Q2 2023 Toast Inc Earnings Call
Good afternoon, My name is cole and that'll be the conference operator today.
At this time I would like to welcome everyone to the Toast earnings Conference call.
All lines had been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question. During this time simply press star one.
On your telephone keypad.
If you would like to withdraw your question press the pound key.
I will now turn the call over to Michael <unk> Senior.
Senior Vice President of Finance and strategy Treasury and Investor Relations.
You may begin your conference.
Thank you call welcome to <unk> earnings Conference call for the second quarter and the June 30th 2023.
Today's call our CEO , Chris copper auto CLO Amman, the Red and CFO Atlanta Gomez will open with prepared remarks, which will be followed by our Q&A session.
Before we start I'd like to draw your attention to the Safe Harbor statement included in today's press release. During this call will make statements related to our business that may be considered forward looking within the meaning of the securities and Exchange Act.
All statements other than statements of historical facts are forward looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures location growth future profit margin outlook expected growth in business outlook, including our financial guidance for the third.
Quarter and full year 2023.
Forward looking statements reflect our views only as of today and accept as required by law, we undertake no obligation to update or revise these forward looking statements. Please refer to the cautionary language in today's press release, and our SEC filings for a discussion of the risks and uncertainty that could cause actual results to differ myths.
Shirley from our expectations.
During this call we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for GAAP results. Please refer to our earnings release, an SEC filings for detailed reconciliations of these non-GAAP measures to the most comparable GAAP measures unless otherwise stated.
All references on this call to cost of revenue gross profit and gross margin sales and marketing expense research and development expense in general and administrative expense or on a non-GAAP basis.
Finally, both the press release and replay of this call, including the accompanying investor presentation will be available on our Investor Relations website and investors Dot <unk> Dot com.
With that let me turn the call over to Chris.
Thank you Michael and thank you everyone for joining us. This afternoon, we sustained our operating momentum and Q2 postings strong results across the board further evidence of toast unique positioning to help lead the digital transformation of the restaurant industry and empower the restaurant community to do it.
<unk> and thrive.
We achieved notable milestones this quarter, surpassing 1 billion in error and posting positive adjusted EBITDA and free cash flow for the first time as a public company, which speaks to the consistent execution of our strategy.
First we're focused on driving location growth and and Q2, we set a record for quarterly net new location additions with over 7500 and ended the quarter with approximately 93000 locations second we are working to serve all segments of the restaurant industry in June we announced a deal naming.
Toast as an approved vendor for Marriotts select service hotels, a clear proof point that we can push deeper into the restaurant Tam and unlock the restaurant space Enterprise space and lastly, we are focused on continued product innovation to open up more segments of the Tam and better serve our customers.
Emerson the toast for hotel restaurants, offering and newer offerings like toast tables, and the recently announced catering events product are all examples of the product advancements we're making.
These efforts are translating into strong results in the second quarter on a year over year basis total revenue increased 45% to $978 million and <unk> was up 38% to $32.1 billion <unk>.
<unk> finished up $1.1 billion up 45% from last year and more than double from two years ago evidence of our ability to scale the business through both increased penetration across the tan and healthy <unk> growth.
Coupled with our strong top line and operational performance, we delivered adjusted EBITDA positive $15 million in Q2 compared to a 33 million dollar loss in the prior year reflect in over 600 basis point improvement and adjusted EBITDA margin.
The combination of durable top line growth and consistent margin improvement is the result of our dedication to balancing investments and key growth areas with efficiency and cost discipline as we scale the business.
On the back of our healthy first half results in operating momentum, we raised full year revenue guidance to 41% year over year growth at the mid point and increased our adjusted EBITDA guide to arrange a $15 million to $35 million, we remain focused on driving efficient durable growth and expect.
Continued margin expansion as we March towards the long term target margins that we previously shared with you.
A core tenet of our product strategies to position our platform to expand deeper into the Tam <unk>.
<unk> for hotel restaurants, and are expanding enterprise capabilities were key and unlocking the Marriott opportunity. The deal we announced enables our team to sell the toast platform to marry select service hotels in the U S and Canada.
There's a range of food and beverage service models across Marriott select service properties from full service dining to quick service to pull side order and the flexibility of our platform to meet the unique needs of different restaurants sizes and formats and the select service level was another important differentiator for <unk>.
While it's still early we've taken a small number of Mary out locations live already and we look forward to bring in the power of our platform to more Marriott properties moving forward and continuing to go deeper and the enterprise segment.
Another way our product is unlock and the ability to go deeper into the Tim and better serve all restaurants stakeholders is by expanding support the numerous restaurants service models and our last voice of the restaurant industry Survey restaurants reported they are managing seven service models on average, including catering and last week.
Announced the launch of toast catering and events new products fully integrated with the toast point of sale to help restaurant seamlessly manage large catering orders and event planning. It incorporates order tracking initial quotes and helps with contracts and once bugs events get integrated to calendars and orders are <unk>.
Ed directly to the kitchen at the right time, the product also creates and voices and allows for direct digital payment through toast. This builds on the invoice and product that we announced last October and bolsters, our ability to more deeply served parts of the town as we estimate over 60% of SNB restaurants.
Offer catering in addition to their on premise business.
Other product enhancements. We've recently made include the launch of our next generation digital ordering sweet since we first introduced online ordering in 2014, we facilitated more than 250 million Commission free orders for our customers based on customer input are enhanced digital order.
Sweet offers a mobile optimized design search engine optimize menus and website customization capabilities. In addition, we've updated the checkout experienced to improve conversion. These efforts are targeted to help customers increased sales and build and maintain direct relationships with their gas.
Guess however.
However, we made a mistake and how we approached monetize and the value of this sweet listening to our customers as a core ethos for how we operate in our day to day efforts are guided by a relentless focus on being the restaurants communities trusted partner.
It was on this basis and after extensive constructive discussions with our customers that we decided to remove the 99 cent consumer facing fee from toast digital ordering channels as.
As we continue to innovate with new products and further strengthen the value. We provide customers. We are well positioned to monetize are offering commensurate with that value, we will be more thoughtful on how we adjust pricing Cohen.
Going forward and we recognize the importance of considering the impact to all stakeholders as we do that.
We remain committed to the same high level of transparency in partnership with customers that we've always delivered.
To wrap up I want to thank our customers and employees.
Our mission to empower the restaurant community to delight their guests do what they love and thrived guides, our efforts and underpins our strategy, we raise the bar in the first half of the year driving record location additions launching new products and service models.
To move deeper into all aspects of the Tam and delivering on our goal of adjusted EBITDA profitability insured. The toast platform is resonating with customers, we have momentum across all segments and we're still in the early stages of tapping the massive opportunity to be the restaurant industries truck.
<unk> technology partner, we're confident that continuing to execute on our strategy and mission will generate significant long term value for our customers our community and our shareholders now I'll turn the call over to Amman.
<unk> go to market performance.
Thank you, Chris and good afternoon, everyone.
First off I'm really proud of the team's performance in the quarter.
We added 7500 net restaurant locations exceeding our prior coordinate your record I over 1000 location.
Our local go to market approach continues to drive sustained momentum and our SNB segment.
Which as many of you know it's quarter our growth.
As we're in markets longer than the average tenure of our account executive team growth, we benefit from hiring bound volume increased when rates and higher productivity would drive to market penetration.
This important trend continues to hold in our SMB business as began sure and acts of a flywheel to drive efficient growth.
We're also excited about our progress stock market the strong quarter in our mid market segment and as Chris mentioned that recent announcement of area to help us break into enterprise.
As I look back at a quarter, we're really pleased with where I go to market Funneling book location stand.
As well as the team's focus to continuously improve our onboarding processes.
To both bring customers like faster instead of up for success.
Let me spend a few minutes highlighting a couple of customer wins from the quarter that speak to our progress.
Interactivity segment tempo urban Bistro is a full service restaurant outside of Phoenix that will leverage that breath of our platform imply.
Implementing nine different modules across all of our product pillars.
This includes our telco handheld and their dining room.
Kitchen display systems to streamline kitchen operations <unk>.
Most tables to manage reservations.
Mobile order and pay to streamline feldhaus service and loyalty gift cards, and email marketing, they're charging guests central regulars.
In addition, typo will use toast, Carole and extra chef to optimize back about operations.
Tesco has plans to open three or four more restaurants and is excited to grow with coast.
Switching to mid market, the 99 restaurant and pub in partnership with a service provider restaurant drove services.
And toast across more than 90 locations in the northeast.
Serving more than $20 million annually. The 99 was attracted to toast because they saw the opportunity to more efficiently manage both front of house and back about operations with our platform.
Cross the brand they plan to use tosco handle devices.
Kitchen display systems, and POF terminals to enhance the guests and staff experience.
Additionally, their back office team will user API integration and Multilocation management module that better centralized menu updates and visibility to their operations.
Moving toward International markets, Canada, Ireland, and the UK we.
We are very encouraged by the early customer feedback.
Customers Love the core capabilities that helped streamlines restaurant operations and our R&D team is hard work listening to our customers and making more of our platform capabilities available to them.
One Great example is our partnership with arcade in the UK after.
After successfully implementing toast at the first location et cetera point.
In London arcade is adding toast two it's new Battersea location at two food trucks.
With 13 cuisines under one roof under the iconic power station arcade Battersea will follow the same model is the first location and implement the telstar from across the entire foot operation and use our kitchen display system and all the kitchen.
And the destroyer Pof's terminal servers will use hand-held to help facilitate more orders and drive additional revenue in a better guest experience.
Arcade is also leveraging our API integrations across several key partners.
As we scale the number of restaurant locations are upsell team has more opportunity to help our customers extend their relationship with toast.
For perspective.
Among locations with more than 10000 <unk>.
About half of them exceed that threshold 10-K, after adding product through our upsold team until shop, which is R. e-commerce platform pre existing customers.
This dual upsell motion with both a sales team and a self serving self service ecommerce shuttle provide a holistic offering for customers depending on their needs.
Let me highlight one customer story that illustrates how're upsell team partners with customers to expand how they leveraged toast.
Slash barbecue and beer, a multilocation barbecue joint in Austin, Texas joined Toast in 2019.
Slab initially started with our POF annihilated ordering to boost sales through COVID-19.
Since 2019 slab of extended to four locations and added slang and toast payroll and team management to upsell team.
They credit toast streamlining operations and time savings thanks to centralize reporting in our back office capability to manage menus sales and employees.
On the heels of south of five barbecues drove the toast.
It sat across all locations has grown by more than <unk> since becoming a customer.
This is a great example that shows what our customers grow weaker.
We grow.
To wrap as I mentioned at the start I'm incredibly proud of our team's performance in this quarter.
As we scale and grow market share and continue to invest our restaurant platform.
We are well positioned to drive Durably, our growth both of our locations at <unk> overtime.
Thanks allow headed off to Atlanta next to go through a quarter in more detail.
Thanks them on and thanks. Thank you everyone for joining I also want to give a special thank you to the entire testing your dedication and your continued execution resulted in another great quarter with the results above expectations we.
We delivered strong top line growth in Q2 and pass the billion dollar Mark and are are while at the same time, demonstrating our ability to consistently drive efficiency across our business.
This marks or six consecutive quarter of adjusted EBITDA margin improvement and led to our first quarter of positive adjusted EBITDA in free cash flow and two years that top line momentum is a testament to the value proposition of our industry, leading software and payments platform.
We're still we're still at the early stages of this significant opportunity to lead the restaurant industry digital transformation and you'll see us continue to balanced growth and efficiency as we scale to drive durable top and bottom line growth.
Or go to market teams are continuing to execute quarter. After quarter Q2 was a record for net location growth with more than 7500 net ads ahead of our expectations.
As a reminder, Q2 is our seasonally strongest quarter of the year and we typically see lower quarterly net ads in the second half each year, given our strong pipeline continued momentum penetrating segments and go to market execution, we are raising our expectations for quarterly net adds to be about 6500 and the sex.
Half of the year.
While we've taken a handful Mary out locations live it's still early it was not a meaningful contributor in Q2 and is not a major factor in our increased expectations for the remainder of the year as we expect to book and take Mary out locations live overtime.
Moving to financial results total revenue grew 45% year over year to $978 million in the second quarter, <unk>, which is our core operational metric increased 45% year over year due to growth in both locations and R.
As the power of our integrated solution resonates with our customers.
Total <unk>, which as a reminder, we look at an an error or basis with over 12 K in the quarter <unk>.
Driven by double digit year over year gains and sauce are pill.
As Chris discussed, we've recently wrote back to consumer fee from our digital ordering channels are platform provides customers significant value and we're committed to continue to innovate to further strengthen that value proposition. We're confident we can monetize about a we provide and expect measured pricing adjustments to contribute.
<unk> growth overtime.
Moving to fend tech solutions on a year over year basis second quarter revenue growth, 44% to 808 million gross profit was up 55% to 177 million and TPB increased 38% to $32.1 billion <unk>.
Average annualized GTD per processing location was up 1% year over year and 7% sequentially.
<unk> the trends remains stable and in line with our seasonal expectations and looking ahead, we anticipate GB GPT growth to moderate given the seasonality of GPT and the moderating tailwind from inflation.
Or non payments and tech products led by test capital.
Contributed approximately $32 million of gross profit and Q2 as we continue to see healthy demand defaults rotisserie capital came in slightly below expectations contributing kipp add that associated with just capital, which we recognize within G&A expense declining relative to the first quarter.
As a reminder, or unique position with both historical in real time access to Pls data allows us to monitor the health of restaurants, and prudently balance risk, while helping our customers grow with fast flexible access to capital.
Not take rate was 55 basis points core payments take.
Net take rate was flat year over year and other fintech products contributed 10 basis points.
Looking ahead consistent with prior years, we expect a mix of credit to seasonally increase which will lay on the corner not take right as the year progresses.
And Q2 total gross profit grew 80% year over year to $225 million, resulting in a gross margin of 23%.
Looking at our recurring stream subscription and Pentech gross profit total of $267 million in the second quarter at 58% year over here.
Turning to our customer acquisition costs harder revenue increased year over year due to both strong location adds an existing customers, adding more hardware ahead of peak season.
Hardware margins improved primarily benefiting from lower shipping costs on a year over year basis.
Sales and marketing side expenses increased 33% year over year as we laughed the investments made the scale the sales team.
We continue to grow both in our new business and upsell sales team and a targeted manner, while remaining focused on scaling unit economics and supporting sustained go to market momentum.
Shifting to R&D are disciplined investment approach is delivering continued product innovation, including a recent launch of toast catering and events.
This offering built of our invoicing product and is a good example of how our products and help customers simplify their workflows improved guest interactions and drive additional transaction volume three toast.
And Q2, G&A expenses increased 33% year over year.
That debt and credit related expenses total to $15 million in queue too with the reserves related to test capital representing the majority of the expense.
Excluding bad debt and credit related expenses, G&A group, 10% year over year, and we expect to see continued leverage as we remain focused on efficiencies in managing head count.
Total queue to adjusted EBITDA was $15 million in margin and was 1.5% delivering on our goal of adjusted EBITDA profitability. This.
This performance was a function of our sustained top line growth and cost discipline as we scale the business.
As I mentioned earlier gross profit from our recurring streams fintech in subscription grew 58% year over year and adjusted EBITDA margin relative to our recurring exchange was 5.6%.
As a reminder, these two metrics are the basis for how we calculate rule of 40 and the combination of the two was 64% marking the fifth consecutive quarter, we exceeded the rules of 40.
Free cash flow was $39 million in the quarter, marking the first time, we had positive quarterly fee free cash flow since becoming a public company. This was the result of positive adjusted EBITDA in the quarter any benefit from working capital primarily related to the growth and GPT.
Looking ahead, we expect some seasonality and working capital a quarter to quarter tied to GTD trends and the timing of certain payments, but over time, we anticipate free cash flow shipped largely follow a similar trajectory as adjusted EBITDA trends.
Now, let me turn to guidance for the first for the third quarter, we expect revenue to be in the range of $1.01 billion to $1.04 billion, representing 36% year over year growth at the mid point at.
It just it EBIT is expected to be in the range of 15 million to $25 million, representing approximately 50 basis points of sequential margin improvement at the midpoint.
Following are solid first half performance, we are increasing our full year guidance and now expect full year revenue to be in the range of 381 billion to 387 billion, a 41% year over year increase at the midpoint.
Are updated full year adjusted EBITDA guidance range is $15 million to $35 million as we now expect to be profitable on a on an adjusted EBITDA basis for the full year.
In closing we finished the first half of 2023 with tremendous momentum driving record location growth and adjusted EBITDA profitability and positive free cash flow and Q2.
We are well positioned to sustain that momentum and capitalize on the massive market opportunity ahead as the restaurant communities trusted partner, while driving durable air our growth and creating long term shareholder value. Thanks, again to our customer base for your trust and thanks to the test team for another quarter of strong.
Execution now I'll turn the call over to the operator to begin Q&A.
At this time I would like to remind everyone in order to ask a question press star and a number one on your telephone keypad.
We'll pause here for just a moment to compile the Q&A roster.
Your first question comes from the line of <unk> <unk> with J P. Morgan you're.
Your line is now open.
Alright, great. Thanks for taking my question. Good afternoon to all of you. So yeah. Thanks for going through everything seems great here I'd love to just ask you if you don't mind.
On the 99 cent fee.
And the lessons learned I guess is really good the questions that I have from implementing bad and withdrawn sure you spoke to a lot of your your clients and Chris you've mentioned stakeholders.
And meeting those expectations as well so can you tell me that I'm looking for.
Yeah, Thanks chance and it's a good question.
I'm going to actually give a bit of brac background on this because some of you may also have similar questions. So for background. We have made significant upgrades as I mentioned in my script to our online ordering products, which actually allow for increased gas conversion and better consumer discovery, we'd actually communicate.
Is it an tested multiple package packaging and pricing approaches over the course of the past year, some which were similar to the fees that several of our competitors employ as we expanded the rollout more broadly several customers voiced pretty constructive feedback one thing I love about our customer base.
<unk> is that they tell us exactly how they feel about everything.
The good the bad and the ugly and upon that feedback we quickly recognize that we made a mistake mainly about how we approached the price change basically the pricing structure change and the impact to their guests in at the end of the day. While this is what I'd call somewhat of a footfault on one <unk>.
Module. This does not have an impact on our ability to leverage packaging and pricing over time.
Customers understand that the products and innovation require investment and they consistently tell us that they're willing to pay for value. So.
From a lesson learned standpoint, we learned a lot from this and there's more questions. We're going to ask ourselves internally when we execute these types of pricing changes or structural changes moving forward. For example, what is the impact on every stakeholder often we talked about the flywheel between.
Happy employees happy gas and happy restaurants, so just asking the right questions on how it affects our key stakeholders as.
This quarter, while our mission and our mission is rooted in beating the trusted partner to the restaurant community. So we've learned quite a bit I actually think it's going to make us stronger in the future as we leverage packaging and pricing, but quite a few lessons learned but pretty confident in our stance to leverage things moving forward.
Good question.
No. That's a thoughtful answer learning through adversity is a good thing if you don't mind, just a quick follow up it sounds like your location expectation is still quite upbeat or.
For the second half so it sounds like you're.
You feel so.
This is going to be 90 days ago around around location, but I just wanted to make sure I caught that correctly. Thank you.
That's right you said.
Look I think as I mentioned my script early proud of the team's execution.
Really feel good about it.
Pipeline our bookings as.
We've talked about in previous calls.
One of the biggest drivers for growth photos is market density the number of customers in a market as well as the tenure of rats.
Really a tailwind for growth and it's something we control.
The more restaurants, we get into market.
It acts of the flywheel for us in terms of everything from top of model to wind rates to productivity and we feel really good about about our outlook for the second half of the year.
Our next question is from Jason Kupferberg with the Bank of America. Your line is now open.
Thank you guys, Yeah nice numbers here I wanted to stay on the net as topic for a minute you raise the outlook there for the second half and just wondering any particular region or any part of the customer base driving Max It doesn't sound like you put much in there from area. So just any additional color on what's driving the.
The higher outlook banks.
Great question as I mentioned I think this is really a story of just our core business and SMB outperforming and I think.
The team executed really well in the first half and the state of the pipeline because I just mentioned.
Great shape I think we're also some of the work we've done done just add to that broadening our 10 or getting into kyocera I was getting into hotels has been helpful as well for the team.
And I think a lot of this also goes back to a vertical focus on restaurants as being a creative fried Schrader and as you pointed out like it's not about while we're really thrilled about the merit partnership that is not what is driving the outlook in the second half of the year.
For sure for sure.
So speaking of Mary can you just talk a little bit about the go to market motion. There. The way you are going to address that opportunity what kind of cell cycles and kind of competitive dynamics are you expecting there and I think you're going to market with with freedom pay to do the payment side. If you can just talk to her.
Sure.
No great question. So let me zoom out just a little bit so over the past few years as we've talked about on these calls we've.
We've made incremental investments in our enterprise platform.
And this work really underscores our ability to open up the new opportunities and expand our town not just primary up but for our mid market in enterprise in general.
Some of the work, including our work on hotel Api's or work on integrations in general and our work on above store configuration, and reporting has given us a more confident stance and going after the enterprise segments.
In terms of the type of go to market. It's a different structure than SMB. These are longer sales cycles. These are a little bit more targeted deals.
We are often in a pilot and then a lab and.
And then in terms of the competition, we think it's relatively greenfield in terms of the enterprise opportunity, there's still quite a bit of legacy up market and we started to record certain wins I mean, certainly we've announced Marriott and this allows us to be an approved vendor at Marriott, It's still very early days at <unk>, but when we think of.
About some of the other wins across enterprise Amman mentioned 99 restaurants. We had also won wessels pretzels, which is 300 plus locations I had already announced last quarter Golden Cross, which is north of 100 locations and then we also one Philly pretzel, which is 170 locations. So our teams picked it up momentum.
They're more confident in their stands to go after the enterprise market. It's.
It's a relatively small team, but they're doing really good work to execute on this Tim expansion.
With regard to freedom pay you had mentioned that in your in your question listen like I said, it's still early with Mary yacht, but the freedom pay partnership really gives us a lot of flexibility to work with a certain segments of enterprise customers up market and further opens up the enterprise Tam.
There's really two important things to leave you with on freedom pay number one it allows us to flexibly work with these enterprise customers, who often have unique payment requirements. They are looking to solve payments across spa hotel restaurants across these diverse business as a number one it opens up some tam and gives us some flesh.
Ability to work with these larger customers and then number too often these large enterprise customers are locked into long term contracts for both pass as well as payments. This allows us to have flexibility to go after them for pass in software and we can partner with freedom pay on those deals and it just puts us in a stronger <unk>.
Physicians of flexibility for the largest section of enterprise customers that being said, you're probably going to ask the question. What does this do for our core business and listen and our core business, both SMB as well as regional in mid market. This doesn't change are integrated platform between pls in payments.
We continue to go to market quite well on the combined.
Platform and toast payments will always be an option so I'll leave it there.
Thanks.
Our next question is from Josh Bear with Morgan Stanley . Your line is now open.
Great. Thanks for the question I think congrats on a strong quarter. So hoping you could talk a little bit about visibility as far as location editions now talking about 13000 to add in the back half of the year I guess like any context for how to think about how much you have to go out and win and go live in the next.
Five months versus what's either already one are already.
In an implementation are going live.
From.
Previous ones.
Hey, Josh look I think we don't we don't guide to the book locations, specifically, but I think that.
The trends, we're seeing as I mentioned in terms of bookings and pipeline are consistent with what we have seen in the past.
And I think I've got a lot of confidence in their ability to.
To continue to execute as they have been.
I think.
The strength that we saw in the first half of the year really is is consistent with the strength of his fan really over the past couple of years and our <unk> business where.
As we get into markets differ we've talked about this in the past I get more customer density.
Representatives, increasing those are things that are driving our productivity I think one other thing that the team is thinking about just to give some color on that is what are the balance and we talked about this last quarter, what what the team lands with an initial sale versus how they expand and so it seems really kinda maximize number of location of the platform. While also looking as much of the platform.
And that's the balance we're trying to maximize wind right and location ads with the.
<unk> on these deals that were booking an.
Overall, I think like at the highest level feel really good about the.
Outlook for the second half of the year.
Okay, Great and then just one more on locations was hoping you could come.
Comment a little bit more on international on how that's either contributed in the quarter or an outlook for the back half. Thank you.
Yeah, I'll take that job. So we're really pleased and Amman mentioned this on a script, we're really pleased with the signal or seen internationally. The customer feedback is really positive and just for everyone's knowledge were taking customers live in Dublin in the U K and Canada.
So far.
Even though we're in the early days, it's not impacting our location adds materially. This year. So you should know that but like I said the progress as really strong and what we've been focused on is really building out the go to market team. We're starting to see very similar patterns in the early days of toast in the U S and so that's a good signal for US we know that Playboy.
<unk> and as the man mentioned, we're focused on expanding the platform. So we can get more of it in the hands of our international customers, but in the end if we assume out just think about what were our ambition around international Israeli to drive the same loyalty the same flywheel markets and replicate that internationally, which is why we are so.
Encouraged by that so overall really good progress, but it's not going to be a material contributor to our results. This year into the location growth that we were talking about.
Alright, thank you.
Our next question is from will Nance with Goldman Sachs. Your line is now open.
Hey, guys I appreciate you taking the question.
Then I was hoping to follow up on the subscription or guidance that you gave a couple of quarters ago. If I'd like an error per location I think it was up somewhere 13, 14% year over year.
This quarter. So it does seem like you're on that glidepath to the 10% year over year, plus or minus that you that you got it too, but I guess the base of locations is going to end up being a lot higher than what we thought it was when he gave the initial guidance I'm wondering if you could talk about the interplay.
Between the accelerated location growth and the IRR per location guidance and I guess, you mentioned doing a little bit last on the upfront sale and more on the upsell motion.
If there is some interplay between some of the slowdown withstanding per location growth and the acceleration in net ads and I guess as we get all of these locations up and running.
What would you expect that something like an upsell motion could lead to a re acceleration and software error or for location growth.
And maybe the years ahead.
Yeah. Thanks that there's a lot in that question. So let me start by saying now we're really pleased with the growth.
At 55% in the quarter and you are exactly right in that we're balancing and a monster mentioned this already we're balancing our location growth with SaaS <unk> upfront or SaaS are pitted grew 14% year over year, but the fundamentals the underlying fundamentals on SAS are code to your question are we still driving to that 10%.
On the air basis, Yes, that's R for all the fundamentals are strong as we've mentioned.
We had a step up and <unk> over the last couple of years, hence the moderation sure. So just keep that in mind and we're going to continue to build on this up some action in on this land and expand notion that we keep talking about but to the point are norstar is really are our growth and that was a healthy 55% this call.
<unk>.
Got it I appreciate you taking a question and on the on the Merry Odd I'm. Just wondering if you could talk through kind of our food dynamics as you move up market.
For instance.
I know your partner freedom pay on some of these deals as those come in and do you see a higher contribution of software and is there more potential for software are opposed to kind of balance out the lack of payments in these deals or any kind of any kind of payments revenue stream kind of ancillary coming from freedom any color. How you think about Arthur dynamics that market.
Yeah, I know, it's a fair question. So we're we're really looking at.
First of all I would just to start with we always think about our <unk> and payback periods always play a role regardless of the segment that were in but just by the nature of them being enterprise customers, the air or will be larger over time.
But then we are going to come back to you and if we don't have the payment dynamics in this deal we're going to focus back on payback periods and unit economics, and we have an opportunity to continue to grow that are pure over time on the south side, but we're we're really encouraged by what we're seeing in its early days to really have an exact.
And on that are pitted, but we anticipate that it will follow the same need an economics that we do for our entire business.
Got it appreciate taking the questions nice job on their customer excel customer acquisition acceleration.
Thank you.
Our next question is from Dan do list with Mizzou Ho. Your line is now open.
Hey, guys.
Really strong results. Congrats just you know my question is on the 99 cent fee I know your competitors are very aggressive.
Obviously, following that that issue in which didn't and advertise.
Different promotions to try to get customers is it any.
Obviously results strong results speak for themselves and nets are super strong, but has there been any kind of conversations with merchandise that you didn't have before regarding some sort of nutrition.
Following the 99th century. Thank you.
Yeah, Dan Good question no. The answer is no I mean.
As you know, it's always been a hyper competitive space for the past decade.
Competitions always throwing campaigns and targets against toast, but.
With regard to the 99 fee.
There has been.
No churn or impact to location ads and wearing execution mode and hard core business.
And the competitive dynamics in our opinion remain the same or when rates look good and we're just plowing forward on execution.
Got it. Thank you and then a quick follow up and sorry. It was already addressed I was on a different call, but can you give us a sense for <unk> for the second half and I apologize if it's already been address thank you.
So it hasn't been but I am happy to repeat for you 10. So Q2, <unk> 55 per cent interest I would say that every time because that.
Truly are neurostar metric and in queue to agree 14%, but overall, we're still driving to the 10% who as we exit 2023, and that's on a <unk> basis, just as a reminder.
The fundamentals are strong our underlying trends are strong.
And as we are as a reminder, what I mentioned as we mentioned that the last two years, we've seen a step up and <unk> and we anticipated that they would moderate as the year progresses. So we're still driving towards that 10% are put on the air or basis at the exit of the year.
Great. Thank you and I apologize for being redundant. Thank you.
Our next question is from Steven Shelton with William Blair. Your line is now open.
Okay. Thanks for taking my questions on my as results here.
And about the catering expansion more do you really get to see and just kind of what that could mean in terms of additional monetization.
Would this be kind of another staff subscription revenue opportunity to think about adding on ordering invoicing.
Or is it more about just supporting more throughput and for the monetization would really come from facilitating.
<unk> G P. B on the payment side of gets how should we be thinking about catering monetization.
Yeah, Hey, Steven.
Two things number one it does come with healthy <unk>. So it does add another lever to drive <unk> growth over time similar to what.
Elena talked about but then on the invoicing front, certainly it's going to run on our rails and Thats, a second components, but but it's healthy on both fronts.
I think the one thing I love about our customer base as I mentioned.
They tell us what they like and what they are missing and for this one it's another good example of going deeper into the Tam.
Specifically for our core business <unk> business, when 60% of SMV restaurants are offering catering their austin doing it through manual processes are point solutions and they tell us that an integrated platform is just better. So it's still early we're very much early in the lifestyle.
<unk> of this product, but we're excited about the long term opportunity for.
For this product because it's going to make the.
The customer's life a lot easier and then it's going to help us on the <unk>.
Got it and that's very helpful. And then a follow up to the end more high level, you know great to see the kind of profitability inflection point. So how do you think about letting profitability ramp here versus reinvesting back into the variety of strategic initiatives underway.
Especially with given some of the momentum you have right now how how are you thinking about it.
Yeah. That's a great question, it's going to be quite balanced I think that.
Obviously running lean and efficient is.
How we how we work and how we how we make decisions every day, but.
As I said on my script, we've got a massive opportunity ahead and we're early in our town and have a ton of opportunity to upsell as we as we grow and innovate more and so we have to have that balancing act I would point you to our guidance for the near term and then pointing to our long term guidance that we gave.
A couple of quarters ago, and that's on a recurring fintech and gross profit. So we'll be balancing both growth and profitability growth and profitability over time, but we certainly want to lean into this momentum we have especially as we exit 2023.
Great. Thank you.
Our next question is from Timothy <unk> with Credit Suisse. Your line is now open.
Great. Thank you have a little bit about the mix of your gross AD. So you mentioned a few of the larger chains 100 units et cetera, Philly Pretzel and others has that created any of a little bit of a mix shift towards.
Competitive takeaways relative to brand new form locations within your overall gross ads and then I have a brief follow up on the payments Rep sure.
He said look I think at the highest level of the mix that received between the openings as existing restaurants have largely remained consistent.
We certainly do well with new restaurants opening up but we also do our team is able to get existing restaurant tours that are using your current system, whether it's legacy of cloud to switch over to toast.
I think that there is to your question about as Bse 60, more success up market in mid market.
That is fundamentally changed I'd say the mix of.
The opening versus existing restaurants.
Okay. Thank you I appreciate that the follow up relates to the potential for revenue share. So currently you have the freedom pay integration and some of the enterprise customers either currently or in the future. We'll have the decoupled payment went through a third party provider I'm sure in many cases as you mentioned, there's already an existing relationship there but.
Is there any economics at all that might be.
Either via.
Freedom pay or the other processor or any other payments revenue share that we should make up.
Yeah.
So no I.
I won't get into the specifics of of our freedom pay deal, but it's not meaningful I would think of it as a <unk> or to play for that specific for this specific Mary out the Christmas point earlier, though he did mention there'll be times and we already have this for enterprise customers.
Do do you want to leverage us for both so I wouldn't I wouldn't take freedom Pan extrapolate it to our entire enterprise book is is that's not where we are today.
Okay, great. Thank you.
Our next question is from <unk> <unk> with the Jeffries. Your line is now open.
Good afternoon, and congrats on a strong quarter, maybe first allantoin for you just as I think about the but the inflection in EBITDA margin this quarter and the change in Opex is actually quite modest.
The dollar off extra.
The upside of the top line I'm just curious if we think about that as a good proxy for sales and marketing are the dollars should maybe grow up in the next couple of quarters, starting going forward and is that with the line to leverage is that laptop questions.
Yeah, I think the I.
I think the leverage you're going to see some modest really across the business and we've shown leverage across all of the opex lines for the last couple of quarters.
Pointing into our guidance for the.
Obviously without me getting the specifics on the quarter.
Would also pointing to the fact that in queue for there is a little bit of seasonality at play in our payments side of the business. So.
That will have a different complexion set in Q3.
But we expect to continue to drive leveraged across all of the Opex lines for the balance of the year.
Okay, Great and then May I think just a follow up on pricing. It's been mentioned a couple of times, but the 99 cent B and maybe had a company I would think about it philosophy on that I just want for clarification. There is no assumption.
Nice won't respect and get that within the rest of the year right and and I guess, when we think about price increase should we think about that based on the comments that you've given should we anticipate one at some point in the near future.
Yeah. So let me let me in gym out a little bit so so first of all.
See our guidance reflects the change to that <unk> was not include no longer in our 2023, but just zooming out definitely pricing is a core element of our strategy over time as we think about the next several years, we think about two dimensions right. One is growth and one is profitability.
<unk> when we consider growth we have the two axes, we always talk about witches location growth. We're early in the town, we have our <unk> our ability to cross some upsell, which we have proof points and we're continuing to home that land and expand lotion on top of that we are pricing, which is a key tenet of our strategy over time, So that's really <unk>.
Giving how we think about the growth in our business I wouldn't over rotate their pricing, but it is a key element of our strategy at that we're contemplating.
Great. Thanks to light activated to working with you again.
Next month.
Our last question comes from the lineup Peter Heckman with da Davidson. Your line is now open.
Hi, Thanks for taking the question could you go over a little bit more on toast capital and.
Aspirations for their business.
First if you could just get through with it.
The data you typically give on a quarterly basis like funding and and if you go through some of the the reserve data again, but as you think about that business I mean.
Generating something like 15% gross profit today I guess.
Do you feel is appropriate to limit the contribution of that business given that in a different macroeconomic environment you might have to pull back on that.
Yeah, Let me start let me zoom out and just start with the premise of why I chose capital and then we did have great performance. This quarter Antos capital contributed about 10 basis points to our overall take right, but at the core we know our restaurants are underbanked and we want to give.
I'm, an opportunity to have access to capital and a fast and flexible way and the proof points. We have is not only do we continue to see demand from new customers, but we're also seeing demand from existing customers coming back and and renewing their loans and our default rates have been for the most part in line and or better.
Than we expected so.
In terms of how we think about are we gonna grow this program for the near term I think we're going to continue to stay kind of in the zone that we've been in but it's really important to remember how we manage the risks. It can cause that is what's given us the confidence to continue to extend loans one as we look at it.
Internal and external anal sort of look at it holistically what are the internal factors were saying what are some of the external factors were seen.
As a reminder, we see we have access to the payment data, which gives us a lot of confidence in the credit worthiness of the customer and then we partner with our bank to offer the loan to the loans are coming off of their balance sheet. So its balance sheet light for us and our liability Israeli capped at 15% of the origination.
And then we make the collections based on the payment volume Dale.
Daily and so as that so we have a lot of confidence in disability into the collection and tier point, if the macro were to change or the environment more to change than we have levers to sort of manage that we can tighten our lending parameters, we can reduce duration, which has an impact on bad debt. So there's a few different levers that we can.
Plain, one should we need to.
Scale back on the program and actually we did scale back on the program.
<unk> in the early days, where we said this might not be the time and we were able to successfully manage the bad that during that time and.
And now we've seen demand come back and as we've relaunched the program and relaunch different loans sizes et cetera, we've seen a help to demand. So I feel very confident we've got a great team managing the risk of this business and more importantly, we're helping our customer scale and grow.
Alright, that's helpful. Thank you.
This concludes today's conference call you may now disconnect your lines.
Alright, thank you.