Q3 2023 Toast Inc Earnings Call
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Good afternoon, My name is cole and I'll be your conference operator today at this time I would like to welcome everyone to the Toast earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to queue for a question. During this time simply press star followed by the number one on your telephone keypad and.
And if for any reason you'd like to withdraw your question press the pound key.
I'll now turn the call over to Michael <unk> Senior Vice President of Finance.
<unk> may begin.
Thanks, Carl welcome to <unk> earnings Conference call for the third quarter ended September 32023 on today's call our CEO, Chris <unk> COO.
<unk> <unk> and CFO Elena Gomez will open we're 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, we'll 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.
<unk> expenditures location growth future profit and margin outlook expected growth and business outlook, including our financial guidance for the fourth quarter and full year 2023.
Forward looking statements reflect our views only as of today and except 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 materially 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 our GAAP results. Please refer to our earnings release and 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 and general and administrative expense are on a non-GAAP basis. Finally, both the press releases and a replay of this call, including the accompanying investor presentation.
We will be available on our Investor relations website at investors <unk> Dot com and with that let me turn the call over to Chris.
Thank you Michael and thank you everyone for joining us. This afternoon, our focus has been on delivering durable and efficient growth in our third quarter results reflect execution on that objective. We added over 6500 net locations in the quarter and <unk> grew 40% year over year, we can.
<unk> to balance top line growth with driving efficiencies as we scale the business and adjusted EBITDA totaled $35 million in the quarter.
The execution against our focused strategy to drive location growth serve all segments of the restaurant industry and bold product innovation to better serve our customers and open up new segments of the market is both driving strong results and has us positioned well positioned to sustain this momentum going forward.
As we announced in September.
<unk> will take over as CEO at the start of 2024 looking back over my nine years as CEO I am incredibly proud of the accomplishments of the <unk> team together, we have scale to serve nearly 100000 restaurant locations with over $1 2 billion in <unk>.
We've built a company culture with strong values and an employee base that embraces our customer centric mission to be the trusted restaurant technology partner at the same time, we've built a scalable durable business that is generating sustainable positive adjusted EBITDA and free.
Cash flow.
Our innovation mindset and our products have also expanded significantly over that time period as we deliver on our mission. We've broadened the types of restaurants that we serve and have made inroads across the entire U S restaurant Tam.
We have also evolved into a multi product platform company with solutions to help restaurants drive growth build deeper connections and experiences with our guests and improve operations and manage their costs toasts has been on this journey for over a decade, and we proudly serve an industry that has navigated many ups.
Downs, there's no better example than over the last few years restaurant operators responded to unprecedented changes quickly expanding their service models to meet evolving consumer demands through at all restaurants remain a central part of consumers' daily lives more recently, we've seen <unk>.
<unk> spend moderate and I'm confident restaurants will navigate the uncertain macro environment with the same resiliency and tenacity. They always do and this battle tested industry will continue to thrive well into the future toasted side by side with our customers every step of the way and is often one step ahead helped.
<unk> restaurants, adapt and thrive no matter the circumstance and we're just getting started the SNB Tam remains a large opportunity for US enterprise restaurant groups are in the early days of adopting cloud technologies and a big International opportunity lies ahead, we are better positioned than ever before.
To expand and continue to build adjacent growth opportunities as we capitalize on the generational opportunity to be the technology platform for restaurants and transform the industry.
Now in our mind for 17 years, having worked with him before I joined toast first and foremost as a co founder of toast. He brings a strong founder's mentality to the CEO seat, where he will continue to raise the bar on execution and innovation. He intimately knows our customer base and has shaped much of the company.
His many roles across the organization from what were seeing product to sales and customer success. So I'm confident that as a months' steps into the CEO role he'll lead toast to new successes and he is surrounded by the most talented leadership team that I've had the opportunity to work with across my career.
To wrap up my last quarterly earnings call. Thank you to our toasters and to our customers. We've accomplished a lot as a team the enthusiasm you bring to our mission sustains our momentum and I'm excited for what lies ahead now I will turn the call over to him on.
Thank you Chris.
<unk> wouldn't be what it is today without your leadership and passion for the business our customers and of course our team.
I think I speak for all toasters, and saying you'll be missed.
And your friendship and support over the past 17 years that we've known each other as it meant a lot to me personally.
As Chris mentioned, we are excited about the opportunity ahead of us to grow the business and continue to be a great partner to the restaurant community.
With just over 10% of the U S market on toast, we have significant runway ahead of us.
Our passion for this industry a strong focus in <unk>.
Innovation to help restaurants drive.
And a world class go to market and customer success team gives us confidence in our ability to drive sustained aero growth, while planting the seeds for future growth initiatives.
We're incredibly happy with our performance in Q3.
And the results represent strong momentum across our business.
<unk> was up 40% year over year to $1 2 billion.
Driven by strong execution across location acquisition and <unk> expansion.
We are confident in our ability to continue to grow IRR across both these dimensions over the long term.
Revenue increased 37% year over year in.
And adjusted EBITDA increased to a record $35 million in Q3.
So its had its sixth consecutive quarter exceeding the rule of 40, measuring fintech and subscription gross profit growth our recurring revenue streams.
Adjusted EBITDA margin.
This consistent execution is a testament to our team.
Who have prioritized both revenue growth and operating leverage as the business has scaled.
We added over 6500 net locations in the quarter.
Approximately 20% more than Q3 last year.
Our local go to market approach continues to help drive strong momentum in our SMB business.
As we increase the number of fiber markets with high customer density and market tender.
While the SMB business is still the primary driver of location growth.
We're making progress across the broader market opportunity as well.
Let me share a few customer stories from the quarter that speak to this.
The Marianna restaurant group switched its four full serve restaurants in Massachusetts, and New Hampshire to toast and three of them are already live in Q3.
They purchased nine products to help streamline their business across both front of house and back of House and noted the simplicity and ease of use of an integrated all in one solution.
In addition to our core offerings.
We're also leveraging leveraging our newer platform capabilities, including toast tables in catering and events.
Tow stables, they can more easily estimate guest wait times.
Good visibility into.
How far along a table is in its service and help with seating guests evenly across service areas to help employee workloads keep them balanced. In addition, the integration between toast tables, and our employee scheduling product helps managers better staff throughout the week.
Using our catering and events product. They have also been able to streamline manual paper dependent process with a digital first approach.
We're excited to work with Marianna restaurant group and support their growth plans over the coming years.
And mid market, we expanded our relationship with creditworthy brands and are excited to partner with them as they grow we signed 50 locations across their multi concept fast casual and kyocera portfolio for a total of 93 locations on toast.
And in enterprise, we are thrilled to extend our relationship with nothing <unk>.
They became a customer in 2019 and currently have over 500 locations live on toast.
We've been working with them to improve bakery productivity drive higher digital conversion and streamline processes for their corporate team.
To support their expansion plans and franchisee count we have signed an additional 300 location the relocations across nothing bundt cakes and expanded set of products available to the franchisee community, including floor scheduling payroll and catering this.
This expansion creates an opportunity to double nothing bundt cakes associated IRR over time.
And we're excited to partner and support their growth plans.
Shifting gears to product we're focused on building products that can both help our customers thrive and run a great business.
Our vertical focus on restaurant continues to be an advantage as we open up deeper parts of the Tam and expand our pool by building differentiated products for the industry.
Product innovation has always been foundational and toasts DNA.
And you should expect us to maintain that focus moving forward.
Last week, we announced tests now.
An app for restaurant operators that provides real time insight into performance data.
How's operators to manage things like kitchen volume adjust menus and communicate with staff on the go on their mobile device.
This is something our customers have been asking for and allows us to build an even deeper deeper connection with restaurant operators.
We're pleased with the early adoption levels with approximately 20% of locations already until about a week after its launch.
In addition, we recently announced Telstra cafes, and bakeries similar to Telstra hotel restaurants, and toast for quick service.
We are building solutions for different restaurant types that better serve deeper parts of the Tam.
Catherine bakeries brings together product capabilities geared to help coffee shops and bakeries grow revenue.
Speed of service.
And create create more repeat guests.
Cafes in bakery serve a variety of customer needs from a regular morning coffee.
The lunch catering or non <unk>. It is a segment of the market that we're excited about and represents a meaningful growth opportunity for toast.
As part of the Cafe and bakery launch, we also announced restaurant retail, which provides unified restaurant and retail Pos systems.
To manage retail skews things like wine selections are packaged coffee and more directly within toasts, providing a one stop shop for customers to managed foodservice and retail together.
We've seen restaurants embraced more service models, especially during and post pandemic.
And this is yet another example.
Of our continuous focus on meeting the evolving needs of our customers.
This is a good example for how our product innovation can help serve deeper parts of the Tam.
Drive incremental <unk> through toast and support ARPA growth.
One customer I'd like to highlight is 320 market cafe.
Family owned gourmet market with two locations in Pennsylvania that includes a pizzeria.
Our cafe.
Our retail area offering prepared foods craft beer and wine as well as our catering business.
Before they joined Toast 300000 took catering orders via phone or email and orders in paper.
Which often got lost in the kitchen and on the retail side the process of adding a new retail skew took over 20 minutes.
This slowed down their ability to serve guests and generate revenue.
Now with toast 3000 market Cafe supports a growing business with quicker inventory management faster checkout.
And a way to take catering orders digitally all in a single integrated platform.
They can now tag in new product and have it on the retail floor in minutes.
Track sales data in real time.
And take down their corkboard, a paper catering orders in a digital system.
In place of a digital system, they can manage from anywhere.
With catering retail online ordering gift cards and more.
Three tiny market cafe has up level of their business with toast and save their employees about eight hours per week of manual work equivalent to a whole shift.
As we continue to broaden our products for our go to market team to serve a variety of customer types of endpoints.
Our upsell team becomes increasingly important to drive growth and adoption of our platform across our customer base.
As we approach 100000 locations and beyond.
Our up sell teams Tam gets bigger and we continue to see this as a big opportunity for growth in our business overtime.
To wrap up as Chris mentioned, we're excited about the opportunity in front of US we are focused on being a strong partner to our restaurant community and.
And we are well positioned to drive sustained area of growth.
In the future while building an efficient <unk>.
<unk> business that can generate long term value for customers and shareholders.
As I think about the opportunity ahead of us an energized and motivated by the momentum we have.
It goes without saying that none of this would be possible without the tireless efforts of our employees.
A special thank you to all toasters.
I am excited to lead this group of talented talented individuals as we transform the restaurant industry.
And with that thank you and I'll pass it off to Atlanta.
Thanks, <unk> and thank you everyone for joining I also want to thank our incredible employees for another quarter of great work. Our team continues to execute at a high level.
40% growth at over $1 billion in <unk> and delivering significant margin expansion.
With a differentiated business model scalable go to market engine and innovative all in one platform. We are well positioned to continue driving efficient growth at scale going forward.
The 40% increase in IRR was on the back of strong location growth and continued <unk> expansion translating to 37% year over year revenue growth.
Our recurring gross profit streams, fintech and subscription totaled $280 million up 39% year over year.
Adjusted EBITDA was $35 million, representing a margin of 13% on a recurring gross profit streams with over 22 percentage points of margin improvement year over year.
Growth in our recurring gross profit streams and adjusted EBITA margin are the basis for how we calculate rule of 40 and this marks the sixth consecutive quarter, we exceeded the rule of 40.
We sustained our go to market momentum in Q3, adding over 6500 net locations that was primarily driven by the flywheel effect from our localized go to market motion as Rep tenure and local market share increase so has rep productivity contributing to a solid year over year increase in F&B rests.
Location at <unk>.
<unk> has always been to serve the entire restaurant Tam over time.
We are increasingly making progress across segments, supplementing our momentum mass and SMB with incremental growth, both up and down market and internationally, resulting in sustained location growth of over 30%, even as we approach 100000 locations.
Our primary focus remains on our core SMB segment, as we broaden and deepen penetration across the Tam, including smaller SMB customers enterprise customers and expanding internationally, our customer mix will evolve and have different SaaS and GPT dynamics, our focus is to maximize <unk>.
<unk>, which is our north star metric, while maintaining the same healthy unit economics overall, we plan to manage the portfolio to the same payback period in the mid teens number of months, ensuring that growth as efficient as we expand and drive incremental profit.
In the third quarter SaaS <unk> grew 47% year over year, driven by strong location growth and a 9% increase in SaaS <unk>, we're capitalizing on our location acquisition momentum we have while continuing to balance ARPA growth, we plan to exit Q4 with SaaS, our peer growth in the mid <unk>.
High single digits, reflecting lower ARPA for Niko <unk> cohorts as we continue to optimize our upfront sale to balanced sustained location growth velocity as well as some impact from mix shift.
Our long term growth algorithm remains the same we have a long runway to increase <unk> through both locations in Arco with just over 10% of U S restaurant locations on the platform a proven differentiated SMB go to market motion and growing traction across a full breadth of restaurant segments as well as green.
<unk> internationally, we're well positioned to sustained healthy growth location for years to come.
Similarly, as we scale customer count we have conviction in our ability to drive healthy SaaS <unk> growth over the long term through pricing and packaging scaling and refining our upsell motion and delivering ongoing product innovation to enhance the customer value proposition.
Moving to Fintech solutions on a year over year basis third quarter revenue and gross profit both grew 36% to $856 million and $182 million respectively.
<unk> increased 34% to $33 7 billion in average annualized <unk> per processing location was down slightly year over year.
Similar to Q2, the year over year change in GPA per processing location was impacted as we lapped inflation tailwind and from a slight mix shift as we extend into more segments of the Tam.
In addition in the back half of the third quarter, we saw a modest slowdown in same store transaction volume, which resulted in a decline in <unk> per processing location in the quarter.
Trends have remained stable since then given the broader macro environment remains mixed or planning for GPT trends to remain at current levels in the near term and for GPA per processing locations declined year over year in Q4.
On non payments Fintech solutions led by test capital contributed $34 million in gross profit in the quarter as demand for the offering remains healthy and default rates remain steady we continue to take a balanced approach to growing test capital and our unique position with real time access to Pls data allows us to <unk>.
Monitor the health of restaurants, and prudently balance risk, while helping our customers grow with fast flexible access to capital.
Net take rate was 54 basis points core net take rate was 44 basis points with other fintech products contributing 10 basis points. This quarter and this quarter included a onetime cost accrual true up while the prior year benefited from a credit <unk>.
Absent those onetime impacts core take rate was approximately flat year over year in Q4, we anticipate core and total net take rate to be in a similar range on both a quarter over quarter and year over year basis.
Turning to customer acquisition cost hardware revenue increased year over year due to both location adds an existing customers, adding more hardware hardware margins improved year over year, primarily due to lower shipping cost.
On the sales and marketing side expenses grew 17% year over year, we're making targeted investments in our go to market team and continuing to grow our upsell team, while staying focused on maintaining healthy unit economics and driving operating leverage.
We manage our customer acquisition cost season, one dollar based payback period, which takes into account the incremental recurring gross profit across both new business and upsell paid.
Payback periods remain within our targeted level at mid teen months for the portfolio.
Shifting to R&D our toaster.
First for cafes in bakery launch, including the restaurant retail offering is another example of leveraging product investments drive deeper location penetration by Super serving the unique needs of our different customers. It also highlights how our product innovation lots more revenue streams for customers and drive incremental transaction volume.
To test through test.
G&A grew 12% year over year in the third quarter, excluding $19 million of bad debt and credit related expenses in the quarter, primarily related to reserves for total test capital G&A was flat year over year, we've seen meaningful leverage in G&A as a result of our focus on efficiency and discipline.
Head Count management.
Excluding bad debt and credit related expenses G&A as a percentage of our recurring gross profit streams was 16% in the quarter, a 600 basis point improvement year over year, and we expect to continue driving operating operating leverage on our overhead cost going forward.
In total adjusted EBITDA was $35 million in Q3 and margin as a percentage of our recurring gross profit streams increased to 13%, marking the seventh consecutive quarter of margin expansion.
As a result of our healthy top line growth and diligence and efficiently scaling the business.
They're all we expect to continue building operating leverage as we March towards the long term target margins, we previously laid out.
Free cash flow was $37 million in Q3, roughly in line with our adjusted EBITDA.
As a reminder, our working capital will fluctuate based on <unk> trends and the timing of payments, but overtime pre cash flow should largely follow a similar trajectory as adjusted EBITDA trends.
Now, let me turn to guidance for the fourth quarter, we expect revenue to be in the range of 1 billion to 1.03 billion, representing 32% year over year growth at the midpoint.
Adjusted EBITDA is expected to be in the range of $5 million to $15 million. In addition to the seasonally lower GP per location in Q4, the sequential decline in adjusted EBITDA compared to the third quarter also reflects our expectation for slower year over year, <unk> growth and investments, we're making to <unk>.
Strengthen our position heading into 2024.
For the full year, we continue to expect revenue to grow 41% at the midpoint of our guidance and now expect adjusted EBITDA to be in the range of $38 million to $48 million, representing an approximately $160 million improvement in adjusted EBITDA versus last year at the midpoint.
To wrap up we are extremely proud of the work that the <unk> team has accomplished thus far in 2023, we're scaling the business in a durable manner as we capitalize on the opportunity ahead of us to build a generational business that delivers significant value to our customers and shareholders and we are well.
Positioned to continue delivering long term growth, while driving operating leverage throughout the business and executing on this long term opportunity that remains ahead of us.
Now I'll turn the call over to the operator to begin Q&A.
Okay.
Thank you.
At this time I would like to remind everyone in order to ask a question press star.
And then the number one on your telephone keypad.
We will pause now to compile the Q&A roster.
Our first question is from Tim <unk> with UBS. Your line is now open.
Great. Thank you for taking my question I wanted to touch on your your thoughts on your ability or potential to take pricing within the core subscription portion of the business. So with a few competitors that are taking pricing price have taken pricing in different ways over the past year or so square Culver.
<unk> and others.
Was hoping you could give us an update on where you think you stand in terms of that potential. Thank you.
Thanks for the question Tim.
I'll start by saying customers as I said in previous calls customers our customers understand the product innovation requires investment in the <unk>.
Mrs will increase over time.
What we've seen is our new customers that are coming on at host are coming on at higher pricing.
And we've also looked at the distribution curve across our customer base in terms of what they are paying across both SaaS and payments.
And see opportunity there and so we're confident that we can drive an increased pricing over time.
We also see opportunity in terms of how we package our products across both software and Fintech and see that as an important lever as well to.
To drive <unk>.
And price.
We're also aware of that.
If you look at the opportunity in front of us gain market share.
Across both locations and product attach rates, we want to make sure that we're offering transparent value based pricing pricing to our customers. So I think.
And the long term, we are confident of our ability to increase prices.
And we're working through it.
Great. Thank you and a brief follow up is just more of a numbers question around and tech take rate. So I believe that the gross take rate ex capital would have been up slightly maybe one basis point year over year, and you mentioned that some of the the accruals and whatnot that if we would normalize it the net take rate was roughly flat.
On a year over year basis could you just talk about looking forward the potential to see a little bit more of a leverage on the Fintech Cogs line, maybe whether it be with payment processors or some of the other non payments related items in there whether it would be support or data center or other costs that are that are in the Cogs line.
Thank you.
Yes, Thanks, Tim that's a fair question look I think over the long term, we have an opportunity to gradually increase our take rate either through investing in our payments infrastructure and just driving operational excellence is we're trying to drive down cost per transaction in that that's both working with our partners.
<unk>.
And then there is obviously we can.
Impact of price of course, that's also at our disposal and then just leveraging our scale as we get bigger I think we'll have we'll be in a position to negotiate even further so I think there is an opportunity both on the.
On pricing side of things, but also as we optimize our cost structure over time.
Thank you.
Our next question is from Stephen Sheldon with William Blair. Your line is now open.
First congrats on all you've accomplished at the helm, Chris and congrats to Oman as well on taking over as CEO.
Just on the guidance it assumes a slight sequential step down in revenue in the fourth quarter versus the number you just put up in the third quarter and I think you said that mainly GPP per location.
It looks like it would be down some.
Can you just talk about how much of that maybe normal seasonality and restaurant revenue versus weakening consumer spending if you have any visibility into that.
Yes sure.
Most of it is Steven it's a good quite it's a fair question. So.
The <unk> pro location, which I commented in the script is really something we saw late in September and continuing into October. So that was the primary calculus, but also remember a seasonal <unk> lower GP per location is lower in Q4, so both of those fat.
Factors played a role but the the reason the primary reason is the trends we're seeing most recently in same store sales.
Got it okay. That's helpful.
And then just on the sales force investments, you're making I.
I guess do you need to keep adding significantly to the sales force can keep location growth when we think about sequential additions.
Three quarters.
Keep adding sales head count to keep location growth, where it's been in recent quarters and maybe talk about the mix of investments, we're making there between.
New location wins, and maybe maybe upselling team.
Yes.
Good question, Steven look I think if you look year over year, our net location adds are up 20% and so a lot of our investment in sales and marketing are calibrated with that back to Atlanta mentioned in terms of making sure that we're tracking towards connectors I think we're trying to be strategic in terms of where we see opportunity to invest whether it's on new business or it's an up so.
To continue to gain market share and continue to grow the business.
But we're always trying to be balanced in terms of making sure that we're managing to economics across the board.
New areas, we're investing in and we've talked about before whether its upmarket and enterprise international right where.
We are still earlier, but overall I think the bulk of the growth in the business is coming through our core SMB business.
Yeah, I would just add.
Set up to have a strong Q4 and on track to our expectations.
Bill on what amongst Athena that consistent execution. Thanks to our sales team is really <unk>.
Showing through and we've got a healthy pipeline as well so when you put that all together I think we're going to continue.
That acquisition momentum into 'twenty, four which will be a big driver of our growth.
Great. Thank you.
Yeah.
Our next question is from will Nance with Goldman Sachs. Your line is now open.
Hey, guys I. Appreciate you taking the question I also wanted to ask a question on the subscription side or on the RV side, you made some comments related to the TPB per location.
Putting the macro stuff aside it sounds like Theres, a little bit of mix shift going on and if I'm interpreting that right. It's kind of smaller locations coming on weighing down on GBP per location is there a similar trend playing out on the software ARPA location I E like smaller location using our software.
I guess, maybe in prior quarters, you've provided some color on sort of what front book Arthur's are looking like.
Any color on where that's trending now and then just.
Your thoughts on how that progresses from here.
Yeah Fair question. So look our F&B remains our core segment data at the highest level and our success in SMB.
It's actually frankly more opportunities across the entire Tam. So that's we're leveraging our product innovation, we're going after those opportunities and we're seeing really good progress.
Segments like E Commerce International and so as we get into those segments and extend it to that Tam, we're going to see both differ.
Different <unk> dynamics, but at the highest level just kind of zooming out.
<unk> continues to be our north star metric and we will always see balancing location growth on an ongoing basis and right. Now is a great example of us capitalizing on that location acquisition momentum so.
Levering $200 million of SaaS AAR, our year over year balancing those 2000 I think 23 is a great example to your question on the front book.
It actually reframe you back to <unk>.
Because you know as we're trying to optimize our land and expand motion and we've talked a lot about the upsell team and as we're extending it to different parts of the Tam like I mentioned international in E Com.
Mix is less comparable than what we shared.
A couple of quarters ago, so for us our Northstar in how we operate the business that's really an increment.
They are basically and that's that's through and through.
And it's also the most reflective of our financial performance, but also how the rock.
Our comp Rep goals are all around <unk>. Our company bonus program is on air growth, that's truly how we manage the business as well.
Got it that makes total sense and then I guess just on the macro point.
As we think about softening in same store sales, which broadly consistent with other with other companies in the space. So I kind of get that point. How are you thinking about the reaction function from from merchants I guess, particularly on the go to market side as you have conversations with prospects.
Sure.
How are you thinking about like the potential for some business and say hey, we're going to take two handhelds instead of three.
We buy a little bit less hardware upfront.
Of that nature, I mean, do you expect sort of like the initial sale to get more difficult in an environment, where where same store sales are softening and any strategies you have to combat that.
Well, we haven't seen that in our core SMB business and as we mentioned in our guidance. We talked about Q4 net location I think it was 6500 range and we continue to be confident in and if you look at the pipeline of top of funnel and our win rates.
We haven't seen anything materially different.
And we continue to believe that.
Is that our growth is really tied to our execution and getting more of these markets and our core SMB business into flywheel status, which is really just growing customer density growing the opportunity in these markets.
And so we haven't seen anything in our pipeline to suggest that the customers are.
Receptive to purchasing toast or looking to buy less of the platform.
Got it Super helpful. Appreciate taking the question.
Thank you.
Our next question is from Tien Tsin Huang with Jpmorgan. Your line is now open.
Okay.
All the best to Chris here, a follow up to Will's question, just on the coast capital side.
If you haven't seen any.
Customers changing their behavior are you changing maybe your appetite to extend credit given what youre seeing on the.
Because from a moderation side.
Yes, it's a fair question and thank you for the question.
Our default rates have been in line with expectations and so and we're seeing healthy demand from our customers. So we don't have plans to change our program economics are very healthy program and we're managing the risk.
You know very well and have a lot of controls in place around the program that said if the macro were to turn we also are confident in our ability to quickly move and throttle throttle the originations if we needed to but overall the program is very healthy and meeting our expectations all the way around.
Okay, great to hear and if you don't mind. The competition question it doesn't sound like it but we get a lot of questions around.
Are your competitors changing their strategies really to look a little bit more like Joe's, whether its verticalizing or forcing payment monetization.
Kind of thing are you seeing any change in competitive competitiveness at all on the ground.
Yes. Thanks, Vincent look we've had we built up a strong competitive program within the business as we track a lot of those data carefully.
And I'll just go back to like this this has always been a competitive market.
Yeah.
To what I, just said earlier.
We really do believe our growth is more tied to our own execution more than anything else and.
And we're tracking the pipeline every day that being said, we're tracking pipeline the top of funnel when rates the productivity of our team by.
By competitor and I think if you go back and just look at our confidence in terms of net adds in Q4.
And is it really just speaks to the performance of our go to market team.
In our own execution.
As a business.
Understood. That's fair. Thank you so much.
Thanks Tycho.
Our next question is from Jason Kupferberg with Bank of America. Your line is now open.
Hey, Thanks, guys. So just on revenue obviously the growth rate here is still robust, but we didn't see the kind of upside. If you will that we've been accustomed to seeing on revenue from toast and you talked about some slower SaaS are clearly you talked about some slowdown in same store sales I mean, maybe on that.
Later point.
Can you quantify how much the same store sales slowed down late in Q3, and just any other callouts that you might have seen in the quarter parts of the business that perhaps weren't quite as strong as you might've been vision.
Yeah. So let me take your question sort of in the slots.
Slots in your question, but.
At the highest level.
The guidance that you are seeing for the balance of the year really reflects the macro that we talked about the GTD per location coming down in September in particular is when we start to see that trend continuing into October and so our guidance reflects.
The macro playing a role.
But just zooming out.
Momentum in the business that we have exiting the year into Q4 still remains healthy regardless of the macro so as we think about the next year, if I just get some color on that.
We are growing healthy and we've got a great operating leverage story. So as we enter into 2024, we're going to go in with the same same discipline focused on growth and and.
As well on cost discipline, and we have delivered healthy growth alongside driving this operating leverage over a $160 million in the year. So really proud of that so despite the macro of course are paying attention to it but that doesn't change the sentiment of this management team about the opportunity ahead of US I think the one thing I'll say is we're going to continue to <unk>.
Obviously in the core business, but we've got some investments in some of our emerging businesses as well, which will help us really position us for long term growth.
Right right.
It makes sense and then just coming back to the upsell team I think you mentioned theyre going to become an even more critical part of the growth story going forward.
You can share just in terms of the size of that team now and.
What sort of productivity gains you, perhaps seen there and to the extent you still see headroom and their productivity.
Yeah. Thanks, Jason Good question look I think as we had mentioned and we mentioned in previous calls the.
Team, that's going after new business new locations is a lot more mature it's been around for 10 years plus.
So team is newer and we continue to refine and.
Build it out we still see it as an opportunity for US we think there's headroom there in terms of.
Everything from growing that team to continue to optimize the motion and how we partner between the new business team. This lending restaurants, how we expand our pool over time.
And.
As I mentioned in the script and the long term we see this.
An important part of our growth story over time.
Thank you.
Thanks, Steve.
Thank you, Jason I'd like to remind everyone to dial in for a question Press star one on your telephone keypad to.
To join the queue. Our next question is from Josh Baer with Morgan Stanley. Your line is now open.
Thank you for the question I was hoping you could double click on the <unk> per location commentary if.
If you could provide any data or insight into what youre seeing as far as the number of diners or ticket items on a ticket or trading down other consumer behaviors, just as it relates to restaurant sales.
Yes, I'll take that.
Feel free to jump in Amman. So average ticket has actually held pretty steady over the last several quarters. So that's.
Not as much of a factor I think it's really same store sales and really I would say towards the end of the quarter is when we saw that and into October.
So and.
And we haven't yet seen trade downs, either as we're looking at the data obviously, we're paying attention to that and maybe in past recessions that's been a factor, but we're not seeing that yet in our data.
Great and then a follow up sticking to GPP.
Given given your position in the industry and your expertise wanted to ask you.
Yeah.
<unk>.
Your view on the near term longer term impacts.
Thank you.
Yeah, Hey, Josh This is Chris good question, we're not seeing anything that indicates a change in consumer behavior.
<unk>, we don't expect it to have a significant impact and we remain laser focused on given the industry. The best technology platform to manage their business. So we're confident dining at restaurants will remain a cornerstone activity for consumers.
And again, not seeing anything related to it.
Great. Thank you.
Our last question is from Dave Koning with Baird. Your line is now open.
Yeah, Hey, guys. Thanks, so much and to follow up a little on <unk> question about toast capital you've had tremendous success, you've grown probably two to four times over the last handful of quarters, but this quarter was a little slower sequentially I guess I'm wondering do you expect that to grow a little closer to the core business going forward.
Instead of kind of the the massive growth going forward.
Yes, I just wanted to remind you that.
Over the last year, we added.
360 day loan products.
You should be mindful of that and your comparisons.
But I would say in the near term I would expect us capital staying in a similar range as a percentage of <unk> is probably a good proxy to the way to think about it but the demand is healthy and we're seeing a lot of customers come back and renew their loans and so we're not seeing any concern about the growth of the program at all.
Got you, Okay, Thanks, and maybe just as a follow up.
I just want to make sure I understood right did you say subscription <unk> going forward in the mid single digit to high single digit year over year growth and if so is that what you expect in Q4 as well.
Yes, my commentary was actually around Q4 to be in the high <unk> up to the mid to high single digits.
And that was really just to zoom out to give you some texture on that as we optimize that with Lan width customers upfront and some of the impact from customer mix, we expect that to be to be gradual but overall, we're optimizing for AAR, which I commented on earlier and as we're getting to a 100000.
We want to continue that momentum.
That's how it that's how I'd characterize that.
Great. Thanks, so much.
Yes, one thing I would add too to that as im thinking about your question.
Just thinking about <unk> over the long term as you said as we think about it.
What is the terminal value of <unk> or what's that level going to look like you know theres a couple of things, we think about which may help frame for the group today, we have more than 10% of our customers paying us over 10-K in our opinion and we see that growing steadily but then just zooming out and you think about all the opportunity we have to grow our <unk> whether that's.
Innovation, which <unk> talked about in his script.
Whether thats, our upsell team, which is very early whether it's pricing and packaging. Just there are several levers that we can put together over the next several years to drive that our expansion and so we're very confident as we exit 2023 that we're going to continue to grow our <unk> and have healthy SaaS AOR growth overtime.
Yes.
Okay.
Thank you.
We have no further questions. So I'll pass the call back to the management team for any closing remarks.
Thank you and thank you all for your thoughtful questions I appreciate your well wishes. Thank you to our toasters and more importantly to our customer base.
And my last point is youre in strong hands with Amman, and Elena moving forward and have a great day. Thank you. Thank you Chris Thanks, Chris.
That concludes today's conference call. Thank you for your participation you may now disconnect your lines.