Okay, great. Welcome everyone to day 2 of the 27th Annual Global Technology Conference here at UBS. My name is Timothy Chiodo. I'm the lead payments processors and fintech analyst. We're very fortunate to have with us today the full team from Toast. We have Aman Narang, who is the incoming CEO, we have Elena Gomez, the CFO, and we're also fortunate to have the IR team here with both Michael Senno and Emily Woodward. So Aman, Elena, Emily, and Michael, thank you for being here in Arizona.
Thanks, Tim.
Thanks for having us.
All right, great. So I mentioned incoming CEO, but also a very unique position in that also an original founder. So, Aman, maybe we could start with you and talk about this new role as the, coming in as the CFO and talking about some of your priorities.
Yeah. Look, first of all, I'm incredibly excited about the opportunity. You know, even though, as you mentioned, I've been at this for 10 years, in some ways it feels like a new beginning. Look, there's a couple of things I'll leave you with. One, the strategy. Strategy fundamentally is not changing, and we're incredibly focused. Chris, Elena, and I are fully aligned on this. We're focused on balancing long-term growth with durable operating leverage in the business as we continue to scale. You know, as I think about just my journey over the past 10 years, and I started off with Steve and John in my basement, actually, and you know, we did every job, right, getting this business up off the ground.
Whether it was getting product market fit with the early point of sale, to getting the first-time earned customers, to really understanding what it takes to scale in this business, and then more recently, in as COO, I've been working really closely with the senior team on our strategy and our priorities. So at the highest level, like, our mission, our purpose is not changing. Like, one thing we always talk about is, you know, we, we always want to get better, right? Whether it's in terms of how we sell, how we support our customers, ways in which we can build products, those are things we're gonna keep doing.
And Chris and Elena have talked a lot about, and I've talked about as we think about the next decade of the business, investing in things that will drive the best customer outcomes, investing in things that will drive durable growth, and then core operating leverage in the business is incredibly important. Look, at the end of the day, if you think about our business, the ability to invest long term into new S-curves and new areas of growth will be driven by our ability to drive meaningful margin on our core business, and that's really, really important. So it's really balancing the two, right, that we're going to continue to focus on.
All right, great, Aman. All right, so for the balance of the presentation here, we're gonna almost kind of walk through the model, starting at the top and hit almost every line item. So let's start with GPV trends. So there was a little bit of softness kind of exiting Q3 that you mentioned. Maybe you just give an update on how things are tracking thus far in Q4.
Sure. I'll start. So at the highest level, we're in line with what we shared a few weeks ago at earnings. Nothing's really changed, but let me provide some texture for those of you who weren't on the call. So as we entered into the year, we understood that because the inflation dynamic that we've had over the last two years, that we would expect GPV per location to moderate, and that exactly has played out. We also, as we get into different parts of the TAM, we're seeing different GPV dynamics. That's more gradual, by the way. Like, the bigger story is really the inflation story. As we entered into Q3, we expected similar trends, right? We expected that moderation and inflation obviously to continue to play a role.
But as we got into September, what we saw was transaction volume started to soften, and so that's what led to GPV per location in September, down 2% year-over-year and down relative to earlier in the year. And so as we thought about Q4, it was really important for us to, you know, think about that context. And obviously, we shared on our earnings call that in October, improved down 1% or 2%, but still down relative to a year ago. And now that we're sitting here and looking at the quarter, we feel those trends are gonna persist. So zooming out, I think, you know, our view is those trends will persist in the near term.
So a little mix, a little macro, fair to say?
Yeah, and I think the other thing, too, is mix, lesser to a lesser degree, because that's way more gradual. But we feel like that GPV per location is largely stabilized in this range, so we're not, you know, we're not suggesting it's gonna get materially worse at this point, but we feel like we can manage it in this narrow range.
Okay, great. That's a great update on GPV.
Yeah.
Let's move on to locations. So this has been an area of where we would have looked at street numbers earlier in the year versus today, they're much higher on locations, and you raised the second half guide for locations pretty recently. So maybe we just talk about some of the positives that have been driving those better locations, that outperformance, and more specifically, if any newer customer types are playing a role there.
Yeah, sure, Tim. Look, I think they're really proud of the way the go-to-market team is performing. As you mentioned, it's been a bright spot for us. And what's really driving this is something we've talked about in previous calls, public calls as well, just our core US SMB business. And if you think about restaurants, you know, the restaurant scene in Boston or Phoenix are very different. And what we see in terms of our ability to grow and gain share is also dependent on what we see locally in these markets. And at the core of it is, what is our market share, and what is the tenure of our team in these markets?
That's really a key driver, our productivity, and that's because you see that in the top of funnel in terms of, awareness for Toast, win rates, conversion, and then, of course, the productivity of our team. And at some level, that kind of makes sense, because if you think about how restaurants buy, right? Social proof in the decision is so important in terms of how they make the decision. And so our core U.S. SMB business is really the—i t's really the main driver of what's driving the net location adds to be in a great spot. We've also seen, you know, over time, we've seen some good momentum with our regional mid-market and mid-market business. That's something we don't talk enough about.
You know, brands like 99 Restaurants or Golden Corral, that's also a very healthy part of the TAM, where we're seeing really good momentum. And then, you know, more gradually, things like Marriott, upmarket, MTY, we're seeing gradually move upmarket as well. I think there's one thing I'll leave you with: we expect over time, r ight? The whole of the restaurant TAM to open up to us. We expect that. That's what we're planning for, that's what our product teams are focused on. But today, the core of the growth is driven by our US SMB business. And of course, the last thing I wanted to mention is the international business. Not quite material yet, but seeing really good early signal. In fact, in many ways, what we see internationally, you know, is not that different.
We don't have the full product yet, but it's very similar to what we saw back in 2013 in, you know, Boston, when we launched the business, in terms of just the customer receptivity for a platform like Toast. So that's another thing we're tracking.
Okay, excellent. Thank you. Before we move on to some of the other items, let's just stick here with locations a little bit.
Yeah.
Just talk a little bit about—y ou mentioned more net adds. But let's break down the two components.
Yeah.
Whether it be gross adds or, of course, your underlying churn trends.
Yeah, look, in terms of some of the major trends, there's nothing material that's changed. If you look at—y ou know, one thing we track very closely is the mix of new restaurant openings with existing restaurants, and we see some territories where there's more affinity towards new restaurant openings, and some territories where it's more of an affinity towards switchers. In both cases, our sales teams were able to hit quota. So we were really good about being able to, you know, win in both environments with strong win rates. In terms of the mix of FSRs and QSRs, you know, we historically, as a business, because of our platform, we've had a lot of strength in FSR.
You look at, like, one of the things that we've seen, for example, the Toast product, one of the most common ways guests will see it is the handheld device, right? So if you go to a restaurant, the handheld to check out. So we've seen a lot of strength in FSRs historically. More recently, with our focus on QSR, with things like a launch of Toast for QSRs, Cafe and Bakery, we've seen an uptick in the mix between FSR and QSR, but it's reasonably balanced across both. And I think the other thing we've seen is, just in terms of the new openings that have come on board, there's a slight, they're slightly skewed towards QSR.
So I think overall, I feel very good about, you know, our sales team's ability and our go-to-market team's ability to continue to grow. In terms of churn, you know, I think the most of the churn that we see is out-of-business churn, restaurants going out of business, and that's been, I think it's been in the 10% range for a while now.
Okay, excellent.
Yeah.
Let's move on a little bit to the spend that goes associated with getting these new locations. When we think about location growth in context of CAC, you've typically talked about this mid-teens payback. Is it fair to say that with these higher locations than we previously modeled, are those paybacks maintaining in that level?
Yeah, we plan definitely. But we plan our payback, and that's exactly how we plan our business. So when we think about the next year, we always come back to that payback period in the mid-teens per month. And it's really based on the dollar-based payback period. So it includes our upsell team, it includes our new business team, it includes all of the reps across the business, of course. And as we get into, as Aman talked about, things like international and enterprise, where there's, like, different payment dynamics, as long as overall we're managing a portfolio to that mid-teens, we feel really good about that conviction.
We know that as we extend it to different parts of the TAM, we'll see that dynamic where, in fact, international today doesn't have the full breadth of the platform. So you can imagine that payback period, as we roll out more product, will just improve. But overall, mid-teens is what we're anchored to.
Excellent. Okay, so consistent on the mid-teens number of months payback. Okay, let's move into SaaS ARR per location, which has, in our investor conversations, been the, the most topical item since the last quarter. So when we think about SaaS ARR per location, there's really three levers. There's the new customers coming in, there's the existing customers, and then, of course, there's pricing across the board. So let's start with the new customers. You gave a very, very helpful disclosure last year in terms of the SaaS ARR per location that was coming in for your new cohorts back to 2020, 2021, and 2022.
Earlier this year, you signaled and disclosed that maybe some of those new cohorts this year were coming in at a slightly lower SaaS ARR per location, and maybe we could just dig into the reasons for that, and some of the mix-related topics.
Yeah, sounds good. So, you're right. I, you know, at the highest level, let me just remind everyone, we're focused obviously on ARR growth. That's our North Star metric, and our reps are comped on that, et cetera. And this year, what you're seeing is a lot of momentum in location acquisition. We had record locations in Q2, as an example, and increased our guide for the balance of the year. In addition to that, we had solid ARPU growth. And so when we look at go-lives, which is your question, like, are go-lives coming on board at a lower ARPU? The fact is, they are, but that's because we're managing and optimizing this land and expand motion, and we should talk about upsell as well, because that's a really important part of that.
Sure.
So we're landing smaller, trying to optimize that motion. I mean, if you just think about when a rep is. Their goal on ARR, right? So when they're on the ground with a customer, they're really gonna try to understand what is the customer's timeline? Can they absorb this product all at once? Are there certain parts of the platform that they just don't wanna adopt today? But we know that the upsell team can come back and cross-sell that, you know, 3-6 months later. And so the rep is very comfortable sort of balancing that tension between location and ARPU, and we empower them to do that because their goal is on ARR. So that's part of it. There's a smaller part related to mix, right?
As we extend into international, as we build out our enterprise, those are gonna naturally have different ARPU dynamics. And international is a great example of, you know, we're seeing really great signal. We don't even have the complete platform out internationally, so that presents an opportunity for us to drive greater ARPU over time. And so we're focused on that, but that, that mix is playing a little bit of a role there. But just kind of zooming out, we feel really confident that over time, with the innovation, with pricing, with packaging, we can drive ARPU up over time. And this is a long-term journey, too.
Excellent. Thank you, Elena. Before we move to the upsell portion, on the, you mentioned the go-live, or as I refer to, the new customers. When we say they're coming in at lower SaaS ARR per location, we mean relative to the go-lives last year. The actual absolute level is pretty similar to your total average.
Yeah, relative to—y eah, exactly. Yeah, exactly. So, we have opportunity as we get into, you know, the next couple of years, just with packaging, to continue to hone that land motion and bring more up front. And we're going to empower the rep to continue to do that, but that's the reference point.
Perfect. Okay, so we mentioned those levers. There's the new customers, which we just covered. Let's go to the existing customers. So the upsell team y ou started building out this team a few years back, and on this most recent earnings call, you talked about further investing behind the upsell team. So maybe we could just talk a little bit about the contributions that you're seeing—
Yeah.
M aybe some of the signs that you saw that made you decide to hire more of those folks?
Yeah. We, we have a lot of conviction long term in our upsell team and our upsell motion, and I, I think it just starts by grounding it in customers. If you talk to our customers, one of the consistent themes that we hear is that they want us to do more. You know, they want a platform that's easily integrated, that's simple, and they're looking for us to, to do more for them. You know, our upsell motion, as we've talked about, is newer. We've had a new business team for a decade now, and the upsell motion, just to level set, it's a couple things. One, we've got this e-commerce engine, it's called Toast Shop, and this is really for the lower margin, lower, you know, simpler products.
Like, you want to buy a new handheld, for example, and add to your hardware, or you want to add in a module that's a lower ARPU module. And then for the more complex sales, we've got the upsell team that we're growing. One stat that I'll share is, and I think we shared this in the last call as well, we're starting to see more and more of our customers, right, above the 10K ARPU threshold, and half of these customers are coming through the upsell channels. We're starting to see some really good signal in our upsell team. They're able to. When we land customers at lower ARPU, that they're able to then jump in and expand that over time. You know, a great example of this is payroll. You know, I think, you know, when we look at.
This is where we're, you know, constantly refining our sales comp plans and such. One of the things we've learned is there are some cases, for example, with payroll, where if you're an existing restaurant- a new restaurant, for example, you know, you want, you want the whole bundle. You might want our online ordering, or scheduling, or payroll. But if you're an existing restaurant with multiple locations, you may want to start with just the point-of-sale platform and some of the core offerings, digital offerings, and maybe payroll is a good module to expand over time. And so we're starting to see some of those— learning some of those patterns in terms of what makes sense for land, what makes sense for expand. And then I think if you just zoom out and look at the overall platform that Toast offers, right?
We've got the core commerce platform, we've got Fintech, we've got guest, employee, and S&A, and across all of these, we're innovating. So more recently, we talked about restaurant and retail, for example, and so this is really the hybrid restaurant and retail concepts. We launched Toast Tables, Toast Catering and Events. A lot of these products have very low penetration rates in our base, and so we have opportunity there with the upsell engine. And so I think overall, like, there's still work to do in terms of tweaking that model, but long term, have tremendous conviction that we can figure it out. And a lot of that's really driven by talking to our customers, who tell us they want us to do more for them because the integration makes their lives easier.
Yeah, the only thing I would add is that that signal that we're seeing because of the, the stat that he talked about, that 10% paying us more than $10K. When you actually look at those customers, like the complexion of the customers that are paying us more, and some are paying us as high as $20K, as an example, you can get to that $10K of ARPU in multiple ways. And so you could be very hardware driven and have lots of Toast Go devices, or you can have payroll and xtraCHEF, and so there, there's a different combinations of our platform that yield that outcome, which we feel really good about 'cause that number continues to grow as well.
Okay, great. There's a few follow-ups on the upsell motion, but maybe we can come back to those, time permitting. I think it's best to move on to bringing it all together. So on SaaS ARR per location, the key topic here, we touched on new we touched on existing. Let's talk about the exit rate this year and into next year. So you've guided for SaaS ARR per location to exit the year at sort of a mid to high single-digit growth rate, slightly below the prior 10% expectation that you had earlier this year. The question from the investment community is: Is that mid to high single digit exit rate the right way to think about 2024, or are there reasons that we could get more optimistic about a re-acceleration?
Yeah, sure. I'll, I'll take that. So at the, at the highest level, yes, Q4, we're in the mid- to high-single digits, of course. And just kind of back to our North Star of ARR, we're really balancing locations and ARPU. And on the ARPU side, we have an opportunity to monetize both, both through Fintech and SaaS, but I'll just comment on SaaS because I know that's the focus. So the way to think about it is, like you said, there's the new, there's the upsell or the existing team, and then there's pricing. That plays a role. So on the new side, you know, we can, through packaging, optimize that land and continue to focus there, and that momentum we have in locations is really positive. On the ARPU side, there's a couple dynamics.
One is this upsell on the existing side, there's this upsell team, which we're really excited about. And then on ARPU, as we continue to extend into different parts of the TAM, there'll be a gradual impact of mix. International is a great example of that. And then zooming out on pricing, that pricing lever is really applicable both on the fintech side and on the SaaS side. So the combination of packaging, landing more upfront, and then optimizing what customers really want. Upsell, knowing we have conviction around that motion, and then pricing across both vectors is really important. And then zooming way out, as Aman said, like, we have a ton of conviction with pricing, new innovation that's yet to come, that we can continue to drive that ARPU growth over time.
Looking at it quarter to quarter is, you know, is not really how we look at it. We look at it more over time.
There we go. Thank you for that. Little mic malfunction. Okay, great! Let's take a broader look at 2024 in general. You just covered some of the thoughts around ARPU locations, but let's talk about the broader P&L and just kinda some of the moving parts, and how investors should think about how you'll plan to manage the P&L in 2024.
Yeah. So Aman and I are super aligned on this, so and he started there in the first question, but we always start with growth and operating leverage. That's just a key principle of how we manage the business, so that's not going to change. And then in terms of, you know, ARR being our North Star metric, that's also not changing. Well, our executives are comped on that, that way, our reps are comped that way. And then as you think about the P&L on the top line, it's really important for us to continue to grow recurring gross profit, which is our fintech gross profit, plus subscription gross profit. Okay? And that metric is how we're actually gonna guide next year. It's the best proxy to ARR, which we always talk about as our North Star metric.
So on the top line, focused on obviously maximizing ARR, maximizing recurring gross profit. On the operating leverage side, you've seen us deliver quarter after quarter, 7 quarters in a row of operating leverage. That is really important to us, like, that is a high priority. Now, as you think about the complexion of our investment, Aman alluded to this, you know, we're gonna continue to invest in the core and drive leverage in the core to afford us the investment in new S-curves, like international and other, other longer term bets that we wanna make. So we're gonna balance that, but continue to focus on margin expansion over time. As you think about the macro in the context of 2024, since we started talking about GPV as an example, look, we're ready to pivot regardless of the macro environment. That's one thing you should hear.
We've been building this very lean structure, which affords us the ability to quickly pivot, and so we feel really comfortable that we can do that. And then zooming way out, if you just think about this business over the next several years, we've talked about driving operating adjusted EBITDA margins of 30%-35%, all driven by this operating leverage that we've talked about. And that's really in our control, right? We know that we can drive leverage in the core business. It's in our control of how we get to that 30%-35%, and that'll be dependent on how the market evolves, but very committed to that over the long term.
Perfect. Thank you, Elena. If we have time, we'll maybe circle back on some of the Q4 expenses, but why don't we just touch on stock-based comp, given it's also an important topic? How should investors think about stock-based comp, either as a percentage of revenue or gross profit, really over the coming years?
Yeah, I mean, we're aligned on this too. Like, the most important thing you should hear is we've already made a commitment and started to drive leverage in stock-based comp. That's not gonna change. It's a very high priority for us. And so the way we're doing that is we're thinking about both dilution and stock-based comp as a percentage. Stock-based comp as a percentage of recurring revenue, we're driving that down over time. We've changed our equity granting practices this year, and so you'll see that play out over time. And then we had some significant hiring, you know, in the 2021, 2022 timeframe after we went public, and that is playing a role in stock-based comp. Some of that will roll off over the next year or two as well.
And then just the way we manage stock-based comp, the transparency now that we're really making that for all of our executives, very, very transparent. They see it in their budgets. That's a change we made this year to make sure that that visibility is not just with us, but really across the executive team and the organization. And that mindset of stock-based comp is like any other expense on the P&L. It's just like cash. And so when you're thinking about hiring that next executive, you need to consider stock-based comp in that, in that calculus. So at the highest level, the takeaway is we are constraining our share issuance over time, period. And that's what we're trying to do. And you should see meaningful dilution improvement over time as well.
Very clear. Thank you, Elena.
Yeah.
Let's move to another topic, which in a way relates to ARPU. It's part of the way to get to that longer-term higher level. Let's talk about new product development and the roadmap. Maybe, Aman, you could talk a little bit about some of where the efforts are being focused these days.
Yeah. So first off, I mean, I think, you know, we, we've got 100,000 sites and growing, and so the one of the great things about our business is we're getting signals from our customers on what's important as we think about our roadmap. And so some of the themes, and of course, it's a broad platform, and so there's a lot of things our customers are asking for. But some of the themes I'll just share. One, we hear from customers that, you know, they really value some of the capabilities in their platform that drive efficiency. So, you know, one example of this is our handheld, the Toast Go device, because it helps them drive throughput and efficiency in the business, turntables faster.
Another thing that we hear is they want interoperability and integration because it makes their lives easier. A simple example of this is, you think of the payroll product, having the employees in one place versus in, you know, one set of employees in a scheduler, one in payroll, and one in Toast in a point of sale, it simplifies their life. Another example, if you think about online ordering, having orders go straight from a customer's phone or browser into the kitchen makes their lives easier. Interoperability is a really important theme.
And three, you know, our customers are asking us, "What are ways in which we can leverage all of this great data to make them smarter?" And really help them with incremental demand, because a lot of what Toast allows them to do is create these digital touch points, whether it's digital receipts or online ordering or marketing, there's lots of data being captured. So those are some of the themes we see that informs our roadmap. And if you zoom out, you know, you talk to our product teams, what they'll tell you is, this goes back to the two vectors of growth, right? You've got locations and ARPU, and so they're thinking about: How do we constantly broaden for our platform the types of customers we can serve.
So when we first started the business, it was more focused on FSRs and added QSRs, you know, hotels, cafes, and bakeries. You know, every day, they're looking at the TAM in a much more segmented way to think about what are ways in which we can keep on expanding the types of restaurants we can serve, and especially restaurants that are, you know, a sweet spot in terms of our proof for Toast. Then on the platform side, you know, we're and if you look at our lines of business, and it maps back to the stakeholders, right? So the employees, the guests, the suppliers, and really looking at what are ways in which we can make their lives be easier. Underneath it all is our core infrastructure platform.
This is supporting all the capabilities that we offer, including our partner ecosystem. So those are some of the things that really drive our, you know, our roadmap. One thing I'll also add is on the fintech side, and we don't talk enough about, of course, Toast's got a whole fintech roadmap as well. And so, you know, of course, we launched the payments business a decade ago, added capital, you know, invoicing. There's a whole set of products there that we think can make the lives of our operators easier, that the team is also thinking about. And it's always about, you know, balancing what do our customers need, what are the things that our customers value, that they're looking for, combined with what are the things that can drive revenue growth for Toast?
Perfect. Thank you, Aman. We don't have too much time left here, but maybe we can squeeze in one or two more. Maybe you could just expand a little bit upon Toast Now f or restaurant owners and managers.
Yeah. So for context, Toast Now is a mobile app that restaurateurs can download, and we've seen tremendous uptick, right, since we launched the app. I think 20% of restaurateurs and growing have downloaded the app, and what it basically allows them to do is use their smartphone to track their business in real time. If you think of restaurateurs, they're on the kitchen floor, they're on the dining room floor, so being able to use their phones—t hey're actually, in fact, they were already doing it because they were going to a mobile browser and logging in to Toast to see what's going on, and the app allows them to do things like, you know, just see all the things that matter in real time.
See their sales, see their cost of labor, see, you know, what's going on with delivery, see what's going on with their menu. And so all of that data being in their pocket is really valuable, and we're seeing three times the engagement that we saw with the Toast back end before the app, with those users. And so, what we're thinking about now is you think about support, right? You think about support. They really have chat support is something we've introduced in beta in the app, and we think there's opportunity there to make that experience a lot more efficient.
And then, of course, because with this level of engagement, you know, a big part of the long-term strategy is to think of what are ways in which we can drive product-led growth because our customers are using this app so often. So really excited about kind of what this app can do for us. It really adds one more medium in terms of how we engage with our customers and see a lot of potential there to continue to drive our growth.
Okay, we promised we'd follow up on the upsell team, so let's see if we can squeeze that in.
Sure.
Can you just bring that to life? If you're on the upsell team, what does your day-to-day look like? What are the tools that you're giving them? What do those phone calls sound like?
Yeah. I think the one of the things that our upsell team really values is, unlike going to go sell to a new customer, the upsell team is selling to existing Toast customers, where we already have this deep relationship. So one of the things that we've done is regionalize the team between the new business team and the upsell team. So what we're starting to see is really good lead exchange and lead sharing, depending on what you land with and where there's opportunities to expand. That relationship and that partnership and the systems and technology to make that easier for our teams at scale is something our sales operations team is really focused on, and we see this as an opportunity for us to make that team more efficient.
And then, of course, like, you know, I think we've, we've spent a decade building out the right data to help our sales team be smarter in terms of how to target, what to focus on, and we're building out some of the same capabilities for the upsell team. So it's looking at where they are in their customer journey, right? How long they've been on Toast, which products they're using, the usage of those products. Some of that data helps them just be smarter about how to go after the, the opportunity, and then also kind of balance that with the customer success team, right? Because if you zoom out and look at the number of touch points we have with our customers through upsell and our customer success team, both are channels for us.
And so looking at what are ways in which we can partner with that team to continue to make the experience for customers better, but also find the right opportunities to say, "Hey, we noticed you're not using a product that we think you're a good fit for. Here's why. Would you consider it? Can I have someone reach out to you?" So that's, that's the other thing that we're thinking about.
Perfect. Thank you. So to Aman, to Elena, to Michael, and to Emily, we really appreciate you making the trip to be with us here in Arizona, and it was a pleasure hosting you.
Thank you, Tim.
Thanks, Tim.