Toast, Inc. Class A

Good afternoon. My name is Emily and I'll 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'd like to ask a question during this time, simply press start followed by the number one on your telephone keypad. If you would like to withdraw your question, please press start followed by two. 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.

Thank you, Emily. Welcome to Toast's earnings conference call for the fourth quarter and year-ended December 31st, 2022. On today's call, our CEO, Chris Camperato, and CFO, Elena Gomez, will open with prepared remarks. They will then be joined by our COO, Aman Narang, 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 statements of historical facts, are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, future profit and margin outlook, expected growth and business outlook, including our financial guidance for the first quarter and full year 2023. Overlooking 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 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, sales and marketing expense, research and development expense, and general and administrative expense are on a non-GAAP basis. Finally, both the press release and a replay of this call, including the accompanying investor presentation, will be available on our investor relations website at investors.toastgab.com. With that, let me turn the call over to Chris.

Thank you, Michael, and thank you, everyone, for joining us this morning. Toast finished 2022. with another quarter marked by strong top line growth of over 50%, further margin improvement, and continued product innovation. Our solid results throughout the year are a great testament to the quality of our battle-tested team and consistent execution on our strategy, driving location growth, more deeply serving all segments of the restaurant industry, and pushing the industry forward through bold product innovation. The complexity of running a restaurant is only increasing. This was particularly evident over the last year with restaurants facing inflation, supply chain challenges, and labor constraints, while continuing to adapt as guests demand a more seamless experience. With that backdrop, the need for restaurants to leverage technology to improve efficiency, grow sales, and quickly adapt is more critical than ever. and the value of Toast's all-in-one digital platform continues to grow. We added approximately 23,000 net new locations to our platform in 2022, and the percentage of locations attaching six or more SaaS modules increased by nearly 10 points, evidence of strong customer demand. There are countless examples of how Toast is helping our customers deliver better top and bottom line results, including Alpine Inn, A tavern in California unlocked a 76% increase in revenue since adding Toast Mobile Order and Pay, driving higher check sizes, a better guest experience, and helping manage the labor shortage. Another example is Silver Diner, which rolled out Toast to 21 locations. Since implementing our platform, servers using Toast Go handhelds are able to cover one to two more tables than before, decreasing table turn times by an average of three to five minutes, providing tangible efficiency benefits. These examples also show how our platform feeds a virtuous cycle that creates a better experience for all stakeholders in the restaurant ecosystem. Enabling staff to be more efficient and effective leads to happier employees, which translates to a better experience for guests who leave higher tips, and reinforce the restaurant as a great place to work for employees. This dynamic leads to more successful, better run restaurants. And as restaurants use more of our integrated platform, it strengthens the cycle, creating powerful network effects for our customers. Restaurants operate in a competitive, rapidly evolving industry with thin profit margins, magnifying the importance of technology. And with the value of our industry-leading platform can offer, we see a generational opportunity to serve as the industry's technology backbone. We are still in the early stages of our potential market opportunity. Even after our growth over the last few years, less than 10% of U.S. restaurant locations are on the Toast platform, and our Q4 ARR only represents about 2% of the $55 billion market opportunity. leaving a long runway of growth ahead as we continue to execute. Turning to our Q4 results, on a year-over-year basis, total revenue grew 50% to $769 million. ARR increased 59% to $901 million, and GPV was up 49% to $25.5 billion. Sustaining our top-line momentum while delivering consistent margin expansion throughout 2022 is evidence of both the scalability of our business model and our commitment to balancing investments in key growth areas with efficiency and cost discipline. In Q4, adjusted EBITDA improved to an $18 million loss. We also sustained healthy location growth. adding approximately 5,500 net new locations in Q4 to end the year with approximately 79,000 total live locations. We consistently executed on our proven, scalable go-to-market strategy throughout 2022, and we continue to benefit from the flywheel effect we've discussed in more and more markets. As we increase penetration, we're confident that we can continue to efficiently grow locations and ARR. Underpinning our location growth is strong demand across restaurant segments. In addition to momentum with SMB restaurants, we continue to gain traction upmarket with larger customers as we invest in our platform. I'll highlight a few bookings from the past quarter. After working with Toast at their Bud Dairy Food Hall location, Cameron Mitchell Restaurants is rolling out Toast to all restaurant brands in their multi-concept FSR-focused portfolio. They were impressed with how Toast easily supported various partners in tech integrations and saw potential for Toast to be their trusted tech partner as the company grows. In addition to our API integrations, Cameron Mitchell is using our multi-location management module to help standardize operations and easily configure menus. They are using our Toast Go handhelds for smoother dining experiences in the front of house and our kitchen display systems to improve back of house operations. They also plan to trial additional features that will further help them control the guest experience. Here north of Boston, Michael's Harborside is a well-known waterfront eatery with a significant uptick in business in warmer months. After enduring another busy season of payroll and scheduling pain and an outdated POS, they looked to Toast to help revamp their approach. In addition to our robust all-in-one platform, Michael's Harborside was attracted to our payroll and team management solution to help digitally onboard their influx of seasonal employees, enable workers to independently swap shifts using our Sling app, and dramatically reduce weekly time spent on payroll from the hour plus they were used to. Michael's Harborside is also excited to leverage Toast Handhelds to help servers work their various rooms, decks, and outdoor dining spaces when the busy season returns. California-based bubble tea shop, Teaspoon, selected Toast to be their tech partner at 45 locations in their franchise-focused, rapidly expanding footprint. Teaspoon was impressed by our restaurant-specific enterprise-grade features, our strong customer references, and our proven track record of onboarding and supporting franchise-based QSRs. With Toast, Teaspoon will offer franchisees a turnkey, all-in-one solution that includes our Toast Go handhelds for line busting, our kitchen display systems for back-of-house expedience, our digital kiosk, which they see as a real differentiator to control labor costs. They will also leverage Toast multi-location management, our scheduling and payroll products, and Extra Chef for invoice automation. On top of our location growth momentum, customers like Teaspoon continue to attach more products. As of the end of Q4, 41% of our customers attached six or more SaaS modules. That percentage has more than doubled in just two years thanks to our continued platform expansion, improving packaging designed to enable our sales team to efficiently attach more products at booking, and the growing momentum of our multi-channel upsell strategy. These factors contributed to the subscription revenue increasing over 90% year over year in 2022, and we continue to see a significant opportunity to further expand SaaS ARPU over time. Helping our customers succeed by unlocking growth and increasing efficiency is at the heart of our business and is what informs our product innovation. As the needs of guests rapidly evolve and the importance of developing incremental revenue streams grow, restaurants are increasingly diversifying into more service models. Our voice of the restaurant industry survey from last year found that, on average, restaurants employ seven different service models. In Q3, we launched Toast Invoicing. enabling restaurants to efficiently manage wholesale and catering orders along with their core restaurant business in one integrated system. Over 5,000 customers have already used our invoice and product to streamline their billing and payment processes, and with an average transaction value over $650, it's also an opportunity for these customers to grow their business. To further expand the service models available through our platform, today we announced the acquisition of Delphi Display Systems, a leading provider of digital menu and drive-through products. Integrating Delphi into the Toast platform will enable us to offer drive-through capabilities on our platform for the first time, giving our customers the option to employ this critical service model to grow their business and offer guests a more omni-channel experience. Adding a drive-through offering and digital menu boards enhances our offering for both small and large quick-serve restaurants. In Q2 of last year, we launched Toast for Quick Serve Restaurants, and we've seen strong follow-through in our funnel from QSRs over the last few quarters. Drive-thru is a critical service model for QSRs and has become an even more important over the past few years. We're excited to welcome the Delphi team to our Toast family and partner more deeply to serve these restaurants. We plan to continue to add more capabilities to our QSR offering in 2023 to drive even deeper penetration in this segment going forward. Last week, we announced our Order with Google integration, expanding our suite of digital ordering products. This capability expands the online reach of our restaurants by providing visibility in Google Search and Google Maps and unlocks another channel for customers to grow their online ordering business. Order with Google is fully integrated with our platform, making it easy for restaurants to update their menus and hours in one place and seamlessly manage order flow. Together with online ordering and the Toast Takeout app, we continue to offer restaurants more options to grow their off-premise business efficiently with commission-free online ordering, while enabling them to offer guests a cost-efficient, seamless experience. In addition to our broad platform, our extensive partner ecosystem continues to expand. During Q4, we exceeded 200 partners in our network, which encompasses technology integration partners, local partners, and large national food and beverage suppliers. Our growing partner ecosystem gives customers access to a wide range of products and services to meet the needs of their restaurant, complementing our existing expanding platform, and further enhancing the value Toast provides to customers. Over half our customers are using a partner integration today through our API module, and these customers are using three integrations on average. Customers that use our partner integrations have over 30% higher total ARPU and a lower churn rate than customers not using API integrations, evidence of the value our partner ecosystem adds for customers and how it enhances our platform. This is another example of the reinforcement benefits from our platform. As we jointly help customers grow, our partners grow, and we grow. Thank you to our partners for sharing in the mission to help the restaurant industry thrive. So as we move into 2023, we are focused on continuing to execute on the same strategy that has been delivering consistent, strong results. First, As we continue to drive location growth, customer trust will always be the foundation of everything we do. The opportunity ahead is massive, and ensuring we are the trusted platform for the restaurant industry as our business scales is always our top priority. Second, product innovation is integral to our DNA. We have an exciting pipeline of new products to help restaurant owners further optimize their operations and to build on the suites of products we offer restaurants to deepen their touch points with their most important stakeholders, guests, employees, and suppliers. Third, we will keep investing to more deeply serve all segments of the restaurant industry. This includes tailored offerings to better serve restaurant types like QSRs, and enhancing the capabilities for customer segments like mid-market and enterprise. And fourth, we will continue building out our international business. While we're still very early, the potential opportunity is significant, and we look forward to taking the next steps in the multi-year journey. Our focus on balancing key investments with disciplined cost management throughout 2022 sets us up well to maintain our operating momentum and deliver another year of strong, durable growth in 2023. We expect to deliver 32% revenue growth for full year 2023 at the midpoint of our guidance range while driving further margin improvement as we progress toward adjusted EBITDA profitability by the end of the year. We remain committed to prudently investing to capitalize on the significant market opportunity while efficiently scaling our business. As we start the year, the macroeconomic backdrop remains uncertain. While the restaurant industry has continued to perform relatively well, We're aware there is less visibility on consumer trends and restaurants continue to operate in a dynamic environment. Our top priority is to continue to help restaurants leverage our platform to overcome the challenges they face and emerge stronger. The uncertainty also calls for us to remain flexible. We've proven our ability to navigate uncertainty in the past and we're well prepared to adapt quickly to any change in trends. Our progress over the last year to ensure a lean cost structure positions us to move even faster as the environment evolves and the flexibility to maintain a disciplined growth mindset as we execute against the massive opportunity ahead. As we turn the page on 2022 and look ahead to 2023, I want to thank our growing customer community for their confidence in Toast, our employees for their focus and dedication, and our extended network of partners, investors, and others who continue to support Toast and the broader restaurant community. While we've accomplished a lot together over the past year, We believe we are just getting started and we're excited about the opportunity in the years to come. Now I'll turn the call over to Elena.