Toast, Inc. (NYSE:TOST) Q1 2024 Earnings Call Transcript May 7, 2024
Toast, Inc. misses on earnings expectations. Reported EPS is $-0.15174 EPS, expectations were $-0.15. TOST isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Cameron, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast First Quarter 2024 Earnings Conference Call. Today’s call will be 45 minutes. I’ll now turn the call over to Michael Senno, Senior Vice President of Finance. You may now begin your conference.
Michael Senno: Thank you, Cameron. Welcome to Toast’s earnings conference call for the first quarter ended March 31, 2024. On today’s call are CEO and Co-Founder, Aman Narang; and CFO, Elena Gomez, who’ll open with prepared remarks, which will be followed by our Q&A session. Before we start, I’d like to draw your attention to the safe harbor statement included in today’s press release. During this call, we’ll make statements related to our business that may be considered forward-looking within the meaning of the Securities Act and the Exchange Act. All statements other than statements of historical facts are forward-looking statements, including those regarding management’s expectations of future financial and operational performance and operational expenditures, location growth, future profitability, time line and margin outlook, anticipated impact of our restructuring plan and share repurchase program, expected growth and business outlook, including our financial guidance for the second quarter and full year 2024.
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, 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 streams. These are the basis for our top line guidance. 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. And with that, let me turn the call over to Aman.
Aman Narang: Thank you, Michael, and thank you, everyone, for joining us this afternoon. 2024 is off to a great start with first quarter results ahead of expectations across the board. We added over 6,000 net locations to our platform, our recurring gross profit streams increased 33% year-over-year, and adjusted EBITDA came in at $57 million, a $74 million improvement versus Q1 last year. I’m really proud of how the whole team performed, and we are well positioned to continue to scale and have a terrific year. Our mission at Toast is to help restaurants delight their guests, do what they love and thrive. We continue to innovate and drive value for our restaurant community, including with the recent launch of our restaurant management suite and upgraded digital storefront suite and a marketing suite, which for the first time, is leveraging AI to help our customers stay one step ahead.
We’re looking forward to sharing more about our longer-term vision and strategy at our Investor Day on May 29. We’ve increased our outlook for the full year based on our performance in Q1, and we are all focused on the 4 strategic priorities I laid out in our February earnings call: one, scaling locations and market share in our core business; two, driving ARR through platform growth; three, expanding addressable market into new adjacencies; and four, setting up the company to scale and deliver ongoing operating leverage. First, scaling restaurant locations and gaining share in our core business. We added over 6,000 net locations in the quarter, driven by the combination of our purpose-built restaurant platform and our local go-to-market engine.
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, which gives us confidence in sustaining healthy location growth. Let me share 2 recent customer stories that speak to our momentum and the value we create for customers. Pickles Pub is a busy full-service restaurant and bar in downtown Baltimore near Camden Yards and M&T Bank Stadium. They switched to Toast to partner with a technology partner that could handle their volume, streamline operations and increase speed of service, particularly on those busy game days. On opening day for the Orioles, they blew through their previous sales record and credit the uplift in part to faster speed of service after implementing Toast Go Handhelds, Mobile Order & Pay and Kitchen Display Systems.
Since switching to Toast, they have reduced order to delivery times for drinks to under a minute. And in addition, the addition of Mobile Order & Pay has opened up a new service model with 20% of food and drink orders coming in directly from guests scanning QR codes at the table and placing the orders themselves. I’m also excited to announce our agreement with Snooze Eatery, a breakfast and lunch concept with over 70 locations nationwide. Snooze needed a technology partner that could support their growth plans and provide a better guest experience with faster and more accurate service. They’re rolling out Toast across their footprint. And for the locations they’ve taken live, they’re already seeing benefits. Toast handhelds have increased server capacity, leading to higher sales, higher tips and greater earnings.
As these 2 stories highlight, our focus on creating products that drive value for our customers continues to drive our growth. Our second priority is driving ARR and ARPU by building products and experiences our customers love. Earlier this year, we launched a suite-based approach to packaging that simplifies the sales process for customers and our sales reps alike. Our suites are designed with good, better, and best tiers and creates a path for customers to adopt more of our platform over time as well as provide a framework for us to roll out and monetize new products and features. They cover the breadth and depth of our customers’ needs across restaurant operations, guest experience, as well as employee and supplier management. Let’s walk through how the suites are adding value for our customers.
The restaurant management suite helps multi-location operators access the latest version of our above-store management tools, and for the first time, access powerful benchmarking data across all restaurants on our platform. Our digital storefront suite helps restaurants take control of their online business, and our marketing suite helps them bring their guests back more often. These launches are scratching the surface of how Toast can leverage one of the best data sets in the restaurant industry to create value for customers. To bring this to life with an example, Whisk is a neighborhood restaurant North of Dallas that recently adopted our AI-powered writing assistant included in our marketing suite. The writing assistant not only does a great job of describing Whisk’s food and atmosphere, it has cut the time required to send out a guest engagement campaign by more than half.
Our recent AI-enhanced marketing campaign drove over $2,500 in sales for Whisk in April alone. Moving to our third priority, expanding our addressable market into new adjacencies. We continue to gain momentum across the first 3 international countries we launched in, the U.K., Canada, and Ireland and remain confident in the potential these markets have to help us drive growth. In Q1, we expanded the platform internationally with the launch of our integrated online ordering capability, which has been received incredibly well by our customers. And as the year progresses, we expect to launch more of our platform across both in-restaurant operations as well as the guest experience. This should help us drive further product differentiation and expand ARPU across these international markets.
Within enterprise, we continue to gain momentum across a broad range of customers. The launch of the enterprise tier of our management suite allows our customers to manage their operations at scale and reduce the administrative workload on their corporate teams. Our pipeline in the segment remains strong, and we have confidence that we’ll continue to increase penetration over time. And beyond international and enterprise, we’re also investing to open up new opportunities where our vertical platform and our local go-to-market team can be a competitive advantage. Our fourth priority is setting up the company to scale and deliver ongoing operating leverage to complement our growth. As I mentioned, we delivered over $57 million in adjusted EBITDA in the past quarter, a $74 million improvement versus Q1 last year.
We have aligned our resources on our most important priorities and are building a culture where everyone across the organization is taking efficiency seriously. This allowed us to increase our full year guidance and puts us on track to expand margins by over 13 percentage points to the midpoint versus last year without sacrificing our most important growth and innovation initiatives. To wrap up, I’ll leave you with a few thoughts: one, I’m confident in how we’re executing and thrilled to be leading this team; and two, we’re still in the early innings of what is possible and have the foundation in place to capitalize on this incredible opportunity ahead. I want to thank every Toaster for their continued dedication and passion for our mission.
It wouldn’t be here without you. Our customers who are entrusting us to support you all, and our investors for believing in us and the potential in this business. Thank you, and now I’ll turn the call over to Elena to share more about this quarter’s results.
Elena Gomez: Thank you, Aman, and to everyone for joining today. To start, I’ll reiterate a thank you to our entire Toast team, whose hard work and continued execution led to another successful quarter. Top and bottom line results exceeded expectations, evidence of our operating momentum and disciplined approach at driving both growth and profitability. In the quarter, ARR grew 32%, and total fintech and subscription gross profit, our recurring gross profit streams increased 33% year-over-year. Adjusted EBITDA was $57 million in the first quarter, a 19% margin on our recurring gross profit streams, up 26 percentage points from Q1 last year. In Q1, we executed on reshaping our cost structure, better aligning our investments with our highest priorities and positioning ourselves to go faster on key growth initiatives.
We now expect slightly higher annualized run rate savings and to capture more in-year savings in 2024 than initially estimated, including in Q1. The first quarter also included onetime cost benefits related to the restructuring. Those factors coupled with stronger-than-expected GPV as the quarter progressed, led to significant adjusted EBITDA outperformance in Q1 and contributed to the increase in our full year outlook. Our conviction in the opportunity ahead is stronger than ever. We will reinvest part of the incremental savings in key growth areas. We added over 6,000 net locations in Q1, increasing total live locations to approximately 112,000, up 32% year-over-year. Our focused vertical strategy and differentiated go-to-market engine, coupled with consistent execution, continue to drive location growth as we deepen penetration across the full breadth of the restaurant TAM.
And with Toast in only 13% of U.S. restaurants and just scratching the surface internationally, we continue to have an opportunity to significantly increase share as we execute our playbook. SaaS ARR grew 39% year-over-year, driven by strong location growth and a 5% increase in SaaS ARPU on an ARR basis. And we continue to expect SaaS ARPU on an ARR basis to be in the mid-single digits in the near term. Payments ARR and fintech gross profit both grew 26% in the first quarter. GPV increased 30% to $34.7 billion with GPV per location down 2% year-over-year. After a softer January related to weather, GPV trends bounced back to similar levels we saw exiting 2023 and consistent with seasonal patterns. Net take rate was 55 basis points and other fintech products contributed 10 basis points.
Our non-payments fintech solutions led by Toast Capital contributed $34 million in gross profit. Toast Capital continues to perform well. Customers value the fast, low-friction access to capital to grow their business, driving healthy demand for the product. As we scale the program, we will diversify and broaden our funding sources. In addition to our existing model, we recently added a forward flow model where a portion of Toast Capital loans are sold to third parties. For loans sold to a third party, we do not take credit risk. As a result, there is a slightly lower revenue take rate and typically no associated bad debt. On the P&L, compared to our current model, that translates to lower recurring gross profit for forward flow originations with nearly 100% flow-through.
We plan to balance both models of the scale originations and continue to optimize for maximizing risk-adjusted returns. Expense growth moderated in the first quarter as we continue to drive efficiencies and cost discipline, coupled with savings from the restructuring actions. As we drive efficiency and increase profitability, we’ll prudently invest in our highest priority growth areas, including product innovation, our go-to-market engine and new growth vectors to expand our TAM. Sales and marketing expenses were up 13% year-over-year. We continue to grow our upsell and international sales teams and make targeted investments in our U.S. new business team to drive deeper penetration. The Q1 restructuring actions impacted our R&D and G&A expense lines more than other parts of the business, resetting the expense growth trajectory in these areas.
We expect R&D expenses will grow at a more moderate level as we continue to make targeted investments to drive product innovation and add value for our customers. G&A was down 13% year-over-year, excluding $15 million of bad debt and credit-related expenses, primarily related to reserves for Toast Capital. We expect ongoing operating leverage in G&A, reflecting our continued focus on driving efficiency in G&A as we scale, including through automation and global diversification of our workforce. Free cash flow was negative $33 million in the quarter due to the timing of cash bonus payments and severance payments in Q1. We expect free cash flow to be positive for the remainder of the year and broadly mirror adjusted EBITDA on a full year basis.
Turning to guidance. For the second quarter, we expect total subscription and fintech gross profit to increase in the 20% to 24% range year-over-year and adjusted EBITDA to be $55 million to $65 million. Our top line growth rate is negatively impacted by a few points due to adding forward flow and comping a small onetime benefit last year. As a result of our strong start to the year, we raised our full year outlook. At the midpoint, we now expect 26% growth in fintech and subscription gross profit and $260 million in adjusted EBITDA, a margin of 19%, marking a 13 percentage point improvement versus 2023. After executing the restructuring, we now have visibility on higher in-year savings than expected and reset the guidance higher to reflect that.
This also factors in our plans to reinvest in key areas of the business to drive sustained growth going forward. With our increased profit expectations for the year and progress on containing stock-based compensation, we are now on a path to be close to breakeven on GAAP operating income by the end of the year. To wrap up, we are making significant progress executing against our goals and are positioned to deliver strong top and bottom line results in 2024. Our top focus remains delivering value to customers, and we are well positioned to drive durable growth across our core business while building new growth curves. We announced our first Investor Day will be held on May 29, at which time you will hear more from our leadership team on our market opportunity, strategy, and growth plans.
We are incredibly excited about what lies ahead for Toast and look forward to sharing with you more then. Now I’ll turn the call back over to the operator. Thank you.
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