerate AI revenue. And the reason that is is if you talk to our customers, they'll tell you they spend more on services than they do on software, right? They spend -- if you go ask the average restaurant or how much is spend on a bookkeeper and accountant on someone to help them payroll and tax or marketing. It's way more than what they're spending on the [indiscernible].

Yes. I'm glad you went through the example on the price. Can you spend a minute? It's just -- since you mentioned I had to ask it, just coming up with the pricing and the philosophy around the pricing on the AI work. Aman, you're always very thoughtful about the pricing the experience I'm talking to. Can you walk us through that a little bit?

Philosophically, the way I think about it is we want to be known in the industry as the best product with great value. And so like we could be optimizing near-term one levers. I think certainly, that's a part of the growth algorithm, but the big focus is really on growth by adding more value to customers by adding more locations and then adding more value to customers. And so specifically on Toast IQ Grow, if I'm honest with you, right now, the focus is on driving a tremendous amount of value for our comers, how the pricing model evolves, right? We have -- we are still learning transparently. We could add a token-based based component to it because some of this in the back end, our COGS will depend on how much of the customer is using their back end to generic campaigns or copy or whatever it may be. But what I'm confident about is that if these platforms can drive the types of outcomes, like I shared the 8% lift in sales, then the pricing is a list of our products, right? The ability to monetize that over time and condition. And what we're focused on, first and foremost, is as we roll out this platform, staying really close to customers to make sure that we are actually landing products that can help them drive more successful business or help them save down.

So what have you learned? I know you're at NRA, I think, with -- in Chicago and Toast IQ is what, 23% penetrated if you do the simple math there. What's the engagement trend looking like? How do you see that changing? What have you learned from Toast IQ so far before we get into growth?

Yes. I think that -- so first of all, like the -- if you go back and look at what customers use Toast for, on the one hand, it's like, okay, they use it for the software platform, and they love our outer platform, but they also really value the human touch and the service. And in fact, like talk to the average resturanteur, they almost look at Toys, the outsourced CIO. They like to call our support line if the internet is down, which has nothing to test because they're like, we need help, and we help them. By the way, with anything and everything, including making changes to the back end the Toast. We're happy to help them because often when they're in the restaurant floor, they want to move on to their [indiscernible]. Now what Toast IQ does is it's an always on capability that has a natural language interface, right? So you can talk to it and say things like, "I need support on any aspect of the platform. That's why we're seeing 40% ticket volume now handled through you can go in and create custom data views. So if you're someone analyzing the data in a 5-location restaurant group, like in the past, you would go on and try to find some specific report, and then if you wanted to understand some very specific nuance perspective, you would go in and say, okay, like, can you export the data into Excel maybe and you read a custom view. And now you just go into to and ask questions like I talked to restaurant or a while back, and they said, 1 of the use cases was really valuable was I just sort of look at year-over-year sales in what was going on, but I wanted to exclude certain categories that were net new because that opened up this catering business and I didn't want to track that in a and they were able to generate that view right into Q versus how to do that exported. We have customers telling us that they've been able to talk to Toast IQ and optimize their labor schedule where they really overstaffed in some periods based upon demand. And so it's really moving from support to like to getting insight from Toast. We've seen customers now leverage it. We launched some basic workflows and automations. So things like think about like in like getting access to like the voids or discounts or fraud, something that ticks up -- that picks up. We want less. That's something you can set up now in Toast IQ as well as workflows. So a simple workflow might be at the end of the night, if someone forgets to clock out, make sure the manager is notified so that they adjust those hours correctly. And so -- and then the next phase of this is really this agentic capability that we've been talking about, where it's moving from -- so the simplist way to think about it is getting support to getting data views and access to insights to alerts and automations and then step Phase III this agentic layer on top of all of our software.

And do you think engagement? Are you encouraged about the adoption and the usage and the discovery and the awareness of IQ and then ultimately grow, I mean, how do you see that evening as a very short quick? I mean the engagement part is always so interesting to me.

Yes. I mean one good data point that I think is telling is I always look for -- which is our sales team, I always look for our customers telling other customers about the value of new product because it tells you a lot, seeing some of that signal when customers are engaging in buying Toast. We are seeing Toast IQ, we track all the sales calls as being a key reason why people are choosing Toast. And then also in our upsell motion, right? Our team is leading with Toast IQ as the foundational capability to bring all this product together. So seeing some really good early signal. And I think that the -- look, I will say -- if you look at our TAM expansion work that we've done in the past couple of years, that is a little bit further along, right? With those businesses are -- while they're still early in terms of the 10 penetration of the potential, have very meaningful revenue that they've scaled up to. And we're working on delivering the same with our AI products, but the early signal so far with our customers has been really really positive.

Okay. Good. I know it's early with Toast IQ and then grow. You talked about on the call how this -- some future features that you're looking to roll out. What could we expect that? What else can you share around sort of the road map here around that...

I've asked the team these tools as fast as possible. We see -- it's interesting with a lot of the engineering velocity work on PRs. One of the things we're really pushing the team on and the team is doing a great job is actually start to say, okay, are we delivering the road map faster. And so I think we -- you will see us increase the rate at which we launch new products and get input from customers and signal from customers to improve those products. And specifically in Toast IQ grow, the opportunity areas to step -- maybe I shared some of this well, I'll try to break it down even further. Step one is if you leverage all of our tools, let's make sure that they're optimized the best they can be. And it turns out that AI actually does a phenomenal job. Just looking at your restaurant's website and your copy and your online ordering images or your marketing copy and e-mails and text campaigns to increase conversion. We have seen that AI-generated campaigns are more effective at getting guests to come back in then human-generated campaigns because, again, there's leveraging data at scale, and they can see which campaigns are more effective versus not. Now what we haven't done and frankly, or really no one has done so far. It's one thing to have campaigns and messages or offers that are largely like driven by intuition An example would be, I've got a happy hour offer, right, come in earlier, come in later, we have some offers. It's another thing to actually use data to be a lot smarter about looking at yield. And so one of the pieces we're working on Toast IQ is to go look at all of the kitchen capacity, the capacity in the dawning room and figure out what ways in which we can leverage all the channels that are accessible to our marketing, whether it's e-mail, text, Google, we have a partnership with them, social media, our local app to generate the right messages and offers that are personalized to the guest that all to factor in restaurants availability and when they're busy when they're not. Because one of the things that we're trying to work on is the biggest opportunity really is how do you find ways to leverage times that are available to get more people in done. And that's a problem that historically has been very has been done just through intuition and versus through data. And that's where we see the potential of the test marketing agent. Just be a lot smarter. Think about like your airline or your hotel or any other industry, right? They're not using not like saying, "Oh, like maybe the week of Christmas, we can charge more of this data that is being used to actually optimize the pricing in the schedule." And I think there is opportunity to leverage offers and campaigns to do the same.

Good you speak with a lot of purpose and excitement I can feel it. So we're definitely going to keep asking you about an over time. So I appreciate you going through all that. Let's split back in. I know we can spend a lot of time on AI, but I have to ask you this, thinking about AI and deploying it internally. We've been looking across our coverage of software fintech looking at gross profit per employee and trying to measure productivity and to is a little below average across the spectrum. I know it's not perfect in terms of benchmarking because the world is a lot bigger than what I cover, but fair or foul. How do you look at productivity and measure where you can or could go with respect to AI efficiency?

Yes, I'll take that. So first of all, AI certainly presents a massive opportunity for us, both on the revenue -- across our P&L, both on revenue and on efficiency. And actually, as we deploy it further, the opportunity just increases Aman talked a lot about the product and our opportunity. As long as we continue to deliver value for our customers, the monetization will follow. We feel very confident about that. And then in terms of efficiency, we're already starting to see some of that efficiency internally. We talked about 40% of our tickets are handled with AI. Our product velocity, we're seeing already early signal that we can get products and features out to market to our customers faster. And so that's the principle behind how we operate is, how can we do more for our customers and can we get them value faster. And so very confident in our ability to drive that efficiency and in fact earlier, I talked about our 40% margin I actually think it's going to be higher given this opportunity across the P&L in terms of both our opportunity to monetize, but also to drive efficiency. And then in terms of the relative comparison, every business model is different. We're definitely paying attention to gross profit per FTE. And as we deploy more AI as we change how we work, definitely we see that increase over time. But just zooming out, when you think about the strength of our financials today, we've delivered a ton of leverage over the last several years, both on an adjusted EBITDA basis, but also on a GAAP basis, and we're incredibly proud about that. And we're going to continue to deploy that same level of discipline. And so AI complemented with the discipline that we've already been employing. We feel it just gives us this opportunity to continue to drive leverage and that 40%-plus margin is going to be higher as a result.

Yes. I just say like I just reinforce is really important for that line of Brad if you we look at like the business the past couple of years and you look at what we have done and actually delivered in terms of growth, both in top line growth as well as an expansion of margin, right? That's the land team really focused on scaling this business in a thoughtful disciplined way. And as you think about the future, there's one thing to take away like we do not need the same level of headcount growth to grow revenue in the new world. And that is why we have more conviction on the long-term margins being even stronger.

Yes. So we'll focus on the absolute margin. And look, you haven't sacrificed customer centricity either, right? So I think that's I don't want to take it off or granted that we're all just looking at an Excel spreadsheet here, but thanks for going through that. So let's do, just for the sake of time, another big priority, of course, expanding [indiscernible] serves. And you talked about it earlier, right? Every new team is growing AR faster and is higher SaaS ARPU than the core data in the same time frame. So maybe I'll just ask which specific piece in stacking the TAM, what surprised you, Aman, Elena? Anything to call out here and magnify and give us a little bit more on what you've learned?

Yes. I mean we are very encouraged by the products we have seen in these new teams, as you mentioned. And sometimes people ask me about which business is not working. The reality is across retail, international enterprise, 2, 3 years into these businesses, both the ARR growth and the absolute ARR and the ARPUs are stronger than when the core restaurant business was to 3 year then. And we're very early in terms of the market share that we have. And so that's what encourages me and the team to go after it, and we're getting meaningful scale in terms of the revenue we've achieved so far and the rate of which is growing. In enterprise, we just opened up drive-through. That's a big part of the TAM. We see tremendous opportunity there to leverage AI, especially voice AI there to make that product even more differentiated in international. We're very focused on really going after all the Tier 1 cities and the countries we're in and eventually will open up more countries, and we're seeing our value prop resonate. And then in retail, I'd say like there's one area that really surprised me the most of your question. And I think there's a lot of -- this is maternally even the company like what are we doing with restaurant company we've been doing for 10-plus years in retail. And the signal has been incredible. Like -- and I think the reason the signal has been in trebles because if you go talk to a lot of these -- in the categories we're in, we started with restaurant retail and the food and beverage retail. This is like grocery stores, convenience stores, liquor stores, early even with gas stations and even beyond now. In general merchandise and B2B retail. Most of them are using on-prem systems. They were built literally before cloud. That's what surprised me the most. And so when they see Toast with our modern platform and our full ecosystem, it's like the same feedback we got when we launched Toast in restaurants. And so I think that's the main thing that surprised me about the product market fit in retail. And I kind of further reinforce that like if we want to build these businesses that serve just brick-and-mortar retail more broadly. The answer is vertical. It's not horizontal. You've got to go deep in each vertical and that's what customers are looking for.

Okay. We're running out of time. I have to ask you about the consumer opportunity because I know Aman I've asked you about this so much because I feel like, right, the merchant platform is clear, and you have the opportunity around the consumer side is so interesting. So what's the latest on Toast Local. How has that app evolved? Are consumers using it as you expected? I know there's been some changes that you've made, but what's the vision? Has that changed?

We're building consumer DNA in the company. Historic the company grew up as [indiscernible], it's a new muscle for us. The positive thing is like over the past -- just even quarter-over-quarter, we have seen [indiscernible] more than doubled. We have seen rankings in the apparent good beverage increase materially. And I think the key reason there is we've got a clear focus in terms of really about two things: great value and a great experience when donning out. That's the primary focus of the app. So what do I mean by that? Signing up for loyalty programs across the tens of thousands of loyalty programs that are available across restaurants, is a lot work, right? Like getting a punch card or dealing with like something extra for each restaurant. One of the things that dose local does, you can track your loyalty without any in across all those restaurants earn points almost in the background, I think about like you swipe a card, you've got the same card on local, it just knows, or you can link it out for number, for example. And so the ability to get loyalty across all the restaurants, a lot of people really value. Similarly, great offers that only we can create because we have the data on the restaurants throughput and when they're busy and when they're not. So we're building out of an office platform to help restaurants automate that tire workflow of generating offices through actually part to growth to drive incremental demand. And then lastly, we just did a partnership with resi. And so now between resi and Toast Table, we've got a lot of density of restaurants, you can book tables at. And you can put a card on file when you book a table, and one of the things that this is very early, one of the things I'm really [indiscernible] on is, at the end of your meal instead of having to pay for your check, you can just -- the service shows up to that your carbon power and lead. And so the focus of the app is great value, great experience. We're seeing ligand early signal. Now look, restaurants are very local. So we don't need to go and do like a national campaign. We're trying to prove in a few cities in the market fit and retention of users and all the metrics that matter to being -- to have conviction to invest even more. And that's what we're working through now.

Okay. No, it's exciting. I think it's a fun topic to keep tracking on. Off the beat of the B2B piece, but I think it's important, just staying with the consumer, anything to share. We just heard from Visa, but anything to share on what you're seeing on consumer health spending structure?

Yes. Look, it's Q1 consumer spending was in line with our expectations and Q2 stable. So -- and that's sort of what we expect. We've studied restaurant cycles over time, and they've proven to be incredibly resilient. So not surprising to us that they're relatively stable. And what we've always said is our GPV per location the metric would look at is always within a narrow band. And that's really what we're seeing in Q1, Q2. So overall, resilience is what I would say, in stability. .

Okay. Maybe just sneak one more and then the closing question. Just thinking about capital priorities have status in every conversation. There was a -- it feels like a towards share repurchase or the authorization is there. Anything changed on the M&A that's worth sharing here on stage?

No, I think with M&A, like our capital allocation discipline is always very much sort of a playbook that we execute against. In terms of M&A, [indiscernible] high, right? We will look at -- we're always canvassing the market just as a normal course of business. And what we're really looking for is products or assets that would accelerate our road map, maybe get us to market faster. They have to be accretive, obviously, financially try. So there's a lot of factors that we look at, but the bar is really high because we have so much opportunity in our core, so much to invest in our new TAMs as well. And then in terms of repurchases, that's just us giving back to shareholders, delivering term shareholder value. So we'll continue to be opportunistic if the market dislocates but we feel really good about our overall discipline here.

Okay. Good. So let's close it out. We talked about a lot. I can definitely sense the enthusiasm around AI. So Aman, we've been forward a year from now, and hopefully, we get you back here on on stage? What's the one outcome or deliverable that you're most excited to lead the conversation with next year.

Some of it might be boring. It will be more of the same, delivering more location ads and more ARPU and all the basics that doesn't change. I think there is real potential in [indiscernible] revenue and that helping us accelerate the surface area of the products, to like you growing for the agents to come.

All right. We'll be watching out for that. Thank you for....

Thank you.

Thank you, everybody.

Thank you.