J.P. Morgan’s 50th Annual Global Technology, Media and Communications Conference 2022

May 24, 2022

Thanks for joining. This is the Toast session. My name is Tien-Tsin Huang. I cover the payments IT services sector, and I was just telling the team, really grateful to cover Toast. We've learned a lot getting to know the sector, understanding the software, and of course, it's very tangible, which is what I love about it. So with us from Toast, we've got Chris Comparato, the CEO. We've got Elena Gomez, also the CFO. Michael's here to keep us honest from IR, and gathered a lot of questions from the investment community. We'll take some questions from the portal, but I think we'll be able to get through a lot of the key questions that people threw in to me, so thank you for that. I thought we'd just kick it out. Keep it easy, if you don't mind. Favorite Toast restaurant in the local area? You guys are local, I know, because you're local, so let's start with that. Your favorite Toast restaurant in the local area? Usually, my favorite Toast restaurant is my last restaurant that I've been to. But locally, I'd say Bar Mezzana, very good in the Ink Block. Jefferson's a great operator. Heather, great GM. It's a really good team, great hospitality, great food. So check out Bar Mezzana. The last great Toast customer I went to was, I was in D.C. this weekend. On Thursday night, I went to Zaytinya. So if any of you are from D.C., Zaytinya, great spot. ThinkFoodGroup is the hospitality group. Chef José Andrés is the chef in Mediterranean tapas. Nice. You can order with a Toast Go device. You could do menu and pay at the table, and it's an amazing experience. Definitely put it on your list, Zaytinya, and I'd love to get them up here in Boston. Yeah, my favorite restaurant, not local, because I'm on the West Coast, so I'll give you a restaurant in Sacramento. It's a Mexican restaurant, and I happened to be there for a family event. There was 20 of us, and we were all able to order with our QR code. Nice. I could see what the teens were ordering down the way, and they were not ordering margaritas, so that was good. That's good. I was also able to pay as we were leaving with my phone, so it was great. Awesome. Great experience. I will definitely have a margarita when we're done with the conference. So, thank you guys for that. Again, thank you all for being here. I thought we'd kick it off with just a generic question here on restaurant software, right? We think of that as very complicated, right? It's a fragmented space. You've done a terrific job of talking about that and educating us on that. How did Toast break through, right? Breaking through is tough, whether it's in software or payments. How would you explain that? We've certainly broken through, but as a reflection, I'll remind everyone we're still only 7% market share in the U.S. for what we do. So I remind the Toast team pretty much every day that there's 93% of the restaurants out in the U.S. are not using Toast, and let's get after it, because it's a pretty large TAM, and the majority of restaurants are not using our platform. I think in the course of the past 10 years, we've done three things consistently well. First and foremost, building a restaurant-specific platform with depth and breadth to serve restaurants of all different types. Often, I talk about democratizing technology so that the platform could be nimble enough so that restaurants of different types can leverage the platform. So you could be an FSR or a QSR, you could be a food truck, you could be a large brand. Being restaurant specific and solving customers' problems, that's number one, and we've consistently done that. Number two is we've built a distribution engine or a hyperlocal go-to-market engine in markets dedicated to customer success, and that's always been the flywheel of the company. It started in Boston. We then went Boston, New York, Chicago, D.C., Miami. But now that flywheel continues, so putting teams in markets to build relationships and then cultivate those markets into what we call flywheel markets, has been the number two competitive moat for us. Then number three is, as you're doing those first two moves, consistently placing seeds into the platform that innovate on top of the platform that we've already built. And that's always been a consistent pattern where we continue to just innovate around the corner and look around the corner of what's coming next. What's a good example of that? We started Toast mobile dining back in 2019. A lot of people think QR codes are new, and QR codes were a pandemic dynamic. We put that team into motion in late 2018, early 2019, because we felt that consumers wanted a remote control to our platform via their phone. So constantly thinking about innovation has been a very good pattern. So those three things have allowed us to execute extremely well and break through as you talk about it, but yet, in many ways, we're just getting started. Great. So I guess I first got to know Toast a little bit as a private company pre-pandemic, and I've been thinking about how Toast has changed pre-pandemic versus today, and of course, there's been a big shift towards mobile order ahead. I fully understand that, but just maybe go back to basics. How is the company different, either culturally or from a product focus standpoint today versus pre-pandemic? Well, let me first talk about what's consistent. Yeah. And you mentioned the word culturally. We have always had the mission to empower the restaurant community to delight their guests, do what they love, and thrive. Our culture is driven by our mission, and we came up with that statement several years ago, to dedicate ourselves to the restaurant community, which has been a difficult business to run. If you think about restaurants, running your average restaurant, it is extremely complex. So that mission has always led us, but how have we adapted around that mission? In the early days of Toast, we called it an all-in-one platform. So many of our first customers wanted not just POS and payments, but they wanted POS payments, online ordering. They wanted digital gift cards and loyalty. And it was kind of like a set of modules or a set of products, and they were somewhat interconnected, but certainly not a platform. So in the early days of Toast, it was sort of an all-in-one set of solutions, and restaurants loved that because they had never seen that before, especially in the cloud. Fast-forward to 2018, we became what I call multi-product, and this is where we started to see sections of our products dedicated to certain stakeholders. So guest-facing functionality with its own roadmap dedicated to consumer, employee-facing functionality such as payroll dedicated to the employee stakeholder. Now fast-forward, supplier-facing functionality dedicated to the chef and suppliers. So 2018 to 2020, I would argue we were multi-product. And now fast-forward 2020 to 2022, we have really evolved into becoming a unified platform. So it has a consistent look and feel, consistent interconnected functionality. We can now sell the entirety of the platform up front. We can cross-sell modules that customers aren't using downstream, and it has become a much stronger platform. And now the whole company orients itself around, well, how do you make sure that that platform gets better and better? We still have lines of business and GMs that are sprinting after their roadmaps, but they are looking for these interconnected use cases that allow the platform to grow over time. And I think that this phase of Toast is now here to stay, which is making sure that we execute on this platform vision. And we are seeing the results of that. So as customers use more and more of our modules, that tells us that we are on the right pattern for platform usage. Yeah. No, for sure. So given those phasings and you are at, what, 62,000 locations today. What is the sweet spot in terms of type of restaurant size, et cetera? We see a lot of pull from multiple segments. I would argue today there's no specific one sweet spot. Reps in certain markets can go after, certainly SMB, 1 to 10 units. They can go after regional mid-market chains, anywhere from 1 to 50. Here in New England, reps can go after Bar Mezzana, the Barbara Lynch Gruppo, but they can also go close b.good as a mid-market chain. Reps have plenty of runway within their TAM to penetrate that market. We're seeing a lot of pull into several different segments. Traditionally, we've been strong at SMB. Traditionally, an SMB across the U.S. is the majority of the TAM for restaurants across the U.S., probably 5 or 6 out of 10 are SMB restaurants, anywhere from 1 to 10 units. But we're seeing pull across multiple segments. At the moment, some of our earliest customers were mid-market enterprises. Enterprises like SusieCakes, Beach Hut Deli, Papa Gino's. Our reps tend to see pull across these segments, but certainly SMB, I'd say SMB leaning towards full serve, has traditionally been a sort of a fast lane for us. But now we're seeing much more of a multi-threaded approach to TAM acquisition. Good. Thinking about moving upmarket, let's say into enterprise or even very micro casual merchants, or restaurants, we get that question a lot. Importance of moving upmarket or even down market, is that a priority? Absolutely. Again, if you look at the U.S. TAM, we're not in 93% of the restaurants out there, and we want to be the platform that powers the entire restaurant industry. We're going to continue to adapt this really robust platform to be agile enough and almost think of it as being personalized towards certain segments. Good example. What is a good example? QSR. QSR is probably at least a third of our business, and a few weeks ago, we announced Toast for QSRs. What is that? Well, that is basically taking this powerful platform, adapting the pricing, the packaging, the configuration so that we can even go faster within QSR. Take Toast for hotel restaurants. For years, customers were telling us, "Chris, we want you to power the restaurant within our hotel property." Finally, we have PMS integrations with six or seven different property management systems, so now we can go fast after 40,000-plus restaurants within hotels. You are going to continue to see us adapt the platform and configure the platform to go faster into these subsegments. It is not just down market or up market, it is also much more tailored to the type of restaurant that an operator is running. Certainly going down market is important. We want to make sure that the platform is really intuitive, easy to price, easy to use, easier self-service. So that serves us down market. Then up market, making sure that as restaurants scale and as brands scale, we have really good above-store reporting, above-store APIs. Again, it comes back to democratizing the platform so that you can adapt it to restaurants of all different types. I would argue we want to be strong in all segments over time, over the course of the next 10 years, certainly strong in all segments, but be measured about how you are tackling these segments as you go. Yeah. No, understood. You are doing something right because you added what? 5,000 locations. Yeah in the most recent quarter. It is a record level, nominally, as we look at that KPI. Is that sustainable, that number? Can you build off of that? There is always the question of who are you displacing and so maybe, I do not know if this is a chance for either of you to go over into your go-to-market strategy and what is working on that front as well. Yeah, sure. I'll take that. At the highest level, we're seeing just sort of the secular shift to digital in restaurants. I think all of us are seeing that in our day-to-day experiences. I think the record number of locations was a testament to the sales team and to what Chris talked about, which is they're getting really comfortable positioning the platform, having a ton of success doing that. The top of funnel, strong all the way through. That's why we believe the momentum is there for us to continue to sustain that growth. In terms of the competitive landscape, we know we see the usual players in a few categories. One is the legacy players, the other is sort of the horizontal tech players, and then some of these point solutions that you sort of have to string together. Regardless of the competitor, we do well. Our healthy win rates are a testament to that, and that's really what you saw in the 5,000 locations we had in Q1. As it relates to our go-to-market motion, restaurants are hyper-local, and we've known that from day one, and so we've positioned our go-to-market to be hyper-local. We're really maniacal about how we do that in terms of TAM per rep and the opportunity. You saw, hopefully some of you saw some of the work in our IR deck, which really explained our go-to-market motion in terms of the economics and how we think about it. When you look at a couple of key cities that we've displayed, you can see that as we get deeper into a market, we get this flywheel effect, which takes hold. You could imagine how we're thinking about that and the footprint across the U.S. to replicate that. We have emerging territories, of course, and so we have to balance the payback periods and all that, of course. At the highest level, if we can replicate what we've seen in some of these major markets, that's a massive opportunity for us. Good. It does seem like density matters. If I see one Toast restaurant- It's true. You see a bunch. Absolutely. I was just talking to a restaurant owner on Friday, and he said he did a bunch of due diligence before he switched from a competitor to us. I said, "Well, what ultimately made you choose?" Of course, it was the breadth of the product, and he had outgrown the other solution. He said he talked to his buddies, basically, who own restaurants, and that's what made the difference. Yeah. No. Word of mouth matters. Let's shift gears to product, if you guys don't mind. The one thing that stood out, and maybe, again, I'm a payment processing nerd, so payroll stood out to me. I think 30% of new took payroll. When I think of payroll is hard. We have ADP here and a bunch of other payroll guys. That's all they do. My question for you is, why would they choose Toast to do payroll? Does that inform you in any way of attaching things that are more tangential from a servicing standpoint? You mentioned breadth in your opening remark. How does that inform your strategy there? Sure. I mean, customers, for years, were telling us, in order to improve their productivity and streamline operations, we ought to do more, for not just POS and payments, but also for the employee value proposition. If you think about employees within a restaurant, anywhere from 70% to 75% turnover, and how do you engage and retain your employees after you've spent time and energy training them? In 2018, we started to look at the employee value proposition, and we recognized that we can move the needle if we make it much easier on that employee value chain to help restaurants onboard, perform labor management, schedule management, tips management, payroll, and then even things like benefits over time. That was the vision. Back in 2018, we acquired StratEx, which was a restaurant-specific payroll provider out of Chicago. Now we've been on this path for three years of building, what I would call, interconnected tissue across that employee value proposition. Instead of a horizontal payroll provider just performing payroll, and then the restaurant has to manage multiple vendors, we said it should really be an embedded piece of the platform, and a restaurant should be able to subscribe to our platform, turn on those modules, and then start to engage their employees. Employees were already clocking in and clocking out of Toast and managing their schedules through Toast, and we said, "Well, geez, payroll's just one aspect of the last mile to pay them." What's a good example of this interconnected system? If we're managing clock in, clock out, schedules, and then issuing payroll, what else is complex about that value proposition? How you manage tips. That's very restaurant specific, how they perform business rules around tips. It's a very manual process at the end of every shift. Walk into a restaurant at 10:00 or 11:00 at night, they're performing these functions manually, and they're trying to figure out who do we distribute money to, and do we pay the chef? Do we pay the runners? Do we pay the hostess? Being able to set and configure business rules around tips management and have that distributed right into payroll made a ton of sense. Okay, what beyond that? Early wage access. What if you're a bartender and you need to pay your rent tomorrow? Making sure that restaurant employees have access to early wages was important. We announced that in November. Still very much an early product for us, but again, this interconnectedness, which starts with, how do I record my time and how do I get paid for it? But much more widely, what's the employee value proposition so that when an employee works at a Toast restaurant, they never want to go back to a non-Toast restaurant? We're seeing that. They're telling us, we're retaining employees, they're paid better, they're treated better, and they could manage more tables, and they're more productive. That tells us we're on the right path with Employee Cloud. Yeah. It probably drives word of mouth as well. Absolutely. It's a transient audience, so they're going to go work at their next restaurant, and they're going to say, "Oh my God, I wish this restaurant." I was at a restaurant in D.C. on Saturday night, Italian restaurant, and there was two waitstaff managing the second floor, and we were staring at two legacy terminals on the wall. Literally our waiter, Casey, was begging me that night, and I'm with family, begging me to pitch the GM Toast because he's like, "Listen, I've worked at a Toast restaurant, and this is really tough." So that's a good example. That's a good one. I won't name the restaurant because I want to be polite. Yeah. I got to go back and see if you were successful. I'm going to try. All right, let's see. I'll come back and follow up one day. Good stuff on the payroll side and employees. And those, what, 11 million employees, Elena? I think is what you guys have talked about. So there's a lot of potential to touch there. But let's talk about just overall attach. I think I wrote down 60% use four or more products, I think- Yep is what you guys called out. So talk to us about what elective products are selling well, and where can that go, that metric go? I can start, and you can- Yeah, go for it. The most popular products that are bundled up front that customers tend to use right out of the gate, certainly the Toast Go device as the commerce platform. The Toast Go device allows waitstaff to do more with less and handle more tables and have that sort of POS in their pocket. That's certainly popular. Then I'd say our guest modules, online ordering, inherent to the platform, allows them to take in orders off premise and online. That's very popular. Loyalty and e-marketing has certainly been popular. Now payroll's starting to crack into that mix of 4-plus products. Yep. We're encouraged with the progress that we're seeing on Employee Cloud. I think you'll continue to see contribution from payroll in the 4-plus mark. XtraCHEF's relatively new. We just armed our entire sales force with xtraCHEF in Q1. Q1 was the first time that they could take it into market. They blew away our internal goal. We're seeing a faster uptick with xtraCHEF in the first quarter versus what we saw with payroll years ago. It's very promising, but still very low contribution. I think we're going to continue to see that 60% using 4-plus go up over time, as long as we continue to execute with good unit economics and sell the entirety of the platform up front. Yeah. Yeah. Elena, do you want to talk about ARPU here and the trend? Yeah, I was just going to say that Yep the proof point we have, which we talked a little bit about on the earnings call, is the fact that at booking, we are seeing about $6,000 of ARPU at booking, which has doubled from two years ago. To Chris's point, our reps are getting really good at positioning the entirety of the platform. That is just one example. There is another example we have been sharing, which is a brewery in Ohio where they have used 10 products, not four, 10, and the ARPU there is mid-teens, well north above $10K just on the SaaS ARPU. Just another example of how a rep can position that whole platform, and in that case, that use case, and this was a regular, it is like a restaurant processing maybe 1.3, 1.5 in payment volume. So you get both the benefit of the integrated payments but also SaaS. But we are really, really proud of what the reps have been able to execute too. Okay. Yeah. ARPU obviously is a KPI we will keep tracking. You mentioned payments. Yep. And of course, we look at GPV across a lot of different companies that we cover. When we did the simple math and look at Toast as a PayFac, you would rank as a top 10 merchant acquirer. So you have a lot of scale Yep on the payment side already. I did not appreciate that until we actually just ran it against the rest of the group. How do you benchmark yourself on payments, whether it be on the pricing side, performance? Is there more that you can do there? Is that a touch point that restaurants consider when they are looking at or evaluating the service overall? Yeah, I think the value of the platform for us is really the integrated model. So, it is payments, but also obviously the software that we offer, and the depth and breadth of the platform is really an important part of our narrative with our customers and obviously to our financial profile. Beyond take rate, we have the ability with the payment rails to do more strategically to offer to our customers, and Chris was just talking about the Toast Pay Card as an example of that, where we are offering same-day sales. Hopefully, that translates to those Toast employees wanting to work at that restaurant. But also getting more GPV onto our platform. So that is just one example of what is possible. And as it relates to the pricing and the take rate, that is something we are always paying attention to in terms of optimization as well. So there's a few different angles of how we approach it. Good. I know the answer because you kind of suggested it, but I'll ask it because people ask me. Sure Investors ask me, which is, would Toast ever unbundle? Would you ever just do payments or just do the software? I know right now you have to buy the whole thing, including the hardware element. So what is the thinking around that? Yeah, when we walk into a restaurant, it's interesting. If you're not in the industry, it's easy to walk into a restaurant and look at hardware, software, and payments as these disparate, disconnected systems. When we walk into a restaurant, we see this interconnectedness across the three. We see a restaurant owner-operator who wants to do more with one partner and less with multiple partners. What's a good example? I don't know how many of you are local, but take Turner Seafood up in Salem, Mass. I'll walk into Turner's, sit at a table, and they may start my order on a Toast Go device. Okay? The waitstaff has the Toast Go device. I'll get out my phone and scan the QR code. I'll continue to add to the order. Okay, so now hardware's interplaying with software quite closely. I'll then finish my meal, and I'll seamlessly pay with my phone and walk out. Like I'm not. Yeah. Or I'll split the check with friends and walk out. These systems are very much interconnected, and interconnected in many ways, not just at the software layer, but also think about the data and now what you can do with that data to understand, well, geez, what devices are online versus offline? How many devices are they using? How many transactions per hour are going through that device? Oh, by the way, what are the line items on every one of these orders? How can we tie that back to guest information? Did the guest sign up for loyalty at the end of that experience? We very much see this interconnectedness across these systems that allow us to really tell the platform story and then drive those insights back into Turner Seafood so that Cathy, the owner, can say, "Well, geez, how much staff should I have on Friday night on Memorial Day weekend when we're going to be slammed?" I think the bundling is here to stay. I think change management is occurring on how restaurants and brands purchase software. We've seen, at least in the customers that adopt Toast, 99-plus percent attach rate on the bundle. We don't see customers telling us, "Disconnect payments" or, "Disconnect hardware." We actually see brands saying, "Well, no, this is the buying pattern of the future." Certainly way up market, that's a big debate. Way up market, will they purchase payments separate from integrated payments? But we believe that change management is afloat and these systems are very much interconnected. Yeah. No, very clear. All right. We've got, what, 7 minutes left. I can feel the energy of the audience saying we got to ask about the macro, so I'll ask it here. We all know the stories of, okay, what's going on with the recession, inflation, consumer discretionary spend. What are you seeing on the ground today, and how recession ready is Toast? Yeah, I think consistent with what we shared at the earnings call, we really haven't seen any signal yet that our restaurants are somehow changing their patterns or anything. The data tells us, in fact, that consumer demand is high. That's what resulted in the quarter we have. That's one point. In terms of Toast in this environment actually is incredibly valuable if you think about the value proposition of Toast and helping customers be just more efficient. A great example is xtraCHEF, right? Someone who's really maniacal about managing their costs. That's a valuable part of our platform. There's elements of the In fact, I would argue that in a rising cost environment, Toast's value goes up. That's one angle. From the company angle, we're doing everything we can, and we're somewhat battlefield tested having come off of COVID, of course. Sure. There's a lot of learning there. We're doing everything we can to make sure that we've got that lean cost structure such that if the macro were to change in a way that we're not seeing today, we're able to adapt very quickly. Good. For what it's worth, we've had Visa and a lot of the merchant players that also play in this category, and they're seeing a lot of strength from the consumer. Another topical question just on the supply chain being a challenge, you have the hardware element. Any issues navigating that? No, we're actually really proud of how the hardware team has really navigated through what has been a super dynamic environment. First, of course, we're seeing elevated costs on our product side, which is expected with the dynamic. We also made a decision last year to bring on more inventory. Our guiding principle was let's not ever let hardware get in the way of our growth. We've been able to execute to that really well. By putting that inventory on hand, it's allowed us to sort of be insulated for any short-term dynamics, which is great, and we have plenty of visibility through the year and into the next year. So we feel good about that. Shipping costs obviously have gone up. You guys saw that in Q4, but we'll continue to navigate it, but I think we can manage it. Okay, good. I know there is always this question around profitability, path to profitability, and there is a lot of growth. I know, Chris, you have said this so many times, a lot of growth ahead of the company. That is very clear. Just the balancing act between profitability and growth and margins. I think on the call you did note more disciplined focus on high ROI investments. Yep. Can you maybe just elaborate on that? Yeah, sure. I think, of course, we are definitely not tone deaf to the backdrop that we are seeing, and this company has always been, just to be clear, very focused on unit economics and payback period. In this backdrop, we are continuing to watch very surgical all the hiring, very much paying attention to discretionary spend. All the while, still pointing investment to growth areas, proven ROI initiatives that we have. Anything new, we are making sure, and international is a great example of this, where we have made a seed investment, if you will, in international. As we continue to learn from that investment, before we invest more, there are high hurdles before we continue to invest. There is a lot of operational hygiene you guys maybe do not see that is going on in the background to make sure we are in fact taking this opportunity and leaning in, but at the same time, doing it a very smart, disciplined approach. Good. How does that play into inorganic? Thinking about ROI. Yeah You've raised. That's a great question. A lot of capital, so. Yeah, no, it's a great question. Of course, the valuations are a little different than they were six months ago. But we are always canvassing the market for opportunity. Opportunistically, if something is going to get us to market faster or it's going to complement our product roadmap, that piques our interest, we'll take a look at it. But all the while making sure it really does make sense, it's solving a customer pain point, and that we have the ability to absorb the asset should it be something more significant. Okay, good. We got a couple of minutes left. Let me fire off two last ones. I think we started out asking around when you guys were private, pre-pandemic, and the journey to get to this point. What about ahead here, Elena or Chris? Just talk to us, what excites you? Is it the product side of things? Is it the cohesion, the operating system, international? There's a lot of places to go. What do you prioritize? I tend to prioritize our mission, which is we have a lot of unfulfilled mission ahead of us, and I spend a lot of my time and energy with customers. So I get excited about taking some of those customer problems and really turning them into solutions, and making sure that as we do that, we execute really well on that journey. So, like I said earlier, 93% of our opportunity is ahead of us and let's stay focused on that mission, and make sure that each and every type of restaurant has a fantastic Toast experience. That excites me because when we see it, restaurants tell us. It's certainly a very vocal community. They let us know when we're doing well or not so well, but I get excited about hearing the stories. The question is, how can we make sure that we execute and go faster so that that 93% translates into more acquisition? Yeah. Great. We got a minute left. I've enjoyed the conversation. Wish we had more time, but I'll. Let's end it with one of my go-tos. I always ask this, right? You've been meeting with a lot of investors and the investment community. What do you think is most misunderstood or maybe underappreciated about Toast amongst the investment community? My opinion is, I don't think people realize how much runway we have, both in the U.S. and globally. I just think we're so early, and to Chris's point, there's so much more innovation we can do on our platform. To me, that's the biggest thing that's misunderstood. Terrific. We are out of time. Thank you both for it. Thank you. Enjoyed the conversation, and hopefully catch up soon again.