Toast, Inc. Class A

Good afternoon. My name is Cole, 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 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 Seno, Senior Vice President of Finance and Strategy, Treasury and Investor Relations. You may begin your conference.

Thank you, Cole. Welcome to TOAST's earnings conference call for the first quarter, ended March 31st, 2023. 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 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 are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, location growth, future profit and margin outlook, expected growth, and business outlook, including our financial guidance for the second quarter and full year 2023. 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 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 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 thank you, everyone, for joining us this afternoon. First quarter results marked a strong start to the year, coming in ahead of expectations across the board. Our consistent execution delivered solid top-line growth of over 50% and significant year-over-year margin improvement and is a function of our continued focus on our core strategy, driving location growth, more deeply serving all segments of the restaurant industry, and pushing the industry forward through continued product innovation. The restaurant industry is undergoing a generational shift to cloud-based technology, and Toast is at the forefront of that change. We are uniquely positioned to help restaurants of all sizes and types start, manage, grow, and expand their businesses. While there remains some uncertainty in the broader macro environment, consumer spending at our restaurants remains healthy. The restaurant industry has proven its durability over time, and we believe it will continue to navigate challenges as they have many times in the past. Now turning to our Q1 results. On a year-over-year basis, total revenue grew 53% to $819 million, ARR increased 55% to $987 million, and GPV was up 50% to 26.7 billion. At the same time, Q1 adjusted EBITDA improved to a 17 million loss compared to a 45 million loss in the previous year, driving an over 600 basis points improvement in adjusted EBITDA margin. Our ability to deliver sustained top line momentum while rapidly moving towards profitability is a testament to our commitment to balancing investments in key growth areas with efficiency and cost discipline as we scale the business. On the back of our strong Q1, we raised full-year revenue guidance 4% at the midpoint, which implies 37% year-over-year growth, and increased our adjusted EBITDA guide with the midpoint of the range at break-even. That increase is a result of the momentum we're seeing in the business and our commitment to the efficiency and cost discipline I just mentioned. Elena will provide more details about our outlook shortly. We continue to see healthy location growth, adding over 5,500 net new locations in Q1 and ending the quarter with approximately 85,000 total live locations. Our go-to-market strategy continues to efficiently drive strong ARR growth through both increased penetration with traction across the TAM and healthy ARPU growth. In the SMB space, our differentiated localized sales efforts continue to scale. We see that as we're in markets longer and rep tenure increases, we can move markets into flywheel status, meaning higher inbound volume, higher win rates, and greater penetration. In one mid-Atlantic city where the rep tenure is above average at two plus years, the market tipped into a rapid growth stage and increased the number of locations by over 60% in two years to reach over 20% penetration amongst SMB restaurants. When it hit flywheel status, we saw lead volume increase and it has remained elevated versus prior levels. This is one example of the growing number of flywheel markets, and with only a small fraction of the SMB TAM in flywheel markets today, there's still tremendous opportunity ahead. As rep tenure and time in market increases, we expect more markets to benefit from the flywheel effect our go-to-market approach creates, enabling us to scale efficiently. So let me highlight some of our recent customer wins from across the TAM. In SMB, as Wisconsin Dells-based Buffalo Fills planned for this year's busy season, and with positive referrals from other local restaurants, they shifted to Toast, adopting 13 modules that span every pillar of the Toast offering. In the front of the house, Buffalo Fills will use Toast Go handhelds to work their multi-level dining space and banquet hall, mobile order and pay for additional table efficiency, and toast tables for managing their active wait list, as well as several other modules to provide an enhanced guest experience. Back of house, our payroll and team management solution will streamline onboarding and scheduling with their sizable seasonal employee base. And our kitchen display systems will power smoother kitchen operations. They'll also use ExtraChef to provide better invoice visibility and help ensure too much inventory isn't left over as the busy season wanes. While the SMB market is an obvious sweet spot for us we're making good progress across different parts of the TAM and across restaurant types. Down market in the small SMB space, we're optimizing pricing and packaging to meet the needs of that customer segment and leveraging an e-commerce sales motion and self-service onboarding to efficiently grow in this segment. In the regional mid-market space, Toast recently added eight more locations to Denver-based TAG restaurant group, bringing the group's full footprint of more than a dozen locations onto Toast. Toast was initially serving the fast casual side of TAG's portfolio and then expanded to higher end FSR locations to allow TAG to have a single technology platform across its portfolio. TAG saw the benefits of a partner who could seamlessly support all operations across its various restaurant types and is adding modules, including third-party delivery, API integrations for our partner network, multi-location management for easy menu updates, invoicing, and Toast Go handheld devices for its full-service locations. Moving further upmarket, in the first quarter, We signed a 300 plus location national QSR chain that wanted a more innovative technology partner with top notch integration functionality, ease of use, and better overall reporting visibility across its entire operating ecosystem. The breadth of these customer wins are clear examples of the power of our restaurant-specific integrated POS and software strategy and the range of customer sizes and types that we can serve. And at only 10% market share for U.S. restaurant locations, we're still very early in penetrating the domestic TAM. We expect to continue adding locations at a healthy clip, are investing to most effectively serve each segment of the TAM, and we are uniquely positioned to capitalize on the big opportunity ahead of us. Our focus on the restaurant industry is a key differentiator and tenet of our product strategy. We are building the specific features and capabilities to meet the unique needs of different segments and types of restaurants, enabling us to deeply penetrate the entire TAM. Our Toast for Hotels product which integrates seamlessly into hotels' property management systems, is a clear example of this motion in action. This product has opened up our ability to better serve hotel restaurants, and we're seeing great momentum. In the first quarter, we signed family-owned Pacific Northwest Cornerstone McMenamin's, which selected Toast for its entire portfolio of 57 pubs and breweries, many of which are located on McMenamin's hotel properties. McMenamin's was attracted to Toast to help streamline operations and to leverage our powerful partner integrations. They look forward to implementing our all-in-one solution and using products including PMS integration, Toast Go handhelds, and mobile order and pay to provide food and beverage access in more areas of their unique properties, from room service, to garden picnics. McMenamin's will also use Extra Chef to modernize their approach to inventory management and toast online ordering in our kitchen display systems for additional efficiency. We are truly excited about the opportunities to transform guest hospitality experiences. Another example of where we're investing to further our abilities to more deeply serve each part of the TAM is in enterprise. We're adding enhanced reporting APIs, specific features for QSRs like POS screens designed to help staff enter orders faster, and improved multi-location management functionality aimed at making menu changes across hundreds or thousands of locations easier and faster. Additionally, Toast now has a P2PE listed payment solution, which when deployed, will meet the unique payment security requirements of this segment, and we believe the progress we're making to better serve this customer segment will enable us to further penetrate enterprise. In addition to investing in areas that can serve different parts of the TAM, our product strategy is anchored around building out a suite of solutions tailored for each of our restaurant stakeholders, restaurant operators, guests, employees, and suppliers. An example of this is the recent launch of Toast Tables, our reservation and waitlist management solution. Tables broadens our ability to engage guests and provides our restaurant customers with more nimble ways to manage their operations through a single platform solution. This differentiated offering is seamlessly integrated with the rest of the Toast platform and allows restaurants to manage operations with one vendor at an affordable monthly price. Toast Tables is off to a fantastic start. In March alone, Toast Tables powered over 450,000 unique bookings, and since going beta just a year ago, has reached thousands of restaurant locations. a feat that took other reservation providers many years to achieve. Toast Tables is emblematic of our ability to quickly innovate on evolving customer needs. Over a short period, a small team was able to build a solution, get it in the hands of several customers for testing and feedback before going beta and going live. our vertical focus provides us the room to innovate and tailor features to the specific needs of restaurants, while our go-to-market engine and large customer base provide us a rapid feedback loop and the ability to scale new products quickly and efficiently. As we've expanded our product and grown our customer base, we've become smarter about the varying rates customers will adopt our products. This is especially true with the growth and development of our upsell team. This team has grown significantly over the last year, and it has allowed us to better balance both customer growth and product adoption. We're able to be more strategic about what products do best as part of the upfront sales motion versus at varying times in a customer's journey on toast. With our consistent innovation engine, differentiated distribution motion and growth of our upsell team, we will continuously evaluate and refine this land and expand approach. So our teams are operating at full steam and the progress we've had to start the year is proof that our focus strategy to grow locations and be the trusted platform for the restaurant industry continue to innovate, and invest to more deeply serve all segments of the restaurant industry, including building out enterprise and international, is paying off. We recently had our brand launches in Canada, Ireland, and the UK, marking another early step to unlock the significant opportunity outside of the US. As we execute on this growth strategy, we also remain focused on efficiency and cost discipline, putting us on track to sustain healthy growth and deliver adjusted EBITDA profit as the year progresses. Before closing, I want to thank our customers and our employees. We're off to a great start this year. The team is executing in all the right places to go after the large opportunity ahead of us while operating with efficiency as a North Star. Now I'll turn the call over to Elena.