Toast, Inc. Class A

Good afternoon. My name is Donyell, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toast 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 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, press the pound key. Thank you. I'll now turn the call over to Michael Senno, Vice President of Investor Relations and Strategic Finance. You may begin your conference. Thanks, Danielle.

Welcome to Toast's earnings conference call for the third quarter ended September 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, Aman Nareng, for our Q&A sessions. 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 the 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 rates of certain metrics, estimated timeline for future profitability, future profit and margin outlook, and our financial guidance for the fourth 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 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, the accompanying investor presentation, 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.toasttab.com. With that, let me turn the call over to Chris.

Thank you, Michael, and good afternoon, everyone. Before I jump in, I'm going to apologize upfront for any coughing outbursts or sips of hot tea as I'm recovering from a nasty cold. So let's jump in. This past quarter marked the first anniversary of Toast IPO. I want to thank all of our employees for their focus and dedication, as well as our partners, customers, and investors. We look forward to our ongoing partnership. And while we've accomplished a lot over the past year, we're even more excited about the opportunity in the years to come. Toast delivered a strong Q3, delivering continued efficient top line growth and improved profitability. In addition to topping our revenue and EBITDA expectations, we surpassed $100 billion in annualized GPV for the first time. These results are a testament to the consistent execution of our core strategy. driving location growth, deepening our ability to serve all segments of the restaurant industry, and delivering product innovation. On the product front, last month we hosted Spark, our annual innovation event, where we announced a number of new product updates to help restaurants grow and expand their business and overcome key challenges. A key highlight is Toast Invoicing, a new product to help restaurants seamlessly manage catering and wholesale orders alongside their in-store takeout and delivery businesses, a great example of our continued product innovation and how we're leveraging new products to better serve different restaurant types. While the fundamentals in our business remain strong, we continue to closely monitor the uncertain macroeconomic environment that both we and our customers are operating in. Toast customers continue to see solid consumer demand, and the restaurant industry remains healthy. We're focused on partnering with both new and existing customers to ensure they are able to adapt and thrive in this dynamic environment. In addition, we are equally prepared to adapt our business to any macro changes in the restaurant industry. In the third quarter, we grew revenue 55% year over year to $752 million, and ARR was up 60% to $868 million. GPV remains healthy, increasing 53% year-over-year in Q3. We also continue to drive strong location growth, adding approximately 5,500 net new locations and ending the quarter with approximately 74,000 total locations. Sustaining over 40% growth in total locations even as our scale grows is indicative of our powerful go-to-market strategy and industry-leading platform. As a result of this consistent execution, we are raising our full-year revenue guidance by 3% at the midpoint of the range, which implies 59% year-over-year growth. We're also increasing our adjusted EBITDA guidance by nearly 30 million at the midpoint. The continued margin improvement in Q3 is further evidence of our focus on cost discipline and efficiency efforts. and our progress towards profitability. We remain committed to balancing investments in our most important areas to go after the massive market opportunity in front of us with disciplined cost management and healthy unit economics to sustain that efficient growth as we scale. Our ability to scale our proven go-to-market strategy gives us confidence that our unit economics will continue to improve over time. We've discussed the flywheel effect that drives increasing referrals and inbounds as we increase penetration in a local market. That results in higher and more efficient productivity. The higher productivity leads to more ARR and better profit contribution as these markets scale. Over the past year, the percentage of total SMB restaurant locations in markets where we have over 20% penetration has increased by more than five times. And we continue to gain share in these markets, proof that we still have significant room to keep increasing share, even in our more established markets. The large majority of our markets are still below that 20% penetration, and we're investing to replicate that flywheel effect in more markets. When you combine the significant untapped SMB opportunity with our nascent share in the enterprise and international segments, We still have a long runway of growth ahead and we're well positioned to capitalize on the digital transformation in the restaurant industry. Demand for toast across the full spectrum of the restaurant types remains strong and our new customers continue to take advantage of more products across our platform to operate more efficiently and grow their business. I'll highlight a few examples from the past quarter. Antoine's, One of New Orleans' storied French Quarter restaurants selected Toast as its technology partner. Known for its classic fine dining experience, Antoine's wanted a new partner who could modernize its back of house while also preserving its special front of house experience. In addition to our robust all-in-one platform, Antoine's was attracted to our payroll and Toast Tips manager solution to help eliminate the inefficiency of making multiple back office trips each night to aggregate tips with their legacy POS. They're also using 13 of Toast's kitchen display systems in their expansive kitchen, along with several of our guest modules. Antoine came to us via a strong referral from another New Orleans Toast customer, a great example of the relationships our local go-to-market team builds and how that flywheel effect works. as we gain traction in these local markets. Walk-Ons is excited to leverage Toast across its growing footprint of nearly 100 existing and planned locations across the South and Midwest. Co-owned by NFL star Drew Brees and named the number one best sports bar in America by ESPN and the number one sports bar franchise two years running by Entrepreneur, Walk-Ons has started to roll out Toast at some of their locations. Seeking to enhance their technology, WACONS is adopting our POS for its ease of use, our TOSCO handhelds to help navigate seas of sports fans, and our API integrations to provide superior service through all of our ordering channels. Tacomaya is a fast casual QSR with six existing and four planned locations throughout Chicago and Illinois. we'll be implementing 10 Toast modules across its footprint, including Extra Chef for better visibility into costs, multi-location management for easier menu updating, and online ordering and mobile order and pay, among others, to provide an efficient, seamless customer experience. Every location also includes a patio, which Taco Maya will equip servers with our Toast Go handhelds to service. It's a great use case for our Toast Go's which have proven to benefit staff productivity. Taco Maya is just one example of the momentum we're building in the QSR segment. Earlier this year, we announced Toast for QSR. And in Q3, QSR has represented nearly half of our bookings, its highest level in recent years. One important benefit of our vertical focus on the restaurant industry is the ability to leverage the Toast platform to develop offerings tailored to the needs of specific restaurant types. enabling us to deepen our penetration across restaurant segments. With restaurants operating in an increasingly dynamic environment, it's critical that we constantly speak to and stay connected with our customers. We recently conducted our annual Voice of the Restaurant Industry survey to gain insights into the major challenges facing restaurants and how tech can help them thrive. Similar to themes we've seen this year, labor shortages and inflation are the biggest challenges facing our customers. One in three restaurants said they've had a difficult time hiring in 2022, and almost 40% started tracking the prices of key ingredients. The survey also highlighted employee scheduling as one of our customers' biggest technology pain points, reinforcing the importance of adding Sling to our team management product suite. In addition, our customers are also diversifying their businesses to meet the evolving needs of guests and to develop new revenue streams. On average, restaurants surveyed employ seven different service models, such as on-premise, takeout, delivery, catering, wholesale, curbside, and drive-through. Our recent product innovations highlight how Toast is uniquely positioned to help restaurants navigate these challenges and take advantage of new opportunities to transform and grow. At Spark, we announced Toast Invoicing, which enables restaurants to efficiently manage wholesale and catering orders along with their core restaurant business in one integrated system. Our customers can save time on managing paperwork and multiple systems while getting paid faster and seamlessly capitalizing on the opportunity to grow their business with more service models. Toast invoicing showcases our ability to deeply serve hybrid locations and provide a seamless billing and payment solution for both B2B and B2C. We estimate over 70% of restaurants already offer catering in addition to their on-premise business. And catering is one of the top three focus areas for restaurant owners and operators as we head into 2023. A great example of how customers are leveraging our new invoicing offering is Founders Table, which operates two QSR concepts, Dos Toros Taqueria and Chopped Creative Salad, and is a great strategic partner of ours. They went live with invoicing in June at 19 of their Dos Toros locations, in order to streamline their operations and payments for catering into one platform after previously using a separate point solution. In addition to the efficiency of managing this through a single integrated platform, over the past three months, Dos Toros monthly invoicing usage with Toast more than doubled. And in September alone, invoicing drove a 17% uplift in their payments volume on toast. At Spark, we also feature our Extra Chef price tracker. As I mentioned earlier, this is a major pain point for restaurants due to the inflationary environment. Our customers can access the price tracker directly from our newly designed Extra Chef dashboard to stay on top of fluctuating ingredient prices and costs. Restaurants like Plaza Pizza are watching price fluctuations week to week And in response to these insights, have engaged in negotiations with food distributors. Plaza Pizza was able to successfully reduce food costs by nearly 10%. Other customers are monitoring key price changes to make strategic decisions about their menus, their recipes, and pricing. Our ability to help customers navigate this important issue is evident in how quickly the attach rate for Extra Chef has ramped. After only adding it to our sales motion in Q1 this year, the percentage of locations that went live in Q3 using ExtraChef is already in the mid-teens, and we continue to see a significant opportunity to reach customers and further develop our product suite to help restaurants manage their suppliers. Finally, I'd like to highlight Toast Capital, where our data on restaurant performance enables us to help offer restaurants seamless, low-friction access to capital. The majority of applicants receive an approval decision in one business day, and on average, funds are dispersed to customers just two days after signing their loan agreement. That differentiated customer experience is evident in customer retention. Among the 2021 customer cohort, Over 70% have taken a second loan, and in some cases, multiple additional loans. In Q3, we expanded our offering, adding a 360-day loan with larger available loan sizes to give customers more choice and meet a wider range of use cases. The strong customer value proposition of Toast Capital and the different offerings we've added over the past year continue to drive healthy growth. With SMB businesses underserved by the banking community and an estimated two-thirds of all SMB businesses having financial needs each year, we have a clear opportunity to leverage our expanding portfolio of banking products to both add significant value for our customers and drive strong growth going forward. In summary, Toast delivered strong execution and continued momentum in Q3, balancing targeted investments to drive product innovation with focus on healthy unit economics and disciplined cost management. Amid uncertain times, we are more committed than ever to our mission, to empower the restaurant community to delight guests, do what they love, and thrive. We believe that serving as the restaurant industry's trusted technology partner and giving restaurants the tools they need to adapt and succeed will benefit our customers while helping Toast deliver durable, efficient growth for many years to come. Now I'll turn the call over to Elena.