Toast, Inc. Class A

Good afternoon. My name is Cole, and I'll be the 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 star 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. I'll now turn the call over to Michael Sino, 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 second quarter and the June 30th, 2023. On today's call, our CEO, Chris Camperotto, COO, Aman Narang, and CFO, Elena Gomez, We'll open with prepared remarks, which will be followed by 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 third 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 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 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. We sustained our operating momentum in Q2, posting strong results across the board, further evidence of Toast's unique positioning to help lead the digital transformation of the restaurant industry and empower the restaurant community to do what they love and thrive. We achieved notable milestones this quarter, surpassing $1 billion in ARR and posting positive adjusted EBITDA and free cash flow for the first time as a public company, which speaks to the consistent execution of our strategy. First, we're focused on driving location growth. And in Q2, we set a record for quarterly net new location additions with over 7,500 and ended the quarter with approximately 93,000 locations. Second, we're working to serve all segments of the restaurant industry. In June, we announced a deal naming Toast as an approved vendor for Marriott's Select Service Hotels, a clear proof point that we can push deeper into the restaurant TAM and unlock the restaurant space or the enterprise space. And lastly, we are focused on continued product innovation to open up more segments of the TAM and better serve our customers. The Toast for Hotel Restaurants offering and newer offerings like Toast Tables and the recently announced Catering at Events product are all examples of the product advancements we're making. These efforts are translating into strong results. In the second quarter, On a year-over-year basis, total revenue increased 45% to $978 million, and GPV was up 38% to $32.1 billion. ARR finished up $1.1 billion, up 45% from last year and more than double from two years ago, evidence of our ability to scale the business through both increased penetration across the TAM and healthy ARPU growth. Coupled with our strong top line and operational performance, we delivered adjusted EBITDA of positive $15 million in Q2 compared to a $33 million loss in the prior year, reflecting an over 600 basis point improvement in adjusted EBITDA margins. The combination of durable top-line growth and consistent margin improvement is the result of our dedication to balancing investments in key growth areas with efficiency and cost discipline as we scale the business. On the back of our healthy first half results and operating momentum, we raised full-year revenue guidance to 41% year-over-year growth at the midpoint and increased our adjusted EBITDA guide to a range of $15 million to $35 million. We remain focused on driving efficient, durable growth and expect continued margin expansion as we march towards the long-term target margins that we previously shared with you. A core tenet of our product strategy is to position our platform to expand deeper into the TAM. Toast for hotel restaurants and our expanding enterprise capabilities were key in unlocking the Marriott opportunity. The deal we announced enables our team to sell the Toast platform to Marriott Select Service hotels in the US and Canada. There's a range of food and beverage service models across Marriott Select Service properties, from full-service dining to quick service to poolside ordering. The flexibility of our platform to meet the unique needs of different restaurant sizes and formats in the select service level was another important differentiator for Marriott. While it's still early, we've taken a small number of Marriott locations live already, and we look forward to bringing the power of our platform to more Marriott properties moving forward and continuing to go deeper in the enterprise segment. Another way our product is unlocking the ability to go deeper into the TAM and better serve all restaurant stakeholders is by expanding support to the numerous restaurant service models. In our last Voice of the Restaurant Industry survey, restaurants reported they are managing seven service models on average, including catering. And last week, we announced the launch of Toast Catering and Events, a new product fully integrated with the Toast point of sale, to help restaurants seamlessly manage large catering orders and event planning. It incorporates order tracking, initial quotes, and helps with contracts. And once booked, events get integrated to calendars and orders are fed directly to the kitchen at the right time. The product also creates invoices and allows for direct digital payment through Toast. This builds on the invoicing product that we announced last October and bolsters our ability to more deeply serve parts of the TAM as we estimate over 60% of SMB restaurants offer catering in addition to their on-premise business. Other product enhancements we've recently made include the launch of our next generation digital ordering suite. Since we first introduced online ordering in 2014, we've facilitated more than 250 million commission-free orders for our customers. Based on customer input, our enhanced digital ordering suite offers a mobile optimized design, search engine optimized menus, and website customization capabilities. In addition, we've updated the checkout experience to improve conversion. These efforts are targeted to help customers increase sales and build and maintain direct relationships with their guests. However, we made a mistake in how we approach monetizing the value of this suite. Listening to our customers is a core ethos for how we operate, and our day-to-day efforts are guided by a relentless focus on being the restaurant community's trusted partner. It was on this basis, and after extensive constructive discussions with our customers, that we decided to remove the 99-cent consumer-facing fee from Toast's digital ordering channels. As we continue to innovate with new products and further strengthen the value we provide customers, we are well-positioned to monetize our offering commensurate with that value. We will be more thoughtful on how we adjust pricing going forward and we recognize the importance of considering the impact to all stakeholders as we do that. We remain committed to the same high level of transparency and partnership with customers that we've always delivered. To wrap up, I want to thank our customers and employees. Our mission to empower the restaurant community to delight their guests, do what they love, and thrive guides our efforts and underpins our strategy. We raised the bar in the first half of the year, driving record location additions, launching new products and service models to move deeper into all aspects of the TAM, and delivering on our goal of adjusted EBITDA profitability. In short, the Toast platform is resonating with customers, we have momentum across all segments, and we're still in the early stages of tapping the massive opportunity to be the restaurant industry's trusted technology partner. We're confident that continuing to execute on our strategy and mission will generate significant long-term value for our customers, our community, and our shareholders. Now I'll turn the call over to Aman to discuss our go-to-market performance.

Thank you, Chris, and good afternoon, everyone. First off, I'm really proud of the team's performance in the quarter. We added 7,500 net restaurant locations, exceeding our prior quarterly record by over 1,000 locations. Our local go-to-market approach continues to drive sustained momentum in our SMB segment, which, as many of you know, is core to our growth. As we're in markets longer and the average tenure of our account executive team grows, we benefit from higher inbound volume, increased win rates, and higher rep productivity, which drives market penetration. This important trend continues to hold in our SMB business as we gain share and acts as a flywheel to drive efficient growth. We're also excited about our progress off-market, the strong quarter in our mid-market segment, and as Chris mentioned, the recent announcement of Marriott to help us break into enterprise. As I look back at the quarter, we're really pleased with where our go-to-market funnel and book locations stand, as well as the team's focus to continuously improve our onboarding processes to both bring customers live faster and set them up for success. Let me spend a few minutes highlighting a couple of customer wins from the quarter that speak to our progress. In our SMB segment, Tempo Urban Bistro is a full-service restaurant outside of Phoenix that will leverage the breadth of our platform, implementing nine different modules across all of our product pillars. This includes our Toast Go handhelds in their dining rooms, kitchen display systems to streamline kitchen operations, toast tables to manage reservations, mobile order and pay to streamline front-of-house service, and loyalty gift cards and email marketing to turn guests into regulars. In addition, Tempo will use Toast Peril and Extra Chef to optimize back-of-house operations. Tempo has plans to open three or four more restaurants and is excited to grow with Toast. Switching to mid-market, the 99 Restaurant and Pub, in partnership with its service provider, Restaurant Growth Services, will implement Toast across more than 90 locations in the Northeast. Serving more than 20 million guests annually, the 99 was attracted to Toast because they saw the opportunity to more efficiently manage both front of house and back of house operations with our platform. Across the brand, they plan to use Toast Go Handle devices, kitchen display systems, and POS terminals to enhance the guest and staff experience. Additionally, their back office team will use their API integrations and multi-location management module to better centralize menu updates and visibility into their operations. Moving to our international markets, Canada, Ireland, and the UK, we are very encouraged by the early customer feedback. Customers love the core capabilities that help streamline restaurant operations, and our R&D team is hard at work listening to our customers and making more of our platform capabilities available to them. One great example is our partnership with Arcade in the UK. After successfully implementing Toast at its first location in Centrepoint in London, Arcade is adding Toast to its new Battersea location and two food trucks. With 13 cuisines under one roof under the iconic power station, Arcade Battersea will follow the same model as the first location and implement the Toast platform across the entire food hall operation and use our kitchen display system in all the kitchens. In addition to our POS terminals, servers will use handhelds to help facilitate more orders and drive additional revenue and a better guest experience. Arcade is also leveraging our API integrations across several key partners. As we scale the number of restaurant locations, our upsell team has more opportunity to help our customers expand their relationship with Toast. For perspective, among locations with more than 10,000 in SaaS ARPU, about half of them exceed that threshold of 10K after adding products to our upsell team in Toast Shop, which is our e-commerce platform for existing customers. This dual upsell motion with both a sales team and a self-service e-commerce channel provide a holistic offering for customers depending on their needs. Let me highlight one customer story that illustrates how our upsell team partners with customers to expand how they leverage Toast. Slab Barbecue and Beer, a multi-location barbecue joint in Austin, Texas, joined Toast in 2019. Slab initially started with our POS and online ordering to boost sales through COVID. Since 2019, Slab has expanded to four locations and added Sling and Toast Payroll and Team Management to our upsell team. They credit Toast with streamlining operations and time savings thanks to centralized reporting and our back office capabilities to manage menus, sales, and employees. On the heels of Slab Barbecue's growth with Toast, its SaaS ARR across all locations has grown by more than 10x since becoming a customer. This is a great example that shows when our customers grow, we grow. As I mentioned at the start, I'm incredibly proud of our team's performance in this quarter. As we scale and grow MarketShare and continue to invest in our restaurant platform, we are well positioned to drive durable ARR growth both through locations and ARPU over time. Thanks. I'm now headed off to Elena next to go through our quarter in more detail.

Thanks, Amman, and thank you, everyone, for joining. I also want to give a special thank you to the entire TIS team. Your dedication and your continued execution resulted in another great quarter with results above expectations. We delivered strong top line growth in Q2 and passed the billion dollar mark in ARR while at the same time demonstrating our ability to consistently drive efficiency across our business. This marks our sixth consecutive quarter of adjusted EBITDA margin improvement. and led to our first quarter of positive adjustity and free cash flow in two years. The top-line momentum is a testament to the value proposition of our industry-leading software and payments platform. We're still at the early stages of this significant opportunity to lead the restaurant industry's digital transformation, and you will see us continue to balance growth and efficiency as we scale to drive durable top- and bottom-line growth. Our go-to-market teams are continuing to execute quarter after quarter. Q2 was a record for net location growth with more than 7,500 net ads ahead of our expectations. As a reminder, Q2 is our seasonally strongest quarter of the year, and we typically see lower quarterly net ads in the second half each year. Given our strong pipeline, continued momentum penetrating segments, and go-to-market execution, we are raising our expectations for quarterly net ads to be about 6,500 in the second half of the year. While we've taken a handful of Marriott locations live, it's still early. It was not a meaningful contributor in Q2 and is not a major factor in our increased expectations for the remainder of the year as we expect to book and take Marriott locations live over time. Moving to financial results, Total revenue grew 45% year-over-year to $978 million in the second quarter. ARR, which is our core operational metric, increased 45% year-over-year due to growth in both locations and ARPU as the power of our integrated solution resonates with our customers. Total ARPU, which as a reminder, we look at on an ARR basis, was over $12K in the quarter driven by double-digit year-over-year gains in SaaS ARPU. As Chris discussed, we recently rolled back the consumer fee from our digital ordering channels. Our platform provides customers significant value and we're committed to continue to innovate to further strengthen that value proposition. We're confident we can monetize the value we provide and expect measured pricing adjustments to contribute to ARPU growth over time. Moving to FinTech solutions, on a year-over-year basis, second quarter revenue grew 44% to $808 million, gross profit was up 55% to $177 million, and GPV increased 38% to $32.1 billion. Average annualized GPV per processing location was up 1% year-over-year and 7% sequentially. GPV trends remain stable and in line with our seasonal expectations, and looking ahead, we anticipate GPV growth to moderate given the seasonality of GPV and the moderating tailwind from inflation. Our non-payment FinTech products led by Toast Capital contributed approximately $32 million of gross profit in Q2 as we continue to see healthy demand. Defaults for Toast Capital came in slightly below expectations, contributing to bad debt associated with Toast Capital, which we recognize within G&A expense, declining relative to the first quarter. As a reminder, our unique position with both historical and real-time access to POS data allows us to monitor the health of restaurants and prudently balance risk while helping our customers grow with fast, flexible access to capital. Net take rate was 55 basis points. Core payments net take rate was flat year over year, and other FinTech products contributed 10 basis points. Looking ahead, consistent with prior years, we expect the mix of credit to seasonally increase, which will weigh on the core net take rate as the year progresses. In Q2, total gross profit grew 80% year over year to $225 million, resulting in a gross margin of 23%. Looking at our recurring streams, subscription and FinTech gross profit totaled $267 million in the second quarter, up 58% year over year. Turning to our customer acquisition costs, hardware revenue increased year over year due to both strong location ads and existing customers adding more hardware ahead of peak season. Hardware margins improved, primarily benefiting from lower shipping costs on a year over year basis. On the sales and marketing side, expenses increased 33% year over year as we lapped the investments made to scale the sales team. We continue to grow both in our new business and upsell sales team in a targeted manner while remaining focused on scaling unit economics and supporting sustained go-to-market momentum. Shifting to R&D, our disciplined investment approach is delivering continued product innovation, including our recent launch of Toast Catering and Events. This offering builds off of our invoicing product and is a good example of how our products can help customers simplify their workflows, improve guest interactions, and drive additional transaction volume through Toast. In Q2, G&A expenses increased 33% year over year. Bad debt and credit-related expenses totaled $15 million in Q2, with reserves related to Toast Capital representing the majority of the expense. Excluding bad debt and credit-related expenses, G&A grew 10% year-over-year, and we expect to see continued leverage as we remain focused on efficiencies and managing headcount. Total Q2 adjusted EBITDA was $15 million, and margin was 1.5%, delivering on our goal of adjusted EBITDA profitability. This performance was a function of our sustained top-line growth and cost discipline as we scale the business. As I mentioned earlier, gross profit from our recurring streams FinTech and subscription grew 58% year-over-year, and adjusted EBITDA margin relative to our recurring streams was 5.6%. As a reminder, these two metrics are the basis for how we calculate Rule of 40, and the combination of the two was 64%, marking the fifth consecutive quarter we exceeded the Rule of 40. Free cash flow was $39 million in the quarter, marking the first time we had positive quarterly free cash flow since becoming a public company. This was a result of positive adjusted EBITDA in the quarter and a benefit from working capital primarily related to the growth in GPV. Looking ahead, we expect some seasonality in working capital quarter-to-quarter tied to GPV trends and the timing of certain payments. But over time, we anticipate free cash flow should largely follow a similar trajectory as adjusted EBITDA trends. Now, let me turn to guidance. For the third quarter, we expect revenue to be in the range of 1.01 billion to 1.04 billion, representing 36% year-over-year growth at the midpoint. Adjusted EBITDA is expected to be in the range of 15 million to 25 million, representing approximately 50 basis points of sequential margin improvement. at the midpoint. Following our solid first-half performance, we are increasing our full-year guidance and now expect full-year revenue to be in the range of $3.81 billion to $3.87 billion, a 41% year-over-year increase at the midpoint. Our updated full-year adjusted EBITDA guidance range is $15 million to $35 million, as we now expect to be profitable on an adjusted EBITDA basis for the full year. We finished the first half of 2023 with tremendous momentum driving record location growth and adjusted EBITDA profitability and positive free cash flow in Q2. We are well positioned to sustain that momentum and capitalize on the massive market opportunity ahead as the restaurant community's trusted partner while driving durable ARR growth and creating long-term shareholder value. Thanks again to our customer base for your trust, and thanks to the Toast team for another quarter of strong execution. Now I'll turn the call over to the operator to begin Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause here for just a moment to compile the Q&A roster. Your first question comes from the line of Ken Tsen Huang with JP Morgan. Your line is now open.

Hi, great. Thanks for taking my question. Good afternoon to all of you. So, yeah, thanks for going through everything. Growth seems great here. I'd love to just ask if you don't mind on the 99 cent fee and the lessons learned, I guess, is really the question that I have from implementing that and the withdrawal. I'm sure you spoke to a lot of your your clients, and Chris, you mentioned stakeholders and meeting those expectations as well. So can you comment on lessons learned?

Yeah, thanks, Chansan. It's a good question. I'm going to actually give a bit of background on this because some of you may also have similar questions. So for background, we had made significant upgrades, as I mentioned in my script, to our online ordering products. which actually allowed for increased guest conversion and better consumer discovery. We'd actually communicated and tested multiple packaging and pricing approaches over the course of the past year, some which were similar to the fees that several of our competitors employ. As we expanded the rollout more broadly, several customers voiced pretty constructive feedback. You know, one thing I love about our customer base is that they tell us exactly how they feel about everything, you know, the good, the bad, and the ugly. And upon that feedback, you know, we quickly recognized that we made a mistake, mainly about how we approach the price change, basically the pricing structure change, and the impact to their guests. You know, at the end of the day, while this is what I'd call somewhat of a foot fault on one module, this does not have an impact on our ability to leverage packaging and pricing over time. You know, our customers understand that the products and innovation require investment and they consistently tell us that they're willing to pay for value. So, you know, from a lesson learned standpoint, we learned a lot from this. And there's more questions we're going to ask ourselves internally when we execute these types of pricing changes or structural changes moving forward. For example, what is the impact on every stakeholder? Often we talked about the flywheel between happy employees, happy guests, and happy restaurants. So just asking the right questions on how it affects our key stakeholders is core to our mission. And our mission is rooted in being the trusted partner to the restaurant community. So we've learned quite a bit. I actually think it's going to make us stronger in the future as we leverage packaging and pricing. But, you know, quite a few lessons learned, but pretty confident in our stance to leverage things moving forward. But good question.

No, that's a thoughtful answer. And learning through adversity is a good thing. If you don't mind, just a quick follow-up. It sounds like your location expectation is still quite upbeat for the second half. So it sounds like you feel still, this is because you did 90 days ago around location growth. Just wanted to make sure I caught that correctly. Thank you.

That's right, Jason. Look, I think, as I mentioned in my script, really proud of the team's execution. know really feel good about our pipeline our bookings as we've talked about in previous calls you know the you know one of the biggest drivers for growth for toast is market density the number of customers in the market as well as the tenure of our reps it's really a tailwind for growth and it's something we control um you know the more restaurants we get in the market uh it acts as a flywheel for us in terms of everything from top of model to win rates to productivity And we feel really good about our outlook for the second half of the year.

Our next question is from Jason Kupferberg with Bank of America. Your line is now open.

Thank you, guys. Yeah, nice numbers here. I wanted to stay on the net ads topic for a minute. You raised the outlook there for the second half. And just wondering, any particular region or any part of the customer base driving max it doesn't sound like you put much in there for Marriott so just any additional color on what's driving the higher outlook thanks yeah look great question as I mentioned I think there's this is really a story of just our core business in SMB outperforming you know I think

The team executed really well in the first half, and the state of the pipeline bookings I just mentioned is in great shape. I think we're also, you know, some of the work we've done just after that, broadening our TAM, getting into QSRs, getting into hotels, has been helpful as well for the team. You know, I think a lot of this also goes back to our vertical focus on restaurants as being a creative differentiator. And as you pointed out, like, it's not about, you know, while we're really thrilled about the Marriott partnership, that is not what is driving the outlook in the second half of the year.

For sure, for sure. So speaking of Marriott, can you just talk a little bit about the go-to-market motion there, the way you're going to address that opportunity, what kind of sales cycles and kind of competitive dynamics are you expecting there? And I think you're going to market with Freedom Pay, do the payment side, if you can just talk through all that. Thanks.

Sure. Yeah, no, great question. So let me zoom out just a little bit. So over the past few years, as we've talked about on these calls, we've made incremental investments in our enterprise platform. And this work really underscores our ability to open up the new opportunities and expand our TAM, not just for Marriott, but for mid-market and enterprise in general. Some of the work, including our work on hotel APIs, our work on integrations in general, and our work on above-store configuration and reporting, has given us a more confident stance in going after the enterprise segment. In terms of the type of go-to-market, it's a different structure than SMB. These are longer sales cycles. These are a little bit more targeted deals. We're often in a pilot and in a lab, and And then in terms of the competition, you know, we think it's relatively greenfield in terms of the enterprise opportunity. There's still quite a bit of legacy up market. And we've started to record, you know, certain wins. I mean, certainly we've announced Marriott, and this allows us to be an approved vendor at Marriott. It's still very early days at Marriott, but when we think about some of the other wins across enterprise, Aman mentioned 99 restaurants. We had also won Wetzel's Pretzels, which is 300 plus locations. I had already announced last quarter Golden Cross, which is north of 100 locations. And then we also won Philly Pretzel, which is 170 locations. So our team's picking up momentum. They're more confident in their stance to go after the enterprise market. It's a relatively small team, but they're doing really good work to execute on this TAM expansion. With regard to Freedom Pay, you had mentioned that in your question. Listen, like I said, it's still early with Marriott, but the Freedom Pay partnership really gives us a lot of flexibility to work with a certain segment of enterprise customers up market and further opens up the enterprise TAM. You know, there's really two important things to leave you with on FreedomPay. Number one, it allows us to flexibly work with these enterprise customers who often have unique payment requirements. They're looking to solve payments across spa, hotel, restaurants, across these diverse businesses. So number one, it opens up some TAM and gives us some flexibility to work with these larger customers. And then number two, often these large enterprise customers are locked into long-term contracts for both POS, as well as payments, this allows us to have flexibility to go after them for POS and software. And we can partner with FreedomPay on those deals. And it just puts us in a stronger position of flexibility for the largest section of enterprise customers. That being said, you're probably going to ask the question, well, what does this do for our core business? And listen, you know, in our core business, both SMB as well as regional and mid-market, this doesn't change our integrated platform between POS and payments. We continue to go to market quite well on the combined platform, and toast payments will always be an option. So I'll leave it there.

Thanks. Our next question is from Josh bear with Morgan Stanley.

Your line is now open.

Great. Thanks for the question and congrats on a strong quarter. So we can talk a little bit about visibility as far as location additions. Uh, now talking about 13,000 to add in the back half of the year, I guess like any context for how to think about how much you have to go out and win and go live in the next five months versus what's either already won or already in implementation or going live from previous wins.

Hey, Josh. Look, I think we don't guide to the book location specifically, but I think the trends we're seeing, as I mentioned, in terms of bookings and pipeline are consistent with what we've seen in the past. And the team's got a lot of confidence in their ability to continue to execute as they have been. I think the strength that we saw in the first half of the year really is consistent with the strength that we've seen really over the past couple years in our core SMB business, where as we get into markets deeper, we've talked about this in the past, we get more customer density, our rep tenure is increasing. Those are things that are driving our productivity. I think one other thing that the team is thinking about, just to give some color on that, is we're trying to balance, and we talked about this last quarter, what the team lands with in initial sale versus how they expand. And so the team is really trying to maximize the number of locations on the platform while also booking as much of the platform up front. And that's a balance where we're trying to maximize win rate and location ads, right, with the ARPU on these deals that we're booking. And so overall, I think, look, at the highest level, feel really good about the outlook for the second half of the year.

Okay, great. And then just one more on locations. I was hoping you could comment a little bit more on international and how that's either contributed in the quarter or in the outlook for the back half. Thank you.

Yeah, I'll take that, Josh. So we're really pleased, and Aman mentioned this on his script, we're really pleased with the signal we're seeing internationally. The customer feedback is really positive. And just for everyone's knowledge, we're taking customers live in Dublin, UK, and Canada. And so far, you know, Even though we're in the early days, it's not impacting our location as materially this year, so you should know that. But like I said, the progress is really strong, and what we've been focused on is really building out the go-to-market team. We're starting to see very similar patterns in the early days of Toast in the U.S., and so that's a good signal for us. We know that playbook. And as Aman mentioned, we're focused on expanding the platform so we can get more of it in the hands of our international customers. But in the end, if we zoom out, Just think about what our ambition around international is really to drive the same loyalty, the same flywheel markets, and replicate that internationally, which is why we're so encouraged by that. So overall, really good progress, but it's not going to be a material contributor to our results this year and to the location growth that we're talking about. Great.

Thank you.

Our next question is from Will Nance with Goldman Sachs. Your line is now open.

Hey, guys. Appreciate you taking the question. Elena, I was hoping to follow up on the subscription ARPU guidance that you gave a couple quarters ago. If I look at ARR per location, I think it was up somewhere 13%, 14% year over year this quarter. So it does seem like you're on that glide path to the 10% year over year plus or minus that you guided to. But I guess the base of locations is going to end up being a lot higher than what we thought it was when you gave the initial guidance. I'm wondering if you could talk about the interplay between the accelerated location growth and the ARR per location guidance. And I guess you mentioned doing a little bit less on the upfront sale and more on the upsell motion. Is there some interplay between some of the slowdown we've seen in ARR per location growth and the acceleration in net ads? And I guess as we get all of these locations up and running, You know, would you expect that something like an upsell motion could lead to a re-acceleration in software ARR per location growth in maybe the years ahead?

Yeah, thanks. There's a lot in that question. So let me start by saying, you know, we're really pleased with the ARR growth at 55% in the quarter. And you're exactly right in that we're balancing, and Aman sort of mentioned this already, we're balancing our location growth with SAS ARPU up front. Our SAS ARPU grew 14% year over year, but the underlying fundamentals on SAS ARPU, and to your question, are we still driving to that 10% ARPU on an ARR basis? Yes, that's our goal. The fundamentals are strong. As we've mentioned, we had a step up in ARPU over the last couple years, hence the moderation this year. So just keep that in mind. And we're going to continue to build on this upsell motion and on this land and expand motion that we keep talking about. But to the point, our North Star is really ARR growth, and that was a healthy 55% this quarter.

Got it. Appreciate you taking the question. And on the Marriott, I'm just wondering if you could talk through kind of ARPU dynamics as you move up market. You know, for instance, I know you're partnering with FreedomPay on some of these deals. As those come in, do you see a higher contribution of software, and is there more potential for software ARPU to kind of balance out the lack of payments in these deals, or any kind of payments revenue stream, kind of ancillary coming from Freedom, just any color, how you think about ARPU dynamics on market?

Yeah, that's a fair question. So we're really looking at, first of all, just to start with, We always think about our ARPU and payback periods always play a role regardless of the segment that we're in. But just by the nature of them being enterprise customers, the ARR will be larger over time. But then we're going to come back to, you know, even if we don't have the payment dynamics in this deal, we're going to focus back on payback periods and unit economics. And we have an opportunity to continue to grow that ARPU over time on the SaaS side. But we're We're really encouraged by what we're seeing, and it's early days to really have an exact precision on that ARPU, but we anticipate that it will follow the same unit economics that we do for our entire business.

Got it. Appreciate you taking the questions, and nice job on the customer acquisition acceleration.

Thank you. Our next question is from Dan Doliv with Mizuho. Your line is now open.

Hey, guys. Really strong results. Congrats. Just, you know, my question is on the 99-cent fee. I know your competitors are very aggressive, obviously, following, you know, that issue, and we've seen them advertise, you know, different promotions to try to get customers. Has there been any... you know, obviously results, strong results speak for themselves and net ads are super strong, but has there been any kind of conversations with merchants that you didn't have before regarding some sort of an attrition following the 99th century? Thank you.

Yeah, Dan, good question. No, the answer is no. I mean, as you know, it's always been a hyper competitive space for the past decade. Competitions always throw in campaigns and targets against Toast. But with regard to the $0.99 fee, there's been no churn or impact to location ads. And we're in execution mode in our core business. And the competitive dynamics, in our opinion, remain the same. Our win rates look good. And we're just plowing forward on execution.

Got it. Thank you. And a quick follow-up, and sorry if it was already addressed. I was on a different call, but can you give us a sense for SAS ARPU for the second half? And I apologize if it's already been addressed. Thank you.

So it has been, but I'm happy to repeat for you, Dan. So Q2, SAS ARR grew 55%. I say that every time because that's really our North Star metric. And in Q2, it grew 14%. But overall, we're still driving to the 10% ARPU as we exit 2023, and that's on an ARR basis just as a reminder. But the fundamentals are strong. Our underlying trends are strong. And as a reminder, what I mentioned is we mentioned that the last two years we've seen a step up in ARPU, and we anticipated that it would moderate as the year progresses. So we're still driving towards that 10% ARPU on an ARR basis at the exit of the year.

Great, thank you, and apologies for being redundant. Thank you.

Our next question is from Steven Sheldon with William Blair. Your line is now open.

Hey, thanks for taking my questions and nice results here. I want to ask about the catering expansion, which is really good to see, and just kind of what that could mean in terms of additional monetization. Will this be kind of another SAS subscription revenue opportunity to think about adding on ordering, invoicing, or is it more about just supporting more throughput and for the monetization would really come from facilitating additional GPV on the payment side? I guess, how should we be thinking about catering monetization?

Yeah, hey, Steven. You know, two things. Number one, it does come with healthy ARPU, so it does add another lever to drive ARPU growth over time, similar to what Elena talked about. But then on the invoicing front, certainly it's going to run on our rails, and that's a second component. But it's healthy on both fronts. You know, I think the one thing I love about our customer base, as I mentioned, is they tell us what they like and what they're missing. And for this one, you know, it's another good example of going deeper into the TAM. And specifically for our core business, our core SMB business, You know, when 60% of SMB restaurants are offering catering, they're often doing it through manual processes or point solutions, and they tell us that an integrated platform is just better. So it's still early. We're very much early in the lifecycle of this product, but we're excited about the long-term opportunity for this product because it's going to make the customer's life a lot easier, and then it's going to help us on the ARPU front.

Got it. That's very helpful. And then a follow up and more high level, you know, great to see the kind of profitability inflection point. So how do you think about letting profitability ramp here versus reinvesting back into the variety of strategic initiatives you have underway, especially with given some of the momentum you have right now? How are you thinking about it?

Yeah, it's a great question. It's going to be quite balanced. I think that obviously running lean and efficient is how we work and how we make decisions every day. But as I said on my script, we've got a massive opportunity ahead and we're early in our TAM and have a ton of opportunity to upsell as we grow and innovate more. And so we have to have that balancing act. I would point you to our guidance for the near term and then pointing to our long-term guidance that we gave a couple of quarters ago, and that's on a recurring FinTech and gross profit. So we'll be balancing both growth and profitability over time, but we certainly want to lean into this momentum we have, especially as we exit 2023. Great. Thank you.

Our next question is from Timothy Chiodo with Credit Suisse. Your line is now open.

Great. Thank you. I want to talk a little bit about the mix of your growth ads. So you mentioned a few of the larger chains, 100 units, et cetera, Philly Pretzel and others. Has that created any of a little bit of a mix shift towards competitive takeaways relative to brand new formed locations within your overall growth ads? And then I have a brief follow up on payments rev share.

Hey, Tim. Yeah, look, I think at the highest level, the mix that we see between new openings and existing restaurants is largely remain consistent. You know, we certainly, you know, do well when a new restaurant's opening up, but we also do, our team is able to get existing restauranteurs that are using your current system, whether it's Legacy or Cloud, to switch over to Toast. I think there's to your question about as we see more success upmarket and mid-market, that hasn't fundamentally changed, I'd say, the mix of the the opening versus existing restaurants.

Okay, thank you. Appreciate that. The follow-up relates to the potential for revenue share. So, clearly, you have the Freedom Pay integration, and some of the enterprise customers, either currently or in the future, will have the decoupled payments through a third-party provider. I'm sure in many cases, as you mentioned, there's already an existing relationship there, but is there any economics at all that Toast might be earning, either via freedom pay or the other processor or any other payments revenue share that we should think of?

Yeah, so I won't get into the specifics of our freedom pay deal, but it's not meaningful. I would think of it as a SAS ARPU play for this specific Marriott deal. To Chris's point earlier, though, he did mention there will be times, and we already have this for enterprise customers, you know, do want to leverage us for both. So I wouldn't take Freedom Pay and extrapolate it to our entire enterprise book because that's not where we are today.

Okay, great. Thank you.

Our next question is from Samad Samana with Jefferies. Your line is now open.

Hi, good afternoon, and congrats on the strong quarter. Maybe first, Elena, one for you. Just as I think about both the inflection and EBITDA margin this quarter and the change in OPEX, it's actually quite modest in terms of dollar OPEX growth, despite the upside of the top line. So I'm just curious, should we think about that as a good proxy for how sales and marketing and R&D dollars should maybe grow for the next couple of quarters going forward? And is that what's aligned to leverage just that? And then I have a follow-up question as well.

Yeah, I think the...

I think the leverage you're going to see some odd is really across the business. And we've shown leverage across all of the OpEx lines for the last several quarters. So I would point you to our guidance for the, you know, obviously without me getting the specifics on the quarter. And I would also point you to the fact that in Q4, there is a little bit of seasonality at play in our payment side of the business. So that'll have a different complexion, say, than Q3. But we expect to continue to drive leverage across all of the OpEx lines for the balance of the year.

Okay, great. And then maybe just a follow-up on pricing. It's been mentioned a couple of times about the 99% fee and maybe how the company will think about its philosophy on that. I just want for clarification, there's no assumption on a price increase based into at least the outlook for the rest of the year, right? And I guess when we think about price increase, should we think about that based on the comments? that you've given should we anticipate one at some point in the near future?

Yeah, so let me zoom out a little bit. So first of all, obviously our guidance reflects the change to the UEP that was not included, you know, it's no longer in our 2023. But just zooming out, Definitely pricing is a core element of our strategy over time. As we think about the next several years, we think about two dimensions, right? One is growth and one is profitability. When we consider growth, we have the two axes we always talk about, which is location growth. We're early in the TAM. We have ARPU, our ability to cross-sell and up-sell, which we have proof points and we're continuing to hone that land and expand motion. On top of that, we have pricing, which is a key element. tenant of our strategy over time. So that's really what's driving how we think about the growth in our business. I wouldn't over-rotate the pricing, but it is a key element of our strategy that we're contemplating.

Great. Thanks, Elena. Good to be working with you again.

Thanks, Bob.

Our last question comes from the line of Peter Heckman with DA Davidson. Your line is now open.

Hi, thanks for taking the question. Could you go over a little bit more on Toast Capital and your aspirations for that business? First, if you could just get some of the data you typically give on a quarterly basis like funding and if you go through some of the reserve data again. But as you think about that business, I mean, I think it's generating something like 15% of gross profit today. I guess, do you feel it's appropriate to limit the contribution of that business, given that in a different macroeconomic environment, you might have to pull back on that?

Yeah, I mean, let me start, let me zoom out and just start with the premise, you know, of why Toast Capital. And then, you know, we did have great performance this quarter on Toast Capital. It contributed about 10 basis points to our overall take rate. But at the core, we know our restaurants are underbanked, and we want to give them an opportunity to have access to capital in a fast and flexible way. And the proof points we have is not only do we continue to see demand from new customers, but we're also seeing demand from existing customers coming back and renewing their loans. And our default rates have been, for the most part, in line and are better than we expected. So in terms of how we think about are we going to grow this program? For the near term, I think we're going to continue to stay kind of in the zone that we've been in. But it's really important to remember how we manage the risk because that is what's given us the confidence to continue to extend loans. One is we look at internal and external, sort of look at it holistically. What are the internal factors we're seeing? What are some of the external factors we're seeing? And as a reminder, we have access to the payment data which gives us a lot of confidence in the credit worthiness of the customer. And then we partner with a bank to offer the loan. So the loans are coming off of their balance sheet. So it's balance sheet light for us. And our liability is really capped at 15% of the origination. And then we make the collections based on the payment volume daily. And so as that's, so we have a lot of confidence and visibility into the collection. And to your point, if the macro were to change or the environment were to change, then we have levers to sort of manage that. You know, we could tighten our lending parameters. We can reduce duration, which has an impact on bad debt. So there's a few different levers that we can play with should we need to kind of scale back on the program. And actually, we did scale back on the program during COVID in the early days where we said this might not be the time and we were able to successfully manage the bad debt during that time. And now we've seen demand come back. And as we've relaunched the program and relaunched different loan sizes, et cetera, we've seen a healthy demand. So I feel very confident. We've got a great team managing the risk of this business. And more importantly, we're helping our customers scale and grow.

All right. That's helpful. Thank you.

This concludes today's conference call. You may now disconnect your line.