Q2 2022 Toast Inc Earnings Call
Both the press releases and a replay of this call, including the accompanying investor presentation will be available on our Investor Relations website at investors <unk> Dot com with that let me turn the call over to Chris.
Thank you Michael and good afternoon, everyone Toasts continues to build on our operational momentum in Q2, posting strong efficient growth exceeding both our revenue and profit expectations and delivering another record quarter of new location additions this momentum stems from.
The consistent execution of our core growth strategy driving location growth deepening our ability to serve all segments of the restaurant industry and delivering product innovation for restaurants on that front last month, we announced the acquisition of slain to further expand our team management suite.
And help restaurants deepen their relationship with employees.
We're excited to welcome the <unk> team to the toast family.
While we have tremendous momentum across our business. We're also cognizant of the current macroeconomic backdrop and what it means for our customers restaurants are operating in a challenging environment.
Facing heightened food cost inflation labor constraints higher wages and uncertainty in the broader economy, but the restaurant industry has faced challenges many times before and proven incredibly resilient over time restaurants adapted and bounce back from unprecedented.
<unk> during Covid and has successfully navigated prior economic downturns, it's a testament to how much people enjoy the restaurant experience even in the most challenging times people love eating out in restaurants are often at the center of our communities.
Turning to our results for the quarter revenue increased 58% year over year to $675 million in the second quarter, and <unk> was up 59% to $787 million.
TPB remains strong growing 62% year over year to $23 billion. In Q2. We also continue to drive strong location growth after adding over 5000 net new restaurant locations in a quarter for the first time in Q1, we now exceeded 6000 net new restaurant location.
In Q2, just incredible growth that is being driven by our strong bookings pipeline as well as continued low churn.
As a result of our consistent execution and first half performance, we are raising our full year revenue guidance by 5% at the midpoint of the range, which implies 55% year over year growth.
Driving towards profitability is a key priority for our team and the progress is clear and the significant adjusted EBITA margin improvements in Q2.
With the increased focus on efficiency and rigorous prioritization of our investment opportunities, we expect to sustain these improvements and we're raising our adjusted EBITDA outlook for 2022 by $35 million at the midpoint to reflect that Elena will provide more detail on our outlook shortly.
With the restaurant industry in the midst of a generational shift to cloud based digital solutions, we continue to seamlessly execute our proven go to market strategy to capitalize on that opportunity as we increased density and more established territories, we benefit from the flywheel effect that drives referrals and.
Inbound leads driving higher and more efficient productivity at the same time, we're gaining traction in less developed markets and are on a path to replicate that flywheel effect as we gained share.
Sure.
In addition to the strong growth in new locations customer churn remains low our industry, leading platform adds tremendous value for our customers, helping them grow and creating a passionate and loyal customer base. The success of the toast restaurants, we support lie at the heart of our business model we have.
Growth as our customers grow.
In Q2, we continued to see success with all formats and types of restaurants.
Highlight a few examples.
In enterprise, we expanded our relationship with Jamba juice by 40 locations, bringing our partnership to more than 700 total locations as part of the expanded relationship Jamba is piloting. The addition of the coast kiosk product to streamline checkout and help combat heightened labor costs Jamba juice.
Showcases how toasted designed to increase throughput and high volume environments, like <unk> and fast casual and how some of our largest customers continue to adopt more of our platform to increase efficiency and drive growth.
Chip cookies selected post in Q2 to support its growing 13 location business from making it backup house more efficient with our payroll extra chef and Multilocation management products to using our point of sale and delivery services to more efficiently serve customers chip cookies saw the value of <unk>.
<unk> is an all in one solution that can help them grow while managing their business more efficiently.
By leveraging more than 10 of our modules chip cookies is a great example of how the benefits to customers increase as they leverage more of our integrated platform.
While ship highlights how new customers are using more of our platform. We also have a significant opportunity to help customers find more ways to leverage the full extent of our platform to create value for their businesses.
Our e-commerce offering toast shop provides customers an efficient self service options to seamlessly add products and has been a consistent source of incremental SaaS <unk> last year. We also started a growth sales team solely focused on selling to our existing customers to complement to shop.
We've continued to invest in and evolve that team in the second quarter marked the first time the entire growth team was selling our full product set.
This enables each of our reps to efficiently partnering with customers on ways to utilize the full breadth of our platform.
A good example of the benefit of our growth team that.
Good example of the benefit our gross seats in bringing customers is maze Mexican grill, a fast casual restaurant group maze initially inquired about adding our loyalty product across its location our growth team worked with the customer to highlight the benefits of our full platform, which led to them adopt in several of our guest products.
As well as payroll and extra shafts. This showcases the power of having a team focused on upsell and reps equipped to help customers take advantage of the full power of our integrated platform.
While we are pleased with the initial results we're still early on in this area.
We see a big opportunity to drive broader adoption of our platform among existing customers.
One of the coasts key differentiator is our focus on restaurants, and our ability to deeply serve different customer segments, regardless of size or format.
Earlier this year, we announced post our hotel restaurants, a powerful new solution designed to meet the unique needs of hotel restaurant operators by seamlessly integrating leading hotel property management systems with the <unk> platform as a result of that new capability in Q2, we signed a regional hotel chain for its full <unk>.
<unk> restaurant concepts across over 10 locations. This hotel chain will use our handheld point of sale for table side order and pay our kitchen display systems to expedite orders and our Multilocation management to efficiently manage menus. This is evidence of the opportunity we have to go much deeper in the <unk>.
Hotel restaurant segment with our new offerings.
Shifting to product as we continue to enable our customers to deeply connect with all of their stakeholders I want to focus on the critical employee touch points.
In the midst of an extremely challenging labor market, winning the hearts and minds of employees is more important than ever last month, we announced the acquisition of sling, a leading employee scheduling and communications solution.
Integrating scheduling and communications into our platform alongside our other team management products, including payroll tips manager and pay card will help restaurants to deepen their relationship with employees more efficiently manage labor and create a differentiated employee experience.
Employee communications and scheduling is a high engagement product and it's also an.
An important new touch points for toast with the more than $11 million restaurant workers in the U S. Similar to our prior acquisitions our relationship with <unk> started at the partnership which launched early last year, the strong customer signal informed our view on how the product can enhance our entire.
Here team management suite after incorporating flame into our sales motion our win rate was higher when customers evaluated sling and payroll together compared to when only quoting payroll. This offers early proof of how sling complements our existing team management suite and can enhance.
The overall value proposition to our customers.
With sling as part of the <unk> family, we plan to fully integrate the offering into our platform to provide customers a seamless experience. The acquisition also allows us to accelerate product development and alignment with our roadmap for our team management suite and continue to build features specifically targeted for a restaurant.
<unk> and their employees fully makes our team management suite more robust and is another example of how with our cloud based platform purpose built to meet the specific needs of restaurants, no partner is better positioned to help the industry adapt and thrive then toast.
While restaurant industry sales has fully bounce back from Covid and are above 2019 levels. As I noted earlier restaurants are facing challenges labor and food are two are the two biggest expenses for restaurants in the current environment has amplified the pressure on both.
Inflation is at a multi decade high in a restaurant workforce is still about 6% below pre pandemic levels, creating staffing constraints, but our platform is built to help restaurants navigate these challenges we provide restaurants with an array of products to automate processes and increase efficiency.
Across their workflows, so they can focus on what matters the most.
Through their guests and their employees.
Extra SaaS not only automate manual invoice processing and inventory management. It also provides the restaurant managers with real time data on food cost trends to inform decisions on menu pricing and sourcing to help preserve profitability with the help of extra shifts underbelly hospitality.
<unk> group in Texas was able to reduce cost by 3% on average across their locations saving over $330000 per year. This is an invaluable tool with food costs rising at historic levels, and we are seeing adoption of extra shaft increase.
As restaurants seek to optimize margins.
Products like our Kosko handheld kiosks, and mobile order and pay allows savvy operators to better manage labor expenses and employees to handle more orders per hour, leading to higher tests, while also providing a better guest experience.
<unk> and fast casual restaurants are rolling out these digital touch points for guests to overcome staffing shortages, while meeting evolving customer preferences.
And post is well positioned to lead that transition for example, new England lobster market Meadery, a fast casual restaurant is using our mobile order and pay solution for the majority of its on premise transactions. In addition to requiring less staff.
Tips have more than doubled and are automatically split amongst employees, helping the restaurant significantly reduce turnover without incremental wage pressure.
In summary, the toast platform is more relevant and valuable than ever to our customers as they navigate these changing conditions as customers use more of our platform. They can drive efficiency across their business to mitigate costs, while continuing to offer a great guest.
Experience simply put our goal is to get restaurants, all the tools they need to adapt and thrive rests.
Restaurants deserve a trusted partner who shares our vision for a future where the restaurant to the entire industry fries and their businesses flourish.
Partner, who helps restaurants spend more time delighting customers and less time confused by technology.
<unk>, who will advocate for the industry and toast is that partner in closing I want to thank our employees for a great first half of the year I am proud of how we're executing and our team's tireless effort to add value for our customers now I'll turn the call over to Elena.
Thanks, Chris and thank you everyone for joining and a big Thank you to the <unk> team all your hard work and dedication to serving our customers led to another quarter of great results.
Both revenue and adjusted EBITDA came in ahead of expectations in Q2, the power of our integrated software and payments model together with our industry, leading platform continued to drive strong top line growth and our commitment to cost discipline was evident in our significant adjusted EBITDA margin improvement.
Not only are we proud of the strong results. This quarter were also excited to welcome the claim team to test as Chris mentioned, playing strengthens our team management product suite and will serve to further differentiate our platform as we focus on being the technology path for the restaurant industry or.
Our proven go to market strategy and investments to scale. The sales team continues to pay off net new location adds further accelerated in Q2 to over 6000, increasing the number of total live locations on our platform to approximately 68000. The continued market share gains highlight the tremendous value of our platform.
Provides restaurants, which also contributes to our consistently low churn rates.
It's worth noting that Q2 is seasonally our strongest quarter for net location adds summer is the peak season for restaurants with some less likely to switch platforms. During their busiest period, we typically add appear in new locations in Q3 than in Q2.
We've seen the seasonal pattern in our business over several years and expect the same this year that said our pipeline remains strong the value proposition is clearly resonating and we are well positioned to sustain our momentum.
Turning to our quarterly results total revenue grew 58% year over year to $675 million <unk>, which is our core operational metric ended it ended Q2 at $787 million up 59% year over year, and 24% compared to Q1.
Total ARPA.
Eclipsed 11000 for the first time driven by strong growth in both our recurring revenue streams SaaS and payments.
Subscription services revenue increased 100% year over year in the second quarter benefiting from our location growth and increased product adoption as both new and existing customers leverage more of our platform as of the end of Q2, 61% of our test locations used four or more products on top of our integrated.
Pos and payment solution, but even a higher percentage of new live customers joined the platform with four or more products. As a result of SaaS ARPA continues to increase for each new quarterly cohort of live customers and is above the average for our platform.
As we think about our long term RPI potential. We also believe upsell will be a big contributor as Chris mentioned, our total sharp E. Commerce store has been an efficient channel for existing customers to add products.
With our gross sales team now complementing that e-commerce solution and all of those reps selling our full array of products, we have an opportunity to drive deeper adoption of our products like extra shop in payroll and help customers leverage more of our integrated platform to create value for their business total ops upsell across toshi.
And our growth sales team contributed over 20% of the incremental SaaS are are in Q2, and we see a big opportunity to unlock incremental <unk> growth over time.
On the Fintech solution side revenue grew 59% to $562 million in gross profit was up 54% year over year to $114 million in the quarter. As a reminder of SaaS revenue in Fintech gross profit comprise what we operationally view as recurring revenue Fintech gross profit benefited from sustained.
<unk> and <unk>, which increased 62% to $23 billion in Q2 average annualized <unk> per processing location was up 16% year over year to $1 4 million the growth in <unk> per processing location as a result of both higher average ticket and the continued rebound in customer transaction, which.
Slightly below 2019 levels in Q2.
The net take rate of 49 basis points was within the range. We expect in the near term debit mix declined quarter over quarter in line with typical seasonal patterns, partly offset by the benefit of our continued cost optimization efforts.
Total gross profit grew 33% year over year, and 24% quarter over quarter to $125 million, resulting in gross margin of 18, 5%.
Looking at our recurring streams subscription and Fintech gross profit totaled $169 million up 67% year over year, driven by our continued location growth and strong ARPA increased across both SaaS and Fintech solutions.
Looking at customer acquisition costs, we continue to tightly manage unit economics to maintain healthy payback periods, even as we navigate headwinds on the hardware side and invest to scale. The business as we noted last quarter hardware margin decline quarter over quarter we.
We expect hardware margins to improve in the second half of the year as we benefit from the shift to lower cost shipping methods. Our decision to strategically increased inventory not only drives cost savings on shipping, but also insulates us from short term supply chain disruptions, allowing us to continue to seamlessly serve our customers.
Before discussing our other cost lines I want to provide context on the pace of our overall operating expense growth over the past year, we accelerated hiring across the business to rebuild our teams. Following the staff reductions in early 2020 to sustain our momentum as a business rapidly scales and to position <unk> to capitalize on this large opportunity.
Attunity ahead, we'll now we're now largely passed that ramp in hiring.
With what's reflected in our updated outlook for the rest of 2022, we believe our cost structure will align with the scale and growth trajectory of the business that positions us to continue investing in key growth areas sustained top line momentum, while further improving profitability going forward.
Sales and marketing expense declined as a percentage of recurring revenue in Q2. The initial benefit from scaling our sales team is already evident in the strong location and ARPA growth last quarter, we discussed how our go to market strategy creates a flywheel effect as we increased market share in a territory inbound traffic and referrals grow.
And our sales reps to deliver higher productivity, we expect that to be a tailwind going forward, particularly as we gained traction in our less penetrated territories that we're investing into.
In addition, our sales reps naturally become more productive as they gain experience by wrapping ramping hiring over the past year. The average tenure of our sales force has naturally decline with our sales rep base closer to our target level, we plan to increase the team at a more steady state and expect our average tenure to increase which is.
Storage lease led to increased productivity.
We expect both of these dynamics to contribute to increased efficiency in sales and marketing expenses over time.
Research and development is another area, where we accelerated investment over the past year. This includes continuing to develop and broaden our platform and scaling the team to support the incredible growth we've experienced over the past two years. We now we now have more than doubled the number of locations on our platform than the onset of Covid and our ambition.
We have grown significantly we're investing to build platform scalability and stability in order to support hundreds of thousands of restaurants over the coming years prior.
Product innovation are also remains core to our growth strategy, our strong <unk> growth gives us conviction on the ROI of our product investments and we still have a huge opportunity to add more products at restaurants, one and provide features and functionality that will enable us to both broaden and more deeply penetrate our tam in the <unk>.
First half of 2022, approximately 20% of our R&D spend went towards products and initiatives that represent less than 5% of our <unk> today.
We expect these areas to become important drivers over the next few years that investment and skewed towards products, where we've already seen initial traction like our team management suite, notably payroll.
A smaller portion is allocated to initiatives that we expect to be meaningful drivers in the medium term, we're committed to maintaining a balanced R&D profile of investing to drive continued innovation in our core products and to scale our platform, while allocating capital to emerging areas that we have high conviction can increase our RP potential and expand our.
Market opportunity.
Moving down the P&L the year over year growth in general and administrative expenses continues to be primarily related to public company related expenses the growth in G&A should decline to a more steady state level in Q4 as we fully lap. The initial step up from late last year. We maintained we intend to remain disciplined in managing <unk>.
<unk> and expect to deliver operating leverage in G&A starting in 2023.
Total Q2, adjusted EBITDA was negative $33 million well ahead of our guidance and margins improved 350 basis points quarter over quarter to negative four 9% our increased focus on efficiency and cost discipline contributed to the beat Additionally, with GPT seasonally higher we typically see greater quarter over.
Quarter margin improvement in Q2, and that was amplified with <unk> exceeding expectations.
Now turning to guidance for the third quarter, we expect revenue to be in the range of $700 million to $730 million, which represents 47% year over year growth at the midpoint with adjusted EBITDA expected to be in the range of negative $40 million to negative $30 million.
Following our strong first half of the year, we are increasing our revenue expectations for the full year by 5% at the midpoint. We now expect full year revenue to be in the range of $2 six 2 billion to $2 66 billion, a 55% year over year increase at the midpoint.
We are also raising our adjusted EBIT guidance range to negative $160 million to negative $140 million for 2022. This includes the integration of swing, which is a modest drag on EBITDA. The midpoint of our updated range is a $70 million and 360 basis point margin improvement compared to the initial 22.
Guidance, we gave in February .
In addition to our strong execution and continued top line momentum the improvement reflects our increased cost discipline and current pace of hiring as we focus on delivering durable efficient growth.
Our current outlook puts us on track for 130 basis point margin improvement in the second half of the year compared to the first while continuing to make targeted investments in key growth areas to position us for a sustained location and our growth for years to come.
Improving profitability is a top priority across the company our results and our improved outlook are indicative of our focus on efficiency and cost discipline.
These efforts will enable us to drive towards profitability faster as we look ahead, while our business remains healthy into Q3, we recognize the economic outlook in the U S is mixed given that we have been measured in our guidance for the rest of the year to factor in that uncertainty and the potential for slower.
<unk> trends.
Overall, we've made great progress on positioning our cost structure for the scale and growth profile of our business, which will enable us to deliver operating leverage and move even faster on growth opportunities to sustained top line momentum. It also gives us the flexibility to adapt quickly to any change in the business our macro environment.
Looking back at the first half while we are very pleased with our performance. We are still early in the early innings with only 1% penetration of the smash hit $55 billion market opportunity. We remain focused on our goal to serve as the technology backbone for the restaurant industry continually bolstering our platform with more products and features.
To add value for our customers to help them outperform their competitors and we're confident that our continued are.
Continuing to execute on our mission will drive sustained location in ARPA growth and create significant long term shareholder value.
Now I'll turn the call back over to the operator to start our Q&A session.
At this time I would like to remind everyone that in order to ask a question Press Star then the number one on your telephone keypad, we will pause here for just a moment to compile the Q&A roster.
The first question is from the line of will Nance with Goldman Sachs. Please proceed.
Hey, guys. Good afternoon nice results today.
I wanted to ask on some of the comments you made around operating leverage starting in next year as well as a lot.
The progress that you've made year to date and controlling cost and obviously raising the EBITDA margin expectations for the year.
I don't think you guys have given a long term profitability target, but I think last quarter, you guys talked about kind of getting to cash flow breakeven over the near term I'm wondering if you can kind of update us on your latest thoughts on when you guys would expect to get there over the next couple of quarters, particularly as we look out to 2023, and you're kind of signaling more operating leverage to come.
Yes, thanks for the question so.
Hopefully you can tell that improving profitability is one of our biggest priorities.
And we've made great progress in the first half of the year on EBIT and you can see that reflected in our guidance.
And we believe we will exit this year and are positioned to balance the investments of growth and margin improvement.
Wanted to be mindful of the macro so I mentioned in my prepared remarks that our guidance reflected some of that which is also part of the reason we didn't want to give guidance beyond 2022, because we want to be incredibly balanced in that.
And we also frankly want to take advantage of this market opportunity that's presented to US we still believe that have a ton of conviction that there is a lot of growth to come in we're in the early innings. So we're trying to balance that growth with also.
Cost discipline as you guys can see in our in our results.
Got it that's helpful. And then maybe just a follow up on some of the take rate dynamics in the quarter. I know you mentioned mix and some of the optimization things going on any color on the reason kind of small business interchange.
The changes that the networks announced and how much how meaningful that was to you guys in that take rate.
Yes, the biggest impact really was the mix shift from credit to debit to credit. So that's really the primary driver offset by some of our own.
Cost optimization efforts. So I would say that's the primary story there is nothing nothing different to report on that.
Got it I appreciate you taking the questions.
Thank you.
The next question is from the line of Josh Baer with Morgan Stanley . Please proceed.
Thanks for the question Great quarter wanted to ask about the 6000 plus location additions any more commentary on regions of strength or market segments that were.
Driving location additions or any big restaurant groups restaurant chains, just looking for more context.
On that our success on a location number.
Yes, Josh good question on.
On the whole the bookings trends remain really solid and we're pleased with how the sales team is executing across the board.
And we're pretty encouraged with the incremental demand from some of our recent product announcements.
<unk> continues to do quite well in <unk> as well as <unk> and <unk>.
I'd say its broad growth across the board and Theres No segment specific breakout, it's really just been across the board.
Okay got it and then one on sling.
Financial impact to the model.
To call out.
The impact of slang is just not material to the numbers today, so we're not going to call it out.
Okay, great. Thank you.
Thank you.
The next question comes from the line of Stephen Sheldon with William Blair. Please proceed.
Hey, good afternoon, and congrats on the really strong performance here.
Wanted to ask you about consumer behavior, and I think you said, you're being a little cautious with your assumptions there in the guidance, but just based on the visibility you have.
Have there been any shifts in the way consumers are engaging with your restaurant clients.
Macro environment has gotten tougher as consumer sentiment is weakened here any general changes to call out there during the quarter and into July .
Sure. Thanks Steven.
First we're not seeing any signs of a drop in consumer demand.
Or pullback in spending in our business restaurants, we're seeing healthy demand consumers continue to spend on services like dining and the <unk> trends are strong that said, we're pretty mindful of the mixed macroeconomic signals and we're monitoring closely we still haven't even through July we haven't seen any pulled.
Back on consumer consumer demand and while we're not immune.
<unk> spend at restaurants has held up relatively well during past recessions and we've been looking at past recessions.
And we feel pretty confident in what consumers will spend within the restaurant market and then the last point I'd make is.
For restaurants, our platform becomes even more valuable in a tough market. So if we did see signal you can rest assured that we've got scenarios plans and we feel like our platforms in a good spot to help restaurants adapt and navigate uncertainty. So we feel pretty good on that consumer dimensions.
Very helpful. Thanks.
And then just a follow up if you talk about a bigger focus on profit and margins just wanted to make sure I understand how you plan to manage things. There is that more margins. We will continue to stabilize or are you also expecting absolute losses to moderate as we think about 2023 and beyond.
Yes, I mean, I think the way to think about it is.
What you guys probably don't see is we're metering, our hiring and really focusing on <unk>.
Investments in high ROI areas, we're taking a deep inspection in areas that don't drive revenue today and being incredibly.
Ruthless in our prioritization, there and so as we think about margins that you should see a steady improvement over time.
Our commitment from this management team to get to breakeven.
Breakeven and profitability over the near term.
Okay.
Thank you the.
The next question is from the line of DJ Hynes with Canaccord. Please proceed.
Hey, guys. Thanks for taking my question and congrats on the results.
Just thinking strategically and context of the industry challenges you mentioned right you guys have tons of data.
Areas of regional concentration you talked about heightened food cost is there an opportunity to create a group purchasing solution like would that makes sense as part of the finance. So I know there are others that do this but I just think that you guys would be really well positioned to participate in that opportunity.
Yes, TJ, it's a good question I'm not going to comment specifically on that opportunity, but as Elena has mentioned in her script.
About 20% of our R&D investments goes towards medium and longer term growth initiatives.
This includes opportunities that fit within our existing product portfolio for example, extra chef and what we could be doing with extra shack over the long term.
You look at team management, and what we could be doing with payroll now with sling and with.
Pay card in the future so each of our product lines of business within the platform have substantial innovation ahead of them and then on top of that we continue to experiment and invest in new ventures, and these are things that I'm not going to talk about today, but we're planting the seeds for how restaurants will thrive in the future and we're taught.
In five to 10 years down the road basically the next ask for how we think restaurants will offering.
So this 20% of our R&D is super important because youll continue to see us experiment listened to our customers and then adapt to their needs, but im not going to speak specifically to group purchasing as an idea.
Yes, yes, understood we'll stay tuned there.
Just on the 68000 locations could you remind us the ballpark mix of of quick serve versus full service and how that feeds into the distribution curve of GBP per location.
Okay.
Hey D J.
So this is amount by the way we had.
Because if you look at our quick serve segments of the market.
Because our customers and quick serve for a long time thats been core to how we've grown and.
Overtime, we have added capability within our platform to help serve this segment better and.
So.
A couple of things one.
In Q2, we saw that as a percentage of our overall book.
<unk> increased and we're confident that that can continue going forward as well.
Chris mentioned you saw Jamba.
But even in the enterprise space Jamba, putting our kiosk solution.
And really if you look at our core capabilities that we offer.
<unk> certainly depend on some of the things that I'll highlight are one our guests we can display.
Ah self ordering kiosks, our kitchen display screens online ordering and loyalty.
Then.
Some of the capabilities that I think are unique to the <unk> platform that <unk>.
Benefit from things like.
A little bit specific but Texan procurement sensitive buzzard for example, the ability for Acadia to check some of them the food is ready.
The order and the ability to.
Add to order the sequel to the line and then add on or had a coffee or dessert later, but took delivery services. The ability to have integrated delivery is probably online ordering or single use promo codes and so theres a lot within the platform that is easily accessible for <unk> and that's what gives us confidence in our opportunity ahead in this segment.
Okay. Thanks, Thanks for the color guys I appreciate it.
Thank you. The next question is from the line of Timothy Chiodo with Credit Suisse. Please proceed.
Thank you I appreciate you taking the question I wanted to ask given your comments about the restaurant operating environment I wanted to see if you could give us some more context around when you look at your gross adds so not the net adds but the gross ads and we think about what portion of those are coming from either a brand new restaurant that was just.
Started in.
Just a brand new company versus an existing restaurant that either is using another system or no system.
What is the mix of that within your gross adds and then the follow up is has the trend in that mix been pretty stable or has it changed over time.
Yes.
Good question.
Its really a balanced <unk>.
Growth across our bookings and our net adds.
We certainly see.
Restaurants that are already operating moves to toast and they believe in a digital platform and these are existing restaurants that are hyper local go to market team knows how to tap into and we see those restaurants lucid hosts secondly, we're seeing restaurants already on post expand and those are net.
Adds as well so we're seeing quite a bit of expansion within our portfolio from existing customers and then thirdly, we certainly see net new locations in the form of new constructions and it's always been a sort of a balanced attack across those three I think as a reminder.
I want to remind you that we're still opening 8%.
Of the U S total addressable market.
So our reps in these markets have a lot of surface area to go after and we're in the early innings of them penetrating these markets to create called flywheel market.
So it's a little bit of a balanced attack in these markets across those three dimensions. The other thing that I'll mention is beyond net ads.
Remember that net adds on locations is only one lever that we play with the second lever is <unk>. So as we win a customer and build trust we're growing more of the platform that the average restaurant is using and Thats, a really important lever for us because restaurants are adopting more and more of our modules.
It's a little bit of a balanced attack across those growth levers.
Yeah.
Excellent. Thank you for the context.
Thank you.
Our next question is from the line of Josh Beck with Keybanc. Please proceed.
Thank you for taking the question I wanted to ask a little bit.
About some of the secondary effects of what Youre seeing in the industry, obviously restaurants like you said hubs record inflation and a lot of there.
So I'm just curious if.
That is effectively pressing the case for automation.
Anyway, it's helping.
Either improve the top of funnel activity or.
The sales cycle anyway.
Yeah, So I'll start with macro.
And.
So we've been at this for 10 years.
At the macro we fundamentally believe that the restaurant industry is going to shift that's a secular shift.
To a unified digital platform that powers all of the stakeholders across the landscape.
It's it's been in existence for 10 years, and it's going to continue for many years to come. So we're seeing restaurants transition to digital both to drive same store sales to drive operational efficiency to drive staff productivity and then to drive automation in the back office.
So it's really across the spectrum, Josh and I think in the back office is a unique opportunity for restaurants to really understand food cost optimization. It starts with extra chef and Thats why were seeing momentum with extra shaft, but it is going to go beyond extra chef with innovations in the back office that help rest.
France.
Understand their menu profitability understand where they are wasting money understand where they can drive better pricing and better food costs as I mentioned, so I think we're just in the early stages of the opportunity in and around extra shifts and it's exciting for us because we're helping restaurants really adapt and adapt quickly.
In the back office amount I don't know if you want to add anything else to that.
I think look.
The extra shifts.
Launch has been.
<unk> has been strong for tourists we started selling this in Q1.
And I think what's exciting about what we're doing is actually for US is how easy it is for a restaurant tours to be able to process invoices just by taking a picture on their phones and that allows our accountants and restaurant tours to actually get a sense of food costs really efficiently and one example of one of our customers out of Cincinnati.
With all the inflation that we're seeing.
Noticed just through the reporting with an extra ship outsource scanning invoices. They saw the cost of beef and potatoes, we're up 20%, 40% plus.
And just getting that visibility allowed them to pay attention to it and they are able to find a different provider for beef.
They looked at ways to increase.
Purchase in bulk.
And.
Profit increase on the burgers by 20%, which is a top three months or so and it's really meaningful for given just crystalline dimension how much of a restaurant spend is on food.
Alright.
Very helpful. Maybe just.
Follow up on.
The subscription or two certainly seems to have had another nice sequential jump. This quarter. My thought was that maybe that would slow down a bit as we went from say more front office oriented.
Adoption, maybe Germany.
And out of the pandemic to maybe more back office types of.
Functionality, so just would be curious to unpack that within the quarter and then really how we should think about.
The pace of.
Expansion moving forward.
Yes, no I think thats it.
Good call out so as you can tell from our prepared remarks, increasing <unk> is such an important part of our growth strategy and we continue to see the sales team execute we talked about tow shop, we talked about our growth team an up sell team and then really our go to market team. Our reps are very good at positioning the entirety of the <unk>.
That form they've been trained to do that.
And to really position that upfront so all of that combined with the innovation that youre seeing and team management extra shaft is really coming together to drive that outcome that you're seeing so we feel confident that we will continue to see progress on our <unk> I won't guide to it specifically, but.
You continue to see as we add new customers, our newer customers are actually having higher ARPA as well, which I mentioned in my prepared remarks, so really encouraging and if I look at what's really driving that.
A combination of our core products, our core commerce products, but also extra chef and payroll, which are very early for us so really encouraging to see that grow.
Thank you. Our next question is from the line of David Koning with Baird. Please proceed.
Oh, Yeah, Hey, guys. Thanks, so much nice job and maybe if I could ask just.
The subscription <unk> has been going up so consistently I think five quarters in a row of 7% to 12%.
Yield growth I guess, we get their ARPA growth in that subscription line.
Do you have insight into how fast that grows in the future or are we at a point now I can't imagine it continuing to grow quite that rapidly on a sequential basis, but is there a way for you to almost give some insight to that growth, 3% sequentially for a while still or how should we think about that.
Yeah, I, just answered that but at the at the highest level. Obviously, that's something that we're completely focused on I'm not going to guide obviously to the future, but what I can tell you is as we're bringing on more.
More locations.
Newer customers that are coming on are coming on with more products. So that should give you a sign that as we're growing and we're growing fast and youll start to see that improve over time.
Okay. Thank you and then secondly, just on the hardware revenue.
<unk> been pretty stable at 29 to 31 or so million per quarter for a long time, but inventory has grown significantly I think up 40% sequentially up 100% year over year give or take why isn't hardware revenue growing growing faster and maybe how should we see that in the future.
Yes.
Things. So we did this a couple of things going on there. One is we had lower year over year growth in our new customers Q2 was our strongest quarter ever for net location adds but keep in mind Q1 last year, we'll still depressed by COVID-19. So the year over year growth rate in Q1 was meaningfully higher.
And then <unk>.
Even while our realized price for hardware sales improved GAAP accounting requires us to proportionately allocate revenue across bundled products. So this meant we shifted some revenue out of hardware in Q2.
But on the haul when you take out the noise I look at the at the revenue and say its been relatively consistent.
Thank you and our next question I would also add.
I'll also add that.
Mentioned this in my prepared remarks, we have been strategically, adding inventory to insulate us from supply chain near.
Near term supply chain issues, so I feel confident.
That our guide reflects all of that.
Thank you. Our next question is from the line of Andrew <unk> with F&B seed and the couch is fishy.
Hey, guys. Thanks for taking my question Nice set of results here I wanted to hone in on the gross margin side, and specifically I'm trying to understand what kind of pricing flexibility you have be it SaaS or on Fintech solutions and then on the cost of revenue side could you give us a little bit more color.
Sure on where you can drive efficiency in Fintech and in SaaS.
Yes, so I love the question because year reinforcing something that we think is really important to our business model, which is the opportunity to monetize both on the fintech side and on the SaaS. So that's an important part of our model over time on the Fintech side, we have opportunities.
Two to continue to drive more volume to our to our platform, which obviously with thrive.
<unk> on our platform and higher take rates.
But then at the same time and we've mentioned this a few times, we have a team really focused on cost optimization and these are.
Operational things that theyre doing behind the scenes, including some R&D efforts.
Et cetera. So the combination of those two is sort of how we think about.
The monetization and the pricing impacts over time on Fintech and then on the SaaS side, obviously, we're going to continue to innovate.
And the combination of those two really drive over over time, our ability to continue to grow.
Got it and then I know, it's still early days, but a lot of questions have been asked here so any update on the <unk>.
Investments you've made in the international and what you've learned thus far that's that's working or maybe be scaling back.
Yes.
We're still very committed to international our investment as you guys know wasn't a significant investment, but it's proceeding as plan we'd have some early customers. The read is really good with those initial customers and just as a reminder, 2022 is really a year of building the foundation for this as a multiyear <unk>.
Ernie for Us and like you said very early innings, but we're encouraged by what we see with the initial customers we have.
Thank you.
Our last question will come from the line of Jeff Cantwell with Wells Fargo. Please proceed.
Hey, Thank you for squeezing me in.
Wanted to ask you a quick one on efficiency.
In your slide 11 talks about.
Two thirds of your new locations have come from inbound channels in one trip there coming from.
Restaurant partner referrals. So can you just remind us what that might have looked like a year ago two years ago I just want to give sense of.
How the trend has developed over time.
Locations for your ability to just continuing to scale and grow more efficient over time. So we're just hoping for any additional color you might provide on that.
Thank you.
Sure.
Thanks for the question look I think we're seeing consistency in our funnel whether across segments as Chris mentioned earlier.
The percentage of inbound referrals has remained consistent and I think the thing that we're most focused on is continue to invest in our go to market team and our customer facing teams because we know that as we increase tender on the sales reps and increased market density that's the number one driver.
Efficiency and growth business.
Okay, Great and then Andrea.
Can you talk just a little bit more about that because we noticed that.
The growth come from last year was pretty.
Pretty impressive group this quarter October growth come from last year. So can you just remind us about.
Seasonality, one Q2 Q3 Q just so we can be aware of.
What expectations should be for <unk>.
As we look out.
Thanks, Kevin.
Yes, I think the way to think about is two things one is both from a location standpoint, typically Q2 is our highest.
Our seasonally higher than Q3, and then it comes back in Q4, so thats the location side.
<unk> per location also tends to be higher in the summer months, So just keep that in mind.
That's probably the two things I would say about seasonality.
Okay, Great got it thanks, very much and congrats on the results.
Thanks.
Thank you I would now like to turn the call back over to the presenters.
Okay. Thank you everyone. We appreciate your time, we appreciate the good questions and we will be in touch so have a great night.
This concludes today's conference call you may now disconnect.