Q3 2022 Toast Inc Earnings Call
Profit and gross margin selling and marketing expense research and development expense and general and administrative expense are on a non-GAAP basis.
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 Dot <unk> Dot com.
With that let me turn the call over to Chris.
Thank you Michael and good afternoon, everyone before I jump in I'm going to apologize upfront for any coughing outburst or sips of hot tea as I'm recovering from a nasty cold so let's jump in this past quarter marked the first anniversary of <unk> IPO I want to thank all of our employees for their focus.
And dedication as well as our partners customers and investors, we look forward to our ongoing partnership and while we've accomplished a lot over the past year were even more excited about the opportunity in the years to come.
<unk> delivered a strong Q3, delivering continued efficient topline growth and improved profitability. In addition to topping our revenue and EBITDA expectations. We surpassed 100 billion in annualized <unk> for the first time. These results are a testament to the consistent execution.
Of our core strategy driving location growth deepening our ability to serve all segments of the restaurant industry and delivering product innovation on the product front last month, we hosted spark our annual innovation event, where we announced a number of new product updates to help restaurants grow and expand there.
Business and overcome key challenges a key highlight is toast invoicing, a new product to help restaurants with seamlessly manage catering and wholesale orders alongside their in store takeout and delivery businesses.
Great example of our continued product innovation and how we're leveraging new products to better serve different restaurant types.
While the fundamentals in our business remains strong we continue to closely monitor the uncertain macroeconomic environment that both we and our customers are operating in toast customers continue to see solid consumer demand and the restaurant industry remains healthy.
We're focused on partnering with both new and existing customers to ensure they are able to adapt and thrive in this dynamic environment. In addition, we are equally prepared to adapt our business to any macro changes in the restaurant industry.
In the third quarter, we grew revenue, 55% year over year to $752 million and <unk> was up 60% to 868 million <unk> remains healthy increasing 53% year over year in Q3, we also continue.
To drive strong location growth, adding approximately 5500, net new locations and ending the quarter with approximately 74000 total locations.
Sustaining over 40% growth in total locations, even as our scale grows is indicative of our powerful go to market strategy and industry leading platform.
As a result of this consistent execution, we are raising our full year revenue guidance by 3% at the midpoint of the range, which implies 59% year over year growth.
Also increasing our adjusted EBITDA guidance by nearly $30 million at the midpoint.
The continued margin improvement in Q3 is further evidence of our focus on cost discipline and efficiency efforts and our progress towards profitability, we remain committed to balancing investments in our most important areas to go after the massive market opportunity in front of us with disciplined cost management.
<unk> and healthy unit economics to sustain that efficient growth as we scale.
Our ability to scale our proven go to market strategy gives us confidence that our unit economics will continue to improve over time.
We've discussed the flywheel effect that drives increasing referrals and inbounds as we increase penetration in our local market that.
That results in higher and more efficient productivity the higher productivity leads to more.
And better profit contribution as these markets scale.
Over the past year, the percentage of total SMB restaurant locations in markets, where we have over 20% penetration has increased by more than five times and we continue to gain share in these markets proof that we still have significant room to keep increasing share even in our more established.
Tablet markets. The large majority of our markets are still below that 20% penetration and we're investing to replicate that flywheel effect in more markets. When you combine the significant untapped SMB opportunity with our nascent share in the enterprise and international segments, we still have a long runway of growth.
Both ahead, and we're well positioned to capitalize on the digital transformation in the restaurant industry.
Demand for toast across the full spectrum of the restaurant types remained strong and our new customers continue to take advantage of more products across our platform to operate more efficiently and grow their business.
I'll highlight a few examples from the past quarter.
Antoine one of New Orleans, storied French quarter restaurants selected toast as its technology partner known for its classic fine dining experience and <unk> wanted a new partner, who could modernize its back of house, while also preserving its special front of house experience.
In addition to our robust all in one platform and <unk> was attracted to our payroll and toast tips manager solutions to help eliminate the inefficiency of making multiple back office trips each night to aggregate hips with their legacy Pos Theyre also using 13 of toasts kitchen.
Display systems in their expansive kitchen, along with several of our guests modules entwine.
<unk> came to us via a strong referral from another New Orleans toast customer a great example of the relationships our local go to market team builds and how that flywheel effect works as we gained traction in these local markets.
Walk ons is excited to leverage toast across its growing footprint of nearly 100 existing and planned locations across the south and Midwest co.
Co owned by NFL Star Drew Brees and named the number one best Sports Bar in America by ESPN and the number one sports by our franchise two years running by entrepreneur walk ons has started to rollout toast at some of their locations.
Looking to enhance their technology walk ons is adopting our Pos for its ease of use are toast go handhelds to help navigate CS of sports fans and our API integrations to provide superior service through all of our ordering channels.
Taco Maya is a fast casual <unk> with six existing and for planned locations throughout Chicago, and Illinois type of Maya, we'll be implementing 10 toast modules across its footprint, including extra chef for better visibility into costs Multilocation management for easier.
Are you updating and online ordering and mobile order and pay among others to provide an efficient seamless customer experience.
Every location also includes a patio, which taco Maia will equip servers with our toast go handhelds to service. It's a great use case for our toast goes which have proven to benefit staff productivity.
<unk> is just one example of the momentum we're building in the <unk> segment earlier this year, we announced <unk> and in Q3 <unk> represented nearly half of our bookings its highest level in recent years, one important benefit of our vertical focus on the restaurant industry is the ability to leverage the tourists.
Platform to develop offerings tailored to the needs of specific restaurant types, enabling us to deepen our penetration across restaurant segments.
With restaurants operating in an increasingly dynamic environment. It is critical that we constantly speak to and stay connected with our customers.
We recently conducted our annual voice of the restaurant industry survey to gain insights into the major challenges facing restaurants, and how <unk> can help them thrive.
<unk> two <unk>.
<unk>, we've seen this year labor shortages and inflation are the biggest challenges facing our customers. One in three restaurants said they've had a difficult time hiring in 2022, and almost 40% started tracking the prices of key ingredients. The survey also highlighted employee scheduling.
As one of our customers' biggest technology pain points reinforcing the importance of adding sling to our team management product suite. In addition, our customers are also diversifying their businesses to meet the evolving needs of guests and to develop new revenue streams on average restaurant surveyed employees.
<unk> seven different service models, such as on premise takeout delivery catering wholesale curbside and drive through our recent product innovations highlight how toast is uniquely positioned to help restaurants navigate these challenges and take advantage of new.
Opportunities to transform and grow at spark, we announced post invoicing, which enables restaurants to efficiently manage wholesale and catering orders along with their core restaurant business in one integrated system.
Our customers can save time on managing paperwork and multiple systems, while getting paid faster and seamlessly capitalizing on the opportunity to grow their business with more service models.
Toast invoicing showcases our ability to deeply serve hybrid locations and provide a seamless billing and payment solutions for both beta b and B to C. We estimate over 70% of restaurants already offered catering in addition to their on premise business and catering is one of the top three four.
<unk> areas for restaurant owners and operators as we head into 2023.
A great example of how customers are leveraging our new invoicing offerings. Its founders table, which operates <unk> concepts dos Toros taqueria and shopped creative salad and is a great strategic partner of ours.
They went live with invoicing in June at 19 of their dose tourist locations in order to streamline their operations and payments for catering into one platform. After previously using a separate point solution.
In addition to the efficiency of managing this through a single integrated platform over the past three months dos Toros monthly invoicing usage with toes more than doubled and in September alone invoicing drove a 17% uplift in their payments volume.
On toast.
At Spark. We also featured our extra shaft price tracker as I mentioned earlier. This is a major pain point for restaurants due to the inflationary environment, our customers can access the price tracker directly from our newly designed extra shaft dashboard to stay on top of fluctuating ingredient prices and <unk>.
Costs restaurants, like Plaza Pizza are watching price fluctuations week to week and in response to these insights have engaged in negotiations with food distributors Plaza Pizza was able to successfully reduce food costs by nearly 10% other customers are monitoring key price changes to may.
Strategic decisions about their menus their recipes and pricing.
Our ability to help customers navigate this important initiative as evidenced in how quickly the attach rate for extra chef has ramped after only adding it to our sales motion in Q1. This year the percentage of locations that wet went live in Q3 using extra shaft is already in the mid.
Teens, and we continue to see a significant opportunity to reach customers and further develop our product suite to help restaurants manage their suppliers.
Finally, I'd like to highlight <unk> capital, where our data on restaurant performance enables us to help offer our restaurants seamless low friction access to capital the majority of applicants to receive an approval decision in one business day and on average.
Funds are dispersed to customers just two days after signing their loan agreement that.
That differentiated customer experience is evident and customer retention.
Among the 2021 customer cohort over 70% have taken a second loan and in some cases multiple additional loans in Q3, we expanded our offering adding a 360 day loan with larger available loan sizes.
To give customers more choice and made a wider range of use cases.
The strong customer value proposition of <unk> capital and the different offerings. We have added over the past year continue to drive healthy growth with SMB businesses underserved by the banking community and an estimated two thirds of all SMB businesses, having financial needs each year, we have a.
Clear opportunity to leverage our expanding portfolio of banking products to both add significant value for our customers and drive strong growth going forward in.
In summary.
<unk> delivered strong execution and continued momentum in Q3 balancing targeted investments to drive product innovation with focus with focus on healthy unit economics and disciplined cost management.
Amid uncertain times, we are more committed to an effort to our mission to empower the restaurant community to delight guests do what they love and thrive, we believe that serving as the restaurant industry as trusted technology partner and giving restaurants, the tools they need to adapt and succeed.
Benefit our customers, while helping toast deliver durable efficient growth for many years to come now I will turn the call over to Elena.
Thanks, Chris and thank you everyone for joining before jumping into the results I want to thank the entire <unk> team for another great quarter, the sustained execution and momentum we've built in the year since our IPO. Thanks to the hard work and dedication of our great team that execution contributed to another strong quarter with revenue.
And adjusted EBITDA, both coming in above the high end of our guidance in Q3, our integrated software and payments model together with a differentiated go to market approach is built to scale efficiently.
And our balanced top line growth and improved profitability is early evidence of that we're still less than 2% of the 55 billion U S market and have a huge opportunity ahead as we lead the restaurant industries digital transition.
Confident that continuing to invest in innovation and scale, our integrated business model will enable us to sustain both strong growth and margin improvement.
In Q3, we added approximately 5500 net new locations, increasing the number of total live locations on our platform to approximately 74000 <unk>. The growth is broad based with a healthy balance of existing restaurants switching over to test existing customers expanding their footprint and new restaurants partnering with them.
As evidenced by the examples Chris just shared we're gaining traction across different types and segments that restaurant. Thanks to the breadth of our industry, leading platform and the ability to deeply serve the entire industry.
We expect to sustain our momentum in Q4 with net location adds in a similar range as Q3.
Turning to our financial results are our which is our core operational metrics ended Q3 at $868 million up 60% year over year.
Total revenue grew 55% year over year to $752 million.
Looking at what we operationally view as recurring revenue subscription revenue and Fintech gross profit totaled $224 million up 82% year over year, driven by our continued location growth and healthy <unk> increases across both SaaS and Fintech solution.
Subscription services revenue increased 96% year over year in the third quarter benefiting from our sustained location growth and increased product adoption total SaaS <unk> grew more than 20% year over year, driven by both new and existing customers as we've discussed new customers are joining the platform at a higher or at higher <unk>.
<unk> been in prior years as they leverage the expanding breadth of our platform Chris.
Chris alluded to the increasing attach rate of a nascent products like extra sure. That's just one example of how our sales team is attaching more products that booking contributing to higher SaaS RFP for our more recent customer cohort.
Existing customers are leveraging upsell channels to add more product the RP for each of our pre 2022 annual customer cohorts is growing at double digit rate and we're still only scratching the surface on the potential for upsell.
And products like payroll and extra shaft are still early on their growth and have much higher penetration with new customers in older coverage plus.
Plus we have an exciting pipeline of new products for our customers to benefit from as we continue to develop our upsell team and refine our sales motion. We believe we can continue to increase <unk> across our annual customer cohort.
On the Fintech solution side revenue grew 55% to $628 million in gross profit was up 74% year over year to $134 million in the quarter.
<unk> growth remains healthy and increased 53% to 25 billion in Q3 average annualized <unk> per processing location of $1 4 million was roughly flat with Q2 and up 8% year over year.
The growth in <unk> per processing location as a result of higher average ticket and the continued rebound in customer transactions, which remained slightly below 2019 levels in Q3.
In addition to healthy payments volume, we're also benefiting from our growing portfolio of Fintech products and services led by <unk> capital those products drove $17 million of gross profit in Q3, <unk> capital offers a strong value proposition and we have a great opportunity to further penetrate the significant restaurant lending marketing operating opera.
<unk> as we expand the offering and additional <unk> capital to our portfolio of non Pos fintech products with nascent offerings like pay card and payout and other products currently in development highlight the strategic benefit of our fintech capabilities and the opportunity to build products that add value for our customers while.
And our operating and driving additional monetization.
The combined.
The combination of continued optimization efforts from our payments platform investments coupled with the growth in other fintech products resulted in a net take rate increasing to 53 basis points.
As a reminder, <unk> per processing location is typically higher during peak season in the second and third quarters. Each year, we expect <unk> per processing location to seasonally decline quarter over quarter in Q4 and in Q1 each year.
Total gross profit grew 78% year over year, and 31% quarter over quarter to $164 million, resulting in gross margin of 21, 8%. We delivered gross margin improvement in each of our reporting lines, leading to over 300 basis point gross margin improvement compared to Q2.
Turning to customer acquisition costs hardware margins improved quarter over quarter due to lower shipping cost hardware revenue decreased year over year, mainly due to a test seasonal comp and accounting guidelines that require allocation of revenue across bundled products.
We've seen an up sell to existing customers referred to a typical seasonal pattern with Q2 benefiting from more hardware sales to existing customers in preparation for the outdoor season, followed by a drop off in Q3 last year within person dining still recovering after cope COVID-19 hardware upsell sales in Q3 were stronger than usual.
On operating expenses, we continue to take a balanced approach to position <unk> for sustained top line momentum as lead that this is the digitization of the restaurant industry, while putting in place a lean and flexible cost structure. Our hiring is focused on key investment areas with the strongest ROI potential in <unk>.
We're rigorously prioritizing those opportunities as we tightly manage expense growth at the same time, we're closely monitoring the dynamic macro backdrop and maintaining the flexibility in our cost structure to adapt to the changing environment.
Moving to our other customer acquisition costs sales and marketing expense growth slowed the 54% year over year and further decline as a percentage of recurring revenue in Q3. Our go to market engine is well positioned to scale efficiently as we drive sustained share gains and build flywheel effect, an increasing number of markets.
We expect rep productivity to increase driving deeper market penetration and improving unit economics.
The recent spark event and release of our test invoicing product is the latest example of how our investments in research and development are driving innovation and help our customers grow their business and improve their bottom line.
We believe our balanced investments across core products emerging growth products and our pipeline of new products will continue to contribute to continued ARPA and location growth.
General and administrative expenses were 25% of recurring revenue. Our G&A expenses include bad debt and credit related expenses, which were approximately $13 million in Q3, excluding bad debt and credit related expenses G&A grew 66% year over year as we continue to absorb public company costs.
With our emphasis on disciplined cost management, we expect where we expect growth in the core G&A expenses to moderate in Q4 and anticipate positive operating leverage on G&A going forward.
Bad debt and credit related expenses include bad debt on outstanding receivables as well as liabilities related to <unk> capital and other fintech offerings. Our data advantage allows us to closely monitor the health of our restaurant and its repayment ability to maintain low default rates and manage our risk and while we expect bad debt and credit expenses related.
<unk> capital to grow as we expand the program the overall operating margin as healthy and accretive to the business.
Total Q3, adjusted EBITDA was negative 19 million or negative $2 six margin was a 230 basis points improvement quarter over quarter Q.
Q3 is a great example of our ability to drive healthy top line growth continue to invest in key areas that will help sustain growth while operating efficiently to improve profitability. We remain focused on optimizing our cost base and a rigorous rigorously prioritizing investments in order to sustain this trajectory going forward.
Now turning to guidance for the fourth quarter, we expect revenue to be in the range of $730 million to $760 million, which represents 46% year over year growth at the midpoint with adjusted EBITDA expected to be in the range of negative 30 to negative $20 million, we continue to see healthy GP vision trends into Q.
Four and our guidance reflects a seasonal decline in <unk> per location similar to our typical historical trend.
Based on strong Q3 performance in Q4 guidance, our full year 2022 revenue expectations are 3% higher at the midpoint. We now expect full year revenue to be in the range of $2 six 9 billion to $2 72 billion, a 59% year over year increase at the midpoint our.
Our updated full year adjusted EBITDA guidance range is negative 127 to negative $117 million and nearly $30 million improvement at the midpoint from our last guidance. This implies an adjusted EBITDA margin of negative four 5% for the year at the midpoint.
Our focus on efficiency and disciplined cost management. This year has enabled us to both meaningfully improved margins. The last few quarters and invest in key areas that we believe will contribute to durable efficient growth. We intend to maintain this balanced approach going forward investing in areas like product innovation as we go after the big market opera.
Today in front of us while driving operating leverage the progress we've made to adapt our cost structures. This year, along with our continued focus on efficient growth puts us on a trajectory to deliver a quarterly adjusted EBITDA profit by the end of 2023.
This assumes the current macro environment remains relatively consistent we are closely monitoring the key indicators and if there were a meaningful change the macro environment that impacts the restaurant industry, we would reassess that timing, but we have a proven ability to navigate changing market conditions and with the improvements in our cost structure, we're prepared to quickly adapt.
Our business to any changes.
In closing, we had a great third quarter, posting strong financial results and building on our operating momentum I want to reiterate my thanks to our teams for their focused execution in the face of this dynamic operating environment restaurants need a trusted technology partner more than ever to help them drive efficiency offer.
Differentiated guest experiences and enable new service models, our relentless focus on being that partner to the restaurant industry and solving their biggest pain points is driving the strong growth in our business.
And the investments to further strengthen our industry leading platform puts us in a great position to lead the digital transition for the restaurant industry.
Now I will turn the call back over to the operator to start our Q&A.
Yeah.
Yes.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We would also ask that you limit yourself to one question and one follow up question.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Tien <unk>.
<unk> Huang of Jpmorgan. Please proceed.
Okay, great. Thanks, so much great results here.
I wanted to ask I like Slide 18, if you don't mind going to that.
That was helpful to see I'm curious how hard or.
How big of a focus is it to narrow this gap between the.
The 21 cohort and pre 21 class it looks like.
What are some of the big products, you need to deal with and I think it sounds like the product upsell team will be tasked to do that.
Any detail there would be great.
Okay.
Hi, Ken Thanks for the question. This is a modern look I think.
One of the things we're really proud of is just a great performance by our by our go to market team in Q3.
Youre seeing not only with new customers or bookings or booking at a higher ARPA and you're also saying that caused for customers over time as we saw on slide 18, our expanding our pro overtime and Thats really across the board we've got on the upsell team.
Growth or is it a more familiar with the newer products as of late I mentioned the attach rates on some of these products like employee cloud an extra shift.
Lower in the hierarchy products, and then until shop with great products like our best products.
<unk> capital as Chris talked about.
And also our core.
Alex in terms of adding more hardware and software subscriptions through kiosks and such.
So across the board thing really good momentum and it's really both on new business bookings as well as well as on OXXO.
As well.
Alright, great.
My quick follow up if you don't mind just.
Bigger picture question around risk appetite.
Going into a less certain macro just risk appetite in general with underwriting the locations. The capital business you talked about extra shifts what do you what signals are you watching there to dial that up or down.
<unk>.
Yes, so our test capital business.
First of all we see a lot of the data.
With our our customers. So we're well positioned to really understand their ability to pay there and sort of their payment volume and so on so the risk is largely manage we pay careful attention to signals, but we're not seeing anything so far in our loan portfolio that leads us to believe that.
Default rates are out of line in fact, theyre very much in line with our expectations and so we're not seeing that risk but of course, we're going to keep monitoring it in light of the backdrop that we're in.
Got you. Thank you.
Thank you. The next question comes from the line of D. J Hynes of Canaccord.
Please proceed hey, guys.
Yeah. Thanks, Thanks for taking the question and nice set of results here.
Elena maybe I'll start with you I wanted to ask about inflationary impacts on GPP per location and how we should think about that going forward I suspect. There is kind of a mix of pros and cons right on the one hand high prices are a good thing for payment volume I presume at some point that works against traffic. So.
How should we be thinking about that as we factor.
The data points into our model.
Yes, no. It's a great question. So inflation is definitely a factor and we know that in our TPB per location and we know that we're benefiting from that.
And we're also benefiting from higher transaction volumes and sort of commented on the fact that in.
Our ticket.
Is going up but also our transaction levels are close but not all the way back to 2019, so we're going to benefit a bit as that reverts back to pre COVID-19 levels and then the other interesting data point, we look at is the.
Cost of food at home and the cost of food away from home and we're seeing that the cost of food at home.
Is growing faster than the cost of food away from home. So as diners have become more comfortable with and we're seeing that trend of consumer demand shifting to food away from home, we expect to continue to benefit from that as well.
Interesting okay. Thanks.
And then maybe a more strategic follow up.
Just around like the importance of building out.
The self serve product led motion to the long term margin profile of the business.
I'm just thinking like as you scale refilling the natural customer attrition, you would see with kind of lower and lower cost of acquisition channels is obviously going to be important but would love to get your thoughts.
On progress RMB, just how important that is.
Yes, DJ This is Chris I think you want to put yourself in a position to support the restaurants demands whether it is a net new customer upfront as Amman mentioned bundling more of the platform upfront.
In efficient motion to to win that customer, but then over time given existing customers the flexibility either through self service product led growth or the upsell motion to have really clear accessibility to our platform and all of its module. So we spend a lot of time.
Looking at that customer journey for restaurant segments of all types to identify what is the right channel for which they can get exposed to the right products and then we capitalize on those efforts and we're seeing that those teams are becoming more and more productive over time. So that's what we look at.
But then we complement that with making sure that the platform has all of the needs that address the restaurants pain points and we continue to <unk>.
Select and build the right products to address those pain points.
That's helpful color. Thank you guys keep it up.
Thank you.
Next question comes from will Nance of Goldman Sachs. Please proceed.
Hey, guys. Good afternoon. Appreciate you taking my questions very nice results today, it's great to see that.
On the top line and particularly in the subscription revenues I guess I wanted to follow up on the attach of caution on the subscription <unk>.
I thought slide 18 was great as well wondering if you could maybe dig into the step function change in <unk> in the 2021 cohort I mean is that primarily a result of payroll and maybe a little bit of extra chef or is there something specific you were you were.
Kind of point us to that drove that step function and then the follow on is what does that what does the sales motion look like the upsell motion for the backlog to get some of these higher RP products kind of penetrated in the base. Thank.
Thank you.
Yeah.
Sure I'll take that and I'm on feel free to chime in as well so that that step function is really broad based as we started.
Testing different bundles that resonate with our customers.
We started understanding that.
Customers are actually actually our sales team is getting really good at positioning the breadth of the platform. That's really the important part that gains to solution selling and in that they are selling.
All elements of the platform, whether it's the guests products online ordering and things like that as well as hardware.
So it's really the breadth of products payroll extra shaft payroll more obviously played a role but we still have a.
Continued opportunity with payroll.
Extra chef is too early to have that big of an impact in fact in 2021 was really in a sense I would I don't even know it shows so early in 2021, so it's really a payroll and the broad breadth of the platform versus any one product.
Yeah.
Got it thought that is super helpful.
The take rate came in.
A bit ahead of where we were looking for like there may have been some contribution from <unk> capital and I was just wondering if you could talk to.
The trajectory of those capital over the last couple of quarters. It sounded like it was a little bit bigger than maybe we thought it was running so and any color you can provide on what the cadence of adoption of those capital has been over the last several quarters would be great. Thank you.
Yeah, No we're really encouraged by <unk> capital and we commented on it because we wanted to give you guys more transparency.
But we will.
We launched a 360 day product in Q3, and the take rate benefit from that.
Our take rate, though is a combination of two factors, it's not just capital, but also the improving both the focus we have on improving our payment operations and infrastructure. So theres always going to be that focus we have a whole team focused on that all the time, but in Q3.
Primary the two primary drivers for both of those things not just dose capital.
Got it thanks, a lot of sense I appreciate taking my questions.
Sure.
Okay.
Thank you. The next question comes from Mike Camden.
Need him.
Please proceed.
Thank you good evening congrats on the quarter and then you commented I think that you expect to be EBITDA profitable exiting 2023 could you just maybe walk through the different levers specifically in terms of what you would then have to deliver on gross margins on the recurring revenue any kind of a framework around that and then what.
Some of the levers on the Opex line that would need to come through to get to that level.
Yes, I mean I'll start by saying, we're very early in our or in the middle in that early but we are in the middle of our 2023 planning. So I'll have more specifics at our next earnings call, but at the highest level, we're going to continue that focus on cost discipline.
Evident and we've shown you guys for the last several quarters. So that's number one we're going to continue to gain leverage in the obvious places like G&A.
But I want to remind you we have a massive opportunity ahead. So we're going to continue to invest in areas that are going to drive long term sustainable growth and that's how I would think about it. It's a very balanced approach to 2023 and in light of the macro.
Right, that's really encouraging to hear though so definitely should be viewed positively by investors.
As a follow up Chris I think a few months ago, you had identified the hospitality opportunity I believe in the press release, you had 40000 plus locations as a target market I guess my question that would be typically wouldn't be think of hospitality those.
Terminal are usually integrated into the property management systems, where I think a company like Microsoft as the incumbent so any progress around that how do you go about displacing someone that has been an incumbent for so long.
Love to hear any color around your progress on the hospitality side and how do you see the opportunity playing out.
Sure so.
We're very excited about the hotel opportunity.
We continue to build out our pms integrations and.
They're well beyond.
Oracle's Pms Theres a span of Pms integrations that we are now capable of interfacing with at hotel properties, but the team continues to build out that foundation, we're very confident that we can support the restaurants within those hotels, we've got a number of opportunities in our pipeline that are exciting but.
I will caution you that it's still early days, where we're winning hotels, but.
But again, we're building that.
That muscle as we speak and over the course of the next few quarters, you will see us.
Continue to execute within that segment and we're excited about it.
Got it thank you so much.
Thank you next question comes from Josh Baer of Morgan Stanley .
Please proceed.
Yes.
Thanks for the question and congrats on the quarter wanted to ask about locations the 5.5 thousand.
Better than expected given I think we were looking for the lower seasonality in Q3, just wondering about the linearity of location adds.
Was there any deterioration going month to month from September to October or even into November .
Yes, So I'll talk about Q3, and you are right Q3 net location adds came in better than we expected and that's really a testament to the onboarding team they were converting existing restaurants that were switching it to us.
Converting them faster. So we saw great performance from that team that pulled some locations into Q3 based on the current pipeline I commented in my prepared remarks, we expect Q4 net locations.
In a similar range to Q3.
And we're still on track for a strong growth here.
Great and then one one on guidance just wanted to make sure I heard right you were saying that guidance reflects a decline in <unk> per location that was similar to historical trends.
Yes, typically GP per location and in my prepared remarks, I mentioned that it's seasonally higher in Q2, and Q3 and dips down into in Q4.
So that's not unusual its typical historical patterns in our revenue guidance reflects that.
Okay I guess the question is on macro.
Consumer spending I guess is there is there any like level of prudence around macro and potential shifts in consumer spending.
Incorporated in that guidance. Thank you.
Yes, Josh I'll jump in we're not seeing any signs of changes in consumer demand or spending across our business.
Restaurants continue to see healthy demand in line with what we think our historical seasonality trends.
And.
That said, we're mindful of the.
The macro environment.
We believe consumer spend on dining has proven resilient during past recessions and then the last thing I'll leave you with is for restaurants, we fundamentally believe that our platform becomes even more valuable in a tough market.
Restaurants are turning to us for driving efficiencies.
Growing their business as we mentioned things like invoicing and new service models, maintaining their teams and then driving operational costs.
The board. So we think we're in a good spot when it comes to looking at the macro and the situations that have been lumen.
And just to comment on your guidance comment in October we're seeing the same seasonal pattern we've seen historically.
Great. Thank you very much.
Yes.
Thank you. The next question comes from Timothy Chiyoda.
Of credit Suisse.
Please proceed.
Right.
Great. Thanks for taking the question first one is a simple one just around the subscription and services gross margins were up nicely quarter over quarter, maybe just dig into a little bit of that was their pricing with some cost leverage and what were some of the drivers that helped that and then in terms of the follow up just in terms of the credit losses on capital maybe you could.
Just recap again the mechanics around when you take the losses versus your partner what the sharing is what the thresholds are there in terms of that working its way into your P&L.
Yeah sure. So on SaaS gross margin, it's really a scaling the business and of course.
We saw a healthy beat on the top line in both.
On the subscription side and Thats really our reps positioning of the platform and our <unk> strong et cetera that we've talked about.
So that's that's really what's the story on SaaS gross margin on your other question was bad debt related is that right. The mechanics. Okay. Yes, so basically as we expand our test flown program, we have to add and accrue for related.
Future potential default rates and our default rates have not been out of line with what we're expecting and.
And we should expect that to continue to grow.
But overall the total capital program is the healthy business and actually accretive to the business of Tim.
Excellent. Thank you for taking both of those.
Thank you. The next question comes from the line of Stephen Sheldon of William Blair. Please proceed.
Hey, Thanks for taking my questions.
First one here just another really strong quarter location growth.
I'm just curious if youre seeing any changes in the types of wins that you're getting are these films.
With Greenfield wins in situations, where you're replacing a legacy vendors.
Or are you starting to also.
He wins, where locations that were previously on competitive SaaS solution.
Curious if thats changed at all this quarter or this year relative to what you've seen historically.
Sure Steven.
Great question look I think we as Kristina mentioned really proud of the results in Q3.
The sales team.
It's really efficient in terms of driving growth.
And.
It's really the story of Q3 is really consistently across the board.
We saw really healthy win rates across legacy and cloud providers.
When we go into the into a buying decision we tend to win more than 50% of time as we've shared in the past we've talked about in previous calls we've talked about our focus on.
To start with our <unk> launch and that start to make an impact in the balance sheet, you referred to as far as trying to improve.
As Chris mentioned, we saw some good momentum in mid market with things like the walk ons when real estate expansion from your enterprise customers doing nothing pancakes and Jamba juice.
And.
Even even in terms of trends like new and existing.
Just coming out of Covid recently seen some small tailwind on new restaurants opening up and.
And we're seeing good good healthy balance of adding new and opening up some existing restaurants as well.
Great. That's really helpful. And then just as a follow up I know, it's very small youre really talking about placing seed investments on the international side this year, but.
Well have an update on the progress you're seeing there how youre thinking about investing behind international next year and any thoughts on why the international could be a revenue contributor or are we still kind of a ways away from that.
Yeah, No I'll start by saying, we're super early in the international opportunities, but very encouraged already by what we're seeing but I would view. We view 2022 is really a building year and into 2023 frankly.
We talked earlier in the year about our investment level. It Hasnt change, we're kind of on the low end of the range of $10 million to $20 million that we talked about and I would tell you as the year has gone on that.
The investment has been increasing obviously as we're building the team out but it's still early.
We're evaluating all the things that you would expect to go to market motion, making sure we understand the product.
We want to put out there in international we've got a few early customers in Canada and in U K. So we're learning from our early customers and so far the.
Feedback has been really encouraging so we're going to continue to make that investment into 2023.
Great. Thank you.
Thank you. The next question comes from Hershey Terawatts of Bernstein.
Please proceed hi, good afternoon.
Hi, Good afternoon, I have a question on churn.
So laid out how would you think about the kind of industry level restaurant chain and you have seen in the past year or so.
Is that much lower versus history.
More importantly, how can you kind of again that location adds can change if the churn kind of I guess.
Because it's taken it in a downturn and I totally appreciate that the restaurants that don't do further questions. Thank you.
Okay.
Yes, no we haven't seen any change in our churn and even during COVID-19, which was a pretty difficult time for our restaurants, our churn was relatively low.
Hello, and consistent so I wouldn't expect that we would see a change in pattern. We haven't said, we'll keep watching it of course, but we haven't seen a change in our pattern.
And also when we double click on the churn most of the churn and the historic historically has been for restaurants that go out of business versus restaurants that are leaving tests to another platform, but continues to be low single digits.
In the single digits. So we're encouraged by that.
The one thing I'll add this is Chris the one thing I'll add is.
Some of these questions related to churn are oriented towards the short term and I just want to remind the audience that.
We're still only at 9%.
Of our total addressable market for U S locations alone and we're less than 2% of our total addressable market. When you look at <unk> as a potential.
We want to be mindful that the restaurant industry is going through a transformation to digital and it's happening across the back of house to the front of house and we believe we're still in the early days of lead in this transformation. So it's just a reminder, because as we talked about with.
Recession warnings. We believe these are short term considerations, but on the long term.
Our increasingly excited about the opportunity ahead.
And just to follow up.
On capital allocation.
Let us get the next smaller rest.
Restaurants health care providers, because they can make.
Very good sense at this valuation environment, but at the same time, a good balance sheet.
Also guidance for button going into a downturn. So how do you how are you kind of like thinking about the balance between the two thank you.
Yes.
Alright, and can you clarify your question are you asking the balance between a strong balance sheet and investing.
And acquiring some of the smaller continuing to acquire some of the smaller.
I'll provide especially.
Yes.
Yeah Fair I understand the question, Yeah look our M&A.
The strategy hasn't really changed I think obviously the backdrop has changed so we're going to continue to canvass the market like we always do.
And our guiding principles around acquired assets to the platform would be consistent with what they've always done which is is it going to get us to market faster is it going to be something that is an adjacency to our platform that really solves a pain point for the customer. So that's not changing of course the valuation.
Our.
Different now and so we're paying attention to that so we'll be opportunistic if there's a fit.
Great. Thank you.
Thank you. The next question comes from.
<unk> Rana Kumar.
UBS. Please proceed.
Good evening. Thanks for taking my question, you've had very strong net take rate in the quarter of 53 basis points I'm just wondering what the key drivers are there and if theres anything unusual to call out as a onetime item.
Yes, I'll repeat what I said earlier, which is there's really two factors driving the take rate benefit. One is our continued focus on just payment optimization and we have a whole team focused on that and then of course, we had healthy demand from our <unk> capital product and we benefited from launching a $3 six.
De loan, which is encouraging so it's a combination of those and and really when you zoom out and think about our take rate and monetization opportunity you want to think beyond take rate and really think about the power of the platform and the fact that we have an opportunity to monetize on the SaaS side and then over the long term.
We're going to continue to drive product innovation that will drive more payment volume through our platform and continue to drive more digital digital digitization of our platform and as we do that we will have more opportunity to drive more volume through the platform and more monetization, but I would assume that I think of a broader than just the in quarter take rate.
Thank you that's very helpful and just one follow up if you can just comment on your progress moving upmarket Tomorrow enterprise.
Larger restaurants. Please thank you.
Sure.
Look I think I think of this as a spectrum right. We started the business in SMB and have gradually gone into bigger and group of peer groups and.
<unk>.
<unk>.
As I just mentioned, we in mid market and enterprise. We saw some good expansion wins. This year, so things like nothing bunch of usage has been a customer of ours for a while extended this to about 400 units out of Texas.
<unk> extended with total as well as Chris called out work on.
Louisiana.
And I think there's a lot of interest in our enterprise offerings. So the amount of inbound we are seeing is continues to grow as well.
Like when I think about.
Just for some context, the four walls of our restaurants like the value proposition, we offer to an F&B or a larger change in many ways is dissimilar things like handheld to improve operational efficiency and a digital tools to improve automation and self service, it's really outside the four walls, where things like config management menu management security and compliance drive thru.
And we continue to work on a lot of those capabilities and we're confident over time that we're going to grow into that time gradually.
Thank you.
Thank you.
We will now take our final question from the line of Josh Beck of Keybank.
Please proceed.
Thank you for squeezing me in.
I also was a big channel of slide 20.
We've had really good progress in the flywheel markets, but they are still less than 10%.
Of the total so.
Yes My question is.
Future years.
This trajectory is likely to continue or is there some element of the emerging markets Youre just investing in that could maybe limit.
The slope of the flywheel markets just curious on what how this trends progressed over time.
Yeah. Great question look we are really proud of the performance of our sales team and what we've accomplished in Q3 and as you correctly pointed out.
Just for context audience labor markets, where we have about 20% or more penetration and thats less than 10% of our overall markets.
<unk>.
And we continue to see the same trend we've seen for a while not where as we see rep tenure because end market tend to improve we tend to see productivity continue to improve.
<unk>.
There's nothing that's telling us that that trend should not continue.
Okay.
Excellent and then maybe a follow up just to close on.
Invoicing products.
Seemed like a very exciting launch at the spark about when.
When you look across your existing base of customers I'm curious how applicable.
The product is.
I'm also curious does it help you get into new segments.
Just curious where the strongest mark to market should may lie for that product.
Yes, Josh is extremely applicable a thumb in my script I talked about the different service models that restaurants are deploying.
To attract and deliver demand.
Catering and invoices is one of those key service models, we believe that roughly 70% of our customer base and the industry has a need to drive catering whether its events whether it's.
Different types of meals, whether it's certain types of opportunities off of the kitchen.
We believe the majority of the restaurants have this need it's in the early days for us So on top of invoicing Youll see this evolve to a broader catering platform restaurants today tend to use either manual processes are point solutions to deliver those engagements, but doing it on an all in one integrated platform.
It makes it a lot easier for the restaurant operator, and then they can drive more invoicing as I mentioned dos Toros tripled the amount of their invoicing usage over the course of the past three months and the payments volume for for their restaurants increased 17%. So we think it's a unique opportunity it's still early days.
We will continue to tell stories on how that evolves over the next few quarters.
Makes sense thanks, Chris.
Thank you.
I'd like to turn the call back over to the presenters.
Okay. Thank you all have a great evening and thank you for your time.
This concludes today's conference call you may now disconnect.