Toast, Inc. Class A

Good afternoon, everyone, and welcome to TOAST's fourth quarter 2021 earnings conference call. I'm Edward Parker, investor relations. Today, our CEO, Chris Comparato, and CFO, Elena Gomez, will join us and discuss our fourth quarter employee results. After their prepared remarks, we'll 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 first quarter and full year 2022. Forward-looking statements reflect our views only as of today and expect 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 SEC filings for discussion of the risks and uncertainty that could cause actual results to differ materially from our expectations. During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our press release, which lays out the detailed reconciliation of GAAP to non-GAAP measures, including some new adjustments we made this quarter. Both the press releases and a replay of this call, including the accompanying investor presentation, will be available on our investor relations website. With that, I'd like to turn the call over to Chris.

Thanks, Edward, and thank you all for taking the time to join us today. Toast delivered a strong fourth quarter in fiscal year 2021, as restaurants' need for an all-in-one platform to help them thrive has only become more important. Before I jump into our results for the fourth quarter and fiscal year, I want to provide you with an overview of our business. First, let me remind you about our big ambitions. We have an amazing opportunity to empower the restaurant community around the world to delight their guests, do what they love, and thrive. That is our mission. Toast provides restaurants with an all-in-one digital 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. We serve every stakeholder, from the guest to the GM or owner, to the wait staff, to the chef, suppliers, and the entire ecosystem. This past year was transformational for Toast as we executed on our plan and became a publicly traded company. Our initial public offering in September was a big milestone for our company and our customer community, and the momentum continued through the end of the year, resulting in a very strong Q4. Our community grew rapidly as we added more restaurants to our platform and as the percentage of live customers on our platform using four or more modules continued to increase. This is a result of our strong focus on execution. Let me share a few financial highlights. During the quarter, revenue increased 111% year over year to $512 million. and annualized recurring run rate or ARR increased 74% year over year to $568 million. This was driven by continued strength in gross payment volume or GPV, the addition of new locations to our platform as we capture market share and continued customer adoption of our growing portfolio of products. The industry continues to rebound from the impact of COVID-19 and GPV on our platform increased to 17 billion in Q4, 125% increase year over year. We ended the quarter with approximately 57,000 live locations on our platform, up from approximately 40,000 locations in Q4 of 2020, representing a 41% increase year over year. As our customer community grew, we also saw accelerated adoption of our platform as the percentage of customers using four or more core modules beyond point of sale and payments increased from 48% in Q4 of 2020 to 59% in Q4 of 2021. As a result, our software as a service, ARPU, increased year over year by 30% from Q4 of 2020. As customers rely on Toast to run their businesses, our net retention continues to be strong and was 135% for 2021, as Elena will discuss in a few minutes. Now I'd like to take a moment and provide some context on the industry as a whole. Throughout 2021, the operating environment remains challenging for restaurant operators as they face the dual challenges of Shifting Workforce Dynamics and a Sustained Labor Shortage Alongside Rising Input Prices Due to Supply Chain Disruption and Accompanying Inflation. As you can imagine, it is challenging to run a restaurant in this environment, and we are committed now more than ever to being the true partner to the restaurant industry, just as we've been since the onset of the pandemic and for the last 10 years. With this backdrop, what we have learned in our history serving the industry is that restaurant operators are incredibly resilient. Even before COVID-19, the industry was transforming. Dining itself was changing from mobile order and pay at the table to delivery and online ordering. The pandemic accelerated these changes. When looking at the performance of restaurants on the Toast platform, we have been impressed by their ability to take full advantage of the platform's capabilities to reinvent their business and navigate the impact of COVID-19. Later this month, we will publish the first edition of our quarterly restaurant trends report, which gives visibility into the overall state of the restaurant industry through sales data from restaurants on the Toast platform. Let me share a few highlights today. As the industry rebounded from the impact of COVID-19 in 2021, restaurant sales as measured by same store GMV or gross merchandise volume on the Toast platform increased by 41% year over year from 2020 to 2021. Overall, same store sales of Toast customers continued to exceed pre-COVID levels as evidenced by GMV per location, increasing nearly 6% from Q4 2019 to Q4 2021. These are just a few strong signs that the restaurant industry, while continually battle tested, is resilient. We will continue to lobby Congress to replenish the Restaurant Revitalization Fund, but we are also glad to see toast adoption contributing to restaurant success and helping restaurants navigate through this difficult time. To better support our customers in the restaurant industry at large as they reimagine their businesses, we hosted thousands of restaurant operators for a virtual edition of Spark, a restaurant innovation event where we previewed the newest toast technology. During the course of the day, we unveiled an entire suite of new products designed to help restaurants take control of their finances, navigate the labor shortage, regain control of third-party delivery, and better manage their P&Ls. The response from our customer community was overwhelmingly positive. So let me share two examples. As many of you know, there is substantial demand for faster access to capital in the restaurant industry. As both their point of sale and payments processor for restaurants, we have unprecedented visibility into the health of their business. Nearly two years ago, we introduced Toast Capital, which allows restaurants to borrow money and pay that money back as a percentage of daily sales. Restaurants absolutely love this product. as they pay back more on busy days and less on slow days. At Spark, we introduced a new longer duration loan product and the demand for this new product has been robust. During calendar year 2021, we originated over $100 million in total Toast Capital loans. A second highlight from SPARC was the introduction of an enhanced suite of products designed to help restaurants maintain control of takeout and delivery. With Orders Hub, Toast has helped more than 20,000 restaurants manage both takeout and delivery orders from first-party toast ordering channels and third-party providers. Toast is the first restaurant technology platform to deliver direct integrations with the five largest third-party delivery brands, DoorDash, Caviar, Grubhub, Postmates, and Uber Eats. And our Performance Center provides unique visibility into the profitability of each channel. When used together, this new suite of products enables our customer community to truly take control of their takeout and delivery business. We're excited about how our customers are using these new products announced at Spark and how they further our position as the lead-in all-in-one platform for restaurants. Throughout the quarter, we experienced robust demand in the market for the Toast platform. In 2021, we added around 17,000 new restaurant locations on the platform. Throughout Q4, we saw incredible demand across all segments, from single location SMB restaurants to regional mid-market and large enterprise brands. This quarter, we signed a new deal with Cinelli Concepts, the holding company for multiple national restaurants and retail brands, including Which Which Superior Sandwiches, Pachugo Gelato Cafe, Burguesa Tenders and Tots, Supernova, and Earth Burger. Cinelli Concepts is looking to improve efficiency by moving its business to a digital platform. It will be rolling out toast to 250 locations nationwide for point of sale, kitchen display systems and kiosks. We also signed a new deal with Cone Restaurant Group, which is rolling out toast for front of house with toast go in order and pay at the table and back of house with our kitchen display system. Cone Restaurant Group will use Toast at 35 locations, both in California and Hawaii, and will continue its efforts in converting its entire technology stack to a best-in-class cloud-based platform. Pavement Coffeehouse, an independent and locally owned coffeehouse with eight shops in Boston and Cambridge, purchased Toast POS and payroll in Q4. Toast is replacing multiple vendors for loyalty, payroll, gift cards, and online ordering. By consolidating on Toast, customers like Pavement Coffeehouse can see lower total costs and experience the benefits of an integrated platform, common UI, shared data and a single partner relationship to manage. In addition to the exciting growth across our customer community, we also welcomed a new board member to our board of directors in Q4. Hilary Kaplow McAdams joined the Toast board of directors on November 30th. If you're not familiar with Hilary, she has spent more than three decades in operating and leadership roles devoted to accelerating high growth software companies through sales, business development, customer success, and more. Currently, she is a venture partner with New Enterprise Associates, NEA, a venture capital firm. Prior to NEA, Hilary served as the president of New Relic, president of global sales at Salesforce, and also held executive roles at Intuit, Inc. and Oracle Corporation. We are really excited about having Hilary on our board. Welcome to the team, Hilary. Before I wrap up and pass the call to Elena, I thought it would also be helpful to tee up our primary focus areas that we look forward to updating you on in 2022. The first is our focus on being the trusted platform of choice for the restaurant industry. There are approximately 860,000 restaurant locations across the US, and we see an enormous opportunity ahead within this large addressable market. As evidenced by our growth in Q4, there is tremendous demand for the Toast platform as restaurant operators navigate the new normal. Toast is the all-in-one technology platform built exclusively for restaurants by people who understand their specific needs. Second, our industry has been through a massive transition during the past two years. to help our customer community navigate this transition. We will continue to invest in their success for a commitment to customer success and support. Third, given our momentum in mid-market and enterprise, we are confident in our ability to serve restaurants of all types and sizes. I shared earlier just a few examples of mid-market and enterprise wins this past quarter, and we will continue to invest and our capability here. Finally, we have a substantial opportunity to provide our platform to international locations. As discussed earlier, we estimate our total addressable market at least doubles the U.S. opportunity if we look globally. In late 2021, we started our initial investment to seed our international expansion. With that, I will close by saying I am honored and humbled to be part of supporting the restaurant industry through this past year. I am also equally excited about 2022. Restaurants are resilient. They make up the social fabric of our community, and we believe our commitment to aligning our success with restaurant success will lead to a stronger and exciting future ahead. I'd like to thank our customers, our partners and our toast employees for their hard work and support in 2021. The financial results we're sharing today wouldn't be possible without your confidence in our platform, commitment to the industry and unwavering support for our vision. Now I'd like to hand it over to our CFO, Elena Gomez.

Thanks, Chris. And I just want to echo the thank you to our employees and to our customers. 2021 has been an unforgettable year, and I appreciate your commitment and dedication to our company. So I'm going to remind you as I get into results that we will refer to GAAP and non-GAAP measures, refer to today's press release for reconciliation of GAAP to non-GAAP financial performance, and additional disclosures regarding these measures. As Chris mentioned, we had a strong Q4 to exit 2021, and to cap off the year, we became the public company. With continued momentum in Q4, we outperformed all key metrics, which is a testament to the strong execution of our collective team. We are proud of the new locations we added to our platform through 2021, which reflect the value of our all-in-one digital platform. In Q4, we generated revenue of $512 million, up 111% year-over-year, and $1.705 million for the full year 2021. 107% increase year over year. We closed the year at $568 million in ARR, up 74% year over year. We continue to believe ARR is our North Star metric. As Chris said, we ended the year with approximately 57,000 live locations on our platform compared to 40,000 in Q4 2020, representing a 41% year over year growth. In addition, we're also proud to report that our net retention rate, also referred to as NRR, which we reported in our S-1 to be greater than 110% for the last five years, was 135% in 2021. NRR comprises both SAS and FinTech Solutions revenue, both of which had a retention rate above 110%. SAS NRR was strong to the expansion of locations from our existing customers, as well as customers adding more products. From a FinTech perspective, we have shared with you that in 2021, we've benefited from higher debit and credit mix, as well as higher Cardinal present volume. In 2022, we anticipate these trends will have largely stabilized, and as such, we expect NRR going forward to trend closer to 110% as we shared in the S-1. Our subscription services revenue grew 86% year-over-year to $54 million in the fourth quarter, driven by an increase in customers adopting more of our SaaS products. As of the end of 2021, 59% of our test locations use four or more core products on top of our integrated POS and payment solution as compared to 48% a year ago. Our financial technology solutions revenue grew 117% year-over-year to $421 million in the fourth quarter, driven by GPV of $17 billion, which had an increase of 124% year-over-year. GPV is driven by transactions processed on our platform. Since early 2021, annualized GPV per processing location continues to remain strong at an average of 1.3 million per location. As a reminder, our GPV per location dropped by 45% at the onset of COVID, but has steadily returned to above pre-COVID levels. As we have stated before, there's quarterly seasonality with our financial technology solutions revenue, as restaurants on average generally perform better in the second and third quarters. Given that, we continue to anticipate seasonal fluctuations in the annualized GPV per location from quarter to quarter. However, on an annualized basis, our GPV per location is consistent and remains durable. For the fourth quarter, non-GAAP gross profit, which excludes stock-based compensation and depreciation and amortization expense, that was a mouthful, came in at $82 million, up 54% year-over-year. In addition to the growth in our customer base, this growth was driven by higher revenue per location, which in turn has been driven by continued growth in average revenue per unit, known as ARPU, for both SaaS and financial technology solutions. We are pleased with our ARPU performance as a driver to non-GAAP gross profit, and we believe that such performance can be sustainable. Drilling down into our ARPU performance, we've seen our SaaS ARPU increase as a result of continued adoption of our platform by both new and existing customers. We continue to invest in our technology and remain highly focused on driving innovation across our product portfolio. Our FinTech Solutions ARPU is up more than 50% from Q4 2019 or pre-COVID levels, primarily as a result of GPV pre-location and card not present volume. As a reminder, two factors that influence FinTech Solutions ARPU are the mix of card not present volume and the debit credit mix. Consumers continue to utilize digital channels, and as such, we believe the Cardinal present volumes will remain elevated. The debit credit mix has returned to pre-COVID levels. Turning to hardware cost of revenue, as shared in last earnings call, our freight costs remain elevated due to supply chain dynamics. We continue to believe they will remain elevated through the near term. Despite increased hardware costs, however, we remain confident in our ability to deliver hardware for our customers. Before I turn to operating expenses, I 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. We are proud to share that our payback period for the full year 2021 was approximately 12 months. Our healthy unit economics and strong payback periods continue to make us feel confident in our ability to invest for durable growth. Now let's turn to our operating expenses, which I will review on a non-GAAP basis. In Q4, we continued to invest in sales and marketing and research and development to capture our TAM and build out our platform. Additionally, general and administrative costs increased as a result of operating as a public company. This includes costs from the adoption of the new credit losses accounting standard in Q4 and increased investment to support the growth of our business. As a result of these investments, adjusted EBITDA for the fourth quarter was negative 45 million for Q4 and negative 42 million for the full year 2021. Now let me turn to guidance. For the first quarter, we expect revenue to be in the range of 469 million to 499 million, which represents 72% year-over-year growth at the midpoint. We expect adjusted EBITDA to be in the range of negative 65 million to negative 55 million. For the full year 2022, we expect revenue to be in the range of 2.349 million to 2.409 million, which represents 40% year-over-year growth at the midpoint, and adjusted EBITDA to be in the range of negative 240 million to negative 200 million. As you can see, we are deliberately investing to drive long-term growth. The stakes have never been higher for restaurants. The restaurant industry is going through massive change driven by undeniable trends in the world across labor, supply chain, and guest adoption of technology. Our investments in 2022 are reflective of this opportunity we have ahead of us. With only approximately 7% market share here in the United States, we continue to believe we are in the early innings of this opportunity. As such, we will continue to invest in research and development as well as in sales and marketing to cost-effectively capture our market share. Our primary focus is on being the trusted platform of choice for the restaurant industry. Our business is performing well, and there is enormous demand for the Toast platform as restaurants need to streamline their operations, increase revenue, and retain great employees. Our ambition continues to be to serve restaurants all around the world. And with that, we will be making foundational investments in 2022 to drive growth internationally. We look forward to updating you on this multi-year journey in future quarters. In closing, our strong 2021 performance demonstrates our success in capturing market share. We are built to serve a large and growing addressable market, and we've shown we can execute at scale with Healthy Unit Economics. We continue to believe we are uniquely positioned to drive durable growth for ourselves and for restaurants using our platform. Now I'd like to turn the call back to the moderator for our Q&A session.