William Blair’s 42nd Annual Growth Stock Conference 2022

Jun 8, 2022

Good afternoon. We'll get started here. Welcome to the session with Toast. For those who don't know me, I'm Stephen Sheldon, and one of the main sectors I cover at William Blair is restaurant technology. Required to inform you that a complete list of research disclosures and potential conflicts of interest is available at our website at williamblair.com. It's really great to have Toast here. From the company, we have CEO Chris Comparato, we have CFO Elena Gomez, and we also have Michael Senno, and I think Andy Ellner, from the investor relations side in the audience. Toast completed its IPO in September 2021. It's delivered really strong growth, really exceptional growth over the last few years. In our view, it's probably the most comprehensive end-to-end SaaS platform for the restaurant industry, and we continue to get even more optimistic on the growth outlook for the company. We're going to do more of a fireside chat today, versus a formal presentation. Just so you know, the breakout after this will be held in the Adler Room upstairs on the second floor. Thank you guys very much for being here with us today. Really appreciate it. Just maybe to start, and maybe this is for you, Chris, it's your first time at our conference, it'd be great just to get a high-level overview of what the solution that Toast provides to restaurant owners and operators. I thought we were going to start with Celtics versus Warriors. That's okay. All right, let's dive in. Our mission at Toast is to empower the restaurant community to delight their guests, do what they love, and thrive. Often when I talk about empowering the restaurant community, I point at all of the stakeholders within the restaurant value chain. From the consumer and the guest, to the GM or owner, to the employee waiting tables or driving the kitchen, to the chef, to the suppliers, maybe even to the accountant. We fundamentally believe that there is an opportunity to put in place a digital backbone or a digital platform that empowers the entire functionality of this restaurant to be successful. By doing that with a restaurant-specific platform, we could drive more revenue into the restaurant, we could drive more productivity per employee, we could drive more efficiency in the back office, and we can connect the dots on the data layer, and then drive those improvements back into the business. As many of you know, running a restaurant is an extremely difficult and complex business, and there's use cases that restaurants tend to peanut butter all over the place through point solutions or other products. We fundamentally believe that a unified digital platform can empower this industry to be successful moving forward. That's in a nutshell what we do and why we do it. We do it for restaurants of all different types. It could be an SMB restaurant, it could be a mid-market enterprise, it could be a QSR, it could be an FSR. We often aim to democratize the technology so that restaurants of different types can benefit from those innovations. It may be a restaurant that is a fine dining, full-serve restaurant leveraging the Toast Go device to turn tables faster, but then you can walk into a cafe bakery, and they are using the same Toast Go device to line busting with a line out the door. We tend to look at the technology and then understand how do we leverage it across different concepts. Got it. That is helpful. And maybe for Elena, maybe talk about the revenue model. How does it work on the SaaS side? How does it work on the payments side? Just more detail on the model itself. Yeah, happy to. Just zooming out, the metric that we pay attention to the most is ARR. The way to think about that is really, it is the combination of locations and then ARPUs, so revenue per location effectively. Let me double-click on. Is my mic not working? Okay. Yeah. This work? Oh, yeah, much better. Okay. Let us just double-click on. Actually, the other thing I would say is, the power of both having a SaaS model but also a payment model is really important, right? The SaaS element is very predictable, and then the payment side of the house, we grow as our customers grow. Just double-clicking on the SaaS side of things. It is a monthly subscription, and Chris talked a little bit about some of the products we offer. The breadth of our platform allows us to monetize that like any other SaaS company. As we continue to innovate, then we have the opportunity to position the platform. You heard me talk in our earnings call a little bit about how our reps are getting really good at positioning the platform, so we will talk about that a little bit later. Then on the payment side, obviously we drive payment volume, and we have a margin on that payment volume. That is the other side of the house. As our payment volume grows, then our revenue grows as well. That is when I say, as our customers grow, we also grow. The other thing that maybe isn't completely obvious is we power the payment rails for these restaurants, and the more that we can do around that gives us an opportunity to go even deeper with our customers, but also monetize it as well. An example of that is Toast Paycard, which you maybe have heard us talk about. That's really a product that allows our employees at Toast restaurants to get their wages faster. We put their wages on a debit card. They use that debit card. It just gives you an example of the power of being the payment processor and how we can innovate, if you will, and drive more volume to our platform. Got it. I hope that helps. Yeah, that's perfect. I guess double-clicking on the software side, where do you see the biggest opportunities to drive software ARPU higher if you think about the next three to five years? Are there certain modules where you're starting to see some notable traction? Just how are you thinking about the traction on the software side? Yes, I will start and feel free to chime in, Chris. Today, let me zoom out and just talk a little bit about where we are today, and then I can talk about where we are going. Today, a new customer comes to us on the SaaS side of things, the ARPU is about $6K. Our average for our entire install base is $4K. The reason we talk about that is because we have seen that ARPU at new booking improve over time. In fact, it has doubled from two years ago. That is a testament to a couple things. One is our go-to-market team is really good at positioning the platform, which we are enabling them to do that. We are asking them to do that. They are having very solution-oriented conversations with restaurant operators. That is one element, but the other element is really where we focus on innovation. We have been able to continue that innovation on our platform, add more control points, which allows our reps to position that as they are talking to restaurant operators. That is where we are today. That number continues to steadily grow, and we believe we are still early, and I will give you a couple of data points, which I shared actually earlier this morning. One is when you think about the percentage of spend a restaurant spends on technology as a percentage of their sales, we see that today in the 2.5%-3% of their sales. If you just take the Toast construct right now, and you say an average Toast restaurant drives somewhere between $1 million and $1.3 million, say, in volume. I am just going to keep it simple. If I just use $1 million in payment volume, and you assume 3% of that restaurant operator of their sales is being spent on tech and our ARPU is $6K, you can see that, okay, 3% of $1 million, that is $30K. Why couldn't we be in a position to capture more of that ARPU over time? We believe we are going to continue to innovate so that we can capture more of that over time. By the way, I think the 2.5%-3% probably grows over time when you compare U.S. restaurants to other industries, which we can talk about at a later time. That is one way to think about it, which is we have still got some room to grow as long as we continue to innovate. The other data point is, I will just give you an example of a restaurant. I think it is a brewery, in Ohio, they added 10 modules, and we offer, call it 15-ish modules. 10 modules, and their SaaS ARPU alone, just the SaaS element of it is in the teens. It kind of paints a picture of what is possible. I am not saying every restaurant on Toast is going to take every module, but it gives you a glimpse into what is possible, and that is just one example. We have many examples like that. I used a donut shop last time as well. I think I like donuts and beer, but those are the examples I use. But it kind of paints a picture of what is possible. That's really helpful. One of the biggest issues I think facing restaurants right now, it's the labor challenges. It's been publicized, a lot of the concepts have talked about it. What has that meant in terms of demand for your platform? What is that creating a tailwind to adopt more solutions that can drive efficiency? Just what has that meant for you? First off, the labor challenges across the restaurant industry are very real. If you look at the past two years, certainly restaurants have been battle tested through COVID to adapt, and adapt to how do they drive sales, how do they engage their employees, how do they run an efficient business? They're forced to do more with less. Every restaurant that you all walk into is thinking about how do we drive employee engagement and happier employees, and then retain those employees. We tend to think there's a flywheel within the restaurant where a happier employee who's more productive creates a better guest experience. We all see it when we're working with a happy waitstaff or a happy bartender or a happy chef. That happier guest experience drives loyalty and drives better restaurant engagement. Maybe it drives a better ticket size, maybe it drives better tips. There tends to be this flywheel between employees, guests, and owners to make sure that this restaurant is humming at the next level. We focus on two things on the employee front. Number one, how do we make sure that the employee can be as productive as possible? We look at how are they taking orders today, what's the operating system and rhythm within that restaurant, and how can we drive productivity? A good example is allowing them to have the Toast Go device to turn tables faster. Even though we don't recognize that as a guest, the waitstaff is turning tables faster because they're managing more tables. They're handling more tables with less staff. The second thing that they're doing is when you complement the Toast Go device with our Mobile Dining Solutions, which is basically the QR code that allows customers to have almost a remote control to Toast through that QR code, the ability to open up a tab, order off the menu, pay your check, and leave. That also complements the same productivity. Now you have a double benefit of the waitstaff, not just turning tables faster, but handling many more tables and much more surface area within that restaurant, and they're more productive, and they're happier doing it, and guests are actually having a happier experience. That's number one. The second thing that we do is we offer in our platform a much better employee value proposition to clock in, clock out, schedule their time, manage their tips. At the end of every night, restaurants are spending a half an hour to an hour to figure out how to distribute their tips. All of that could be restaurant specific and automated within our platform. Now by turning on these modules, you're allowing the restaurant to not just manage tips, but then distribute payroll and then turn on same-day pay so that the employee is having a much better value proposition through their use of the software. That's only the start of where we can go on this employee life cycle. We tend to look at this picture and say, "Okay, we can help you solve these labor challenges by creating a happier workforce that's more productive, that's earning more, and treating guests at the next level." A lot more to do on that front, but we tend to help restaurants navigate those real challenges that they're going through. That's great. I wanted to ask about consumer behavior, and I feel like through your platform, you get pretty good visibility into how consumers are dining in person, how they're engaging digitally. I guess, what trends have you seen in the cadence of in-person and digital spending by consumers, if you look back over the last few years and maybe expectations going forward? Yeah, the most important thing, if you look at the past two years, the most important thing has been to enable the restaurant to capitalize on the omni-channel opportunities. Not just the dine-in experience, but what can happen off-premise. Certainly, back in Q2 of 2020, every restaurant was forced to adapt and cater to off-premise ordering. How can the platform sort of unlock that potential? Well, we could unlock that potential through integrated online ordering, integration with all the third-party marketplaces, and driving takeout. That immediately opens up three channels off-premise that the restaurant can now adapt and say, "Okay, orders are coming into the kitchen. This is great." Over the course of the past two years, though, now things are starting to flip back to dine-in. We published our Restaurant Trends Report, I think three or four weeks ago, and if you look at year-over-year, on a GMV basis, dine-in is up 46% from Q1 of 2021. So that shows us that restaurants are now adapting back to dine-in. So it is making sure that restaurants are prepared with Toast Go, Mobile Dining Solutions, kiosk, and everything that it takes to offer a great consumer experience within the four walls of the restaurant itself. But zooming out, as an owner/operator of a restaurant, you want to be in a position where you can drive these revenue channels, but then analyze the performance of each of these channels, and then optimize your operation around that channel performance. So through utilities like the Performance Center within Toast, we can now look at margins and productivity by channel so that the restaurant can really adapt. Like is tomorrow night going to be a rainy Friday night in Chicago? And guess what? We should really push third-party ordering and make sure that we downsize our staffing and we cater to off-premise. Or is it going to be a beautiful sunny night in Chicago and I want to go sit on the patio? Let's make sure that we staff up and optimize that channel. But we are putting these businesses in a position to really analyze their business and become knowledge workers, and then drive those channels that are tailored to the specific setup that they are faced with. Got it. That is really helpful. I wanted to ask a little bit about sales efficiency. It is usually a lot harder to be efficient on the sales side when you are going after SMB, and I know you guys are going after now restaurants of all sizes, but maybe talk about the sales efficiency trends you have seen. What does the go-to-market look like? Just any detail there. Yeah. First, let me step back and describe the model a little bit. And we believe it is very much a differentiator for the company. We put teams in local markets, so these are hyper local markets across major cities and geos in the U.S. And these teams, we are in the hospitality business, so we want to build relationships with restaurants in person, not just over the phone. And that is what they are used to. So we put teams in markets. This started back in 2012 with Boston, then New York, then D.C., Chicago, Miami. Now it is across the U.S. But these teams within hyperlocal markets build relationships, and as they become more productive, we look at their rep pacing based on productivity and ARR, and they create a flywheel within these markets. Over time, we see that our sales reps become actually more efficient as they become more tenured in that market. What are they doing? They are driving more leads and referrals through happy customers, and our churn is extremely low. That allows the reps to leverage referrals and cross checks with their customer base as they sell more restaurants within that market. That creates this flywheel that allows them to be much more productive over time. Then we are constantly analyzing what is the TAM per rep and how many reps can allow us to be in as many decisions as possible across these markets. Our motivation is to make sure a market becomes a flywheel market sooner rather than later, but that is why we look at sales enablement, rep pacing, rep productivity, ARR, and they are actually selling more and more of the platform up front. That is a very good signal to us that they are on the right path and the market is maturing over time. No different than I look at Boston today. Boston, we are probably 12%-15% market penetrated in Boston, so we still have a lot of TAM ahead of us in Boston. We are starting to add more reps to make sure that we are in as many decisions as possible as markets turn over. But that efficiency is critically important, and it is how we think about the business. We look at the unit economics, the CAC payback periods. We look at the rep tenure, but a lot of different analytics behind that model, but we feel like it is a competitive differentiator for us. Got it. Very helpful. On the location growth, you talked about Boston. You have continued to put up very strong location growth. How big of an opportunity is it for you to continue adding locations in the U.S.? Is there also a concept in your base where you kind of grow with your customers? Your customers may be adding new locations and maybe that being a component of the location growth over time. Yeah. First of all, I think there is a big opportunity. We talk about the TAM opportunity, which is around 860,000 restaurants, and so we are really early in that journey, 7% penetrated today. Then when you look at in terms of dollars, we are about 1% penetrated. So we definitely think there is an opportunity to continue, and that is why you are seeing us invest into that opportunity. As we invest, we see these flywheel investments happen and so on. Then we continue to invest. We have strong win rates, and the competitive landscape isn't changing dramatically, so we see our ability to continue to grow those locations. Then the last thing I would say is that we have deliberately said our number one priority is to go after that market share, and that is what you see in our investment profile. But over time, we're going to continue to invest in innovation so we can then grow that ARPU over time as well. Got it. As I said, you guys have historically at least focused on the SMB space. You're starting to move up a little bit more upmarket or at least talking about it more. I know you have some bigger customers there. How do you think about the upmarket opportunity? What does the competitive environment look like as you move upmarket? Just any detail on it. Yeah, I think upmarket's an attractive TAM. Again, we've been upmarket for years, what I would call the mid-market space. In our early days, it was SusieCakes, and one of our largest customers is Jamba Juice, part of Focus Brands. But it's been measured, and we've been pretty methodical and measured about going upmarket, because what we don't want to do is be in a situation where we bring on a large brand, and we're doing a ton of custom work in the roadmap. So we want to make sure that the platform unlocks the ability for brands to do their business easily, which means let's make sure that we invest in above-store reporting, above-store publishing, APIs that allow enterprise architects to have Toast at the core of their infrastructure, but then APIs that allow them to stitch in other technology partners on top of us. Then, a lot of functionality around security, reliability, and scale, everything that you would expect an enterprise CIO or CTO to be looking at. So it's pretty methodical, and we continue to chip away at certain brands that we're winning over time, but we're not trying to go too fast. We're trying to make sure that it's very measured and that the platform has what these enterprises need to be successful. But I also think in the larger upmarket space, they haven't really moved to cloud yet. So I have a lot of conversations with some of the largest brands in the world, and over time, they see themselves moving to cloud, but they are also being measured about how to adopt cloud technologies across all of their properties in a way that allows them to be successful. I think you will continue to see us announce wins in the space, but be pretty measured about how we are going after that part of the market. Makes sense. Wanted to ask about international. That was one of the bigger announcements this year, that you are going to start pushing the investments, at least on the international expansion. Maybe talk about what investments you need to make, what milestones you are looking at achieving over the next couple of years, and maybe what that business could look like if you think 3 to 5 years down the road. I will take that. At the highest level, one thing I want to put it in context, our investment in 2022 is really a seed investment. It is mid-teens, somewhere between $10 million and $20 million. I would say it is not disproportionately taking management attention, simply because we have got such a massive opportunity in the U.S. that that is really what we are going after. What are we doing in international? Well, one is we are understanding the competitive landscape. We are understanding the go-to-market motion that will work. Chris described our go-to-market motion here. I think what we are trying to test is, will that work in these countries that we are going in? We are going into English-speaking countries first. Just really understanding what will the steady state of this business look like over time? Before we continue to invest international, we want to make sure it reaches certain hurdles. That is what I would say. It is a learning year. We have got one or two customers that we are learning from, which is great. So far, that has been really good feedback for us. The conviction about going international, it is a multi-year journey. 3 to 5 years, we will be talking more about the impact to our financials. In between now and then, it is really a journey. That is how we think about it, really, at this point. Got it. Makes sense. Wanted to ask about hardware. It's still a critical component of what you guys are doing. How have you been managing through the current supply chain challenges? How much risk is there, I guess, in terms of being able to source hardware that supports your offerings? Any detail on the hardware side? Yeah, no. Hardware is definitely important to all our restaurants so they can run effectively on our platform, so continues to be an important part of our offering. We made a decision last year, actually probably September, right around the IPO, when we started seeing signal that supply chain was going to be important, something we needed to pay attention to. We made two decisions. One is, let's never let hardware be the reason we can't grow. So the guiding principle was we've got to have enough hardware to never let it impede our growth. So that was number one. Number two, related to that, we said, let's get more hardware on our balance sheet so that we can insulate ourselves from any short-term supply chain dynamics. So that's played out. We, of course, are seeing rising costs and product costs and freight, which we've absorbed, and it's reflected in all of our guidance. I feel like we have pretty good visibility at this point into what those costs will be. They peaked sometime at the end of last year, and I think we've gotten better visibility. I think that situation, in general, is going to be fluid. I think we're going to still have to pay attention to it. That said, I'm not worried about our ability to deliver hardware to our customers, which is really important. Got it. Maybe a few quick hitters. I know we're close to out of time. But first one, you haven't set any real discrete profitability targets. How should investors think about near-term trends in margins, where they could go over time and how important is it you to make progress towards positive free cash flow? Yeah, no, definitely. You waited till 27 minutes in to ask that question, but great. No, look, it is a top priority for the management team, absolutely. Hopefully, you see that reflected in the tone of our guidance, where we are positioning the company for consistent margin expansion over time. A really important priority across the company. It is not just in the G&A function, but it is in how we go to market, it is in our R&D efforts, and how we think about that investment relative to ARPU. It is really a tone in the company of how we are approaching it. We have come out and said, over the near term, we are going to get our way towards profitability. Got it. A lot of discussion on the macro environment, potential for recession. What are the implications to Toast if we head into a slower period or a recession? My first comment would be, restaurants have truly been battle tested in the past two years. You could best expect every restaurant, no matter what size, to be thinking about this and thinking about what levers to pull if there is additional pressure. They are already pulling the lever of price increases, how much can the consumer absorb? They are doing what is possible today. We are keeping laser focus on the unit economics and the dynamics that we see and the signal that we see from the market. Right now, we do not see any material weakness in the industry. If anything, we see restaurants as busy as they have ever been in the past two and a half years. We go out to eat a lot, and we see it firsthand. The restaurants that we are walking into are super busy and trying to optimize their revenue and optimize their productivity. We are keeping a close eye on it. We know that the platform is on the good side of helping them adapt. We are coaching restaurants to be ready, and be ready to drive revenue, be ready to drive productivity, be ready to do more food cost optimization in the back office through tools like xtraCHEF. At the moment, we continue to execute and not really lose sight of the opportunity. At 7% market share, we believe our platform should be in every restaurant to allow them to be successful, and we are still very much in our early days of doing that. Got it. Yeah. The only thing I would add is that we looked back at the data at recessionary times, back in 2008, and restaurants were really resilient. We're using that as a I realize it was a different time, but still a data point that gives us a bit of confidence. Then, of course, we're like any good CFO doing right now, just doing all of the scenario planning should we get ourselves into that situation. But for now, the signal is that we haven't seen that in our restaurants. Got it. Sneak one more in here. You completed two acquisitions so far. You also have xtraCHEF being one of them. You have $1.2 billion, give or take, on the balance sheet, cash and equivalents. How do you think about using M&A to continue rounding out the product portfolio? Yeah, I think it's an important. We're definitely always canvassing the market for the opportunity out there. There's so much innovation happening right now all around food tech, and so we're paying attention to that. The criteria we're looking for really is, it goes back to the customer. What are the control points that we believe a customer needs to run an efficient operation? If it's a natural extension of our strategy and something that is really going to be relevant for the customer, just like xtraCHEF and payroll, then that's something we would consider. Got it. Well, I think we're out of time. All right. Chris, Elena, thank you so much for being here. Thank you. The breakout, again, is in Adler upstairs.