Toast, Inc. Class A

Thank you, Sarah. Welcome to Toast's earnings conference call for the fourth quarter and full year ended December 31st, 2024. 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 and margin outlook, business and investment strategy, expected growth, and business outlook, including our financial guidance for the first quarter and full year 2025. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our SEC filings for discussion of the risks and uncertainty that could cause actual results to differ materially from our expectations. During this call, we will discuss certain non-GAAP financial measures, 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 tap 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 can be found on the investor relations website at investors.toasttab.com. After the call, a replay will be available on our website. And with that, let me turn the call over to Aman.

Thanks, Michael. And thank you, everybody, for joining us this afternoon. 2024 was a great year for Toast. We added a record 28,000 net locations. Our current gross profit streams grew 34% year over year. Adjusted EBITDA grew to $373 million, and we were gap profitable for the first time in the history of the business. I'm really proud of our team, and I'm confident that we're well positioned for a great 2025. Our mission at Toast is to help restaurants delight their guests, do what they love, and thrive. From day one, our vertical strategy has served us well by focusing on solving the needs of restaurants better than anybody else in the world. This has allowed us to deepen our market share, and establish a leadership position across SMB and mid-market restaurants here in the U.S. More recently, we've also started to expand our addressable market into new customer segments, new geographies, and new verticals. In 2024, our enterprise team had their best year yet, with marquee wins including Potbelly, Perkins, and Hilton Hotels. We continue to drive strong growth across our initial international markets, and our team in food and beverage retail demonstrated in 2024 that we should invest more to grow even faster in 2025. Over the next decade, we have the opportunity to serve many multiples of our 134,000 customer locations today. Not only can we grow market share and scale locations in our four U.S. restaurant segments, we can continue to expand our TAM by building up the platform to support new geographies and new verticals across complex higher GPV merchants where we have a right to win. Our strategy remains consistent with what we shared recently at our investor day, but we have refreshed our priorities to reflect what is most critical in 2025. First, and market share in our core US restaurant business. Second, demonstrating that our new markets can be material drivers of growth. Third, increasing customer adoption of our broad platform and driving differentiation through data and AI. And lastly, continue to hold a high bar and invest against their most important priorities while gradually expanding margins. All right, so let's dig in. First, scaling locations and market share in our core U.S. restaurant business. Despite our strong growth at just 15% market share in the U.S. restaurant market, we have tremendous headroom to scale. In 2024, we increased market share and location count in all of our top 100 markets in the SMB segment. Our most penetrated markets continue to see strong growth, which gives us confidence that our flywheel strategy is working, and we have the opportunity to scale market share in the years ahead. In 2025, we plan to surgically increase sales and marketing investments in our core business, including brand investments to increase awareness and consideration. As an example, we recently launched our It's the Little Things campaign that highlights how much the small details matter in hospitality. and can be the difference between an incredible guest experience versus just an average one. This campaign showcased the breadth and depth of our vertically integrated restaurant platform, a reason why more than a third of all James Beard award winners and over half of all Michelin star rated US restaurants run their businesses on toast. One of these Michelin stars belongs to Revere, a fine dining restaurant in Washington DC that has seen significant time and cost savings with toast. Toast Payroll has cut the time it takes for their small team to do payroll from three hours down to one. And because it's integrated directly into Toast, it's also more accurate. They also use Extra Chef to save time in inventory and identify when they're overpaying for ingredients, like when they decided to pull lobster from their menu recently after seeing the prices of lobster skyrocket. Without this data on their fingertips, their menu costs would have been over budget. Toast frees up the Revere team and gets them out of the back office so that they can focus on what they do best, delivering an award-winning tasting menu and a great guest experience. Moving on, our second priority is demonstrating that these new markets can be material drivers of growth. In 2024, we made great progress across enterprise, international, and retail, and expect to surpass 10,000 customer locations across these new segments later this year. We're investing in these businesses because customer reception and feedback has been strong, and we see the potential for them to drive significant location expansion for many years to come. In 2025, we'll invest in our R&D platform and our go-to-market capacity to drive customer satisfaction, win rates, and market share across these new markets, positioning us for strong growth in 2026 and beyond. In our enterprise business, as I shared, I'm excited to announce that Hilton Hotels and Resorts has chosen to partner with Toast as an approved food and beverage POS provider. This builds on our growing presence in hotels, including large chains such as Marriott and Choice Hotels, as well as many independent operators who see the benefit of the Toast platform. In addition, we've also signed our largest full-service restaurant deal with Ascent Brands, starting with 500 Perkins and Huddle House restaurants. Ascent recognized that they needed a modern cloud-based technology partner to improve operational efficiency. to help their staff drive consistently great service and support their ambitious expansion plans. Beyond these wins, our pipeline and presence up market has never been stronger, and I look forward to welcoming more large brands to Toast later this year. Internationally, you've heard us talk about our growth and positive customer feedback in our international markets, despite missing key parts of our platform that needed to be internationalized. We made progress against this throughout 2024, And most recently launched our loyalty and restaurant retail products. SAS ARPU for international locations that went live in Q4 2024 was up 50% year over year. And in 2025, we believe we have the necessary surface area across our platform to grow market share, expand sales capacity, and have a great year. And lastly, in retail, 2024 was really a year to test and learn. We knew that the same vertically-focused approach that has worked so well in restaurants would work for us in food and beverage retail. As we brought on initial customers, we've had tremendous learnings that has helped shape our product roadmap and our customer-facing strategy across sales, marketing, and customer success. One decision we've made is to scale a dedicated sales team to support our retail efforts to keep our restaurant team focused on increasing market share in our core market and let a specialist team go after this new opportunity. The food and beverage retail market, especially in grocery and convenience, has historically been served by legacy solutions with relatively low market share across horizontal cloud-based entrants. Our vertical approach has resonated with customers because we're going deep on the challenges these customers face, including the need for a mobile inventory tool, as well as new service models to make it easier and faster to drive speed of service, manage inventory, and efficiency at checkout, as well as improve the guest experience. To bring this to life, let me share an example. Kelly's Market in Decatur, Georgia. Kelly's is a grocery meets deli meets coffee meet wine bar. And before Toast, they actually used two separate point of sale systems because they didn't have something that could work seamlessly across their operation. Toast makes it possible for Kelly's to really deliver on hospitality. For example, a customer's sandwich order follows them as they move from the deli counter over to grocery and then to checkout. something other POS systems struggle to do. Kelly's is also able to customize each terminal to the store so that our POS prompts the tip of the coffee bar, but not a grocery checkout. And most importantly, with Toast, they're able to streamline their purchasing, receiving, and inventory workflows into a single system to save the team more than 10 hours a week. While it is exciting to track our progress and outlook this year, add even more conviction about what's possible over the next decade as we scale market share and expand our term TAM beyond these markets we're in today. Brick-and-mortar businesses continue to be underserved by modern, easy-to-use technology, and our platform is architected to be able to expand across multiple growth vectors in parallel. Next, our third priority is to increase customer adoption of our broad platform and drive differentiation by leveraging data and AI. At Toast, we deeply understand restaurants, the people that work in them, and the little things that add up to improving the lives of everyone in this business. This is reflected in how we build our products, and it's fueled our location growth, while also increasing attach rates in ARPU. Our aim is to help solve the hardest challenges our customers face, and to do so through a tightly integrated platform that remains easy to use. That's a delicate balance that we work hard to maintain. I'll share some examples from the past year. For front-of-house staff, we've launched dozens of enhancements to our core POS software, to kiosks, as well as kitchen display systems. To help drive guest engagement and demand, we've launched websites, branded apps, SMS marketing, powered by AI capabilities. And to help restaurants manage cost and complexity, we've improved reporting and multi-location management, enhanced our payroll and supply our accounting products, and launched a benchmarking tool that leverages our extensive restaurant data to provide actionable insights for our customers. This benchmarking tool has been a game changer for many of our customers, including our team at Otto, a full-service restaurant in Louisville, who have used their insights to enhance their menu, add new specials, and even change their hours of operation to grow their business. For example, they noticed that chicken sales were underrepresented in restaurants near them by using this data, and used that to add and market a fried chicken special on a slower night that boosted Tuesday night revenues by 40%. That's the power of our data. The scale of our data set and our product platform, the opportunity that AI creates, and our deep restaurant expertise are a strong foundation to build from as we look to the future. We also know how important guest demand and retention are, and we will deepen our focus here. Our strategy is anchored in helping restaurants improve their top and bottom line, and we're confident this will translate into stronger food growth and win rates for toast over the long term. And finally, as I wrap up, our fourth priority is to continue to hold a high margin, high bar, and invest against what's most important while gradually expanding margins. In 2024, you saw us make some tough choices and restructure our investments against what's most important. You also saw us dramatically expand margins while continuing to drive strong top-line growth. In 2025, we will continue to use the same discipline approach and make investments very deliberately in areas we see long-term opportunity for growth and differentiation. The Toast team does a great job of leveraging data to invest across different market horizons, which will help us continue to balance margins while doubling down in the areas where we see strong growth potential. As I wrap up, I want to thank and congratulate the Toast team for a record 2024. I also want to thank our customers and our investors for having confidence in all of us. I think we have a strong plan for this coming year, and more importantly, have clarity on what is most important to achieve our goals over the long term. Thank you, everybody. And next, I'll turn the call over to Elena to share more on this quarter's results and our outlook for 2025.

Thank you, Aman, and to everyone for joining the call today. I also want to thank our employees for another successful quarter and for the terrific execution that delivered our record performance throughout the year. Our full year results showcase the strength of our business model in what was a transformational year for Toast. We added a record 28,000 net locations processed approximately 160 billion in payment volume, and grew both ARR and our recurring gross profit streams 34%. We're delivering that growth at scale. In 2024, we added over 400 million in ARR and processed over a half a percentage point of total US GDP. On top of the strong top line momentum, we also significantly changed the financial profile of the company. highlighting our efficient approach to scaling the business. For the full year 2024, adjusted EBITDA was $373 million, with margins expanding 20 percentage points year over year, and we posted our first full year of GAAP profitability. We entered 2025 operating with momentum and from a position of financial strength. As you heard from Aman, we see a large and growing opportunity ahead of us to serve many multiples of our customer base. Our investments in 2025 are primarily directed at accelerating progress in new markets and fortifying our strength in our core as we position the company for durable growth over the long term. At the same time, we will take the same disciplined approach to balancing growth and profitability that you've seen from us. That balance is reflected in the midpoints of our 2025 guidance of 24% growth in our recurring gross profit streams and $520 million in adjusted EBITDA, a 30% margin. Turning to our results, in the fourth quarter, our recurring gross profit streams increased 39%, capping off a strong year of top-line growth Total monetization measured by our recurring gross profit streams as a percentage of GPD was 93 basis points in the fourth quarter. That is 10 basis point, that's a 10 basis point improvement from prior year and reflects our growing share of wallet and the increasing value we're providing our customers. We added approximately 7,000 net locations in the quarter. growing our total locations approximately 134,000, up 26% year over year. Looking out, we are well positioned to add a comparable number of net locations to our platform in 2025, as in 2024. In Q4, SAS ARR grew 32% year over year due to our strong location growth and a 5% increase in SAS ARR on the ARR basis. Subscription revenue increased 41% and gross profit 47%, benefiting from the improved ARR to revenue conversion we discussed last quarter, which partially includes a one-time benefit that will not recur in 2025. Our SAS net retention rate remained in a healthy range at 110% in 2024, led by solid contributions from up-to and location expansion from existing customers. Payments ARR and FinTech gross profit both increased 35% in Q4. GTV was $42 billion, up 25% year-over-year, with Q4 GTV per location down 1% versus the prior year. Q4 net take rate was 56 basis points with a core net take rate of 46 basis points. We typically see a quarter-over-quarter decline in payments take rate in Q4 from seasonally higher credit However, Q4 payments take rate and increase one basis point versus Q3 due to continued COGS optimization and the targeted price changes we made in September. We're confident in the team's execution and will continue to take a balanced approach to pricing, making thoughtful, targeted adjustments to complement our primary growth drivers of location additions and product attach. Non-payment FinTech solutions led by Toast Capital contributed $43 million in gross profit in Q4. For the year, Toast Capital originations exceeded a billion, reflecting steady, healthy demand from our customers. Toast Capital bad debt was down for a full year versus 2023, even as gross profit grew over 20%. That improvement reflects adding the forward flow model and lower default rates from optimizing our customer underwriting process. Looking ahead, we expect bad debt to grow as the program scales, and for Toast Capital's contribution to take rate to remain in a similar range as in 2024. Moving to expenses. In Q4, operating expenses excluding bad debt and credit-related expenses increased 12%, reflecting targeted investments in our highest priority growth initiatives. That includes expanding our retail-specific sales team and seeding new brand investments, which contributed to a 32% year-over-year increase in sales and marketing expenses. R&D grew 2% while G&A declined 12%, excluding $19 million of bad debt and credit-related expenses. In 2025, our investments will directly align with the priorities Amon laid out, accelerating our progress in our new markets, continuing to drive market share gains in our core, and innovation that leverages our scale and data to further differentiate our vertical offerings. Our dollar-based payback periods remain in the mid-teen months in 2024. We manage payback on a portfolio basis, and our ability to maintain a consistent level even as we increase investment in our TAM expansion areas demonstrates the strength and efficiency of our core customer group. We will continue to manage payback to mid-teens on a portfolio basis as we make long-term growth investments. Adjusted EBITDA was 111 million in the fourth quarter and margins expanded 18 percentage points year-over-year to 28%. GAAP operating income was 32 million in Q4, reflecting strong operating performance and lower stock expense. Through disciplined equity management, Stock-based comp was 16% of recurring gross profit streams exiting 2024, and we remain on track to reach our target of low double-digit percent of recurring gross profit over the medium term. Free cash flow totaled $134 million in Q4 and $306 million for the full year. In 2025, we anticipate free cash flow to broadly mirror adjusted EBITDA for the full year and expect typical seasonality throughout the year, with lower free cash order, the seasonality of our payments business, and the timing of annual cash bonus payments. Moving to guidance. In Q1, we expect total subscription and FinTech gross profit growth in the 27 to 30% range, and adjusted EBITDA to be 100 million to 110 million. On a full year basis, we expect 23 to 25% growth in our recurring gross profit stream. We anticipate higher growth in the first half of the year. In the second half of the year, we will allow the improved ARR to revenue conversion and comp against related one-time benefits we saw in 2024. On a full year, adjusted with the guidance of 510 to 530 million reflects a 30% margin at the midpoint and reaches our 30 to 35% future margin targets ahead of expectations. Our ability to increase investments in our new markets while expanding margins is a testament to the durability of our business model and the strength of our position in US SMB and mid-market restaurants. With good signals across international, food and beverage retail, and enterprise, we have confidence accelerating our investment will drive meaningful penetration over the next few years. On top of that, we will continue to seed investments in longer-term opportunities to build our next generation of growth vectors. In all, we are positioning ourselves to deliver healthy growth in 2025, 2026, and beyond. To wrap up, we are executing across the board, growing our core, expanding our TAM, and delivering leverage as we scale. Heading into 2025, we're laser focused on sustaining our momentum and continuing to execute at a high level across those same three areas. We're incredibly excited about what lies ahead for TOSP and are well positioned to capture the massive opportunities ahead. Now I'll turn back the call over to the operator to begin Q&A.