Toast, Inc. Class A

Good afternoon. My name is Sam and I will be your conference operator today. At this time, I would like to welcome everyone to the test earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. I'll now turn the call over to Michael Seno, Vice President of Investor Relations and Treasury. You may begin your conference.

Thank you, Sam. Welcome to Toast's earnings conference call for the first quarter ended March 31st, 2022. On today's call, our CEO, Chris Comparato, and CFO, Elena Gomez, will open with prepared remarks. They will then be joined by our COO, Aman Narang, for our Q&A session. 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 the securities and the exchange app. All statements other than statements of historical facts 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 second quarter and full year of 2022. 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 questionnaire 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 discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results, please refer to our earnings release and SEC filings for detailed reconciliation of these non-GAAP measures to the most comparable GAAP measures. Unless otherwise stated, all references on this call to cost of revenue, gross profit and gross margin, selling and marketing expense, research and development expense, and general and administrative expense are on a non-GAAP basis. Finally, both the press releases and the replay of this call, including the accompanying investor presentation, will be available on our investor relations website at investors.toasttab.com. With that, let me turn the call over to Chris.

Thank you, Michael, and good afternoon, everyone. Toast delivered a strong first quarter, coming in well ahead of expectations across the board. We added a record number of net new locations to our platform as we continue to lead the digitization of the 800 billion restaurant industry and penetrate our 55 billion market opportunity. Our performance is a function of continued execution on our three core growth drivers, increasing the number of restaurant locations on our platform, delivering product innovations so restaurants use more of our platform to drive success with all of their stakeholders and deepening our ability to serve all segments of the market. Despite being one of the largest industries in the world, restaurants have been underserved by technology with one of the lowest levels of digitization of any sector. Running a restaurant is also an incredibly complex and competitive business. The pandemic, a tight labor market, supply chain constraints, and inflation have only magnified the challenges the stakes have never been higher for restaurant owners to embrace technology to help them improve operational efficiency and increase sales so they can thrive in this dynamic new world over the next several years we expect every restaurant to operate on a unified digital platform and just like we've seen in other industries Restaurants that embrace a digital platform perform better. As the restaurant industry goes through this wholesale digital transformation, we expect restaurant spend on technology to increase, closing the gap with other industries. Amid this secular shift to digital in the cloud, Toast is executing on a generational opportunity to become the trusted partner restaurants need and to serve as the industry's technology backbone. We are leading restaurants into a new era of hospitality. With our laser focus on restaurants and a proven track record of innovation, we've built the best-in-class platform that offers restaurants everything they need to win, to delight their guests, attract and retain employees, manage supplier relationships, and ultimately do what they love and thrive. We understand the unique needs of restaurants of any size or concept in a way that no other platform can, and we are adding more capabilities to help serve every segment of the market and expand our reach. Now turning to our results for the quarter. Revenue increased 90% year over year to $535 million in the first quarter, and ARR increased 66% year over year to $637 million. This was driven by an acceleration in subscription revenue growth from the addition of new locations and continued customer adoption of our growing portfolio of products, as well as strong growth in GPV. Customers using four or more core modules beyond point of sale and payments reach 60% in Q1, contributing to the robust 103% year-over-year growth in subscription revenue. GPV on our platform increased 98% year-over-year to $18 billion in Q1, and for the first time ever, We exceeded 5,000 net new locations in a quarter. We ended Q1 with approximately 62,000 live locations on our platform, up nearly 45% year over year. And we're still just scratching the surface of this massive long-term opportunity. Even as our ARR has more than tripled over the past two years, it still represents only about 1% of our 55 billion market opportunity in the US. On the back of our strong start to the year, we increased our full-year revenue guidance by 6% at the midpoint of the range, which implies 48% year-over-year growth. We also improved our adjusted EBITDA outlook as we focus on driving efficient growth. I want to add additional context on our investment levels this year. Our Q1 results are further evidence of the momentum in our business and the reason we have conviction to invest to capture the massive market opportunity in front of us. At the same time, the current environment calls for heightened discipline, and we're actively evaluating our spend to make sure we scale in a sustainable, efficient manner. That means identifying efficiency opportunities throughout our business and directing our investments only to areas that drive growth and have a proven return profile. We've shown in the past we can grow efficiently and deliver profits. With a proven go-to-market approach that gains leverage with scale, healthy unit economics, and disciplined cost management, we're confident we will drive sustained strong growth and healthy long-term profitability. Our updated guidance implies a margin improvement in the second half of the year, and we expect to continue on that trajectory moving forward. Now I want to turn to how we're executing on our core growth drivers. As the restaurant industry undergoes the secular shift to digital and the cloud, driving location growth is a key priority, and we're leaning into this in a number of ways to build on our momentum. We continue to benefit from our proven scalable go-to-market formula. The restaurant industry is a uniquely local business, and our model feeds on that. As we've seen in our most established markets, As our penetration increases and more customers in a market experience our superior product offering, the number of referrals and inbound leads accelerate, creating a flywheel effect that drives strong and efficient growth. We're investing in less developed markets to build that same flywheel. As we build this muscle broadly across more markets, we expect it to continue to drive efficient location growth. Not only are we rapidly adding locations, we are seeing that our new customers are leveraging more of our products from the onset, a strong signal of the demand for our broader platform. Software ARPU for locations booked in Q1 approximately doubled from just two years ago. We've seen strong uptake for our guest modules as we've significantly enhanced our products to help customers cater to the evolving guest needs over the past two years. Our payroll and team management offering is also building momentum, and we continue to see a significant opportunity to attach more products to our existing customer base, an important indication of our long-term ARPU growth potential. Let me share with you a few examples of the strong demand we are seeing across restaurant segments. This quarter, we expanded our relationship with Union Square Hospitality Group. which has created some of New York's most beloved restaurants, cafes, and bars. They're expanding Toast to 16 total locations, including Gramercy Tavern, Union Square Cafe, The Modern, and their daily provisions concepts. In addition to our Toast Go handheld point of sale and kitchen operations, USHG will manage their multiple concepts and menu configurations using our multi-location menu management. They're also planning on using Toast for hotel restaurants to manage their Marta location, allowing them to seamlessly charge the hotel rooms during the payment process. This quarter, we also expanded our Nothing Bunk Cakes, a national bakery chain. Nothing Bunk Cakes expanded its relationship with Toast, purchasing our product for 70 new locations in Q1, which would increase our partnership to over 500 locations in the next 12 months. They are using Toast to drive revenue and help build a seamless purchase process for their guests. Tacombi, a growing fast casual Mexican food chain, expanded with Toast in Q1. They were live with Toast in 13 locations using our Toast Go, our Toast Flex, and multi-location management products. And they signed a contract to add several more locations in the next 12 months using all of these products. Additionally, Tacoma is adding our kitchen display system in their current locations. In addition to our broad and growing platform, we also continue to grow our extensive partner ecosystem, which now includes more than 180 partners across large national food and beverage suppliers, technology integration partners, and local partners. This quarter, we extended our reseller partnership with U.S. Foods. a leading food service distributor that works with approximately 250,000 restaurants and food service operators. We focused on continuing to strengthen our partner network to give our customers seamless access to every product and service they need, further enhancing the value our platform provides. Shifting to product innovation, I talk to many of our customers every quarter, and a consistent theme I hear is they didn't get into the restaurant industry because they love technology, but they do realize that the industry is going through a digital transformation and they need a partner who they can grow with so they can do what they love. That's why we consider Toast an extension of R&D for the restaurant industry. We give restaurants all the tools they need to run their business, integrated point of sale and payments, mobile ordering and delivery, marketing and loyalty, team management, frictionless access to capital, and a growing array of integrated services to meet the evolving needs of our customers. We've built an array of products that serve restaurant owners at their core, but also create a better experience for all stakeholders in the restaurant ecosystem, guests, employees, and suppliers. There tends to be a flywheel between happier employees leading to happier restaurant guests and both contributing to more successful, better-run restaurants. We're continuing to invest in products to further differentiate our platform by enhancing and deepening the touchpoints between restaurants and each stakeholder. And with our integrated platform, as restaurants add more of our products, it strengthens the flywheel, creating powerful network effects for our customers. In supplier management, we're making great progress with our Extra Chef product, which provides accounts payable automation and inventory management. With restaurants facing supply chain challenges and inflation, we're seeing just how important it is to help our customers manage profitability by easily comparing the cost of a menu item versus what they're charging. And longer term, we have opportunities to expand the services we offer restaurants in this area and further optimize and automate their supplier management. Our payroll and team management products speed up employee onboarding, simplify payroll, and ensure employees are paid on time. With restaurants still facing labor challenges, if you're not providing a great employee experience and paying your employees quickly, it will be more difficult for you to hire and retain great talent, which impacts the guest experience and sales. We believe both selling payroll into our existing customer base and continuing to innovate in this space to help restaurants offer employees even more services that can differentiate them in this tough labor market represent meaningful growth opportunities going forward. As we continue to build scale and drive growth in our core segments, another key growth strategy is to position toast to increase penetration in all restaurant segments and expand to new markets with our laser focus on serving the restaurant industry we're uniquely able to adapt our platform to meet the specific needs of different types of restaurants one example from this quarter is targeted for quick service restaurants we've built an offering that better suits the needs of these restaurants and helps them get results even quicker as i mentioned we also announced toast for hotel restaurants a new solution designed to meet the unique needs of hotel restaurant operators. Toast now integrates with several hotel management software providers, allowing us to better serve this segment. And we're focused on continuing to adapt our product and packaging to serve the specific needs of each type of restaurant in order to drive deeper penetration across segments. In addition, as we discussed last quarter, we've seeded an initial investment in international this year. We believe our best-in-class product offering and go-to-market approach translates well to other markets, which will enable us to tap into a broader TAM and become another driver, growth driver, longer term. Before closing, I wanted to thank our customers and employees. The restaurant industry remains resilient even amid the many macro challenges across the globe. and we are incredibly proud to be able to partner with our customers as they navigate these challenges. And thank you to our great employees for helping get Toast off to a great start in 2022 and build on our terrific operating momentum. We're still very early in our journey, and we're confident that by continuing to relentlessly execute on our strategy, we'll create significant value for our customers and shareholders over the long term. Finally, before I pass the call over to Elena to go through our financials, I want to congratulate her on her one-year anniversary at Toast. What an incredible year it's been. Elena, I'm excited to partner with you on this journey ahead. And now, Elena, I'll turn it over to you.