Q2 2024 Toast Inc Earnings Call
As required by law, we undertake no obligation to update or revise these forward looking statements.
Michael: 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, including but not limited to non-GAAP subscription services gross profit and non-GAAP financial technology solutions gross profit, which we refer to collectively as our recurring gross profit stream. These are the basis for our top line guidance.
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, including but not limited to non-GAAP subscription services gross profit and non-GAAP financial technology solutions gross profit, which we refer to collectively as a recurring gross profit streams.
These are the basis for our top line guidance.
Michael: 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, the press release can be found on the Investor Relations website at investors.toasttab.com. After the call, a replay will be available on our website.
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, the press release can be found on the Investor Relations website at investors Dot <unk> Dot com after the call a replay will be available on our website.
Aman: And with that, let me turn the call over to Aman. Thank you, Michael, and thank you, everyone, for joining us this afternoon. We had a strong second quarter. We added a record 8,000 employees at locations. Our recurring gross profit streams increased 29% year-over-year. Adjusted EBITDA came in at $92 million.
And with that let me turn the call over to Amar.
Aman: And we've achieved gap income profitability ahead of expectation. I'm really proud of how the team performed. And we're well positioned to continue to scale and have a strong second half. Our mission at Toast is to help restaurants delight their guests, do what they love, and thrive. At our first Investor Day in May, we shared the opportunity, strategy, and drivers behind our momentum. At about 13% share in U.S. restaurants, we have an incredible opportunity ahead of us to scale and become the platform of choice serving this amazing industry.
Aman: Our products and data assets, combined with our local go-to-market engine and customer success teams, uniquely position us to drive both location and ARPA expansion and sustain durable growth over the long term. In addition to scaling across U.S. S&B and mid-market restaurants, we're thoughtfully laying the foundation to expand our TAM across the international market. Enterprise Restaurant Chains, as well as Food & Beverage Retail. The team has done a great job of identifying segments of the market. Where do we have a right to win?
Aman: Without distracting from our ability to scale in our core market segment. And these investments allow us to expand our TAM and support our ability to drive durable growth and shareholder returns. We've increased our outlook for the full year based on our performance in the first half, and we're all focused on the four strategic priorities we laid out earlier this year.
Aman: One, scaling locations and market share in our core business. Two, expanding our offering for restaurants with products customers love.
Aman: Expanding our addressable market into new adjacencies. And four, setting up the company to deliver ongoing operating leverage as we scale. So first, scaling restaurant locations and gaining share in our core business. Our record 8,000 net ads in the second quarter were driven by our Purpose-Built Restaurant Platform and our local go-to-market engine.
Aman: As we gain momentum in local markets across the country, we continue to see a pliable effect with higher rep productivity and faster market share gains. In fact, in our top 10 viable markets across the country, with the highest market share, we saw 50% more wins on average in Q2 versus non-fiber markets.
Aman: This gives us confidence in our ability to continue to drive strong market share gains over time. And we're gaining share because restaurants see the impact we can have on their businesses. I'll spotlight one recent example that speaks to the value we bring. Vizoria, a growing fast casual concept in greater Atlanta, switched to Toast from another cloud provider to help fuel its next stage of growth.
Aman: By complementing our POS terminals with self-ordering kiosks for guests and kitchen display systems across their food and prep lines, they've reduced average order times by five minutes. And as a result, Missouri estimates that they've increased revenue by 25% across their locations. Switching gears, our second priority is expanding our offering for restaurants with products and experiences customers love. Our platform and partner ecosystem serves all the restaurant stakeholders, operators, guests, employees, and suppliers, and creates value across many dimensions, including supporting new revenue streams, driving throughput, and simplifying operations. Last quarter, I talked about the launch of product suites across good, better, and best tiers to simplify how we sell and how our customers adopt our products. We're starting to see this have an impact.
Speaker Change: across their locations.
Speaker Change: Switching gears, our second priority is expanding our offering for restaurants with products and experiences customers love.
Amar: Our platform and partner ecosystem serves all the restaurant stakeholders, operators, guests, employees, and suppliers, and creates value across many dimensions, including supporting new revenue streams, driving throughput, and simplifying operations.
Aman: For example, since we launched our digital storefront suite in the spring, approximately 30% of Book locations upgraded to our pro tier, which includes our new website product. And this website product works in concert with the rest of our digital suite to help restaurants build a great online presence. As we continue to mature our product suites, we're confident we will see similar trends across our platform, which will, in turn, help us drive product attach and ARR.
We're starting to see this have an impact.
and this website products works in concert with the rest of our digital suite to help restaurants build a great online presence. As we continue to mature our product suites, we're confident we will see similar trends across our platform which will in turn help us drive product attach and ARR.
Aman: Internationally, across the UK, Canada, and Ireland, our team has been hard at work building out the platform to drive both differentiation and our proof. In the first half, we launched several products, including online ordering, mobile order and pay, gift cards, and kiosks. Attached rates are surpassing expectations. As an example, nearly half of international June bookings... Adopted Toast Online Ordering. Tahini's is a Canadian quick-serve restaurant that's already rolled out toast across 42 locations.
Aman: The plan is to double their location count next year. One of the highlights for Tahini's has been a 15% increase in check sizes at their kiosk versus ordering at a POS terminal. They credit this increase to our kiosk's ability to prompt for data-driven upsells via beautiful custom images of their dishes for items that go better together. And this growth in revenue has helped them invest more back into their business to support their ambitious growth goals.
Aman: Our team has plans to roll out more products internationally this year, including guest marketing, restaurant retail, toast tables, as well as our Patel PMS integration and 2,000 live locations as of Q2. We are excited about our progress and continue to remain bullish on the long-term potential, given how early we are in the international opportunity. Next, our third priority is expanding our addressable market into new adjacencies, including enterprise and food and beverage retail. We recently expanded our partnership with Metzel's Pretzels by signing an extension for another 100 stores, in addition to the 300 locations already on our platform.
Aman: We continue to roll out Toast across a number of marquee brands, including Wetzel's and Barbecue Holdings, which are part of fast-growing MTY brands. And the improvements we have made to our platform, combined with our strong pipeline, give us confidence in steadily increasing enterprise penetration over time. As I mentioned at our investor day in May, the work we've put in over the past decade building on a platform has allowed us to enter new verticals, including grocery, convenience stores, and Bottle Shop.
Aman: There are 220,000 locations and $660 billion in spend in these markets alone in the U.S., and so far, we've booked a thousand new customers. We see a significant growth opportunity here, in part because so much of this market is still using legacy on-premises solutions and doesn't see the benefits of an integrated cloud platform. For example, Victory Hospitality Group in Portland, Maine recently launched three markets on Toast in addition to their portfolio of award-winning restaurants that have been with us since 2016.
Aman: Since adding Toast, the staff has been able to offer better service to their guests by making back-office tasks, including inventory management, much more streamlined. We see examples like this across many of our early retail customers and have confidence that we can drive significant growth in this segment. And finally, our fourth priority is to deliver operating leverage in our core business as we scale both to drive shareholder returns and have the capital available to invest in our nascent market segment. Our adjusted EBITDA was $92 million in the second quarter.
Amar: is to deliver operating leverage in our core business as we scale both to drive shareholder returns and have the capital available to invest into our nascent market segments.
Aman: A $77 million improvement from a year ago. I'm very proud of the team's ability to both drive strong growth and this level of margin expansion in a short period of time. Thank you Aman and to everyone for joining us.
Amar: We will invest more back into our business to support our growth plans while working towards our long-term margin goals.
Amar: Our partners for helping to enable this great ecosystem.
Unknown Executive: I also want to thank our employees. Your continued focus on execution delivered another strong quarter with top and bottom line results above expectations. RMD expenses declined 4% year-over-year in Q2.
Amar: In the second quarter, ARR grew 29% driven by strong location growth and continued ARPU expansion.
Amar: Total FinTech and subscription gross profit are recurring gross profit streams, also increased 29% year-over-year and totaled $344 million.
Amar: Payments ARR grew 24% and FinTech Gross Profit increased 23% in Q2.
Amar: The net take rate contribution is slightly lower than prior periods due to the introduction of forward flow, which comes with a lower take rate per dollar of origination, but carries no credit risk.
Amar: Expanding capacity with diverse funding sources enables us to prudently grow the program and optimize across models to maximize risk-adjusted returns.
Amar: We are on track for the targeted payments pricing increase we've discussed and expected to have a small impact on core net take rate in the second half of the year.
Amar: Over time, ongoing price adjustments will be one of the several drivers of our long-term growth algorithm.
Amar: Total operating expenses were up 2% year-over-year in the quarter, reflecting a full quarter of savings from restructuring actions taken earlier in the year.
Amar: We anticipate operating expense growth will increase in the second half, as we reinvest savings into our highest priority areas across go-to-market, product, TAM expansion to drive sustained long-term growth.
Amar: We'll maintain the same disciplined investment approach we've employed and remain focused on driving efficiencies across the business to fund investments and drive margin expansion.
Amar: Sales and marketing expenses increased 16% year-over-year in Q2, as we continue to grow our upsell and international sales teams and make targeted investments in our U.S. go-to-market motion to drive deeper penetration.
Amar: R&D expenses declined 4% year-over-year in Q2.
Unknown Executive: We expect to see the impact of reinvestment starting in Q3. We're making targeted investments aligned with our product strategy to provide a differentiated platform for our core S&B and mid-market customers. Excluding $50 million of bad debt and credit-related expenses, G&A was down 12% year-over-year.
Amar: We expect to see the impact of reinvestment starting in Q3.
Amar: We're making targeted investments aligned with our product strategy to provide a differentiated platform for our core SMB and mid-market customers.
Amar: Innovate new products that create value for our customers and expand into new TAMs.
Amar: Excluding $50 million of bad debt and credit-related expenses, G&A was down 12% year-over-year. We will continue to drive efficiency within G&A, including through automation and global diversification of our workforce, and expect ongoing operating leverage.
Unknown Executive: We will continue to drive efficiency within G&A, including through automation and global diversification of our workforce, and expect ongoing operating leverage. Now turning to guidance. For the third quarter, we expect total subscription and FinTech gross profit to increase in the 23% to 27% range year-over-year and adjusted EBITDA to be $70 million to $80 million.
Amar: Bad debt associated with Toast Capital was lower relative to prior periods, benefiting from the addition of Forward Flow and the continued optimization of the program.
Amar: Our progress in growing Adjusted EBITA combined with containing stock-based compensation expenses resulted in our first quarter of GAAP operating income profit reaching $5 million in the quarter.
Amar: Free cash flow totaled $108 million in the second quarter, driven by strong majestity and a benefit from working capital due to the seasonality of our payments business.
Amar: Moving to capital allocation. Year-to-date, we have repurchased $49 million in shares. At the start of Q3, we also opportunistically repurchased a warrant for 5.2 million shares expiring in 2027 for $60 million.
Amar: The warrant repurchase aligns with our broader capital allocation strategy to maximize shareholder value, in part by reducing dilution.
Amar: We view it as an accelerated, efficient share repurchase and use of cash we would have otherwise allocated for opportunistic stock repurchases.
Amar: As a result, we anticipate a slower pace of buybacks for the balance of the year, although we will remain opportunistic based on market conditions.
Amar: Now turning to guidance. For the third quarter we expect total subscription and FinTech gross profit to increase in the 23% to 27% range year-over-year and adjusted EBITDA to be $70 million to $80 million.
Amar: Following our strong first-half performance, we are increasing our full-year outlook. We now expect 27% to 29% growth in FinTech and subscription gross profit, and $285 million to $305 million in adjusted EBITDA.
Unknown Executive: At the midpoints, it represents a 22% margin, a 16 percentage point improvement versus 2023. This is also driving the quarterly fluctuations in adjusted EBITDA margins. Our expectations for the four-year margins are representative of how we are managing the business and capturing our growth investment and efficiency gains. Yon, Susan Hine, with J.P. Morgan.
Amar: At the midpoints, it represents a 22% margin, a 16 percentage point improvement versus 2023.
Amar: We expect to be around breakeven on a gap basis for the remainder of the year.
Amar: After benefiting from the restructuring savings in the first half of the year, our guidance includes investment in key areas of the business which are concentrated in the back half of the year.
Amar: This is also driving the quarterly fluctuations in adjusted EBITDA margins. Our expectations for the full year margins are representative of how we are managing the business and capture our growth investment and efficiency gains.
Amar: We plan to build off of our full year 2024 margin and steadily progress towards our medium and long-term targets.
Amar: To wrap up, we are extremely proud of our execution and momentum through the first half of 2024. We are on track for a strong second half of the year and well positioned to sustain high growth and margin expansion over the long term.
Speaker Change: Now I will turn the call back over to the operator to begin Q&A.
Speaker Change: Thank you. We will begin the question and answer session.
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, to please press star and the number 1 on your telephone keypad.
Speaker Change: Your first question comes from...
Speaker Change: Tian Susan Hwang, with J.P. Morgan. You may proceed.
Speaker Change: Hey, good afternoon, good results here. Just want to ask on...
Unknown Executive: The second half, and if there's been any change in restaurant health in the last couple of months since we last got together, I understand the location addition and seasonality comment, Selena, that you mentioned, but just any other observations? The next question comes from... Dan Dolev with Michel Rbeiz. Hey guys, thanks for taking my question. I want to ask about the subscription era. I think it looks pretty strong, another strong quarter.
Speaker Change: The second half, and if there's been any change in restaurant health in the last couple of months since we last got together, I understand the location addition, seasonality comment, Elena, that you mentioned, but just any other observations on the macro side. Thank you.
Elena: Yeah, thanks, Tinson, for the question. So in Q2, our GPV per location was down 3%, and as we head into Q3, it's in that same range, so it's been relatively consistent.
Amar: And our guidance reflects that, as I laid out on the call. That said, the macro is dynamic, and we also know a couple other data points about our restaurants. They've proven to be resilient through various economic cycles, but of course we're going to continue to monitor it.
Speaker Change: And just zooming out, as we think about GPV growing 26% at $40 billion this quarter, we should have a lot of confidence in our ability to manage the business through various economic cycles.
Speaker Change: Perfect, thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from...
Speaker Change: Stone, Stan Doliv with Michio Hemi.
Stan Doliv: Hey guys, thanks for taking my question. I wanted to ask about subscription ARR. I think it looks pretty strong and the annual number looks actually really good. I want to know what kind of products are resonating with your customers today?
Speaker Change: Because the up-sell performance, at least from what we're seeing here, looks pretty good in the context of the same go-sell location.
Speaker Change: Thank you.
Speaker Change: Thanks for your question, Dan. Look, there's a broad range of capabilities we shared across.
Speaker Change: This is our platform analyst day. Everything things like data and AI and we share our benchmarking tool...
Speaker Change: The feedback from our customers has been positive. Generative AI and leveraging that in our CRM tool.
Speaker Change: Sous-chef is another area we're excited about to help be an umbrella for all of our AI innovations. That's one area that the team's excited about.
Speaker Change: And then across our platform, you know, we've talked about how the platform has Commerce, Guest, Employee Cloud, NS&A, and FinTech.
Speaker Change: And across all of those areas, you know, there's work the team is putting in to help continue to refine and iterate on the products. So on guests, for example, you know, our Toast Tables product, catering, online ordering.
Speaker Change: Fioran
Speaker Change: Our new website product has been good feedback on.
Speaker Change: On the Employee Cloud side, there's a lot of focus on our payroll product working in conjunction with our scheduling and our tips product. We'll continue to work on the product market fit in our supplier and accounting product.
Speaker Change: And I'll just wrap by saying a lot of the focus we have as a team, all the work we're doing in suites, is really to make sure that we're driving strong R2 growth in the medium and long term. You know, we recognize this is an important growth driver for the business.
Speaker Change: Got a great quarter and great momentum.
Speaker Change: Thank you, Dan. Thanks, Tom.
Dan: Thank you.
Speaker Change: Your next question comes from William Nance with Goulburn Sachs. Your line is open.
Unknown Executive: I wanted to stick with the macro themes and contingent workers question a second ago, just on decisions to make some of the incremental investments. You know, I think there's been a lot of focus on the macro recently. And I guess when you think about adding additional headcount to go to market function. Yeah, great question.
William Nance: Hey guys, appreciate you taking the question. Nice to see another strong quarter. I wanted to ask, maybe sticking with the macro themes and tensions question a second ago,
William Nance: Just on decisions to make some of the incremental investments, you know, I think there's been a lot of focus on the macro recently, and
Speaker Change: I guess, when you think about adding additional headcount to go-to-market functions...
Speaker Change: You know, like, how do you think about sort of the mix of net ads and...
Speaker Change: as sort of new restaurant location formation sort of slows, are you actually seeing that in the numbers? And how do you kind of how do you kind of marry that with the decision to accelerate investments in the back half? Thanks.
Aman: Well, thanks. Thanks for asking. As you can imagine, it's taken us a decade to build our SMB business. And, as I mentioned on the call, your next question comes from Stephen Sheldon with William Blair. Hey, thanks and nice work in the court, legacy on.
Speaker Change: Yeah, great question, Will. Thanks for asking.
Speaker Change: In terms of the mix of NROs and existing, we've continued to see not a fundamentally different pattern, and our team has the ability to sign and convert both existing restaurants and NROs.
Speaker Change: If I just zoom out, you think about the progress we've made, one thing I just want to start by saying is I'm really proud of the team's performance, we had a record 8,000 net ads in Q2, and I was reflecting on how 8K is an important milestone for us, you look at our ARPU at 12K+,
Speaker Change: And we're approaching $100 million in ARR that we added in a quarter, and if you just think about sustaining this level of growth quarter after quarter for the next decade, I think it's a great outcome. In Q2 specifically, a lot of the net ads came from our core U.S. SMB and mid-market business.
William Nance: As you can imagine, it's taken us a decade to build our SMB business.
William Nance: One of the things I'm really proud of is our top 10 slivo markets continue to be really productive.
William Nance: They're 50% more wins versus non-flammable markets and flammable markets have expanded 5x in the last three years. So while we're excited about adding capacity, sales capacity in international retail, and we will look to do that in the second half, really proud of the progress we've made in our core SMB business.
William Nance: And to your question about investing, I think it's a fair question, ultimately we see really healthy payback periods in economics in our core business.
William Nance: And we see nice growth drivers in some of these new segments that we're getting into. And so as long as we continue to see our unit economics be healthy, we're going to look to continue to invest.
Speaker Change: Makes total sense. Appreciate you taking the question.
Speaker Change: Thanks a lot.
Speaker Change: Your next question comes from Stephen Sheldon with William Blair. Your line is open.
Stephen Sheldon: Hey, thanks and nice work in the quarter.
Stephen Sheldon: You know, as you kind of expand into some of these adjacent markets, grocery, convenience stores, etc., I think Aman, you talked about the big opportunities to replace.
Aman: So just wanted to broaden that and ask if there are any other specific parts where there's a bigger legacy replacement, about SMB restaurants, Enterprise Restaurants, International, and again, there's the Jason Marcus which I think you hit on. Yeah, thanks for the question, Stephen. I think we've mentioned in the calls in the past that the enterprise segment has slower conversion cycles, so there is more legacy upmarket.
Speaker Change: Legacy On-Prem Solutions. So just wanted to broaden that and ask if there, as you look at the end markets Toast is pursuing, are there specific portions where there's bigger legacy replacement opportunities than other
Speaker Change: So you think about S&B restaurants, enterprise restaurants, international, and again those adjacent markets which I think you hit on in your prepared comments.
Aman: We also see that within retail, that, you know, there are some very specific needs, and there isn't a great cloud provider that has taken over the space. In fact, it reminds me a little bit of what the restaurant business was like 10 years ago. And so those are the two segments that I see a lot of opportunity in. But you know, even if you look at the international markets, for larger restaurants with higher GPV, the trend and pattern we see is that there is a lot of legacy still out there.
Speaker Change: Yeah. Thanks for the question, Stephen. I think we've mentioned in the calls in the past that the enterprise segment, the conversion cycles are slower, so there is more legacy up market.
Speaker Change: We also see that, within retail, that, you know, there are some very specific needs and there isn't...
Speaker Change: A great cloud provider that has taken over the space. In fact, reminds me a little bit of what the restaurant business was like 10 years ago.
Speaker Change: And so those are the two segments that I see a lot of opportunity in, but even if you look at the international markets.
William Nance: For larger restaurants with higher GPV, the trend and pattern we see...
William Nance: is a lot of legacy still out there.
Speaker Change: One of the big challenges for us is to really think about asset allocation across all these growth sectors.
Aman: And so, you know, one of the big challenges for us is to really think about asset allocation across all these growth sectors. And, you know, the thing that we're focused on is, what is the customer feedback we're getting? What are our payback periods?
William Nance: And, you know, the thing that we're focused on is what is the customer feedback we're getting? What are our payback periods? What are your economics? What is our NPS? And those are some of the drivers that help us determine how we allocate capital across these different growth vectors and where we see ultimately long-term the biggest.
Aman: What is our economics? What is our NPS? And those are some of the drivers that help us determine how we allocate capital across these different growth sectors and where we see, ultimately, the biggest growth potential across these market segments over the long term.
Speaker Change: Growth potential across these market segments.
Aman: Very helpful. Thank you. Thanks, Stephen. Your next question comes from Tim Chiodo with UBS.
Speaker Change: Got it. Very helpful. Thank you.
Stephen Sheldon: Thanks Stephen.
Unknown Executive: The line is open. Great, thank you for taking the question. I have an upfront question around the upsell teams and land and expand. But if you don't mind, I was hoping to also clarify something about the second half guidance. For the upsell teams in the land expand, those are two things that you focused on last year, hiring more of the upsell folks in the fourth quarter, I believe. And maybe you could just talk a little bit about the progress that you're seeing with those teams as those additional heads that might have been brought on later last year, probably becoming more productive.
Unknown Executive: And as we think about them contributing, Sassarpu or Sassarpur location in the back half of the year and beyond. And then actually, I'll just throw in the guidance clarifier, if you don't mind. If I'm not mistaken, the prior guidance would have implied GPV per location being a little bit better in the second half. And now it's slightly, maybe a downtick there.
Speaker Change: Great, thank you for taking the question. I have an upfront question around the upsell teams and land and expand, but if you don't mind, I was hoping to also clarify something for the second half guidance.
William Nance: for the upsell.
Speaker Change: Teams in the Land Xpand. Those are two things that you focused on last year, hiring more of the upsell folks in the fourth quarter, I believe.
Unknown Executive: So is it fair to say that the guidance is actually absorbing a little bit more macro pressure, and you were still able to raise the guidance despite, Yeah, I mean, that's a fair... Let me think about, I'm trying to think about Q1, but that's a fair assessment. Tim, our guidance does reflect our latest thinking. And what we've seen is it's been relatively consistent in terms of same-source sales. It's been in this narrow band of GPB per location.
William Nance: And actually, I'll just throw in the...
Speaker Change: The guidance clarifier, if you don't mind.
Speaker Change: If I'm not mistaken, the prior guidance would have implied GPV per location being a little bit better in the second half.
Speaker Change: And now it's slightly, maybe a downtick there. So is it fair to say that the guidance is actually absorbing a little bit more macro pressure and you were still able to raise the guide despite that incremental macro pressure?
Speaker Change: Yeah, I mean, that's a fair...
Unknown Executive: So that's how we think about it, and we anticipate it being in a narrow band for the back half of the year, but that's factored into our guidance on a year-over-year basis. And on Upsell, Tim, on your question about Upsell, you know, two years in, we're, I'll start by saying we're learning a lot. You know, we'll continue to optimize this in conjunction with our new business team. And this team is a critical component of driving to drive ARPU growth because the new business team, First and foremost, is focused on growing locations.
Speaker Change: Let me think about, I'm trying to think about Q1, but that's a fair assessment, Tim, our guidance does reflect our latest thinking, and what we've seen is it's been relatively consistent in terms of same-source sales. It's been in this narrow band, GPB per location.
Speaker Change: So that's how we think about it, and we anticipate it to be in a narrow band for the back half of the year, but that's factored into our guidance.
William Nance: on a year-over-year basis.
Speaker Change: On Upsell, Tim, on your question on Upsell, you know, two years in, we're, I'll start by saying we're learning a lot, you know, we'll continue to optimize this in conjunction with our new business team, and this team is a critical component of driving, to drive our food growth, because the new business team
Aman: And as our platform continues to improve, I talked about, you know, there was a question earlier about how we think about the product portfolio and what, you know, what customers are looking for. As we continue to mature our platform and as we continue to invest in these suites to make our products easier to buy and sell, this upsell team is critical to making sure that we continue to drive ARPU growth to complement the great location growth that we're seeing.
Speaker Change: First and foremost, let's focus on growing locations.
William Nance: As our platform continues to improve, we talked about, you know, there was a question earlier about...
William Nance: How do we think about the product portfolio and what customers are looking for as we continue to mature our platform?
William Nance: And as we continue to invest in these suites to make our products easier to buy and sell.
Speaker Change: Thank you.
Speaker Change: This upsell team is critical to making sure that we continue to drive ARPU growth to complement the great location growth that we're seeing.
Aman: And the last thing is, you know, we've talked in the past about Toast Shop and product-led growth. That's another thing the R&D team is very focused on, especially for products where the ability to adopt and activate is easier.
Speaker Change: And the last thing is, you know, we've talked in the past about Toast Shop and product-led growth. That's another thing the R&D team is very focused on, especially for products.
William Nance: where the ability to adopt and activate is easier. So you know I think two years in we're pleased with the progress the upsell team has made. There's still work to do and we're committed to making sure that we continue to refine our land and expand motion across our new business team and our upsell team.
Aman: So, you know, I think two years in, we're pleased with the progress the upsell team has made. There's still work to do, and we're committed to making sure that we continue to refine our strategy and expand motion across our new business team and our upsell team. Great. Thank you for both of those.
Unknown Executive: Next step. Thank you, Tim. The next question comes from Harshita Rawat with Bernstein. Your line's open.
Speaker Change: Great, thank you on both of those.
Speaker Change: Thank you.
Kim: Thank you, Kim.
Speaker Change: The next question comes from Harshita Rawat with Bernstein. Your line is open.
Unknown Executive: Good afternoon. Good afternoon. Very strong location ads. Can you maybe expand upon the contribution? And then, Elena, I should have to think about location. I know you've mentioned Ceasar, haven't you?
Speaker Change: Good luck.
Harshita Rawat: Good afternoon. Very strong location ads. Can you maybe expand upon the contributions also from new areas like food and beverage retail, international, and then Elena, how should we want to think about location ads in 3Q? I know you've mentioned seasonality, kind of driven headwinds.
Speaker Change: and the second half of the year. Thank you.
Aman: Yeah, sure. Thanks. Thanks, Harshita. International retail is growing nicely. As we said, on shared analyst day, international at 2,000 locations live. Starting to see, you know, the investments we're making to expand the platform that's responding really well with our customers. And our team has got more to sell in their bag, which has been great.
Elena: Sure. Thanks, Harshita.
Speaker Change: International retail are growing nicely. As we said, shared analyst day, international, the 2,000 locations live. Start to see, you know, the investments we're making to expand the platform that's resonating really well with our customers. And our team has got more to sell in their bag, which has been great. And we're going to continue to invest.
Aman: And we're going to continue to invest to bring more of our platform, as we've shared in the past, internationally before we really put the pedal down in some of these markets on go-to-market capacity. And on retail, you know, we're, again, really proud of the progress teams made. This was, you know, a Sparkworks project that got to 1,000 locations booked relatively quickly.
Speaker Change: Bring more of our platform as we've shared in the past internationally before we really put the pedal down in some of these markets on go-to-market capacity.
Speaker Change: And on retail, you know, we've...
Speaker Change: Again, really proud of the progress teams made.
Speaker Change: This is, you know, a Sparkworks project that's gotten to a thousand locations booked relatively quickly.
Aman: But if you remember that if you zoom out and think about this, you know, our core business in the U.S., we've been at it for 11 years now, relative to these new businesses that are still early, don't have the same level of sales capacity, or the same maturity in the product. And so the bulk of the ads are coming from our core business. And, you know, the thing we talked about, the five-year effect, is still the primary driver of our growth.
Speaker Change: I want you to remember that if you zoom out and think about this, you know...
Speaker Change: Our core business in the U.S., we've been at it for 11 years now, relative to these new businesses that are still early, doesn't have the same level of sales capacity, the same maturity in the product.
Speaker Change: And so the bulk of the ads are coming from our core business.
Unknown Executive: And as you think about the next few years, and especially the next decade, of course, our aspirations are to continue to expand not just in our core business but also make these new areas more significant contributors. And we're working on that. Yeah, and Harshita, on your question about the second half, you know, first of all, as Aman said, I just echo Aman's comments: we had a strong first half of the year on net location ads, the demand and funnel remain strong, and we're still on track to add more net locations in 24 than we did in 23. And that's off a bigger base.
Speaker Change: Still the primary driver of our growth. And as you think about the next few years, and you think about especially about the next decade, of course, our aspirations are to continue to expand not just in our core business, but also make these new areas more significant contributors, and we're working on that.
Harshita Rawat: Yeah, and Harshita, on your question on the second half, you know, first of all, as Aman, I just echo Aman's comments, we had a strong first half of the year on net location ads, the demand and funnel remained strong, and we're still on track to add more net locations in 24 than we did in 23, and that's off a bigger base.
Unknown Executive: I'll just reiterate what I said in the script, which is Q2 quarterly net ads tend to be obviously higher than the rest of the year, given seasonality. So just think about that as you plan your models. I'm confident the team is executing well. Thanks, Harshita. We now have Josh Baer with Morgan Stanley.
Speaker Change: I'll just reiterate what I said in the script, which is Q2 quarterly net ads tend to be obviously higher than the rest of the year given seasonality, so just think about that as you plan your models for the second half.
Speaker Change: I'm confident the team is executing well.
Speaker Change: Thank you.
Speaker Change: Thanks for sitting
Speaker Change: We now have Josh Baer with Morgan Stanley . Your line is open.
Unknown Executive: Great, thank you for the question. I was hoping you could unpack GPV per location just a bit more, any impact from mix, changing mix on that metric, and then I was hoping you could dig into the trends you're seeing just across diner, a number of ticket items and check.
Speaker Change: Great, thank you for the question. I was hoping you could unpack GPV per location just a bit more, any impact from mix, changing mix on that metric, and then I was hoping you could dig into the trends you're seeing just across seated diner, number of ticket items, and check sizes. Thanks.
Unknown Executive: Yeah, I'm happy to unpack that. So just to put it in context, you know, Q2 was down 3% August year to date, you know, in the same zone, as I mentioned, and most of that, the primary driver of that is same source sales declining year over year. So that's the primary driver; there's a small portion related to mix, but it's mostly really same-source sales declining. And that trend has been relatively consistent.
Speaker Change: Yeah, I'm happy to unpack that. So just to put it in context, you know, Q2 was down 3%.
Speaker Change: August here today, you know, in the same zone, as I mentioned.
Speaker Change: And most of that, the primary driver of that is same-source sales declining year over year, so that's the primary driver. There's a small portion related to mix, but it's mostly really same-source sales declining. And that trend has been relatively consistent.
Speaker Change: And in terms of, you know, the different pockets of our, of our segments, we haven't seen, you know, a notable pattern that's different across our segments.
Unknown Executive: And in terms of, you know, the different pockets of our, of our segments, we haven't seen, you know, a notable pattern that's different across our segments. And just that, in terms of check size or order size, there hasn't been any fundamental change. And I think if you look at these changes, they are very gradual and in a narrow band, and I think, as Elena mentioned, have been a pattern that we've seen over the past year. Your next question comes from Black Coat with Autumn.
Speaker Change: And just that, in terms of check size or order size, there hasn't been any fundamental change. And I think if you look at these changes, these are very gradual and in a narrow band, and I think, as Elena mentioned, have been a pattern that we've seen over the past year.
Speaker Change: Excellent, thanks.
Speaker Change: Your next question comes from Matt Coad with Autonomous.
Unknown Executive: Hey guys, thanks for taking the question here. I wanted to dig in a little bit more on the investments needed in food and beverage. At the investment day, you talked about how you've already made a lot of investments to kind of get to product parity there and build out the platforms and all the modules that you need. But it sounds like... a good amount of investment that needs to be made, So I was hoping you could touch on that and maybe use like a baseball analogy, right? Like what stage are we in in terms of building out the platform? For those,
Matt Coad: Hey guys, thanks for taking the question here. I wanted to dig in a little bit more on the investments needed in food and beverage retail and international.
Matt Coad: At the investment day, you talked about how you've already made a lot of investments to kind of get to product parity there and build out the platforms and all the modules that you need, but it sounds like there's still a good amount of investment that needs to be done.
Speaker Change: So, I was hoping you could touch on that and maybe use like a baseball analogy, right? Like, what adding are we in, in terms of building out the platform for those two new verticals right now?
Aman: Yeah, I think it's a fair question, Matt. I'm not going to use a baseball analogy, but I'll say that our core business in the US is in year 12 or 11, and we're in year two and year one for these other businesses, to give you some context. Look, I'll start by saying, like, I think the customer reception has been amazing. It's been really positive.
Speaker Change: I think it's a fair question, Matt. I'm not going to use a baseball analogy, but I'll say that our core business in the U.S.
Speaker Change: We're in year 12 or 11, and we're in year 2 and year 1 for these other businesses, to give you some context.
Speaker Change: but
Speaker Change: Look, I'll start by saying, like, you know, I think the customer reception has been amazing. It's been really positive. I mean, this Big Tree Hospitality story that I shared in the call, we see a lot of these stories across our customer base.
Aman: I mean, this Big Tree Hospitality story that I shared on the call, we see a lot of these stories across our customer base. And I think one of the big drivers is that there are a lot of legacy solutions, and the ability to move them to this all-in-one approach in the cloud really resonates with our customers in the space. In terms of the features, you know, I think one of the ones we shared at Analyst Day that continues to resonate a lot is the ability to manage inventory on the floor.
Speaker Change: And I think one of the big drivers is that there's a lot of legacy solutions and the ability to move it to this all-in-one approach in the cloud, it really resonates with our customers in the space.
Speaker Change: In terms of the features, I think one of the ones we shared at Analyst Day that continues to resonate a lot is the ability to manage inventory on the floor. We continue to hear feedback that that's a feature and a capability, and there's some capabilities around that that add a lot of efficiency for staff.
Aman: We continue to hear feedback that that's a feature and a capability, and there are some capabilities around that that add a lot of efficiency for staff. On e-commerce also, because, you know, we think of the retailers offering e-commerce capabilities as important, and so having that built into the back end and integrated is really valuable. And then, Matt, to your question on the roadmap, you know, there's work to do if you think of the 220,000 locations we laid out. You know, there's work to do on the fuel integrations, that's an area we're working on. We're working on the payment side, supporting SNAP and EBT. There's some work in grocery stores and on deli scale management.
Speaker Change: On e-commerce also, because retailers offering e-commerce capability is important, and so having that built into the back end and integrated is really valuable.
Speaker Change: And then, Matt, to your question on roadmap, you know, there's work to do if you think of the 220,000 locations we laid out.
Speaker Change: There's work to do on the fuel integrations, that's an area we're working on. We're working on the payment side, supporting SNAP and EBT. There's some work in grocery on deli scale management.
Aman: But we also get a lot on the platform. When you think about our platform, we get a lot across things like payroll, payments, and scheduling that's built in that can really be reused. And so we see this as a great opportunity where the return investment on our ability to build in the segment is really, really high. And then internationally, I think it's not the same lift.
Speaker Change: But we also get a lot on the platform. When you think about our platform, we get a lot across.
Speaker Change: We see this as a great opportunity where the return on investment, our ability to build in this segment is really, really high.
Aman: I know I talk about a lot of products, but it's not nearly the same weight to be able to bring these products to market internationally. But as you can imagine, we've taken a decade to build this platform in the U.S., and so to support internationalization, it's a gradual process that the team is working on. Yeah, the only thing I would build upon what you said, Aman, is, you know, as I mentioned at Analyst A, we take a very, we take capital allocation, obviously, as a strategy and some guiding principles.
Speaker Change: And then internationally, I think it's not the same lift. I know I talk about a lot of products, but it's not nearly the same lift to be able to bring these products to market internationally. But as you can imagine, we've taken a decade to build this platform in the U.S. and sort of support internationalization. It's a gradual process that the team is working on.
Aman: And as we think about these emerging businesses, we have a very thoughtful, gated way that we approach investing. And so we wait to see signals before we incrementally invest. So that's just a discipline we have.
Speaker Change: Yeah, the only thing I would build up on what you said, Aman, is...
Speaker Change: You know, as I mentioned at Analyst A, we take a very, we take capital allocation obviously as a
Speaker Change: You know, a strategy and some guiding principles. And as we think about
Speaker Change: These emerging businesses, we have a very...
Speaker Change: We have a very thoughtful, gated way that we approach investing, and so we wait to see signal before we incrementally invest, so that's just a discipline we have, and you'll continue to see that as we grow these businesses.
Unknown Executive: And you'll continue to see that as we grow these businesses. Really helpful. Thanks, guys. Thanks, Matt. Thank you, Matt. Your next question comes from David Hynes with Canaccord Unity.
Speaker Change: Really helpful. Thanks guys.
Matt Coad: Thanks, Matt.
Speaker Change: Thank you, Mark.
Speaker Change: Your next question comes from David Hynes with Canaccord Unity. The line is open.
Unknown Executive: Hey, thanks for taking the question, guys. Excellent results. Aman, I'd love to get an update from you on what you're hearing from customers. Michael Hynes, Stephen Sheldon, Jason Kupferberg, Michael Senno, Elena Gomez, David Koning, Matthew Coad, Joshua Baer, Samad Samana, Darrin Peller, Timothy Chiodo, William Nance, Peter Heckmann, Andrew Harte, Jonathan Vassil, Michel Rbeiz, Stephen Fredette, Dominic Ball, Jonathan Vassil, Michel Rbeiz, Stephen Fredette, Toast, Yeah, thanks for the question, DJ.
Speaker Change: Hey, thanks for taking the question, guys. Excellent results. Aman.
David Hynes: I'd love to get an update from you on what you're hearing from customers with respect to interest and your opportunity with AI, whether that's Sous Chef or some of the other initiatives you have underway, and I guess how you think these can contribute to the financial model over time.
Aman: Look, I think it's still early. I think in the world of AI, one of the things that the team is really focused on is, how do we leverage AI to create value for our customers? That's a mantra that we've been reinforcing over and over with our team to just really make sure that the work we're doing is landing with customers. And one great example of this is, you know, the work we did on our guest marketing tool. So when you think of restauranteurs, they're not marketers.
Speaker Change: Yeah, thanks for the question, DJ. Look, I think it's still early. I think in the world of AI, you know, one of the things that the team is really focused on is how do we leverage AI to create value for our customers? That's the mantra that we've been reinforcing over and over with our team. And just to really make sure that the work we're doing is landing with customers. And one great example of this is, you know, the work we did
Speaker Change: in our guest marketing tool. So you think of restauranteurs, they're not marketers. And so the ability to have generative AI create great campaigns for them when they're on their floor and have that drive demand for them. And this is like all the text and the ability to actually send out these campaigns is a great example.
Aman: And so the ability to have generative AI create great campaigns for them when they're on their floor and have that drive demand for them is like all the texts, and the ability to actually send out these campaigns is a great example of leveraging AI, generative AI, to actually create value and help create demand for restaurants. And we've seen examples already, it's early, where data is actually having a big impact on the activation and adoption of the product. Another example on the data side is benchmarking.
Speaker Change: of leveraging AI, generative AI, to actually create value and help create demand for restaurants. And we've seen examples already, it's early, where it's actually having a big impact on the activation and adoption of the product.
Aman: So, as you can imagine, we've got 120,000 restaurants on the platform. And so we've got this amazing dataset that we can leverage. And the team is thinking through all the ways in which we can add value, and one of them is just leveraging data to help restaurants be smarter. You know, you think about restaurants, think about simple things like what to put on the menus or how to price menus, and how to think about inflation.
Speaker Change: Another example on the data side is benchmarking. So, as you can imagine, we've got 120,000 plus restaurants on the platform.
Speaker Change: And so we've got this amazing data set.
Speaker Change: that we can leverage. And the team is thinking through what are all the ways in which we can add value.
Speaker Change: And one of them is just leveraging the data to help restaurants be smarter. You know, you think about restaurants, think about...
Speaker Change: Simple things like what to put on menus or how to price menus, how to think about inflation. There's not a lot of data that's been there historically. And so the ability to actually log into Toast and say, tell me in my zip code what's going on, has been really, really well received.
Aman: And so we've got a lot of data that's been there historically. And so the ability to actually log into Toast and say, tell me my zip code, what's going on, has been really, really well received. And with Sous Chef specifically, the idea is it's an umbrella.
Aman: Think of it like chat GPT; it's like an umbrella where you can get prompts, you can get recommendations. You can also, over time, you can search to get feedback in terms of, you know, how to run a better restaurant. And so there are many ideas the team is considering within that umbrella, and benchmarking or some of the work we're doing with CRM are examples of that, where this prompt can give you recommendations on how to leverage your data to be smarter or to drive demand. It makes sense. We did a demo of the benchmarking product down in New York.
Speaker Change: And with Sous Chef specifically, the idea is it's an umbrella, think of it like Chat GPT, it's like an umbrella where you can get prompts, you can get recommendations, you can also, over time, you can search to get...
Speaker Change: Get feedback in terms of what, you know, how to run a better restaurant. And so there are many ideas the team is considering within that umbrella and benchmarking or, you know, or some of the work we're doing with
Speaker Change: With CRM are examples of that, where this prompt can give you recommendations on how to leverage your data to be smarter or to drive demand.
Speaker Change: Yeah, it makes sense. We did the demo of the benchmarking product down in New York, and it's pretty slick. So, thanks for the call.
Unknown Executive: So thanks for the call. All right. Thanks, Peter. Thank you. We now have Samad Samana with us.
DJ: All right, thanks, DJ.
Speaker Change: Thank you. We now have Samad Samana with Jeffrey.
Unknown Executive: Hi, good evening. Thanks for taking my question. So Elena, I know I hear you on the back half guidance around net ads and the commentary. I just wanted to ask, are you changing any of your assumptions around what you're expecting for gross retention as you think about the back half of what net ads ultimately look like? And I guess any observation on what you saw in the second quarter around Turner retention metrics inside of the installation?
Speaker Change: Hi, good evening. Thanks for taking my question. So, Elena, I just, I know, I hear you on the back half guidance around net ads and the commentary. I just wanted to ask.
Samad Samana: Are you changing any of your assumptions around what you're expecting?
Samad Samana: For gross retention, as you think about the back half on what the net ads ultimately look like. And I guess any observation on what you saw in the second quarter around Turner retention metrics inside of the install base.
Unknown Executive: Yeah, broadly speaking now, I think that the team has been executing well, no material change in how we're thinking about business, and on churn, you know, we're slightly above the 10% range on an annualized basis, up slightly relative to a year ago, but very similar to where it's been the last few quarters. And it continues to be predominantly out of business churn. So the impact on ARR is low, right, on an annualized ARR basis.
Speaker Change: Yeah, broadly speaking now, I think that the team has been executing well, no material change in how we're thinking about the business.
Speaker Change: And on churn, you know, we're slightly above the 10% range on an annualized basis, which is up slightly relative to a year ago, but very similar to where it's been the last few quarters.
Speaker Change: And it continues to be predominantly out-of-business churn, so the impact to ARR is low, right, on an ARR basis. So we built that into the net ads that you see we build in our churn assumptions, and no material change there.
Unknown Executive: So we built that into the net ads that you see; we built in our churn assumptions and no material churn. Gotcha. And I apologize if I missed this, but do you guys still have the view that you'll add more net ads this year than last year? I think you'd previously said that. And I'm not sure if I heard that on this call or not. Yeah, I answered that a few minutes ago. So, yes, he did hear that.
Speaker Change: Gotcha, and I apologize if I missed this, but do you guys still have the view that you'll add more net ads this year than last year? I think you'd previously said that, and I'm not sure if I heard that on this call or not.
Speaker Change: Yeah, I answered that a few minutes ago, so yes, you did hear that.
Speaker Change: Okay, great. Thank you.
Speaker Change: No problem. Thank you, Matt.
Unknown Executive: Okay, great, thank you. No problem. We will now take our last question from the line of Andrew Bauch with Wells Fargo. Hey, this is Conan on behalf of Andrew.
Speaker Change: We will now take our last question from the line of Andrew Bauch with Wells Fargo. Your line is open.
Unknown Executive: Thanks for taking the question. I wanted to focus a little bit on the macro again, just in the case that we see, you know, a slower restaurant spend environment materialized throughout the back half, what are some of the offsets built into the business or levers you can pull from the cost side to manage impacts near? And what are you embedding into the guide? Yeah, no, thanks for the question, Andrew, or Conan for Andrew.
Speaker Change: Hey, this is Koning on for Andrew. Thanks for taking the question.
Koning: I wanted to focus a little bit on the macro again, just in the case that we see, you know, slower restaurant spend, environment materialized throughout the back half, what are some of the offsets built into the business or levers you can pull from the cost side to manage impacts near term?
Speaker Change: and what are you embedding into the guide?
Unknown Executive: Look, at the highest level, let me start by saying the value of the Toast platform is durable during tough times, and we've proven that over cycles. But more importantly, we've proven that we're able to adapt the business quickly. So, you know, as we became more of a lean company earlier in the year, it just positions us to absorb changes in the macro and enables us to move faster if we need to.
Speaker Change: Thanks. Yeah, no, thanks for the question, Andrew, or Conan for Andrew. Look, at the highest level, let me start by saying the value of the Toast platform
Speaker Change: is durable during tough times, and we've proven that over cycles. But more importantly, we've proven that we're able to adapt the business.
Speaker Change: quickly. So, you know, as we became more of a lean company earlier in the year, it just positions us to absorb changes in the macro and enables us to move faster if we need to. So if we needed to take action, we would. That said, right now what we're seeing is
Unknown Executive: So if we needed to take action, we would. That said, right now, what we're seeing is the same sales decline is really what's driving the GPB per location down 3% in Q2. We're seeing that same zone as we start the quarter here.
Speaker Change: Same-sourced sales decline is really what's driving the GPB prolocation. With down 3% in Q2, we're seeing that same zone as we start the quarter here, and our guidance reflects that. We know the macro is dynamic, of course, but we also know restaurants have proven to be resilient, so I'm confident in the guide that we gave.
Speaker Change: We'll just continue to monitor.
Unknown Executive: And our guidance reflects that we know the macro dynamic, of course, and we also know restaurants have proven to be resilient. So confident in the guide that we gave, and we'll just continue to monitor. God, I thank you. Thank you. Thank you, Connor. I would like to hand it back to the management team for some final, Thanks for the time, everyone. This does conclude today's call. Thank you all for joining us. You may now disconnect your lines and enjoy the rest of the event.
Speaker Change: Got it. Thank you.
Speaker Change: Thank you. Thank you, Connor.
Speaker Change: I would like to hand it back to the management team for some final remarks.
Speaker Change: Thanks for the time everyone.
Speaker Change: This does conclude today's call. Thank you all for joining.
Speaker Change: You may now disconnect your lines and enjoy the rest of your day.