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    Toast Inc (TOST)

    Business Description

    Toast, Inc. (TOST) is a cloud-based, all-in-one digital technology platform designed specifically for the restaurant industry. The company offers a comprehensive suite of software-as-a-service (SaaS) products and financial technology solutions, including integrated payment processing and restaurant-grade hardware. Toast serves as the restaurant operating system, connecting front-of-house and back-of-house operations across various service models such as dine-in, takeout, delivery, catering, and retail.

    1. Financial Technology Solutions - Facilitates payment transactions through transaction-based fees and includes marketing and servicing working capital loans through Toast Capital.
    2. Subscription Services - Provides access to Toast's software applications over a term of 12 to 36 months, with fees based on location, software products purchased, hardware configuration, and employee count.
    3. Hardware and Professional Services - Sells hardware such as terminals, tablets, and handhelds, and offers professional services like installation, configuration, and training.

    Q3 2024 Summary

    Initial Price$25.83July 1, 2024
    Final Price$28.56October 1, 2024
    Price Change$2.73
    % Change+10.57%

    What went well

    • Strong net location adds of approximately 7,000 in Q3, driven by a good mix of new restaurant openings and competitive takeaways, with confidence in continuing location growth into 2025, including expansion into Retail and International markets.
    • Significant win of Potbelly Sandwich Works, adding over 400 locations, demonstrating success in the Enterprise segment and the potential to capture larger clients for substantial future growth.
    • Robust performance of Toast Capital, with increasing demand and potential to expand the program, contributing to overall growth and profitability, while default rates remain in line with expectations.

    What went wrong

    • GPV per location decreased by approximately 3% year-over-year and is expected to remain at similar levels, indicating potential stagnation in customer spending.
    • The company expects adjusted EBITDA to decline sequentially in Q4 compared to Q3 due to typical seasonal declines and planned investments, which may impact profitability.
    • A portion of the increase in subscription revenue was due to a one-time benefit, suggesting future growth in subscription revenue may not be as high.

    Q&A Summary

    1. Location Growth Outlook
      Q: Will you add more locations in '25 vs '24?
      A: We've had a great quarter with 7,000 net adds , and strong net adds in 2024. Led by our flywheel markets driving strong productivity , we're confident in our ability to continue driving location growth into next year.

    2. Price Increases Impact
      Q: How long will price increases roll through the base?
      A: We made very targeted price changes for a small cohort of customers, effective in September. Minimal impact in Q3, small impact in Q4. Pricing is a long-term strategy, and we'll occasionally make targeted adjustments where it makes sense.

    3. Software ARPU Expansion
      Q: What's driving the sharp acceleration in software ARPU?
      A: We improved our ARR to revenue conversion by enhancing billing infrastructure and quote-to-cash processes. This resulted in more ARR converting to revenue. Some of this is a one-time benefit , so future quarters won't be as high as Q3 but higher than historical levels.

    4. Enterprise Pipeline Growth
      Q: How is the enterprise pipeline building?
      A: We're continuing to build on previous years with increasing scale and opportunities. This reflects our go-to-market execution and investments in product capabilities upmarket. Enterprise is an important growth vector for us over the next decade.

    5. Capital Business Outlook
      Q: Where will capital volumes as % of GPV be longer term?
      A: Our execution has been excellent, with $43 million in performance this quarter , and default rates are as expected. We'll continue to grow the program in a balanced way , and there's no reason we couldn't grow through more attach while ensuring a balanced risk-adjusted manner.

    6. GPV per Location Trend
      Q: Has GPV per location troughed in Q3?
      A: GPV per location was down 3%, consistent with Q2 , and has been relatively stable over several quarters. As we head into Q4, it will be in the same range, as reflected in our guidance. We expect a similar trend over the next couple of quarters.

    7. Strategic Priorities Ahead
      Q: Any re-prioritization of initiatives for next year?
      A: Our strategy remains consistent with what we outlined at Investor Day. We're focusing on scaling our core business and expanding into areas with good opportunities like international and CPG retail. We're investing more in these areas based on positive signals.

    8. Net Adds and Churn
      Q: Are the 7,000 net adds balanced between openings and takeaways?
      A: The 7,000 net adds are consistent with past trends , showing a good mix of new openings and existing restaurants upgrading. Churn is largely aligned with historical patterns, impacting smaller ARR due to smaller restaurants.

    9. Retail Go-To-Market Strategy
      Q: How are you approaching retail go-to-market strategy?
      A: We see great momentum in retail, giving us confidence to invest more in 2025. We're investing strategically with a team focused on retail and leveraging our existing sales reps to drive lead flow. We're tweaking and testing the best approach to maximize growth.

    10. New Product Upsell Strategy
      Q: How are you upselling Branded App and SMS Marketing?
      A: These are valuable additions to our guest suite to help customers drive demand. Early feedback is great, especially among mid-market and multi-unit SMB customers. It's part of our long-term growth strategy to drive locations and expand our TAM. Gross profit impact is too early to report, but our focus on unit economics and payback periods remains.

    11. International and Retail Wins
      Q: Any numbers on location wins for international and retail?
      A: We're seeing continued momentum since Investor Day. Progress across both international and retail is positive. In CPG retail, there's good progress across grocery, convenience, and bottle shops. Internationally, we're adding more products, improving unit economics and productivity. We plan to invest more in these businesses in '25 based on current signals.

    12. ARR vs. Revenue Growth
      Q: What's the difference between SaaS ARPU and subscription revenue growth?
      A: Differences between ARR and revenue are due to timing, concessions, or credits. When discussing SaaS ARPU, we're referring to an ARR basis. The team's execution has been strong.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDQ3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Subscription Services107121131141500151166189
    Financial Technology Solutions6738088568523,1898731,0231,067
    Hardware314134-----
    Professional Services8811-----
    Hardware and Professional Services----176515349
    Total Revenue8199781,0321,0363,8651,0751,2421,305
    Revenue by Geography - in Millions of USDQ3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    United States8199781,032-----
    Other RegionsNot MaterialNot MaterialNot Material-----
    Total Revenue8199781,0321,0363,8651,0751,2421,305
    KPIs - Metric (Unit)Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    ARR [$ Million]9871,1401,2181,218-1,3051,4731,554
    GPV [$ Billion]26.732.133.733.6-34.740.541.7
    Locations [Count]85,00093,00099,000106,000-112,000120,000127,000

    Executive Team

    NamePositionStart DateShort Bio
    Aman NarangChief Executive Officer, Co-FounderJanuary 1, 2024Aman Narang is a Co-Founder of Toast, Inc. and has served as its CEO since January 1, 2024. Previously, he was Co-President (2012-2023) and COO (2021-2023). He holds B.S. and M.S. degrees from MIT.
    Stephen FredettePresident, Co-FounderJanuary 2024Stephen Fredette is a Co-Founder and has been serving as President of Toast, Inc. since January 2024. He was Co-President (2015-2023) and CEO (2011-2015). He holds a B.S. in Chemistry from MIT.
    Elena GomezChief Financial Officer, Interim Chief Accounting OfficerMay 2021 (CFO), August 9, 2024 (Interim CAO)Elena Gomez has been the CFO of Toast, Inc. since May 2021 and became Interim Chief Accounting Officer on August 9, 2024. She was previously CFO at Zendesk and held senior roles at Salesforce.
    Brian ElworthyGeneral Counsel, Corporate SecretaryNovember 2016 (GC), August 2021 (CS)Brian Elworthy has been the General Counsel of Toast, Inc. since November 2016 and the Corporate Secretary since August 2021. He previously worked at inVentiv Health and Ropes & Gray LLP.
    Michael MatlockChief Accounting Officer (Resigned)March 1, 2023Michael Matlock served as the Chief Accounting Officer of Toast, Inc. starting March 1, 2023. He announced his resignation on June 20, 2024, effective August 9, 2024.
    Jonathan VassilChief Revenue OfficerJanuary 2022Jonathan Vassil has been the Chief Revenue Officer of Toast, Inc. since January 2022. He joined Toast in August 2017 and previously held leadership roles at GolfNow, Orderup, and Groupon.

    Questions to Ask Management

    1. Your GPV per location has declined approximately 3% year-over-year for consecutive quarters, and you expect this trend to continue into Q4. What are the underlying factors driving this decline, and how do you plan to address them?

    2. Operating expenses increased 11% year-over-year in Q3, with sales and marketing expenses up 25% and R&D expenses up 5%. How do you justify these increased investments amidst declining GPV per location, and what return on investment do you expect?

    3. Churn remains slightly above 10% on an annualized basis, primarily impacting smaller restaurants. What strategies are you implementing to reduce churn among these smaller clients and improve overall retention?

    4. You added approximately 7,000 net locations this quarter. Can you provide a breakdown between new restaurant openings and competitive takeaways, and how sustainable is this level of net adds in the current market environment?

    5. You are investing more in TAM expansion areas like retail and international markets next year. Given the early stages of these ventures and increased operating expenses, how confident are you that these investments will yield profitable returns, and what are the main risks you foresee?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateFebruary 2024
    End Date/DurationNo expiration date
    Total additional amount$250 million
    Remaining authorization amount$194 million as of September 30, 2024
    DetailsRepurchase of Class A common stock, flexible capital allocation, no obligation to acquire specific amount, may be suspended at any time

    Past Guidance

    Toast (TOST) Guidance from the Last Four Earnings Calls

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      • Q4 2024 Guidance:
        • Total subscription and fintech gross profit growth: Expected to grow in the 32% to 35% range year-over-year.
        • Adjusted EBITDA: Expected to be in the range of $90 million to $100 million.
        • Sequential decline in adjusted EBITDA and margin: Attributed to typical seasonal decline in GPV per location and planned reinvestments.
      • FY 2024 Guidance:
        • Fintech subscription gross profit growth: Expected to grow 32% to 33%.
        • Adjusted EBITDA: Expected to be in the range of $352 million to $362 million, representing a 26% adjusted EBITDA margin at the midpoint.

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Q3 2024 Guidance:
        • Total subscription and fintech gross profit: Expected to increase in the 23% to 27% range year-over-year.
        • Adjusted EBITDA: Expected to be in the range of $70 million to $80 million.
      • FY 2024 Guidance:
        • Fintech and subscription gross profit: Expected to grow 27% to 29% year-over-year.
        • Adjusted EBITDA: Expected to be in the range of $285 million to $305 million, representing a 22% margin at the midpoint, which is a 16 percentage point improvement versus 2023.
        • GAAP profitability: Expected to be around breakeven for the remainder of the year.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Q2 2024 Guidance:
        • Total subscription and fintech gross profit: Expected to increase in the 20% to 24% range year-over-year.
        • Adjusted EBITDA: Expected to be between $55 million to $65 million.
      • FY 2024 Guidance:
        • Fintech and subscription gross profit: Expected to grow by 26%.
        • Adjusted EBITDA: Expected to be $260 million, with a margin of 19%, marking a 13 percentage point improvement versus 2023.
        • GAAP operating income: Expected to be close to breakeven by the end of the year.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      • Q1 2024 Guidance:
        • Top line growth: Expected to grow 22%.
        • Adjusted EBITDA: Anticipated to be $20 million at the midpoint.
        • Net location adds: Expected to be in the 5,500 range, with location adds peaking in Q2.
        • Free cash flow: Expected to be negative in Q1 due to seasonality and timing of cash bonus payments.
      • FY 2024 Guidance:
        • Recurring gross profit streams: Anticipated to grow 24%.
        • Adjusted EBITDA: Midpoint guidance of $210 million, reflecting a nearly $150 million improvement and margin expansion of 10 percentage points relative to 2023.
        • Stock-based compensation: Aimed to reduce from 27% in 2023 to low double digits as a percentage of recurring gross profit streams over the medium term.
        • Restructuring charges: Anticipated to be $45 million to $55 million for the year, with most in Q1.
        • Annualized savings: Expected to exceed $100 million from restructuring and lower hiring.
        • GAAP operating income profitability: On track for profitability by the first half of 2025.