All right. We are going to get started. My name is Will Nance. Joining us for day two of the conference and kicking us off is the Toast team. We have Co-founder and CEO, Aman, and President and CFO, Elena. Thank you for joining us.
Thanks for having us.
Okay. I want to start a little bit big picture here, as it's almost exactly the five-year anniversary of the IPO.
Yep.
The company had about 50,000 locations. That's more than tripled since then. For 2021, recurring gross profit was roughly $400 million. EBITDA was negative.
You've nearly 6x the top line. You're on track for over $800 million of adjusted EBITDA this year. You've been consistently GAAP profitable. Just a major scaling story ever since the IPO. What do you attribute that success to? How do you think about measuring success from here?
Yeah. First of all, good morning, everyone. Thank you for joining us. Day-to-day in our business, we're working so hard to execute day after day, month after month, quarter after quarter, and it's easy to lose sight of just the progress we've made. To your point, in five years, we have grown the business over 6x. We've scaled the business both in the bottom line and the top line. I think at its core, obviously, it comes back to the execution of the team. You look at, I think, what we've been able to do, one, in our core business. This is the U.S. SMB restaurant business. We have established ourselves in a market leadership position, and we continue to scale as strong clip. Two, I think when we started the business 15 years ago, it was largely U.S. SMB restaurants.
When we went public five years ago, we had started to talk about, okay, what is the long-term opportunity here beyond that core TAM? Two, three years ago, we started to build out our international business, our enterprise business, and our retail business. Today, Toast firmly is a business that is in many countries. It is both an SMB and an enterprise, and it's in many ways, probably maybe most importantly, also in many verticals. We're seeing really good traction in those new TAM that we're going after. I think that's a big part of the story as well. As I think about really the next five years, I think one, we are taking GPV share in our core business faster than any of the competitors we typically see.
We've got the most GPV share in our core, so continuing to lean in, and we think there's an opportunity to double market share in our core business. That's the top priority. In our new TAM, Elena and I have shared this before, but there's no question that as we take a five- and 10-year outlook, these businesses could be very significant. Across all these three TAMs, we see massive opportunity to continue to grow and scale. We're adding sales capacity across them. I think the last thing I'll say is when we went public, that was the beginnings of us really moving from a point-of-sale application to more of a platform. We had launched products for guests, employees, suppliers. Those were all pretty nascent.
The ARPU at the IPO was maybe 8K or 9K, don't quote me on the exact numbers, but today it's over 13K. We're seeing this platform story evolve, and as we think about the next five years, with AI, there's a big opportunity to really expand and accelerate that growth. We're seeing that with products like Toast IQ Grow. I think those are some of the key focus areas the next five years that we'll continue to lean into.
I want to come back to some of this product and new vertical opportunities, but maybe we could start off just on the core.
I think a lot of the success is still driven by the core, and a lot has changed in the market since the IPO. How do you think about the growth algorithm going forward, and then what has changed on the competitive environment today versus when you went public?
I think the biggest thing that's changed is we have gone from maybe 4% or 5% market share to over 20% share on locations. More than that on GPV, because bigger restaurants typically choose Toast. I think as you look at the growth in our core, it's a couple things. One is right from day one, we have focused on building out the platform and going deep on the needs of the restaurant vertical. I think one of the misunderstandings about the restaurant business is people think of it as one product with one set of needs, but actually within restaurants, there's so many sub-verticals. One of the expressions we've used to talk about our business is to build out the thousand little things that our customers need.
Starting off with QSR restaurants and FSRs and bars and nightclubs, hotel restaurants, non-English speaking restaurants, cafeterias, the list goes on. Each of these TAMs has different needs. Just recently I was talking to a prospect and they were talking about using our QR codes, scanning a QR code in a hotel environment to then add service charges and charge it to a room. If you look at sports entertainment, they have specific requirements around all these different locations managed across a shared kitchen, both for pickup and in-store orders. There's lots of different features and capabilities, and we're comfortable with that complexity, that vertical depth that's needed to support restaurants. I think that is at the core of what's allowed us to continue to drive really strong win rates and the growth that we continue to see in our core business.
I have tons of conviction that as long as we continue to lean into that we can continue to see some really strong growth in our core. The second piece of it is the sales and service motion that we've built out over the past decade, starting in the U.S. and then now internationally as well. I think that's a huge advantage in terms of serving these bigger customers. Toast typically serves customers that have higher GPV, these more complex businesses. Our sales team, you look at the productivity of the team, we continue to see flywheel markets perform really well. More markets enter flywheel, but we're seeing greater, stronger productivity. I think that continues to be an area where we're performing really well as well.
As I think about the next decade, I think one of the biggest opportunities back to vertical focus that I think we have is we think about Toast when we first started, it was a software platform, right? Customers would use our platform to use all the capabilities and workflows to manage employees, their suppliers, or their guest experience and the operations of the restaurant. Now for the first time with AI, you're starting to see we can actually take on some of that work, really. Like with Toast IQ Grow, for example, we can share that in a little bit. It's two things. One is the intelligence layer and then also taking up some of the manual work restaurateurs typically have had to outsource.
That I think allows us. The North Star there is can we help these SMB restaurateurs run a more profitable business? I think if we can do that, I think we'll be well-positioned in the market.
Yeah. Elena, Aman mentioned some of the ARPU stats over the last couple of years. Payments take rate, SaaS ARPUs, kind of up and to the right really consistently for the last couple of years. Most of that I think has been module adoption on the SaaS side and a lot of optimizations on the take rate side. As you look ahead, how are you thinking about pricing as a lever for growth?
Yeah, it's a great question. Look, at the highest level, the priority is market share gains, right? That's what Aman just talked about, our growth algorithm, and you said it in your question. It's really about driving location growth and then product attach. That's really the primary growth vector that we're leaning on today. Over the long term, certainly pricing will be available to us, and our pricing philosophy really hasn't changed, right? We really are focused on very targeted small price moves where it makes sense, where we might see customers that are outliers relative to the current market rate, but those are small, surgical, very targeted. Our primary growth algorithm, again, is really driving locations and ARPU. When you think about our total monetization, RGP over GPV, that's about 100 basis points.
It grew 5 basis points year-over-year, and that's, again, on the back of strong product adoption and then, of course, the COGS optimization that we've been working on for a very long time.
At the end of the day, we're very much focused on if we drive customer outcomes and do some of this work that Aman talked about, we're very confident in our ability to monetize through pricing.
Elena, I guess you guys see such a broad aperture for consumer spending on restaurants. Any call-outs in the current quarter that you would make on just the environment and overall spending levels?
Yeah, no, we're steady as she goes, in line with expectations. We look at data in many different ways, but nothing new to report since earnings.
We could daily.
Daily, yeah.
Yeah. No news is good news. I wanted to shift to Toast IQ Grow. I think this has been one of the bigger stories of the past year. You just mentioned it, Aman, in your last answer. This is really how the company is thinking about attacking the opportunity for AI-enabled products.
Yes.
You mentioned this is on pace to be the fastest product to ever reach $10 million in ARR in the company's history. Maybe you can talk about just what you're hearing from restaurant customers, and what they're demanding from Toast from an AI perspective.
Yeah. For us, when AI really started to take off, the obvious place that we first went to was, okay, we've got all this great data, right? Let's get it into an LLM so that it's accessible and searchable. That was the beginnings of, okay, you can start to analyze and get insight on what's going on in your business. One of the things that's been powerful already is people are using Toast IQ to load all of their data and get insight about what are the drivers of profitability in their business, which for an SMB operator is a big deal because historically, a lot of the data is not as accessible and hard to use. Even if you've got custom reports, to really understand how do you generate the right view of your data, is a lot of work.
Whereas with a language interface, you just ask it a question about, "Why were my sales down last week? Why was cost of food different versus a couple of weeks ago?" That was step one. What we have seen more recently is when we talk to a lot of our customers, what they told us was, look, for a lot of the work that they're focused on, like running a great restaurant, great service, great food. Most successful restaurants in the SMB space are outsourcing things like demand and marketing. They're outsourcing things like bookkeeping. They're outsourcing, the bookkeeper might help them with labor and their schedules, forecasting what demand might be.
And what we have been able to do is actually build a better version, truly a better version of what was out there before by leveraging our software, leveraging our data, then building the AI capability with humans in the loop to help them take on some of that work. Toast IQ Grow is the first example of this. So what Toast IQ Grow is all of our guest-facing products. So things like online ordering, websites, loyalty, CRM, marketing, advertising. What we are doing is leveraging the data and leveraging AI to actually do the work of figuring out how to make sure your website is optimized for SEO, to make sure that your online ordering is set up such that it maximizes conversions. Your marketing and advertising campaigns are set up to, again, to drive engagement with your guests.
What we have seen is customers that switch to it, and this was a data point, frankly, that I know it is early, we have shared it is approaching $10 million ARR, but the customers that have switched to it have seen sales growth. When you think about an SMB business, 40% sales growth. When incremental demand is so expensive, it is a huge deal. So that product actually right now is constrained on bringing customers live because of the impact that we are seeing on customer top line. What the opportunity is long term is, if you think about a restaurant, there is no concept of looking at when they are busy and when they are not. There is no concept of actually understanding your guests to say what might get them to engage with your marketing to actually come in.
Say, if you are making this up here, but if you love margaritas and guacamole, the messaging that might engage you is different than the average user. So we have got all the data to look at when the restaurants are busy, when they are not busy, and to look at all their guests, and to better understand what sort of marketing we can generate. So part two of this can be incredibly personalized in a way that I think historically has really not been available to restaurants, which allows us to create even more impact. That is across, of course, demand, but then also across suppliers and the cost of food and all the supplies restaurants have, the demand forecast, the labor schedule. The North Star is across all of these variables. That is what the team is working towards. Can you improve profitability? Because it is such a low margin business.
So I think that is what ultimately is going to drive our win rate. That is what is ultimately going to drive our ability to continue to take share. The team on the core SMB side, that is their focus.
Yeah. Elena, maybe you can talk about this more from a financial perspective. How are you thinking about the potential for Toast IQ Grow and other AI products in the IQ suite to contribute to SaaS ARPU growth over time?
Yeah, it's a great question. First of all, really strong performance from Toast IQ Grow already out of the gate, which is really encouraging. The impact to ARPU meaningfully will take some time just because we're in the early days. As Aman said, if we can take some of this work that our customers are doing, and often they're actually paying a third party to do for them, we have this opportunity not only to do it better, but also leverage the data, leverage the software, and all the complexity that he just talked about puts us in a unique position to monetize. That's what we're really excited about. I would even zoom out and say AI has really presented a much bigger opportunity for us to drive ARPU growth over the long term.
IQ Grow is the first product that we're seeing really great traction. You can imagine all the complexity that lives in a restaurant and all the services that we can do for them. For us, that presents an opportunity to take that data, which is an asset, take our software, and then provide services to our customers. So I'm very confident over time we can impact ARPU meaningfully.
Yeah. Makes sense.
One thing I'll just add, Elena, is, and you may have hit this, is if you look at the services TAM that exists in the restaurant business, it's meaningfully bigger than the software TAM. If you look at what restaurants are spending on all the software from Toast or other partners that sit on top of our platform, relative to what they spend on bookkeeping or marketing or even to pick up the phone in the restaurant. One of the things that I think maybe I didn't hit earlier is there's all this work that we think with AI we can do more efficiently and better. And so that opportunity in terms of, again, we've got to prove it, right?
But that opportunity to re-accelerate ARPU growth because we're going after this TAM where the spend is greater than what it is for software, I think is a massive opportunity for us. Toast IQ Grow is the beginnings of it, and we'll keep you all updated as we launch more products. And it's everything from answering the phone with voice AI in a restaurant or a drive-thru, to managing the books, to scheduling labor, to helping on the cost of supplies. And I think a lot of that manual work, we've shown with Toast IQ Grow, which is our marketing AI product, we can take on for the first time.
That's great. Well, we could probably spend a lot more time talking about IQ, but I wanted to maybe pivot over and talk about some of the new TAMs and new verticals you mentioned up front.
Well, I think one of the highlights of this quarter was the record net adds and the disclosure that you expect the expansion TAMs, the ARR from these new verticals to roughly double this year to around $200 million. With that, I was hoping you could do sort of a state of the union, three main verticals, retail, international, and enterprise. Where do each of them stand, and how do you think about milestones for each of them as you look ahead?
Yeah. The retail, international, enterprise businesses, all these businesses really two, three years ago were very nascent, sub-$10 million ARR. It is exciting to see them grow and scale, just like our core businesses did. We talked about how they will double this year from $100 million to $200 million. One of the things that we do internally is we comp these businesses to our core business a couple of years in, because we have got that data. What we see is these businesses, really all three of them, are growing faster and have higher ARPUs than the core did two, three years in. I think that is really encouraging. I think it really speaks to really the product market fit that Toast has beyond U.S. SMB restaurants.
Now, each of these businesses, obviously, the constraints to growth and the customer reception and the feedback and the product roadmap is different. Fundamentally, the anchor product is point-of-sale platform. That is consistent. The hardware, the networking, the software, the base is consistent, and that is why all of our customers, whether it is a hotel or an enterprise chain or grocery store or a restaurant, it is all using a shared multi-tenant platform. It is not like we have split up the code base across all these different customers. In our international business, the opportunity that we have seen as we launched in the U.K. and Canada and Australia and Ireland is we have got to focus on the tier 1 cities where you have got really the restaurant GPV and the GDP per capita.
As we think about the roadmap, we think we have a massive opportunity to open up the TAM by going into these tier 1 cities globally, and you will see us open up more cities over time. That is not just for SMB restaurants. Initially, it will be focused on SMB restaurants, but already in the U.K., for example, we have got grocery. We see an enterprise opportunity internationally. Then, of course, longer term, we see an opportunity in retail as well, more broadly. In our enterprise business, we continue to see in the non-drive-thru TAM. For context, we launched our drive-thru product about a year ago, maybe six or 12 months ago.
Yeah.
We continue to take share at a strong clip. We have got probably the strongest pipeline we have had from the issue of the company, and people see the value of our platform in terms of table turns, all the things we have seen in SMB, the digital platform. In drive-thru, it is early, but we are seeing, again, we are starting to see, because that is such a big part of the TAM as a product continues to get built out. We are seeing ourselves in more opportunities just because of the Toast brand that we have got. Enterprise is really, I would say the blockers long term are the product investments to support the enterprise business. This is everything from building out Hub Store security compliance to guest products, up market, some of the AI products to support some of the use cases that are a little bit different in enterprise.
It is really gated on product more than go to market. In retail, it is interesting, when we first launched in retail, there was a lot of skeptics who said, "You are a restaurant company. What right do you have to win in retail?" It turns out that business, in many ways, is the best business we have launched of the new businesses. The ARPU is the closest to our core business. We are investing heavily in go-to-market capacity in that business right now, and it is because we are seeing really good signal on the ground from customers. We started off in restaurant retail, these hybrid concepts, and then launched in grocery, in convenience stores, in liquor stores, and have expanded from there as well. We are focused on the vertical depth that allowed us to succeed in restaurants, and that has been really positive.
In fact, one of the things that is, I think, a little misunderstood about Toast is just how varied our core U.S. SMB TAM is. What allowed us to succeed in restaurants was not that we built this generic horizontal platform. We were comfortable supporting all of the different sub-verticals that I talked about earlier and went deep on the thousand little things and the features, and we liked that complexity to support all the features this TAM needed, whether quick serve, full serve, bars, nightclubs, non-English speaking, pizza. I was amazed at how many features, by the way, this business needed, coming from e-commerce before at a company called Endeca. It turns out in all these new TAMs, it is the same playbook.
As we go into, whether it is sports entertainment or we go into grocery, convenience stores attached to gas stations, it is this vertical depth of the platform that is necessary, and that really speaks to our, plays to our strength. We have been able to lean in there, and that is a big part what is allowing us to succeed in these new verticals.
Yeah. Maybe you just addressed it, but I would love to hear just how you think about the philosophy around evaluating new TAMs.
Yeah.
I think this quarter you talked about fuel and gas stations
Right
as kind of a sub-vertical within retail, sports and entertainment, and on the enterprise side. How do you think about entering these new sub-TAMs and verticals, and then how do you ensure that the vertical focus that's always been the differentiator for Toast is preserved as the company looks wider?
Yeah. We've got a top-down view. Every year we refresh our strategy in a three-year plan, and so we've got a top-down view of where we want to go, right? Which countries, which cities, which verticals, enterprise, which sub-verticals, which target accounts. Of course, we want to, number one is market leadership in our core business. We evaluate all of this. Then we also bottoms up, get a lot of signal from customers. For example, the fuel work was simply, turns out 80% of the convenience stores, and I was surprised by this stat, are attached to gas stations, and half of that market is actually SMB. When I thought of gas stations initially, I was like, "This is all Shell and Chevron." It's not. Actually, half the market is actually SMB. That really speaks to our strength.
We did the work to integrate into the fuel controller, and I think our board was pretty concerned when we brought in the fuel controller and a gas pump into the boardroom one time. Anyway, it's about that capability, and are seeing really good early pipeline there because that market's all entirely legacy. They're using systems from the 80s and 90s often to run their businesses. In sports entertainment, similarly, the push there was actually there's a lot of overlap from some of the SMB TAMs. The product gaps that existed for us in sports entertainment, very similar to actually what food halls needed in terms of multiple locations being often shared by a shared kitchen and the complexity of handling not just in-store, but also pickup and delivery as part of that operation and managing throughput.
It was things like managing the reporting that is needed in that concept in terms of aggregating all that data across one concept where some config is shared and some isn't. Again, this goes back to the thousand little things and our comfort in building out the platform to support all these different sub-verticals. Again, as I said earlier, this is very much in our DNA because it's how we got here. If you look at the 15-year journey we've been on in our core SMB business, the reason we have gotten to where we are is not because we've got the best sales team. Yes, we've got a great sales team, but it's also because we've got a great service motion and a great product that actually meets the needs of these customers. So it's very natural for us to go after these new sub-verticals.
Now, one guiding principle that we use internally as we think about where we go is we look for parts of the TAM where there is typically higher GPV per location, because that's correlated with a complex business with complex product needs, a higher touch sales and service motion, which we've built out over the past decade. That's really where we see the biggest opportunity. We're not as interested in going after the parts of TAM which are low GPV down market.
Makes sense. Maybe on that note, Elena, one of the ongoing debates around the new TAMs is always the impact on unit economics and maybe even more so the impact on some of the headline KPIs that investors focus on. As these new verticals drive a larger share of the incremental location growth, how do you expect that to impact some of these KPIs?
Yeah, that's a fair question. As we've talked about, our priority in this moment is really to prioritize market share gains because we believe that's a key determinant of our long-term shareholder value, so we're investing behind these TAMs that Aman just talked about. But you're right. As they scale, we're going to see a different complexion to our customer profile. But keep in mind the core business is still a pretty big part of our business. But the important thing is, actually, let me give you a little texture. When we think about the core business at around the same time as these new TAMs, each of our new TAMs already are at that same profile or even higher in terms of ARPU. So that gives us a lot of confidence.
If you think about where the core started, a couple of years in, it was, call it $6K in ARPU, and today we are almost double that, actually more than double that. We have this opportunity to really follow that same playbook with these new TAMs as we build out more capabilities and drive more innovation. So that is a piece of texture I think is really helpful for us to study and understand. When you think about the payback, that is really the most important thing we are focused on in each of these new TAMs. We know the playbook, right? We have done it with the core business. We are going to do it with each of these new TAMs. For each of them, it is a little bit different, right?
Aman just talked about in international, we are really focused on tier 1 cities, and we are honing our go-to-market motion. In retail, we are adding rep capacity. So we know we have extended payback periods right now, but we also know what steady state looks like in terms of rep capacity.
All said, we feel really confident in our ability to drive that payback to what we think is healthy in a few years, sub 20 months. The other thing Aman said earlier is we are really drafting off the core platform in both R&D and then also in the company drafting off the G&A investment. So we are not spinning up another platform. We are not adding more investment. We are really drafting off the core business. So I feel really confident in our ability to manage those paybacks, which is, to us, what gives us confidence that these will be very profitable businesses over the long term.
Makes sense. Elena, coming into the quarter, memory costs and hardware were really top of mind for investors. I was wondering if you could provide an update in terms of what you are seeing today, the work that you have done over the last couple of quarters to mitigate some of those impacts, and I think in particular, some of the commentary you had this past quarter about emerging on the other side of this cycle in a structurally better position from a margin perspective.
Yeah. No, really proud of, we have a hardware ops team, and this is what they've been living and breathing every day. Our priority once the memory shortage emerged was let's just make sure that we are never in a position where hardware constraints limit our growth. We've been able to secure inventory for this year and next year. We feel really good about that. But then also, we took this opportunity to really go deep on everything, on the entire end-to-end supply chain, whether it was a bill of materials, the product cost, et cetera. In doing so, we identified certain areas where we could have even longer-term structural change to our P&L. Certainly, from where we started to where we are, we thought the expenses were going to be much higher. They're lower than we anticipated for 2026, but also for 2027.
To your point, structurally, we believe we have an opportunity to optimize the supply chain based on segments, et cetera, that will give us this opportunity to drive down costs and just have improved margins. Some of the specific things we've done, in certain cases, we can use hardware with lower memory chip costs. We can use older generations of hardware in certain cases for a certain set of customers. Opportunistically, we're in the spot market buying at favorable prices, and we're always looking at that and really being surgical about those buys. All in all, I feel really good, not only about our ability to manage it, but also our hardware margin structurally. When we get out of this memory crisis, I'm very confident they'll be better than where they were before we started this.
Makes sense. Some of the other commentary you provided this quarter was the decision to invest against some of these longer-term initiatives. You had the tariff refund that I think was reinvested. Can you talk about the philosophy around growth-related investments? What are the signals that you're seeing that you're responding to, and how it all kind of bakes into the near-term operating leverage profile?
Yeah, absolutely. The way we often think about, Aman just talked about every year we go through a strategy session. We look out several years. When we think about that, we're thinking about positioning the company to drive durable growth for many years to come and compounding our top-line growth. In that context, we look at all the opportunities in front of us, and we're not opportunity constraint. You heard Aman talk a lot about our ideas. As we go deeper into the core, as we go deeper into these new TAMs, we uncover even more opportunities. We're excited about that.
And so to that end, what we think about is we want to drive durable growth, but at the same time expand margins gradually, and that's what we're executing to in 2026, and you'll see us follow that same cadence in the coming years. What gives us confidence to invest, we're actively choosing to invest right now, is the progress we're seeing already in these new TAMs. We talked about getting over $200 million in ARR, and each of them, and also the payback that I just talked about, we feel really good about our ability to drive that payback. So when you put that all together, we're investing behind driving this durable growth over the long term. Overall, feeling really good about as we get into these new TAMs, we're seeing even more opportunity.
So when you think about more the long-term margin profile, you had some optimistic commentary on both the margin profile of the core and what you think you can do in some of these new verticals. How has just the view of the margin potential of the business evolved over time?
Yes. At the highest level, we're operating in a really strong position of financial strength. That's the core. If you think about our core business, operating at Rule of 60, essentially, growing over 20% margins in our core business, 40% and growing, and we continue to drive efficiency up and down the P&L. That is really important to us. That strength in that core business is enabling and fueling the growth in these new TAMs that we've talked about as well. So I feel really good about that. When you consider the AI opportunity and just how we're thinking about it across the company, reimagining how we work, that presents even more operating leverage for us over the long term.
So zooming out, when I think about the margin profile of this business, 40%+ , is no question, I think there's a real opportunity to get there and maybe even expand that margin over the long term.
Got it. Well, I think that basically takes us to time, but thank you both for being here. I really enjoyed the conversation.
Thank you, everybody.
Thank you.