Toast, Inc. Class A

Good afternoon. My name is Kate 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 star followed by the number two. Thank you. I'll now turn the call over to Michael Seno, Senior Vice President of Finance. You may begin your conference.

Thanks, Kate. Welcome to Toast's earnings conference call for the fourth quarter and full year, ended December 31st, 2023. On today's call, our CEO and co-founder, Aman Narang, and CFO, Elena Gomez, will 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 Act 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 profitability timeline and margin outlook, anticipated impact of our restructuring plan and share repurchase program, expected growth in business outlook, including our financial guidance for the first quarter and full year 2024. 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 can cause actual results to differ materially from our expectations. During this call, we will discuss certain non-GAAP financial measures, including, but not limited to, non-GAAP subscription services gross profit and non-GAAP financial technology solutions gross profit, which we refer to collectively as our recurring gross profit streams. These are the basis for our top line guidance. 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, the press release and our earnings presentation can be found on the investor relations website at investors.toastapp.com. We will no longer publish an earnings presentation on a quarterly basis going forward. After the call, a replay will be available on our website. With that, let me turn the call over to Aman.

Thank you, Michael. Good afternoon, everyone. And thank you for joining today's conference call. This is my 12th year since we launched Toast in my basement with Steve Fredette and Jonathan Grin back in 2012. And I'm honored to be here today with all of you and lead this great business as CEO on my first earnings call. Before I recap 2023 and look ahead to 2024, I do want to address one topic upfront. We've made the difficult but right decision to reduce our headcount by 10%. As you know, Toast grew rapidly over the past few years to support our growing customer community. As we've taken a look across the organization, it has become clear that we grew our team too quickly in some areas, and we need to restructure the organization to best align with our most important priorities. The changes we announced today primarily focus on non-customer facing roles, and we remain committed to sustaining healthy top line growth and delivering a best in class customer experience. I want to thank every toaster past and present, including those who are leaving us, for the important part each of you played in getting us to where we are today. In the very immediate term, my priority is to ensure we navigate today's decision with empathy and support for those affected. As we work through this transition, I'm confident we can tap into a renewed sense of optimism for the opportunity ahead. Our defining challenge for 2024 is to operate with a shared urgency against our mission, raise the bar on how we collaborate, and maintain a relentless focus on our customers. Over the past decade, we've built a leading integrated software platform for the restaurant industry. And since our IPO in September 2021, we've launched so much innovation to help restaurants thrive. products like reservations, websites, scheduling, retail capabilities for restaurants, a full redesign of our POS experience, and more recently, our Toast Now operator app, to name a few. This focus on platform innovation has allowed us to double the number of restaurants on our platform to 106,000 and more than double ARR to over 1.2 billion in CIPO. As we look ahead, our conviction in the future is as strong as ever. We are well on our way to becoming the technology platform of choice for the entire restaurant industry. Continuing to deliver on our mission and serving as the technology backbone for restaurants will lead to significant value creation for all our stakeholders, our customers, our shareholders, and of course our coasters that support our community each and every day. To accomplish this, we're focused on four strategic priorities. First, scaling restaurant locations within our core business. Second, driving ARR and ARPU by building products and experiences our customers love. Third, expanding our addressable market by launching and scaling new growth vectors. And fourth, setting up the company to scale and deliver ongoing operating leverage. Now let me walk through each of these in more detail. First, we will continue to win market share and scale restaurant locations within our core business. We added over 6,500 net locations in Q4 and ended the year with approximately 106,000 locations, a 34% increase versus 2022. Our ability to sustain over 30% location growth at this scale is a testament to our competitive differentiation, our all-in-one platform, our localized go-to-market approach, and the consistent execution by our sales and customer success teams. The momentum in our SMB segments has allowed us to double the number of flywheel markets over the past year. with 30% of our markets now in flywheel, defined by over 20% SMB market share. Our rep productivity in flywheel markets is over 10% higher than other markets, leading to faster share gains. Even in our most penetrated markets where we have over 30% market share, we are still gaining share at a healthy clip. These markets are a benchmark for how we expect other markets to evolve over time and gives us confidence in sustaining healthy location growth. The foundation of our success starts with high-value, full-serve restaurants, which our go-to-market team is prioritizing. In addition, we're gaining traction across the broader TAM as we expand our product offerings to serve different restaurant types. And as our addressable market grows and we see gradual adjustments in our mix across SMB, mid-market, enterprise, and international restaurants, we expect our food to continue to increase and GPV per location to remain above industry averages. our team continues to ensure we maintain healthy unit economics as we scale locations across these categories. In addition to our SMB market segment, which is the largest share of the market and remains the biggest driver of net ads, we continue to see growth in our mid-market segment, including brands such as Wetzel's Pretzels, the 99, Dirty Dough, Romano's Macaroni Grill, that have joined Toast over the past year. Let me highlight what FSR went from the quarter. Urban Prime Marketplace and Restaurant, founded by chef Arjan Ekinci in Florida, opened in October. Urban Prime is an upscale FSR with large indoor and outdoor dining areas, as well as a gourmet market featuring a butcher shop, sushi, and wine. After extensive research, Urban Prime selected Toast to consolidate their business across their thriving restaurant and gourmet market, and are leveraging our POS terminals, Toast Go handle devices, kitchen display systems, online ordering, gift cards, and marketing. Using our restaurant and retail product, they were able to consolidate POS systems across their restaurant and market to simplify their front and back office operations and consolidate all the revenue streams into a single backend. In addition, they've also recently switched to Toast Payroll to further streamline and simplify their business. It's great to see Urban Prime expand with Toast and refer several restaurants to Toast. Our second priority is driving ARR and ARPU by building products and experiences our customers love. To complement our strong location growth, we are laser focused on increasing ARR at scale. In 2023, we grew total ARR 35% year over year. We believe there's runway in our existing markets to continue to scale locations while also increasing both SaaS and FinTech ARR to product innovation, pricing, and our continued investment in upselling existing customers through our growth sales team. Higher product attach rates is an important driver of ARPU. Many of our existing products have plenty of runway to scale, and our product teams continue to act on customer feedback to enhance and expand their terminal attach potential across their customer base. For new customers, earlier this month, we rolled out simpler product packaging that will enable our new business reps to maximize initial product attachment ARPU while balancing strong location growth. And for existing customers, price adjustments is a new lever that we're looking to build into our ongoing ARPU growth strategy. We will take a holistic approach across both SaaS and FinTech, and you should see progress from us in 2024 that we build on moving forward. One customer that has expanded and adopted more of the platform is Angelo's Ristorante in Massachusetts. Angelos is a classic Italian eatery, half fine dining, half takeout pizzeria. We joined Toast in 2018. On a busy Friday night, Angelos may send 40 to 50 tickets to the kitchen in a short 15-minute period. And to support this volume, they went looking for a new POS. After looking at 10 different systems, they chose Toast because it best met their needs. Since joining Toast, Angelos' SaaS ARR has almost doubled. Angelo, the restaurant's owner, has worked closely with us to add more products to grow revenue, including online ordering, catering and events, and toast tables. With toast tables, Angelo's hosts can more efficiently manage table turnover and bring in more reservations. And as a new payroll customer this year, Angelo is excited about the time and cost savings he's seen so far. All right, so shifting to our next priority, our third priority is expanding our TAM by launching and scaling new growth vectors. To complement our success across SMB restaurants, our product team is hard at work to make Toast an even better fit across enterprise, hotel restaurants, and international markets. Last week, we announced an agreement with Choice Hotels. Toast will be the brand standard for Cambria and Radisson hotels, as well as a qualified vendor for other Choice brands. Cambria and Radisson will leverage the breadth of the Toast platform, including Toast online ordering, mobile order and pay, kiosk, and Toast Payments to support the different dining options across their properties. We're also thrilled to welcome Caribou Coffee to Toast. They chose us to maximize speed of service across their coffee shops and partner with a scalable restaurant platform to support their expansion plans. And internationally, I'm excited to share that we've exceeded 1,000 locations as of the fourth quarter. The team has worked hard to establish the Toast brand in parts of Canada, the UK, and Ireland, using the same localized go-to-market approach that has worked domestically. The customer reception in these markets has been terrific, and it reminds me of what we saw here in the US in the early days. As more of our platform is available in international markets, including online ordering, guest marketing, and reservations, we expect to drive higher ARPU and further improve our payback periods and margins. This is a priority in 2024. We're confident that as the enterprise international markets represent a significant growth opportunity for Toast. Additionally, we're also looking to leverage our differentiated go-to-market engine, our all-in-one platform, and our growing scale to open up new opportunities for us. We're seeding investments in new parts of the TAM where we believe our market position provides a competitive advantage. Restaurant retail is a good example of this, and these nascent initiatives should further complement our growth potential over the long term. Next, our fourth priority is setting up the company to operate and scale to deliver ongoing operating leverage. In 2023, we grew ARR 35% and adjusted EBITDA to $61 million, which was a $175 million dollar improvement year over year. Our progress shows the scalability of our business as we balance growth and profitability. As we continue to grow, we are committed to the ambitious priorities I laid out above as well as delivering increased operating leverage, including gap operating income profit by the first half of 2025. This effort includes managing a stock-based compensation expense with the same discipline that we approach all our expense lines. Additionally, as we start to scale free cash flow, our capital allocation approach will evolve. This includes prioritizing organic investments in areas we have signal and conviction that we can grow, looking at M&A if we see the right opportunities, and returning capital to our shareholders. To support this, our board has approved a $250 million share repurchase authorization, which we will leverage opportunistically based on market conditions. We plan to regularly evaluate and optimize our capital allocation priorities, and we will do so with a disciplined and transparent approach. All right, to wrap up, I want to leave you with a few themes that I covered today. We have a large opportunity ahead and have built the foundation to capitalize on it. As we execute our playbook to deliver continued market share gains in our core business, we will invest in parallel and leverage our strengths to open up additional TAM and build new growth curves. We will sustain ARPU and ARR growth through a combination of product attach and pricing. And we're confident we have a scalable business model and will continue to balance growth and profitability. I want to thank all our Toasters, including those who will be leaving us, for your dedication and contribution to Toast. As I said earlier, this week is a tough week, but I'm confident that we will move past this and over time build a stronger Toast. I also want to thank our customers for entrusting us to support this incredible community. And I want to thank our shareholders for believing in us and the potential in this business. Thank you. And I'll turn it over to Elena.