Toast, Inc. Class A

Good afternoon, everyone, and welcome to TOAST's third quarter 2021 earnings conference call. I'm Alice Lopato, Vice President of Investor Relations. Today, our CEO, Chris Camperotto, and CFO, Elena Gomez, will join us and discuss our third quarter results. After their prepared remarks, we will take questions. Before we start, I'd like to draw your attention to the safe harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of Section 27A, of the Securities Exchange Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical fact are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, and business outlook, including our financial guidance for the fourth quarter and full year 2021. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our Form 10-Q, which will be filed with the SEC this afternoon for a discussion of the risks and uncertainties that may cause actual results to differ materially from expectations. During this call, we may present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for GAAP results. The reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. Both the press release and a replay of this call, including the accompanying investor presentation, will be available on our investor relations website. With that, I would like to turn it over to Chris.

Thanks, Alice. Welcome, everyone, to our first earnings call as a public company. I am Chris Camperado, CEO of Toast. I'm excited to be with you today to share my thoughts on our company, our opportunity, and our Q3 performance. Given that it's our very first earnings call, I'd like to start by zooming out a bit and providing you an overview of our business, the restaurant industry, and our opportunity. Toast provides restaurants with an all-in-one technology platform that combines point of sale, front of house, back of house, and guest facing technology integrated with financial technology and payments all built with the restaurant's success in mind. Toast works for all restaurants regardless of size, concept, or cuisine, from independent cafes to enterprise brands. At Toast, our mission is to empower the restaurant community to delight their guests, do what they love, and thrive. When we say restaurant community, We mean every stakeholder, from the guest, to the GM or owner, to the wait staff, to the chef, to the suppliers, and the entire ecosystem. Together, we believe we can delight guests with fast and seamless service, make employees happier with higher wages, tips, and a better work experience, and help restaurants be more successful with increased sales, deeper customer relationships, and lower employee turnover. Our success is tied to our customers' success, and working with them to be better together underpins everything that we do. At no time was that commitment tested more than during the onset of the COVID-19 pandemic. We responded by accelerating certain product releases, which empowered restaurants to provide a contactless dining experience, fulfill online takeout and delivery orders and communicate with their customers as we all navigated constantly changing public health, business and consumer pressures. In addition, We supported grassroots campaigns and lobbied Congress directly on behalf of restaurants. We are proud to see that these efforts have resulted in overall same-store sales of Toast customers exceeding pre-COVID levels and continuing to improve. Market research suggests that there are approximately 860,000 restaurants in the US alone. Collectively, the industry is one of the largest employers, providing jobs to more than 11 million people and generating nearly $700 billion of sales each year, around 3% of the US GDP. Yet it has one of the lowest levels of tech spend as a percentage of sales of any sector. If you've worked in a restaurant, you know it's a complex business with a lot of moving parts. They operate with low margins, high employee turnover, highly perishable products, and complex regulations. Yet many restaurants continue to run on legacy systems, pen and paper, or disconnected horizontal and point solutions, each with their own costs and barriers to scalability. So we believe there is a massive opportunity for us to support this industry as it grows and evolves and as its tech spend closes the gap with that of other sectors. We're conservatively estimating our current serviceable addressable market, or SAM, at approximately $15 billion. We see an approximately $55 billion total addressable market, or TAM, in the US for restaurant technology spend by 2024. This TAM at least doubles if we look globally. As we continue to grow and add more products to our portfolio, we believe we have the right strategy to go after this massive opportunity. This strategy starts with our relentless focus on product innovation. Our powerful platform integrates software with our payment processing system, supporting over 15 products. Because our platform is all-in-one, covering every aspect of a restaurant's operation, Toast restaurants are empowered to use that data to unlock new insights and further optimize their businesses, which has led to higher sales and margins, more seamless operations, and lower employee turnover. Our customers provide us tremendous insight into our product roadmap. A major example of this is our recent acquisition of Extra Chef in June. We heard from customers how challenging it has been to manage their supply chain, especially during the last year and a half. In a survey, over half of our customer community told us that high operating costs and food costs were a top challenge. By simply snapping photos of supplier invoices, coding and categorizing, our customers will have access to digitized line item details that are accurate and available to their team from anywhere and can unlock insights into purchasing behavior, supplier optimization, financial performance, and ultimately savings. Our unique go-to-market strategy serves as a competitive differentiator for us. Knowing that the restaurant market is hyper-local, we've invested in a sales force and a customer success team of localized, field-based industry experts trusted by these local communities. Our employees live in these communities and dine in these restaurants night in and night out and are true partners to our customers. When we create raving fans, they spread the word throughout a region. This is why approximately two-thirds of our new locations come from inbound channels and one-fifth from customer or partner referrals. This creates further efficiency in our go-to-market motion and our sales productivity typically increases as our positive reputation spreads within a local restaurant community. Our ongoing expansion is supported by our customer success team. who brings vast technical and industry knowledge to the restaurants we work with, quickly accessible through a single point of contact, 24 hours a day, seven days a week, 365 days a year. Critical to avoiding downtime in an industry that is always on and does so much of their business on weekends and holidays. We also have a robust ecosystem of over 150 suppliers, tech, and local partners. These relationships enable us to deliver more value to customers while providing significant visibility into customer adoption. This data can lead to valuable insights into selectively pursuing M&A opportunities, which was the case in our acquisition of Stratex for payroll management and ExtraChef for invoice and accounts payable solutions. Now I'd like to go into the details for the quarter. In Q3, we delivered strong results across the board. We grew revenue 105% year over year to 486 million and annual recurring run rate or ARR growth 77% year over year to 544 million. This was driven by strong gross payment volume or GPV growth of 123% year over year, landing at 16.5 billion and strong customer adoption of our products. As of Q3, 56% of our toast locations used four or more products on top of our integrated POS and payment solution compared to 44% a year ago. We continue to see a consistent trend of guests returning to restaurants, as well as off-premise trends such as online ordering, delivery and takeout sustain, which demonstrates that these consumer behaviors are here to stay for the long term. Let me now share with you some customer wins in the quarter. We signed a new deal with Fat Tuesday, a national chain known for its frozen drinks. Fat Tuesday is rolling out toast at 40 locations nationwide and will build its entire technology stack on toast, starting with our point of sale, order and pay at the table, kitchen display screens, and multi-location management products. Organic juice bar Clean Juice has franchise locations in 28 states and is making ordering, payments, and delivery more seamless with Toast. In Q3, Clean Juice expanded with Toast, renewing its agreement for 121 locations and adding a commitment to bring Toast to 50 net new locations. Clean Juice uses Toast Point of Sale, Toast Go devices, Toast Flex terminals, Toast Kitchen display systems, and kiosks, along with our gift card software, multi-channel location management, and API ecosystem integrations. We also expanded our relationship with Eggs Up Grill, a rapidly growing breakfast, brunch, and lunch brand. Eggs Up Grill currently uses Toast Point of Sale, Toast Flexes, Toast Go devices, and Toast printers. This quarter, they signed an agreement to expand Toast to an additional 30 locations. With new revenue channels developed during the pandemic, Eggs Up Grill saw a 13% increase in 2021 sales compared to 2019 and 60% ahead of 2020. Next week on November 16th, we'll host Spark, our inaugural restaurant innovation event. At Spark, we will share major new product releases and provide a sneak peek into our innovation roadmap. The name for our event is a reference to the spark that lights a stove or an oven to make the magic of a restaurant happen. It also alludes to the spark of imagination that leads to innovation and transformative change. This all-virtual two-hour event will consist of keynotes, product updates, and guest speakers, including world-renowned chef, restaurateur, humanitarian, and Toast customer, Jose Andres. You'll hear about how we're moving the restaurant industry forward with innovative new products that empower the restaurant, the guests, and employees. If you'd like more information on attending the event, please contact our investor relations team at ir.toasttab.com or visit our website for more information and to sign up. As part of our continued efforts to support the restaurant community, we recently signed a public letter from the Independent Restaurant Coalition advocating for replenishment of the Restaurant Revitalization Fund. We've also joined the Pledge 1% movement to donate our capital to fund social impact programs through our philanthropic group, Toast.org. Before I turn the call over to Elena to walk you through the financials, I wanted to thank our employees, our customers, our partners, and our shareholders for their support in helping us achieve a major milestone in becoming a public company. Restaurants are resilient. and they make up the social fabric of our community and we believe our commitment to aligning our success with the success of the restaurant community will lead to a stronger and exciting future ahead. Now I'd like to hand it over to our CFO, Elena Gomez.

Thanks, Chris. Before I begin, I want to take a moment to recognize the entire Toast team on their efforts to become a public company and a special call out to my own Toast finance team. It's because of the collective efforts of this team that we are where we are today. I also want to thank our existing and new shareholders. We are excited to be on this journey with you as a public company. While we are proud of this milestone, we are just getting started. As Chris mentioned, we believe we have a total addressable market of $55 billion in the US, and we estimate the global TAM to be twice as large. As a leader in one of the world's largest industries, we've built a unique business model to address this opportunity and support rapid growth at scale. Before I go into the results of the quarter, let me share with you why we have a powerful business model. First, we have proven we can achieve high growth at scale. Second, we have an integrated software and payments model. Thus, we benefit from not only the predictability of SaaS, but also from the increase in transaction volumes as our customers grow. Third, our all-in-one platform combined with our boots on the ground go-to-market strategy keeps our customers happy and drives strong retention. Finally, as our customers continue to expand with us, we've been able to maintain strong unit economics. Now let me walk you through how we generate revenue. We generate revenue in four ways, subscription services, financial technology solutions, hardware, and professional services. We consider subscription services and financial technology solutions as our recurring revenue streams. Subscription services revenue is generated from our SaaS products, such as digital ordering, delivery, and team management, to name a few. Financial technology solutions revenue is generated primarily from facilitating payment transactions and also includes fees earned for loans we offer through our Toast Capital program. We recognize our financial technology solutions revenue on a gross basis. We consider our other two revenue streams, hardware and professional services revenue, as one time and effectively part of our customer acquisition costs. We price them competitively to minimize barriers to entry. Since the majority of our revenue comes from financial technology solutions, we believe annual recurring run rate, or ARR, which excludes transaction-based costs, is the operational metric that best reflects the scale and growth of our business. You can find the full definition of ARR in our earnings press release and our Form 10-Q for the third quarter. The key drivers of ARR include growth of restaurant locations on our platform, the adoption of our SaaS products, and the total GPV processed. Before I turn to the results for the quarter, please note again, we will refer to both GAAP and non-GAAP financial measures. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. I'll now turn to the results for the third quarter. We delivered strong performance in the first quarter as a public company. In Q3, we continue to see growth from both new locations as well as an increase in GPV on our platform as the restaurant industry continues to recover. Additionally, customers continued to adopt more Toast products. As a result, in Q3, we delivered revenue of $486 million up 105% year-over-year and ARR of $544 million up 77% year-over-year. Our subscription services grew 67% year-over-year to $46 million in the third quarter, driven by the increase in customers adopting more of our SaaS products. In Q3, 56% of our toast locations used four or more products on top of integrated POS and payment solution as compared to 44% a year ago. Our financial technology solutions revenue grew 115% year-over-year to $404 million in the third quarter, driven by our strong GPV of $16.5 billion in Q3, up 123% year-over-year. We anticipate our financial technology solutions revenue to normalize as GPV per location returns to normal patterns. For the third quarter, non-GAAP gross profit, which excludes stock-based compensation expense, came in at $89 million, up 75% year-over-year, driven by growth in our customer base and higher revenue per location, driven by an increase in SAS ARPU and elevated GPV. Our freight costs are elevated in Q3 due to supply chain dynamics. While they're not as high as anticipated, we do believe they will remain elevated through the near term. Despite increased costs, we continue to be very confident in our ability to deliver hardware for our customers. Now let's turn to our operating expenses, which I will review on an adjusted non-GAAP basis, which excludes stock-based compensation expense for each line item. Before I do, I do want to remind you that we use customer acquisition costs and payback metrics to measure the performance of our business and guide our investment decisions. With this in mind, in Q3, we continue to invest in sales and marketing and research and development to capture our TAM and build out our platform. General and administrative expenses were elevated due to our transition to a public company and rebuilding the foundation to scale our business. Adjusted EBITDA for the third quarter was negative 10 million compared to roughly break even a year ago. In Q3, we had free cash flow negative of 21 million compared to roughly break even a year ago and positive 53 million in Q2. Our Q2 free cash flow result was primarily impacted by a one-time benefit related to interchange billing terms. Now let me turn to guidance. For the fourth quarter, we expect revenue to be in the range of $465 to $495 million, which represents 98% growth at the midpoint. We expect adjusted EBITDA to be in the range of negative 50 to negative 40 million. For the full year, 2021, we expect revenue to be in the range of $1.655 million to $1.685 million, which represents 103% year-over-year growth at the midpoint, and adjusted EBITDA to be in the range of $-46 million to $-36 million. While I'm not providing 2022 guidance, I want to remind you that financial technology solutions revenue is benefiting from elevated GPV per location, which we anticipate will normalize as we exit 2021 into 2022. In closing, our strong Q3 performance demonstrates our success in continuing to execute and to capture market share as the industry continues rapid digital transformation. Built to serve a large and growing addressable market, we've shown we can execute at scale with healthy unit economics. With this foundation in place, we believe we are uniquely positioned to drive durable growth for ourselves and for the restaurants using our platform. Now I'd like to turn the call back over to the moderator for our Q&A session.