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

That's great. Well, we could probably spend a lot more time talking about IQ. But I wanted to maybe pivot over and talk about some of the new TAM and new verticals you mentioned upfront. Well, I think 1 of the highlights of this quarter was the record net adds and the disclosure that you expect the expansion TAMs, the ARR from these new verticals to roughly double this year to around $200 million. So with that, I was hoping you could do sort of a state of the union, 3 main verticals: retail, international and enterprise. Where do we of them stand? And how do you think about milestones for each of them as you look ahead? .

Yes. So the -- the retail international enterprise business, all of these businesses really 2, 3 years ago were very nascent, sub-$10 million ARR and it's exciting to see them grow in scale, just like our core business, we talked about how they'll double this year from $100 million to $200 million. And one of the things that we do in become these businesses to our core business a couple of years in because we've got that data. And what we see is these businesses really alter them are growing faster and have higher ARPUs than the court did, right, 2, 3 years in. And I think that's really encouraging. And I think it really speaks to really the product market fit that Toast has beyond U.S. SMB restaurants. Now each of these businesses, obviously, the constraints to growth and the customer reception and the feedback on the product road map is different. But fundamentally, the [indiscernible] product is on a sale platform that's consistent, right, the hardware, the networking, the software, the base is consistent. And that's why all of our customers, whether it's a hotel or enterprise chain or grocery store or restaurant, all using a shared multi-tenant platform. It's not like we've split up the code base across all these different customers. In our international business, the opportunity that we've seen as we launched in the U.K. and Canada and Australia and Ireland is we've got to focus on the Tier 1 cities where you've got really the restaurant GPV and the GDP per capita. And so as we think about the road map, we think we have a massive opportunity to open up the TAM by going into the Tier 1 cities globally, and you'll see us open up more cities over time. And that's not just for SMB restaurants, right? Initially, it will be focused on SMB restaurants, but already in the U.K., for example, we've got grocery. We see an enterprise opportunity internationally. And then, of course, longer term, we see an often retail as well more broadly. In our enterprise business, we continue to see in the non-drive-thru TAM. So for context, we launched our drive-thru product about a year ago, 4 months ago. We continue to take share at a strong clip. We've got probably the strongest pipeline we've had an issue the company and people see the value of our platform in terms of table turns, all the things we've seen in SMB, the digital platform. And then it drives fruit early, but we're seeing -- again, we're starting to see a not such a big part of the TAM as the product continues to get built out, we're seeing ourselves in more opportunities because of the Toast brands we've got. And so Enterprise is really -- I'd say the blocker long term of the product investments to support the enterprise business is everything from building up store security compliance to guest products, up market, some of the AI products to support some of the use cases that are a little bit different than enterprise. So it's really getting a product more than go to market. And then in retail, and it's interesting when we first launched in retail, there's a lot of skeptics who said your restaurant company, what right do you have to win in retail. It turns out that business, in many ways, is the best business we've launched in the new businesses. The ARPU is the closest to our core business. We're investing heavily in the go-to-market capacity in that business right now. And it's because we're seeing really good signal on the ground for customers. We started off in restaurant retail, these hybrid concepts and they're launched in grocery and convenience stores, in liquor stores and have expanded from there as well. And we're focused on like the vertical depth that allowed us to succeed in restaurants. And that's been really, really positive. In fact, one of the things that, I think, a little bit misunderstood about Toast is just how varied our core U.S. SMB TAM is. Like it's allowed us to succeed in restaurants was not that we built this generic horizontal platform, we were comfortable supporting all of the different subverticals that I talked about earlier and went deep on the thousand little things and the features, and we've been -- we like the complexity to support all the future this TAM needed, whether it's retrofit full-serve bars, nightclubs, non-English-speaking. I was amazed of how many features, by the way, this data coming from e-commerce before at a company called Endeka. And -- and it turns out like in all these new teams, it's the same place as we go into, whether it's Force entertainment, or we go into gross convenience stores, test the gas stations, it's the vertical depth of the platform that's necessary. And that has really played to our strength. And so we've been able to lean in there and that's a big part what's allowing us to succeed in these new verticals.

So I mean maybe you just addressed it, but I'd love to hear just how you think about the philosophy around evaluating new TAM. So I think this quarter, you talked about fuel gas stations as kind of a spleen retail, sports and entertainment and on the enterprise side. So how do you think about entering these new sub cans and verticals? And then how do you ensure that the vertical focus that's always been the differentiator for Toast is preserved as the company looks wider.

So we've got a top-down view. Every year we're doing it. I mean, we refresh our strategy and a 3-year plan. And we've got a top-down view of where we want to go, which countries with cities which verticals, enterprise subverticals, with target accounts. Of course, we want to -- number one is market leadership in our core business. So we evaluate all of this. And then we have also bottomed up, get a lot of signal on customers. And so for example, the fuel work was simply turns out $0.08 of the convenience stores, and I was surprised by us that are attached to gas issues. And half of that market is actually SMB. But I thought gas station initially a [indiscernible], is not actually half the market, it's actually SMB. And that really speaks to our strength. And so we did the work to integrate it the fuel controller. And I think our Board was pretty concerned when we brought in the fuel controller and a gas pump in the boardroom 1 time, but any out that capability. And we're seeing really good early pipeline there because that market is entirely legacy, they're using systems from often on their businesses. And then fourth entertainment, similarly, the push there was actually a lot of overlap from some of the SMB TAM. The product gap that existed for us, of course, entertainment, very similar to actually what food hall needed in terms of multiple locations being often shared by a shared kitchen, and the complexity of handing not just in-store, but also pickup in delivery as part of that operation and managing throughput. It was things like managing the reporting that is needed in that concept in terms of aggregating all that data across one concept where some configure shared in some isn't. And again, this goes back to the thousand little things and our comfort in building out the platform to support all these different subverticals. And again, as I said earlier, this is very much in our DNA because it's how we got here. If you look at the 15-year journey we've been on in our core SMB business, the reason we have gotten to where we are is not because we've got the best else. We've got a great sales team, but it's also because we've got a great service motion and a great product that actually meets the needs of customers. And so it's very natural for us to go after these new subverticals. Now 1 guiding principle that we use internally as we think about where we go is we look for parts of the TAM where there is typically higher GPV per location because that's correlated with a complex business, a complex product needs, a higher truck sales and service motion, which we've built out over the decades in the past decade. And that's really where we see the biggest opportunity. We're not as interested in going after the part of and which are low GPV down market.

Makes sense. Maybe on that note, Elena, one of the kind of ongoing debates around the new TAM is always the impact on unit economics and maybe even more so the impact on some of the headline KPIs that investors focus on. So as these new verticals drive a larger share of the incremental location growth, how do you expect that to impact some of these KPIs?

Yes, it's a fair question. So as we've talked about, our priority in this moment is really to prioritize market share gains because we believe that will -- that's a key determinant of our long-term shareholder value. And so we're investing behind these TAMs that Aman just talked about. But you're right, as they scale, we're going to see a different complexion to our customer profile. But keep in mind, the core business is still a pretty big part of our business. But the important thing is, I'll give you -- actually, let me give you a little texture -- when we think about the core business around the same time as these new TAMs, each of our new TAMs already are at that same profile or even higher in terms of ARPU. And so that gives us a lot of confidence. If you think about where the core started in a couple of years and call it 60 and ARPU. And today, we're almost double that -- actually more than double that. And so we have this opportunity to really follow that same playbook with these new TAMs as we build out more capabilities and drive more innovation. So that's a picture I think is really helpful for us to study and understand. And then when you think about the payback, that's really the most important thing we're focused on in each of these new towns, and we know the playbook, right? We've done it with the core business. We're going to do it with each of these new TAMs. And for each of them, it's a little bit different, right? Aman just talked about in international, we're really focused on Tier 1 cities, and we're honing our go-to-market motion. In retail, we're adding rep capacity. So we know we have extended payback periods right now, but we also know what the payback -- we know what steady state looks like in terms of rep capacity. So all said, we feel really confident in our ability to drive that payback to what we think is healthy in a few years, sub-20 months. And the other thing Aman said earlier is we're really drafting off the core platform in both R&D and then also in the company drafting off the G&A investment. So we're not spinning up another platform. We're not adding more investment. We're really drafting off the core business. So I feel really confident in our ability to manage those paybacks, which is, to us, what gives us confidence that these will be very profitable as this is over the long term.

Makes sense. And coming into the quarter, memory costs and hardware were really top of mind for investors. I was wondering if you could provide an update in terms of what you're seeing today, the work that you've done over the last couple of quarters to mitigate some of those impacts. And I think, in particular, some of the commentary you had this past quarter about emerging on the other side of the cycle in a structurally better position from a margin perspective.

Yes. Now really proud of -- we have a hardware ops team, and this is what they've been living and breathing every day. And our priority, once the memory shortage emerged, was let's just make sure that we are never in a position where hardware constraints limit our growth. And so we've been able to secure inventory for this year and next year, we feel really good about that. But then also, we took this opportunity to really go deep on everything on the entire end-to-end supply chain, whether it was the bill of materials or product costs, et cetera. And in doing so, we identified certain areas where we could have even longer-term structural change to our P&L. And certainly, from where we started to where we are, we thought expenses were going to be much higher. They're lower than we anticipated in 2026, but also for 2027. And to your point, structurally, we believe we have an opportunity to optimize the supply chain based on segments, et cetera, that will give us this opportunity to drive down costs and just have improved margins. Some of the specific things we've done, we've -- in certain cases, we can use hardware with lower memory chip cost. We can use older generations of hardware in certain cases for a certain set of customers. And then opportunistically, we're in the spot market buying at favorable prices, and we're always looking at that and really surgical about those buys. But all in all, I feel really good not only about our ability to manage it, but also our hardware margins structurally when we get out of this memory crisis, I'm very confident they'll be better than where they were before we started this.

Makes sense. Some of the other commentary you provided this quarter was the decision to invest against some of the longer-term initiatives. You had the tariff refund that I think was reinvested. Can you talk about the philosophy around growth-related investments? What are the signals that you're seeing that you're responding to? And then how it all kind of bakes into the near-term operating leverage profile?

Yes, absolutely. So the way we often think about Aman just talked about, every year, we go through a strategy session we look out several years. And when we think about that, we're thinking about positioning the company to drive durable growth for many years to come and compounding our top line growth. And so in that context, we look at all the opportunities in front of us, and we're not opportunity constrained, like you heard Aman talk a lot about our ideas. And as we go deeper into the core, as we go deeper into these new TAMs, we uncover even more opportunities. So we're excited about that. And so to that end, what we think about is we want to drive durable growth, but at the same time, expand margins gradually, and that's what we're executing to in '26, and you'll see us follow that same cadence in the coming years. And what gives us confidence to invest, right? We're actively choosing to invest right now is the progress we're seeing already in these new TAMs. And we talked about getting over $200 million in ARR and to them and also the payback that I just talked about. We feel really good about our ability to drive that payback. So when you put that all together, we're investing behind driving this durable growth over the long term. And then overall, feeling really good about as we get into these new TAMs, we're seeing even more opportunity.

So when you think about more of the long-term margin profile, you had some optimistic commentary on both the margin profile of the core and what you think you can do in some of these new verticals. How is just the view of the margin potential of the business evolved over time?

Yes. It's -- at the highest level, we're operating in a really strong position of financial strength, like that's the core. If you think about our core business, operating that rule of 60 essentially, growing over 20% margins in our core business, 40% and growing. And we continue to drive efficiency up and down the P&L. That is really important to us. And that strength in that core business is enabling and fueling the growth in these new TAMs that we've talked about as well. So I feel really good about that. And then when you consider the AI opportunity and just how we're thinking about it across the company, reimagining how we work, that presents even more operating leverage for us over the long term. So zooming out when I think about the margin profile of this business, 40% plus, there's no question. I think there's a real opportunity to get there and maybe even expand that margin over the long term.

Got it. Well, I think that basically takes us to time. But thank you both for being here. Really enjoy the conversation.

Thank you, everybody.

Thank you.