Toast’s Q1 2024 results exceeded expectations with significant growth across key metrics.
Added over 6,000 net locations, bringing total live locations to approximately 112,000.
Recurring gross profit streams increased by 33% year-over-year.
Adjusted EBITDA for Q1 was $57 million, marking a $74 million improvement from Q1 last year.
Annual Recurring Revenue (ARR) grew by 32%, with SaaS ARR up 39% year-over-year.
Gross Payment Volume (GPV) increased by 30% to $34.7 billion.
Launched new products including restaurant management suite, digital storefront suite, and AI-powered marketing suite.
Strategic Priorities and Growth
Focused on scaling locations and market share, driving ARR through platform growth, expanding into new markets, and enhancing operational efficiency.
Innovation and customer value creation remain central, illustrated by successful product launches and customer stories.
International expansion continues with positive momentum in the U.K., Canada, and Ireland.
Enterprise segment showing strong pipeline and increased penetration.
Financial Outlook and Investments
Adjusted EBITDA margin improved significantly, contributing to an increased full-year guidance.
Reinvesting savings from restructuring into key growth areas.
Payments and fintech solutions, including Toast Capital, continue to drive significant gross profit.
Planning to balance Toast Capital’s funding models to optimize for risk-adjusted returns.
Sales and marketing expenses grew by 13% year-over-year, with investments in upsell and international sales teams.
Free cash flow expected to be positive for the remainder of the year.
Future Projections
For Q2, total subscription and fintech gross profit expected to increase by 20% to 24% year-over-year.
Full-year outlook raised to 26% growth in fintech and subscription gross profit and $260 million in adjusted EBITDA.
Anticipates being close to breakeven on GAAP operating income by year-end.
Upcoming Events
Investor Day scheduled for May 29, where further details on strategy and growth plans will be discussed.
Question and Answer
Net Take Rates and Pricing Strategy
Question
How will the Visa-Mastercard interchange settlement impact net take rates, and what is the update on the company’s pricing strategy, particularly regarding off-market contracts?
Answer
The Visa-Mastercard settlement is expected to impact the company in the second half of 2025, primarily at the highest volume levels and not significantly in 2024.
The company will implement a gradual and steady cadence of small price adjustments, starting with fintech in the second half of 2024, particularly focusing on off-market contracts.
Growth Outlook and Recurring GP
Question
Does the Q2 guidance for recurring GP growth imply a re-acceleration in the back half of the year, and what factors contribute to this trend?
Answer
The full-year guidance of 26% at the midpoint suggests increasing GP growth over time.
Factors contributing to lower recurring GP in Q2 include the implementation of forward flow and the comping of a one-time SaaS revenue benefit, as well as the gradual implementation of targeted fintech pricing in the back half of the year.
GPV Per Location Trends
Question
How are GPV per location trends expected to evolve in Q2 and beyond, considering the impact of January and the potential for acceleration?
Answer
January’s lighter performance due to a weather pattern has normalized, and GPV returned to sustained or seasonal levels as the quarter progressed.
In the first part of Q2, GPV per location is down low single digits.
Guidance for the back half of the year suggests improving GPV per location trends as comparisons become more favorable.
New Product Suites and Competitive Dynamics
Question
What is the opportunity size and competitive landscape for the new product suites (management suite, digital storefront, marketing suite), and how do they align with the company’s strategy of simplification and innovation?
Answer
The suites are designed to simplify the sales process and adoption of the platform for both customers and the go-to-market team, offering good, better, and best tiers for flexibility and value realization.
The company will continue to invest in existing lines of business and products, with a focus on leveraging AI and data to drive customer success.
The company remains focused on execution and believes that its own platform and go-to-market engine are key drivers of long-term growth.
Long-Term Profitability Targets and GAAP Guidance
Question
Given the progress on margin and the evolving business model, is there a change in thinking regarding the long-term profitability target of 30% to 35% margin as a percentage of gross profit, and what factors contribute to the updated GAAP guidance?
Answer
The company will provide updates on its long-term financial profile at the upcoming Analyst Day but remains committed to driving ongoing operating leverage while balancing growth and innovation.
The confidence in updated GAAP guidance is driven by a focus on stock-based compensation and efficiency and scale achieved over the past several quarters.
Structural Trends in GPV Per Location
Question
Beyond the second quarter, are there any directional views on GPV per location trends structurally, considering mix shifts and the focus on upmarket and downmarket segments?
Answer
There are no material changes expected in GPV per location trends beyond the macroeconomic environment.
The core SMB business continues to drive the bulk of growth, and any mix shifts will be gradual and occur over a long period of time.
Competitive Intensity and Product Development
Question
Are there any changes in competitive intensity, particularly as peers upgrade technology and verticalize, and how does this impact the company’s focus on product velocity and expansion into adjacencies?
Answer
The company acknowledges the competitive market but remains focused on innovation and execution for its unique customer community.
There are no material changes in competitive dynamics to report at the moment.
Addressable Market and Upmarket Expansion
Question
How much of the approximately 850,000 U.S. restaurant locations are addressable by the company’s current solutions, and what challenges and opportunities exist in displacing modern software or payment players as the company expands upmarket?
Answer
The company sees significant room for growth within its core TAM, with the most penetrated markets still showing strong growth and the enterprise segment remaining nascent.
The company is focused on getting all markets into a flywheel state and is addressing upmarket challenges by offering more flexible solutions, including partnerships with companies like FreedomPay.
Net Revenue Retention and Uptick Expectations
Question
Is there any implied uptick in net revenue retention in the annual guidance, and what factors contribute to the expected improvement after the downtick in 2023?
Answer
The company has not provided specific commentary on net revenue retention in the guidance.
Benchmarking Analytics and Differentiation
Question
How robust can the benchmarking analytics capabilities become, and how do they support further differentiation of the platform relative to competitors, particularly given the company’s advantageous position for data benchmarking?
Answer
Benchmarking capabilities leverage the company’s extensive data set to provide valuable insights for restaurants, addressing customer demand and adding significant value.
Early feedback on the benchmarking initiative has been positive, and the company will continue to iterate based on customer input.
Location Growth Outlook and Confidence
Question
What is the level of confidence in surpassing 2023 net adds, given the outperformance in the first quarter and the pipeline visibility?
Answer
The company is confident in exceeding 2023 net adds, driven by strong Q1 performance, a healthy pipeline, and seasonally strong Q2 expectations.
Sales Team Size and Composition
Question
Can you provide an update on the size and composition of the sales team, particularly the quota-carrying salespeople, and how has this evolved since the IPO?
Answer
The company has continued to add to the sales team since the IPO, but the flywheel dynamics allow for ARR growth without a proportional increase in sales reps.
The company maintains a balanced approach across new business, upsell, and international teams, managing payback periods and adding to the sales force strategically.
Forward Flow Agreement Impact
Question
What would have been the impact on gross profit or recurring gross profit for the rest of the year if the forward flow agreement had not been in place, i.e., would the recurring gross profit guidance have been higher by a point or two?
Answer
It is too early to provide a meaningful impact assessment for 2024.
Location Adds and Segment Contribution
Question
Which segments of the end market drove the upside in location adds, and what are the specific expectations for Q2 net adds?
Answer
The bulk of growth came from the core business, with increasing market share driving productivity gains.
International and enterprise segments are showing early momentum but are still nascent compared to the core SMB business.
Q2 is expected to be seasonally stronger, but no specific net add guidance is provided.
Product Adoption Metrics and Relevance
Question
Can you provide an update on the percentage of locations using six or more elective products and how this metric is trending?
Answer
The company considers the six-or-more elective products metric less relevant due to the introduction of product suites, which offer a simpler and more structured approach to product adoption.
Capital Efficiency and Contribution Margin
Question
Will the forward flow agreement help expand the contribution margin percentage and grow contribution margin by optimizing capital efficiency?
Answer
At the highest level, the forward flow model does not involve credit risk and offers a healthy margin profile.
The company’s capital program aims to maximize risk-adjusted returns, and the forward flow agreement with Workflow provides a favorable margin profile while supporting business scalability.
Cost Savings from Risk and One-Time Benefits
Question
Can you provide an update on the realization of the $100 million in annualized cost savings from the risk program, particularly for the first quarter?
Answer
While no specific quarterly guidance has been provided, the company experienced approximately $10 million of incremental savings in Q1, with roughly one-third related to stock-based compensation.
Product Gaps for Larger Merchants and Future Releases
Question
Are there any product gaps for larger merchants, and should we expect more product releases specifically geared towards this segment in the future?
Answer
The company acknowledges the need to address the needs of larger merchants and will gradually release more capabilities within the restaurant management suite to cater to the upmarket segment.
International Growth and Product Pipeline
Question
How should we think about the product pipeline and product parity with the U.S. for international growth, and what is the expected OpEx impact?
Answer
The company has announced features like integrated online ordering for international markets, which have been well-received, and there is a roadmap for further product expansion to support international customers.
The incremental investment required to build products for international markets is lower than for the U.S. market, given the reuse of existing capabilities and frameworks.
SaaS ARPU Trends and Upsell Strategy
Question
Is there any expected fluctuation in SaaS ARPU for 2024, and what is the long-term upsell strategy that could potentially lead to an improvement in the SaaS ARPU growth trend?
Answer
In the near term, mid-single digit growth on an ARR basis is expected, but the company has opportunities to grow ARPU over time through increased product attach, innovation, and pricing adjustments.
