Toast, Inc. Class A

Good afternoon. My name is Hannah and I will be your conference operator today. At this time, I would like to welcome everyone to the Toast second quarter 2022 earnings 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. I will now turn the call over to Michael Seno, Vice President of Investor Relations and Treasury. You may begin your conference.

Thank you, Hannah. Welcome to TOS Earnings Conference Call for the second quarter, ended June 30th, 2022. On today's call, our CEO, Chris Camperotto, and CFO, Elena Gomez, will open with prepared remarks. They will then be joined by our COO, Amon 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 Act. All statements, other than statements of historical facts or 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 third quarter and full year 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 cautionary language in today's press release and our SEC filings for a 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 financial measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release and SEC filings for detailed reconciliations 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 a replay of this call, including the accompanying investor presentation, will be available on our investor relations website at investors.toastapp.com. With that, let me turn the call over to Chris.

Thank you, Michael, and good afternoon, everyone. Toast continues to build on our operational momentum in Q2. hosting strong, efficient growth, exceeding both our revenue and profit expectations, and delivering another record quarter of new location additions. This momentum stems from the consistent execution of our core growth strategy, driving location growth, deepening our ability to serve all segments of the restaurant industry, and delivering product innovation for restaurants. On that front, last month we announced the acquisition of Sling, to further expand our team management suite and help restaurants deepen their relationship with employees. We're excited to welcome the Sling team to the Toast family. While we have tremendous momentum across our business, we're also cognizant of the current macroeconomic backdrop and what it means for our customers. Restaurants are operating in a challenging environment, facing heightened food cost inflation, labor constraints, higher wages, and uncertainty in this broader economy. But the restaurant industry has faced challenges many times before and proven incredibly resilient over time. Restaurants adapted and bounced back from unprecedented conditions during COVID and have successfully navigated prior economic downturns. It's a testament to how much people enjoy the restaurant experience. Even in the most challenging times, people love eating out and restaurants are often at the center of our communities. Turning to our results for the quarter, revenue increased 58% year over year to $675 million in the second quarter, and ARR was up 59% to $787 million. GPV remained strong, growing 62% year over year to $23 billion in Q2. We also continue to drive strong location growth. After adding over 5,000 net new restaurant locations in a quarter for the first time in Q1, we now exceeded 6,000 net new restaurant locations in Q2. Just incredible growth that is being driven by our strong bookings pipeline, as well as continued low churn. As a result of our consistent execution and first half performance, we are raising our full year revenue guidance by 5% at the midpoint of the range, which implies 55% year-over-year growth. Driving toward profitability is a key priority for our team, and the progress is clear in the significant adjusted EBITDA margin improvements in Q2. With the increased focus on efficiency and rigorous prioritization of our investment opportunities, we expect to sustain these improvements and we're raising our adjusted EBITDA outlook for 2022 by $35 million at the midpoint to reflect that. Elena will provide more detail on our outlook shortly. With the restaurant industry in the midst of a generational shift to cloud-based digital solutions, we continue to seamlessly execute our proven go-to-market strategy to capitalize on that opportunity. As we increase density in more established territories, we benefit from the flywheel effect that drives referrals and inbound leads, driving higher and more efficient productivity. At the same time, we're gaining traction in less developed markets and are on a path to replicate that flywheel effect as we gain share. In addition to the strong growth in new locations, customer churn remains low. Our industry-leading platform adds tremendous value for our customers, helping them grow and creating a passionate and loyal customer base. The success of the toast restaurants we support lie at the heart of our business model. We grow as our customers grow. In Q2, we continue to see success with all formats and types of restaurants. I'll highlight a few examples. In Enterprise, we expanded our relationship with Jamba Juice by 40 locations, bringing our partnership to more than 700 total locations. As part of the expanded relationship, Jamba is piloting the addition of the Toast Kiosk product to streamline checkout and help combat heightened labor costs. Jamba Juice showcases how Toast is designed to increase throughput in high-volume environments like QSR and Fast Casual, and how some of our largest customers continue to adopt more of our platform to increase efficiency and drive growth. Chip Cookies selected Toast in Q2 to support its growing 13-location business. From making its back of house more efficient with our payroll, extra chef, and multi-location management products, to using our point of sale and delivery services to more efficiently serve customers, Chip Cookies saw the value of Toast as an all-in-one solution that could help them grow while managing their business more efficiently. By leveraging more than 10 of our modules, Chip Cookies is a great example of how the benefits to customers increase as they leverage more of our integrated platform. While Chip highlights how new customers are using more of our platform, we also have a significant opportunity to help customers find more ways to leverage the full extent of our platform to create value for their businesses. Our e-commerce offering, Toast Shop, provides customers an efficient self-service option to seamlessly add products, and has been a consistent source of incremental SaaS ARPU. Last year, we also started a growth sales team solely focused on selling to our existing customers to complement ToeShop. We've continued to invest in and evolve that team, and the second quarter marked the first time the entire growth team was selling our full product set. This enables each of our reps to efficiently partner with customers on ways to utilize the full breadth of our platform. A good example of the benefit our growth team can bring customers is May's Mexican Grill, a fast casual restaurant group. May's initially inquired about adding our loyalty products across its locations. Our growth team worked with the customer to highlight the benefits of our full platform which led to them adopting several of our guest products, as well as payroll and extra chefs. This showcases the power of having a team focused on upsell and reps equipped to help customers take advantage of the full power of our integrated platform. While we are pleased with the initial results, we're still early on in this area. We see a big opportunity to drive broader adoption of our platform among existing customers. One of Toast's key differentiators is our focus on restaurants and our ability to deeply serve different customer segments, regardless of size or format. Earlier this year, we announced Toast for Hotel Restaurants, a powerful new solution designed to meet the unique needs of hotel restaurant operators by seamlessly integrating leading hotel property management systems with the Toast platform. As a result of that new capability, in Q2, we signed a regional hotel chain for its full-service restaurant concept across over 10 locations. This hotel chain will use our handheld point-of-sale for table-side order and pay, our kitchen display systems to expedite orders, and our multi-location management to efficiently manage menus. This is evidence of the opportunity we have to go much deeper in the hotel restaurant segment with our new offering. Shipping to product. As we continue to enable our customers to deeply connect with all of their stakeholders, I want to focus on the critical employee touch point. In the midst of an extremely challenging labor market, winning the hearts and minds of employees is more important than ever. Last month, we announced the acquisition of Sling, a leading employee scheduling and communications solution. Integrating scheduling and communications into our platform alongside our other team management products, including payroll, tips manager, and pay card, will help restaurants deepen their relationship with employees, more efficiently manage labor, and create a differentiated employee experience. Employee communications and scheduling is a high-engagement product, and it's also an important new touchpoint for Toast with the more than 11 million restaurant workers in the U.S. Similar to our prior acquisitions, our relationship with Sling started as a partnership, which launched early last year. The strong customer signal informed our view on how the product can enhance our entire team management suite. After incorporating Sling into our sales motion, our win rate was higher when customers evaluated Sling and payroll together compared to when only quoting payroll. This offers early proof of how Sling complements our existing team management suite and can enhance the overall value proposition to our customers. With Sling as part of the Toast family, we plan to fully integrate the offering into our platform to provide customers a seamless experience. The acquisition also allows us to accelerate product development in alignment with the roadmap for our team management suite and continue to build features specifically targeted for our restaurant customers and their employees. Sling makes our team management suite more robust and is another example of how with our cloud-based platform, purpose-built to meet the specific needs of restaurants, no partner is better positioned to help the industry adapt and thrive than Toast. While restaurant industry sales have fully bounced back from COVID and are above 2019 levels, as I noted earlier, restaurants are facing challenges. Labor and food are the two biggest expenses for restaurants, and the current environment has amplified the pressure on both. Inflation is at a multi-decade high, and the restaurant workforce is still about 6% below pre-pandemic levels, creating staffing constraints. But our platform is built to help restaurants navigate these challenges. We provide restaurants with an array of products to automate processes and increase efficiency across their workflows so they can focus on what matters the most, the food, their guests, and their employees. Extra Chef not only automates manual invoice processing and inventory management, it also provides restaurant managers with real-time data on food cost trends to inform decisions on menu pricing and sourcing to help preserve profitability. With the help of Extra Chef, Underbelly Hospitality Group in Texas was able to reduce costs by 3% on average across their locations, saving over $330,000 per year. This is an invaluable tool with food costs rising at historic levels, and we are seeing adoption of Extra Chef increase as restaurants seek to optimize margins. Products like our Toast Go handhelds, kiosks, and mobile order and pay allows savvy operators to better manage labor expenses and employees to handle more orders per hour, leading to higher tips while also providing a better guest experience. More QSR and fast casual restaurants are rolling out these digital touchpoints for guests to overcome staffing shortages while meeting evolving customer preferences. And Toast is well positioned to lead that transition. For example, New England Lobster Market Meadery, a fast casual restaurant, is using our mobile order and pay solution for the majority of its on-premise transactions. In addition to requiring less staff, tips have more than doubled and are automatically split amongst employees, helping the restaurant significantly reduce turnover without incremental wage pressure. In summary, The Toast platform is more relevant and valuable than ever to our customers as they navigate these changing conditions. As customers use more of our platform, they can drive efficiency across their business to mitigate costs while continuing to offer a great guest experience. Simply put, our goal is to give restaurants all the tools they need to adapt and thrive. Restaurants deserve a trusted partner who shares their vision for a future where the restaurants of the entire industry thrive and their businesses flourish. A partner who helps restaurants spend more time delighting customers and less time confused by technology. A partner who will advocate for the industry and toast as that partner. In closing, I want to thank our employees for a great first half of the year. I'm proud of how we're executing and our team's tireless effort to add value for our customers. Now I'll turn the call over to Elena.