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Yeah, they are. Right.
Okay, great. Welcome, everyone. My name is Timothy Chiodo. I'm the lead payments, processors, and fintech analyst here at UBS, and we're very excited to be joined today by the team from Toast. I want to thank Elena Gomez, the CFO, who's here on stage with me, but also Michael Senno and Emily Woodward, who also made the trip here to Arizona. Thank you to the Toast team, and great to be here with you, Elena.
Thank you for having me.
All right. We have a lot of topics to get through. We're going to do our best, but we're going to start out with 2024 as a recap. It's been a great year for Toast. Your main top-line metric, which is recurring gross profit, it's growing over 30%. You've added more locations this year on a net basis than you did last year, or on pace to do so. And you've added about $300 million in EBITDA, so can you just frame for the audience what has been driving all this great success and a strong 2024?
Yeah, sure. Happy to. First of all, really proud of the team's performance in 2024. And when we reflect on 2024, in many ways, it was a reset year for us. We started the year with a restructure at the first part of the year. And really, the restructure set the tone for the year in many ways. We also had a new CEO. Aman had been our COO, joined and became officially the CEO at the start of the year. He brought some priorities, which we'll talk about. Our capital allocation very much connected to those priorities. And then, of course, we've been showing that discipline of driving operating leverage, and we continue to do that. And a lot of times we got questions about, "Oh, now you've done the restructure, so back to normal." And it was like, "Well, that's just one area that we're driving, obviously, leverage.
We're going to just continue to operate that way," and so that really set the tone for 2024, and Aman laid out very early in his first earnings call in February four priorities. One was to continue to go deeper in the core TAM that we operate in. Two was to continue to innovate. Product innovation has always been at the center of what we do, and that is not changing, and then also extend into these new TAMs, and then finally continue this focus on leverage, and so that really characterized the start of the year and really allowed us to exit 2023, which will allow us to exit 2024 in a really strong financial position, which will allow us then to, as I think about 2025, lean into investing for our growth areas, and so we feel really great about that.
The leverage you saw in 2024, because of the things I talked about, is much higher than what you'll see in 2025. So you'll see in 2025, as we invest behind these growth vectors, where we have a ton of conviction, margin expansion closer to 100 basis points-200 basis points versus what you saw in 2024. So all in all, very pleased with how the team is executing, really excited about what lies ahead, and proud of the performance.
All right. Excellent. Thank you, Elena, for that context around 2025. You mentioned in your opening remarks there something around TAM expansion. So let's hit on that while we're there. So let's talk about international and food and beverage retail, two areas that you've expanded into more recently.
Sure. So the way we think about our growth, and we laid this out at Analyst Day, we're really thinking about building durable growth over the long term, and to that end, we want to leverage the capabilities of our platform and extend it to areas where we believe we have a right to win and have conviction, and so retail and international are examples of that. Our long-term ambition is to basically leverage the platform we have to serve hundreds of thousands of locations over time. That's like the meta goal over the long term, so like I said, international and retail being sort of the first entries into that, we're pretty excited. We've seen really great customer signal behind both of those. They're a little bit different, but generally we're seeing that's common across both of them is customer receptivity is positive.
And in both cases, when we look at the unit economics and look at that at steady state, we say, "Okay, this kind of runs based on how we manage the business, based on the payback periods that we manage," et cetera. So really excited about continuing to invest behind these as we see good signal.
All right. Excellent. And one more minor for modeling purposes. When investors think about those two areas, international and food and beverage retail, can you just talk about the differences there from a GPV per location basis and then also SaaS ARR per location?
Yeah, no, it's a great question. As we continue to have success, it's very clear to us that not all locations are created equal. And I'll talk a little bit about the texture around both international and retail. But that's really why we always come back to focusing on ARR, because ultimately that is our North Star. But we do have to take into consideration the dynamics of retail and international, a little bit different than we have in U.S. restaurants. So international, starting there, GPV per location, a bit smaller, smaller footprints than what we see in the U.S. Today, the SaaS ARPU in international is a bit less because we started with just some of the core parts of our platform. But as we extend and add more of the platform internationally, we'll see that opportunity to drive more ARPU.
So in international, I think there is an opportunity for that SaaS ARPU to get closer to sort of U.S. levels once we continue to build out the platform. So we've done a few things, like this year we launched some of the guest parts of our platform, et cetera. On retail, GPV per location looks about the same to slightly better than U.S. restaurants. Total ARPU is higher, but it's super early. So we understand that we're early in this journey on retail, and ultimately the dust will settle where it is. Regardless, we will focus back on payback periods and unit economics. And so when we look at our portfolio of businesses, the really important thing for us is to manage back to that overall payback period.
Okay, perfect. Thank you, Elena. Moving down the model, let's go to location growth. So for this year, you've guided to having more net adds in 2024 than you had in 2023. As we look at locations and the potential for net adds in 2025, how should investors think about some of the areas where you might have success, whether it be geography, customer size, customer type, et cetera?
Yeah, it's a great question. So first of all, really proud of the team who's on pace to deliver more locations in 2024 than 2023. It's just a testament to the platform and how it's resonated in the market. When we think about our long-term ambition, we really think about how do we continue to add more locations, hundreds of thousands of locations, not where we are today, but where will we be over the long term? And that's really about hundreds of thousands of locations that we want to serve across new geographies, new segments, new verticals. So if you take that and then you say, "How can we harness our platform to sustain growth over the long term?" That is really our ambition.
So when you bring it now to 2025, you'll see most of our net adds are going to continue to be in SMB mid-market as they have been because international and retail is so early. But over time, and they're contributing, they're small contributors, but over time you'll see they will contribute more. And so again, our focus is how do we sustain location growth across all of our portfolio businesses over time?
Excellent. Moving to subscription revenue, so the SaaS side of the business. So this is a good one that we could kind of clarify. So clearly there were some changes around the improvements of the billing infrastructure and the end-to-end quote to cash process. This caused the ARR conversion to go up. It was kind of hovering in the low 90s in the first half of the year, stepped up to about 97% in Q3. We understand that there was partly a recurring item there and then partly a one-time item. So the question from investors is, what is the right level of ARR conversion that we should think about in the model over the next year or so?
Sure. Let me give some texture on what we did, and then I can help describe sort of the future. So we spent some time early this year really looking at how do we convert more of our ARR to revenue. And what does that really mean? That means when a customer joins, they sign a contract all the way through NetSuite. So I have a team of accountants booking that revenue. There's lots of steps along the way, including Salesforce, et cetera. And so when we looked at that end-to-end process, we understood that there was an opportunity for us to convert more of that ARR to revenue. And so what you saw in Q3, to the point, is you saw 96%, 97% of ARR converting to revenue, which is higher than it's been historically. Historically, it's been closer to 91%.
And so some of that benefit is one-time, and some of it will be ongoing. The one-time nature of that benefit is if you think about when we understood, "Wait a second, we can actually collect more revenue than we had in the past," that allowed me then to release the reserves I had for uncollectibility. That's that one-time benefit. You'll see a little bit more of that in Q4. And as you think about modeling, which is ultimately your question, we won't be as high as what you saw in Q3, but we won't be back to historical levels either.
Perfect. All right, great. Thank you for that context, Elena. Let's move on to SaaS ARR per location growth. So it's been sort of in the mid-singles, 4% or so the past two quarters. How should investors think about modeling this metric going forward, keeping in mind some factors around more attach and also potential pricing on the SaaS side that we gather was not in the plan for this year, but potentially in the outer years?
Yeah, it's a great question. So first of all, the overall SaaS ARR growing 30% is really just this combination that formula we always talk about location growth complemented with ARPU growth. ARPU growth in the 4% range is a good range. It's where it's been over the last several quarters. I think it's a great range for the near term. But when we think about ARPU and take the long-term trajectory of ARPU, there's a few things we consider. Number one, we have a lot of footprint, a lot of product on our platform, a lot of product that is not at its terminal attach rate. We understand that. And so what can we do to optimize our product-market fit? How can we continue to refine the product so we can drive that attach, knowing that we're not anywhere near terminal attach rates on a lot of our products?
So that's number one. And then number two, as you know, we have an upsell team that we've been continuing to work with and support. And so as that team continues to refine their program, that'll help drive ARPU over the long term. And then finally, to the point of pricing, the way we think about pricing is it's one of the growth algorithms of the business, but we're going to be incredibly measured around it. And it's going to become just part of our ongoing normal course of business. So it's not something you might actually ever see a step function change in ARPU because of a massive price change. If that were true, we would obviously share that with you.
But otherwise, think of it as just really good hygiene of us looking at our existing installed base, comparing it to market rates, making sure we're connecting our value, being transparent with our customers, and then occasionally doing targeted price adjustments on the SaaS side.
Perfect. Thank you, Elena. Continuing to move down the model, let's go to the fintech side and let's go to GPV per location. So this has been sort of down in the low single digits the past few quarters. You said that was kind of a good range to be in, at least for the near term. But when we think about the reasons for this factor being or this metric being where it's at, we think about macro, we think about mix. Can you just walk us through some of the dynamics?
Yeah, no, that's right. So GPV per location has been down 3% year -over -year. At the highest level, consumer trends have stabilized and are relatively healthy. And so when we look at that trend, a couple of things come to mind. One is it's generally going to be in a very narrow tight band. And so we'll keep monitoring that. As we think about going forward, GPV per location in Q4 will be in the same zone really as what you've seen in Q3. And I would expect that heading into 2025 as well. It's dynamic. Obviously, we'll keep watching it, but that's sort of what our thesis is right now.
All right, perfect. Let's move to fintech net take rate. So it was up about a basis point year -over -year when we look at it sort of ex capital, which is the core metric we look at there. But it was about flat quarter -over -quarter, so in that sort of 45 basis points range. So a lot of investors were saying, "Hey, I thought you took pricing on September 1st. Why didn't I see the uptick?" We understand there's slightly more credit mix in Q3 that could have maybe masked that pricing. But maybe you could just talk a little bit about fintech take rate in the near term, and then we'll get into the medium term.
Yeah, sure, sure. So you're right. We did a small price increase for a small cohort of customers in Q3 towards the tail end of Q3. And just to put some texture around that, similar to what I said on SaaS, we're going to take a very measured, targeted approach to pricing over the long term. And in this case, what we did is we took customers who had joined the platform several years ago and got them closer to market rates. But again, it was a small cohort of customers done at the end of Q3. We'll see some of that benefit in Q4, a small benefit in Q4. But to the point you made, there's puts and takes on take rate, obviously. And so typically what you see seasonally is our take rate sequentially comes down in Q4.
What you'll see this quarter because of this price increase is you'll see about a basis point increase in take rate. And so that's how you should sort of characterize that move.
Okay, great. Thank you. So clarifying roughly a basis point or so up quarter -over -quarter when typically it would be down quarter -over -quarter in Q4.
Exactly, exactly, yeah.
All right, that's a great clarifier. Thank you. Let's move on to the longer term on the fintech take rate ex capital. So again, that core metric. Can you just talk about some of the mix factors, whether it be enterprise or international or retail, and how they could impact that modeling item? And then also other puts and takes outside of mix?
Yeah, sure. So first I'll start by saying because we're so early and because the majority of our bases are going to be mid-market, the impact from retail and international will be gradual. It's just the nature of the way the math works, if you will. I think over time that might change, but in the near term, because we're so early, it should have a gradual impact. But when you think about our opportunity to impact long-term take rate over time, absolutely, we have conviction that over the long term, can we make decisions that will ultimately increase our take rate over the long term? And so let me dive into what some of those are. One is, can we optimize our cost structure? Two, pricing, which we've talked about. Three, can we drive more digital products?
Four, can we invest in other embedded finance products that could drive take rate over the long term? So on cost optimization, if you just think about it, given the scale we are today on an annualized basis, $165 million of GPV, you just think about that and continue, that's going to continue to grow. That puts us in a position where we can drive more scale, optimize on a per transaction basis, work with our partners to help with that. So that's one opportunity we have. Pricing, we've talked about. I think we'll take a very measured approach on pricing, of course. And then on driving digital products, that's a place where we actually can control that innovation. It's really about our product roadmap and make sure we drive that innovation, bring more digital transactions into the ecosystem.
And then finally, as we think about embedded financers, there's a whole host of things we can do given all the data that we have. But that's super early and that's really over the long term. But across all four of those, our confidence in driving that take rate over the long term up is pretty high. But you'll never see sort of this step function change. It will be slow and steady movement over years.
Okay, thank you, Elena. You got into some of these topics there, so it's a good segue. So far we've been talking mainly about the fintech take rate on an ex capital basis. Now let's talk about capital. So capital gross profit is about 10 basis points or so of your volume, and it's about a low teens mix of your gross profit. You've talked about it remaining relatively stable as a percentage of the GPV. So maybe just talk a little bit about how the capital business could begin to scale and also how the introduction of the forward flow aspect has supported that.
Yeah, sure, happy to. So we're really encouraged by what we continue to see with our Toast Capital program. The demand is very healthy. It's one of our highest NPS products. A lot of our customers come back and renew their loans, so all in all, very healthy, and the way the team is managing the risk, default rates are in line with what we've expected, so all in all, the program's working quite well. In terms of forward flow, that was an opportunity for us as we started to grow the program to really think about how to diversify our funding sources. Somewhat in the normal course of business, we always intended that we would need a diverse set of funding resources, so we did that early in 2024, and the financial dynamics of that are a little bit different, as you know.
The majority of our loans in 2024 continue to be on the CRT program. Over the long term, the forward flow model is allowing us to scale. I think where we will be relative to GPV, I would say as the business grows, Toast Capital will grow with it. But it doesn't mean that there aren't things we can do to drive higher attach over time, to drive more product innovation, to drive more volume through that program. It's just in the near term, I would encourage you to kind of think about it growing in line with the business.
Okay, thank you, Elena. We're going to move now a little bit to expenses and payback period. So sales and marketing spend. So at the Investor Day , you talked about referral channels driving about 20% of, I think it was gross adds or new locations. And you've also mentioned multiple times that about 75% of new locations come via inbound channels. So when you think about those two factors and some of your payback periods, which have been 14 months more recently in 2023, an improvement from 22 months back in 2019, how should we think about fiscal 2025 net adds as you deploy this marketing spend?
Yeah, that's a great question. So a couple of things. One is referral channels obviously are very important and central to how we're central to the playbook that we have. I think the place I would start is really what's driving our success in market is our go-to-market footprint combined with this very deep purpose-built vertical platform. That is really at the core of what's driving our success and will continue to be part of the playbook. Referrals will also be really important because social proof, having the restaurant down the street and the owners all in that neighborhood talk, that continues to be a really important channel for us. As we think about 2025, we'll obviously continue to do that. We'll have targeted investments in rep capacity as well. And then, of course, we'll invest behind retail and international to support those.
But as we think about our investments, it's across consistent playbook for 2024 and then continuing to invest behind these growth vectors as well.
All right, excellent. Well, you alluded to a topic on the next topic, which is really around the sales teams and the coverage. So sometimes when we think about the sales teams that you have, we think about how much coverage of the market do you have. So the question is, how well covered do you think you are? And for the areas where you might not have sales coverage, would you prefer to fill those gaps with more direct hires or would you consider third parties to help fill those gaps, ISOs, etc.?
Yeah, it's a fair question. So first of all, just to hit it at the top, we definitely feel like we have broad coverage across the U.S. And including if it's in a less dense area, we have inside sales to sort of complement our go-to-market footprint that's across the U.S. So I feel really confident that we've got the coverage and the capacity to deliver against the goals we have for 2025. And then, of course, the referral playbook will continue to play a role. In terms of partners, we use partners today already as part of our playbook. So they hand us leads and we're always looking to enter into partnerships with players in the ecosystem, which we believe will drive leads to us and that the unit economics obviously have to make sense. In terms of banking, it hasn't been part of our playbook so far.
It's not something that we're thinking about today, but over the long term, we're always going to be looking at ways to maximize our growth. Perhaps it's something we'll look into, but it's not really considered as part of our playbook today in 2025.
Okay, thank you, Elena. Let's move on to the new product roadmap and the associated R&D spend. So where would you describe some of the most products that are being requested most by restaurants? Where are the areas that your R&D teams are spending their time?
Sure. So at its core, if you think about the Toast platform being really sort of the central nervous system of a restaurant, really everything that a restaurant operator does, whether it's front of house, back of house, really comes back to this platform to help the operation simplify workflows, drive more revenue, simplify even the guest experience, for example. So that's really the overarching focus. Some of our roadmap, a lot of our roadmap ideas really come from our customers. I spend time with customers, all of us spend time with customers. We have a customer advisory board. Those are really important inputs into the roadmap. And then we have GMs across all of our lines of business who are very connected to not what restaurants need today, but what they will need two or three years from now.
And so all of those data points really inform our roadmap. And then finally, as you've seen us do over the last several years, we take some of that engineering capacity to invest against these new growth vectors. Retail, international enterprise is a great example. And you've seen us have some of those enterprise wins. That's really because we've been investing behind some of that enterprise capability. In the interim, we've had this year we launched Branded App, so it allows our restaurants to have an online presence. That's been going well, but it's early. We also have a marketing automation, SMS marketing, also another opportunity for guests to connect, for restaurant operators to connect with their guests. And then longer term, if you just think about we have over 100,000, 120,000 restaurants on our platform and growing.
That data asset that we're collecting and going to continue to grow puts us in a position where we can use that data, harness that data to serve up insights to our customers, to serve up improving workflows, etc. You can just imagine that that asset will become increasingly valuable to us over time. We go back to fintech, which you asked about earlier. That's also another opportunity. It's not in the roadmap today, but there's a whole team focused on what is the fintech opportunity over the next 2 years-3 years, given that we have this data asset? How can we harness that? How can we make the Toast Capital program richer? That's how we think about it. We're excited about the innovation that's happened and where we're going as well.
Excellent, Elena. I think we have time to squeeze in maybe one or two more. This is a common question we get from investors around unit economics by customer segment. Enterprise restaurants, maybe it's a small chain, medium-sized chain relative to maybe an independent SMB type of restaurant. It's questions around, are they using as much software? So is their SaaS ARR per location a little bit lower? There's questions around if they will use payments or not. Maybe you could just talk a little bit about the varying unit economics across enterprise versus SMB.
Sure, sure. Well, first of all, I think regardless of the segment, whether it's enterprise, SMB, retail, we're always managing back to that mid-teens payback in months. So that's just the principle that we operate within. When you think about an enterprise customer, the complexion of that customer is usually very different. It's hundreds of locations. And so the team negotiates a deal which has significant ARR. It's very different than a one-to-one restaurant. When I go with my rep and go into a restaurant, which I do sometimes, that's a very different conversation than when I talk to a CIO of an enterprise customer. And so the economics of that, because there's significant ARR, works because you have much higher ARR over a long set of a large set of locations. And so that's why that works. And these deals are negotiated sort of one-on-one, if you will.
Every one of them is a little bit different. A lot of them come across my desk, but we always come back to what are the guardrails that we believe we need to have, whether we have payments or not, to make this deal still meet the thresholds we want on payback periods, and that's how we manage that, so that's why it looks different. Obviously, enterprise customers tend to be stickier over the long term, so that plays a role when you look at LTV to CAC over the long term.
Excellent. All right, let's wrap up with a final question around the surcharging programs that you offer to merchants. Maybe you could just provide an overview of the mechanics of how the surcharging program works, some of the rules and constraints associated with it, with the network rules. And then also just what the customer sort of want, need, and demand has been for this program.
Yeah, sure. Let's start with a lot of demand for this product, but with a small set of customers, and so that's really important. Some customers have been asking for that for a very long time. We delivered a compliance solution this year and seen early traction, really positive. What it really does is it allows our customers to pass on the processing cost to their customers in a compliant way. I think there were ways that they could work around it before. Now they can do it in a very compliant way, and so far, the traction has been really positive, but it's early. We have a small set of customers that are using it today. We'll see how that plays out over time.
Excellent. Well, again, on behalf of our team and also everyone here at UBS, we want to thank the full Toast team. So Michael, Emily, Elena, we really appreciate you making the trip and being a big part of our conference. So, thank you.
Thank you.