Good afternoon. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toast earnings conference call. I'll now turn the call over to Michael Senno, Vice President of Investor Relations and Strategic Finance. You may begin your conference.

Thank you, Emily. Welcome to the Toast earnings conference call for the fourth quarter and year ended December 31, 2022. On today's call are CEO, Chris Comparato, and CFO, Elena Gomez, who will open our prepared remarks. They will then be joined by our COO, Aman Narang, for 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 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, future profit and margin outlook, expected growth and business outlook, including our financial guidance for the first 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 release and a replay of this call, including the accompanying investor presentation, will be available on our Investor Relations website at investors.toasttab.com. With that, let me turn the call over to Chris.

Thank you, Michael, and thank you, everyone, for joining us this morning. Toast finished 2022 with another quarter marked by strong top line growth of over 50%, further margin improvement and continued product innovation. Our solid results throughout the year are a great testament to the quality of our battle-tested team and consistent execution on our strategy, driving location growth, more deeply serving all segments of the restaurant industry and pushing the industry forward through bold product innovation. The complexity of running a restaurant is only increasing. This was particularly evident over the last year with restaurants facing inflation, supply chain challenges and labor constraints while continuing to adapt as guests demand a more seamless experience. With that backdrop, the need for restaurants to leverage technology to improve efficiency, grow sales and quickly adapt is more critical than ever. And the value of Toast's all-in-one digital platform continues to grow. We added approximately 23,000 net new locations to our platform in 2022, and the percentage of locations attaching 6 or more SaaS modules increased by nearly 10 points, evidence of strong customer demand. There are countless examples of how Toast is helping our customers deliver better top and bottom line results, including Alpine Inn, a tavern in California that unlocked a 76% increase in revenue since adding Toast Mobile Order & Pay, driving higher check sizes, a better guest experience and helping manage the labor shortage. Another example is Silver Diner, which rolled out Toast to 21 locations. Since implementing our platform, servers using Toast handhelds are able to cover 1 to 2 more tables than before, decreasing table turn times by an average of 3 to 5 minutes, providing tangible efficiency benefits. These examples also show how our platform feeds a virtuous cycle that creates a better experience for the restaurant ecosystem, enabling staff to be more efficient and effective, leading to happier employees, which translates to a better experience for guests who leave higher tips and reinforce the restaurant as a great place to work for employees. This dynamic leads to more successful, better-run restaurants. And as restaurants use more of our integrated platform, it strengthens the cycle, creating powerful network effects for our customers. Restaurants operate in a competitive, rapidly evolving industry within profit margins, magnifying the importance of technology. And with the value of our industry-leading platform can offer, we see a generational opportunity to serve as the industry's technology backbone. We are still in the early stages of our potential market opportunity. Even after our growth over the last few years, less than 10% of U.S. restaurant locations are on the Toast platform, and our Q4 ARR only represents about 2% of the $55 billion market opportunity, leaving a long runway of growth ahead as we continue to execute. Turning to our Q4 results. On a year-over-year basis, total revenue grew 50% to $759 million. ARR increased 59% to $901 million, and GPV was up 49% to $25.5 billion. Sustaining our top line momentum while delivering consistent margin expansion throughout 2022 is evidence of both the scalability of our business model and our commitment to balancing investments in key growth areas with efficiency and cost discipline. In Q4, adjusted EBITDA improved to an $18 million loss. We also sustained healthy location growth, adding approximately 5,500 net new locations in Q4 to end the year with approximately 79,000 total live locations. We consistently executed on our proven, scalable go-to-market strategy throughout 2022, and we continue to benefit from the flywheel effects we've discussed in more and more markets. As we increase penetration, we're confident that we can continue to efficiently grow locations and ARR. Underpinning our location growth is strong demand across restaurant segments. In addition to momentum with SMB restaurants, we continue to gain traction upmarket with larger customers as we invest in our platform. I'll highlight a few bookings from the past quarter. After working with Toast at their Bud Dairy Food Hall location, Cameron Mitchell restaurants are rolling out Toast to all restaurant brands in their multi-concept FSR focused portfolio. They were impressed with how Toast easily supported various partners and tech integrations and saw potential for Toast to be their trusted tech partner as the company grows. In addition to our API integrations, Cameron Mitchell is using our multi-location management module to help standardize operations and easily configure menus. They are using our Toast Go handhelds for smoother dining experiences in the front of house and our kitchen display systems to improve back-of-house operations. They also plan to trial additional features that will further help them control the guest experience. Here, north of Boston, Michael's Harborside is a well-known waterfront eatery with a significant uptick in business in warmer months. After enduring another busy season of payroll and scheduling pain in an outdated POS, they looked to Toast to help revamp their approach. In addition to our robust all-in-one platform, Michael's Harborside was attracted to our payroll and team management solution to help digitally onboard their influx of seasonal employees, enabling workers to independently swap shifts using our Sling app and dramatically reduce weekly time spent on payroll from the hour plus they were used to. Michael's Harborside is also excited to leverage Toast handhelds to help servers work their various rooms, decks, and outdoor dining spaces when the busy season returns. California-based bubble tea shop Teaspoon selected Toast to be their tech partner at 45 locations in their franchise-focused, rapidly expanding footprint. Teaspoon was impressed by restaurant-specific enterprise-grade features, our strong customer references, and our proven track record of onboarding and supporting franchise-based QSRs. With Toast, Teaspoon will offer franchisees a turnkey all-in-one solution that includes our Toast Go handhelds for line busting, our kitchen display systems for back-of-house experience, and our digital kiosks, which they see as a real differentiator to control labor costs. They will also leverage Toast multi-location management, our scheduling and payroll products, and Extra Chef for invoice automation. On top of our location growth momentum, customers like Teaspoon continue to attach more products. As of the end of Q4, 41% of our customers attached 6 or more SaaS modules. That percentage has more than doubled in just 2 years, thanks to our continued platform expansion, improving packaging designed to enable our sales team to efficiently attach more products at booking and the growing momentum of our multichannel upsell strategy. These factors contributed to the subscription revenue increasing over 90% year-over-year in 2022, and we continue to see a significant opportunity to further expand SaaS ARPU over time. Helping our customers succeed by unlocking growth and increasing efficiency is at the heart of our business and informs our product innovation. As the needs of guests rapidly evolve and the importance of developing incremental revenue streams grow, restaurants are increasingly diversifying into more service models. Our voice of the restaurant industry survey from last year found that on average, restaurants employ 7 different service models. In Q3, we launched Toast Invoicing, enabling restaurants to efficiently manage wholesale and catering orders, along with their core restaurant business in one integrated system. Over 5,000 customers have already used our invoicing product to streamline their billing and payment processes, and with an average transaction value over $650, it's also an opportunity for these customers to grow their business. To further expand the service models available through our platform, today we announced the acquisition of Delphi Display Systems, a leading provider of digital menu and drive-through products. Integrating Delphi into the Toast platform will enable us to offer drive-through capabilities on our platform for the first time, giving our customers the option to employ this critical service model to grow their business and offer guests a more omnichannel experience. Adding a drive-through offering and digital menu boards enhances our offering for both small and large quick-serve restaurants. In Q2 of last year, we launched Toast for quick-serve restaurants, and we've seen strong follow-through in our funnel from QSRs over the last few quarters. Drive-thru is a critical service model for QSRs and has become even more important over the past few years. We're excited to welcome the Delphi team to our Toast family and partner more deeply to serve these restaurants. We plan to continue to add more capabilities to our QSR offering in 2023 to drive even deeper penetration in this segment going forward. Last week, we announced our order with Google integration, expanding our suite of digital ordering products. This capability expands the online reach of our restaurants by providing visibility in Google Search and Google Maps and unlocks another channel for customers to grow their online ordering business. Order with Google is fully integrated with our platform, making it easy for restaurants to update their menus and hours in one place and seamlessly manage order flow. Together with online ordering and the Toast takeout app, we continue to offer restaurants more options to grow their off-premise business efficiently with commission-free online ordering while enabling them to offer guests a cost-efficient, seamless experience. In addition to our broad platform, our extensive partner ecosystem continues to expand. During Q4, we exceeded 200 partners in our network, which encompasses technology integration partners, local partners, and large national food and beverage suppliers. Our growing partner ecosystem gives customers access to a wide range of products and services to meet the needs of their restaurants, complementing our existing expanding platform and further enhancing the value Toast provides to customers. Over half our customers are using a partner integration today through our API module. And these customers are using 3 integrations on average. Customers that use our partner integrations have over 30% higher total ARPU and a lower churn rate than customers not using API integrations, evidence of the value our partner ecosystem adds for customers and how it enhances our platform. This is another example of the reinforcing benefits from our platform as we jointly help customers grow, our partners grow, and we grow. Thank you to our partners for sharing in the mission to help the restaurant industry thrive. So as we move into 2023, we are focused on continuing to execute on the same strategy that has been delivering consistent strong results. First, as we continue to drive location growth, customer trust will always be the foundation of everything we do. The opportunity ahead is massive, and ensuring we are the trusted platform for the restaurant industry as our business scales is always our top priority. Second, product innovation is integral to our DNA. We have an exciting pipeline of new products to help restaurant owners further optimize their operations and to build on the suites of products we offer restaurants to deepen their touch points with their most important stakeholders: guests, employees, and suppliers. Third, we will keep investing to more deeply serve all segments of the restaurant industry. This includes tailored offerings to better serve restaurant types like QSRs and enhancing the capabilities for customer segments like mid-market and enterprise. And fourth, we will continue building out our international business. While we're still very early, the potential opportunity is significant, and we look forward to taking the next steps in the multiyear journey. Our focus on balancing key investments with disciplined cost management throughout 2022 sets us up well to maintain our operating momentum and deliver another year of strong durable growth in 2023. We expect to deliver 32% revenue growth for the full year 2023 at the midpoint of our guidance range while driving further margin improvement as we progress toward adjusted EBITDA profitability by the end of the year. We remain committed to prudently investing to capitalize on the significant market opportunity while efficiently scaling our business. As we start the year, the macroeconomic backdrop remains uncertain. While the restaurant industry has continued to perform relatively well, we're aware there is less visibility on consumer trends, and restaurants continue to operate in a dynamic environment. Our top priority is to continue to help restaurants leverage our platform to overcome the challenges they face and emerge stronger. The uncertainty also calls for us to remain flexible. We've proven our ability to navigate uncertainty in the past, and we're well prepared to adapt quickly to any change in trends. Our progress over the last year to ensure a lean cost structure positions us to move even faster as the environment evolves and the flexibility to maintain a disciplined growth mindset as we execute against the massive opportunity ahead. As we turn the page on 2022 and look ahead to 2023, I want to thank our growing customer community for their confidence in Toast, our employees for their focus and dedication, and our extended network of partners, investors, and others who continue to support Toast and the broader restaurant community. While we've accomplished a lot together over the past year, we believe we are just getting started, and we're excited about the opportunity in the years to come. Now I'll turn the call over to Elena.

Good morning, and thanks, Chris, and thank you, everyone, for joining. I want to start with a shout out to the entire Toast team. Thank you for another great quarter and consistent execution and hard work that drove our strong performance throughout the past year. We sustained our operating momentum in Q4, exceeding the high end of our range on both our revenue and adjusted EBITDA guidance. Our industry-leading software and payments platform continues to drive solid top line growth, while our commitment to scalable, efficient growth has resulted in 4 consecutive quarters of adjusted EBITDA margin improvement. And we're just getting started. We are still in the early stages of a generational opportunity to be the restaurant industry's trusted technology partner. With smart targeted investments in product innovation to continue to expand our industry-leading platform combined with the same consistent disciplined execution we delivered in 2022, we believe we have a long runway of top and bottom line growth ahead. In Q4, we added approximately 5,500 net new locations, increasing the total number of live locations on our platform to approximately 79,000. Our differentiated go-to-market approach and the strong execution of our sales team led to consistent strong net location adds throughout the year, enabling us to sustain approximately 40% year-over-year location growth. As demonstrated in many examples Chris just shared, we're seeing success across the full breadth of our restaurant segments, maintaining our strength in SMB while building momentum upmarket. Total revenue grew 50% year-over-year to $769 million in the fourth quarter. For the full year 2022, total revenue of $2.7 billion was up 60% from the previous year. ARR, which is our core operational metric, closed the year at $901 million, up 59% year-over-year. Subscription revenue and fintech gross profit, the key components of our recurring revenue, totaled $232 million in Q4, up 73% year-over-year, driven by our continued location growth and healthy ARPU growth across both SaaS and fintech. Our 2022 performance resulted in a total net retention rate, or NRR, of 118%. That's down from 135% in 2021. As a reminder, we anticipated the decline since 2021 benefited from GPV recovery and higher margin debit and credit non-present volume during COVID, which stabilized in 2022. Our SaaS NRR increased 5 points to 128%, driven by our momentum and upsell, continued location expansion from existing customers, and low churn. Subscription services revenue grew 76% year-over-year in Q4, while total SaaS ARPU increased nearly 20% and is up by more than 50% from 2 years ago as we continue to see new customers join the platform with higher ARPU and existing customers adopt more products. As of the end of Q4, 41% of our restaurant locations attach 6 or more SaaS modules compared to just 32% last year, and the average SaaS ARPU for this cohort is significantly higher than our overall SaaS ARPU. This is a great example of the longer-term ARPU potential as we continue to expand the platform, optimize our packaging and refine our upsell motion. Moving to fintech solutions. Revenue grew 52% to $640 million, and gross profit was up 71% year-over-year to $137 million in the fourth quarter. GPV growth remained solid and increased 49% to $25.5 billion in Q4. Average annualized GPV per processing location was just below $1.4 million, up 7% year-over-year and slightly below Q3 levels, in line with typical seasonal patterns. We also continue to benefit from our nonpayment fintech products and services led by Toast Capital. These products drove approximately $24 million of gross profit in Q4. Our growing Toast Capital offering provides eligible customers with fast, flexible access to capital to grow their business. And as our customers grow and expand their business, we grow with them. For example, a steakhouse in Georgia used funds from Toast Capital to install powered curtains to enclose its patio during colder months. That opened up about 70 additional seats driving incremental sales in the winter and contributed to 20% sales growth in 2022, providing the restaurant a great ROI. We're uniquely positioned to manage the risk profile of our portfolio and prudently scale the offering; our restaurant POS and payment processing data provides insight to assess and monitor the health of a restaurant to inform our underwriting process and pricing. Loans are repaid using a portion of each restaurant's daily payment volume, reducing repayment risk. Our banking partnership also includes a loss cap to offer further protection. These factors enable us to balance risk while helping our customers grow and continuing to expand our business. Net take rate increased to 54 basis points, driven by the growth in other fintech products, slightly offset by the seasonal higher credit mix similar to what we typically see in Q4. We expect the net take rate to remain in a similar range in 2023. In Q4, total gross profit grew 110% year-over-year and 5% quarter-over-quarter to $172 million, resulting in total gross margin of 22.4%. Looking at our recurring stream, subscription and fintech gross profit totaled $207 million in the fourth quarter, up 78% year-over-year, showcasing the power of our integrated business model. Turning to customer acquisition costs. Hardware margins improved slightly due to lower shipping costs. Hardware revenue decreased year-over-year due to the pricing and packaging of bundled product sales. Excluding that impact, hardware revenue increased, driven by upsell and location growth. Our sales and marketing investments continue to deliver solid returns as evidenced by our consistent net new location adds each quarter. We expect to continue to efficiently scale our go-to-market engine as we drive deeper penetration and build a flywheel effect in more markets over time. Managing customer acquisition costs and maintaining healthy unit economics is a key focus as we scale the business and help inform our investment decisions. For the full year in 2022, our payback period was in line with our expectations at approximately 15 months. We remain confident in our ability to scale our unit economics as we benefit from increasing market penetration, the rep tenure driving the productivity of our sales team, and opportunities to optimize hardware costs and continued momentum in ARPU growth. As Chris highlighted, our order with Google integration is the latest example of the ongoing product innovation resulting from our R&D investments, and we have an exciting pipeline of new products and capabilities on tap for 2023 that will further enhance our platform and unlock more value for our customers and drive sustained ARPU in location over the long term. In Q4, total general and administrative expenses increased 39% year-over-year. Excluding bad debt and credit-related expenses, G&A expenses grew 5% year-over-year as we started to lap the step-up in public company costs and benefit from operating leverage. Bad debt and credit-related expenses totaled $18 million in Q4, which includes bad debt on outstanding receivables as well as liabilities related to Toast Capital and other fintech offerings. As a reminder, we expect bad debt and credit-related expenses related to Toast Capital to increase as we grow the program. The overall operating margin for Toast Capital is healthy and accretive to the overall business, and we believe is indicative of the health of the program. Total Q4 adjusted EBITDA was negative $18 million, and margin was 2.3%, over 600 basis points improvement from the prior year. This progress is a direct result of our focus on having a lean cost structure combined with durable top line growth. The improvements to our cost structure and commitment to disciplined investing and efficiency put us in a great position to drive sustained margin improvements in 2023 and increase our ability to adapt quickly in this dynamic environment. Now let me turn to guidance. For the first quarter, we expect revenue to be in the range of $745 million to $775 million, representing 42% year-over-year growth at the midpoint. Adjusted EBITDA is expected to be in the range of negative $30 million to negative $20 million. Our guidance reflects a typical seasonal decline in GPV per processing location as Q1 is historically the lowest quarter of the year. For the full year 2023, we expect revenue to be in the range of $3.57 billion to $3.66 billion, which represents 32% year-over-year growth at the midpoint, with negative $10 million. At the midpoint, this implies a 370 basis point margin improvement and nearly $100 million profit improvement compared to 2022. We also remain on target to deliver a quarterly adjusted EBITDA profit by the end of 2023. To provide some additional context on our guidance, we intend to maintain a balanced approach in 2023 with disciplined targeted investments to capitalize on the opportunity to be the trusted platform for the restaurant industry while staying lean and efficient as we scale. We also plan to make further investments in longer-term initiatives such as building enterprise capabilities and expanding internationally, which both expand our market opportunity and position Toast for sustained strong growth over the long term. Now looking beyond 2023, we're confident that our integrated software and payments model will continue to scale efficiently, as total subscription plus fintech gross profit in our core business compounds over time; we expect to show meaningful operating leverage. As we achieve larger scale, we expect adjusted EBITDA as a percentage of total subscription plus fintech gross profit to reach 30% to 35% range. This financial profile reflects our current business mix and does not factor in the impact from nascent long-term opportunities like expansion into the enterprise segment or international. We intend to execute the same playbook going forward, balancing efficiency and margin improvement with disciplined targeted investments to capitalize on the massive opportunity in our core business, which we believe will drive several years of sustained strong growth. As we balance growth and profitability each year, our goal is to consistently exceed the rule of 40 on the path to our target margin -- target financial profile. Certain years that may mean delivering more margin expansion, and in some years, we may decide to invest more to deepen penetration or increase our ARPU potential. We'll assess those decisions in the context of optimizing our long-term cash flow potential. Given the size of the opportunity ahead and the power of our integrated software and payments model, we expect to operate above the Rule of 40 even as our core business grows into this margin profile. Subscription and fintech are our recurring gross profit streams and the basis on which we operate the business and serve as the anchor for our margin and how we assess our operating expenses. We expect a combination of improving unit economics and leverage on overhead costs to drive the path to 30% to 35% margins. I'll highlight a few key areas we will see leverage as our total ARR continues to scale. In addition, as we've discussed, sales and rep productivity is correlated with both rep tenure and market penetration. We've seen this dynamic play out in our flywheel markets and expect that as we continue to drive higher penetration and as rep tenure increases, sales and marketing costs will continue to become more efficient. Longer term, we expect hardware and services margins to improve as we see the full benefit from shift to lower cost shipping and further supply chain optimization plus increased efficiency in onboarding new customers. Our focus on cost discipline and efficiency will also be evident in G&A. We expect operating leverage starting in 2023 and our underlying G&A expenses to benefit from automation and increased scale over time. Our long-term G&A profile also factors in credit liability expenses proportionate with the growth in Toast Capital. In closing, 2022 was a strong year for Toast, and we continue to have a lot of conviction about our long-term opportunity. The consistent execution across the company led to durable growth where our focus on efficiency and disciplined cost management drove meaningful margin improvement. We remain in very early stages of an incredible market opportunity and are confident that continuing to relentlessly execute our strategy will lead to sustained location and ARPU growth and create significant long-term shareholder value. I want to thank all of our employees, customers, and partners, and we look forward to an exciting 2023.

Now I'll turn the call back over to the operator to start our Q&A. [Operator Instructions]. Our first question today comes from Dan Dolev with Mizuho.

Great results. Much appreciated. So I do have a question about--two questions, a question and a quick follow-up about the SaaS thing. So--if I look at your SaaS growth, revenue per customer was basically like flattish and like slightly down year-over-year. And what happened there? A lot of people were very bullish or expecting with massive growth in that SaaS revenue per customer? And then I have a quick follow-up.

Yes. So SaaS--so first of all, I just want to compliment our upsell team and our growth team for positioning the platform, and really, we're seeing a lot of momentum there. And I also want to remind you that our SaaS ARPU overall is up 20%, Dan, and over 2 years, it's up 50%. So I just want to start there and provide that context. And also, SaaS revenue in Q4 was up 75%. So really, really actually proud of the way the team has executed. And we're going to continue to see progress as we innovate more on our platform, and we're going to continue to see more customers bringing on more upfront as we land customers at a higher ARPU, but also our upsell team is having really good progress so far.

Got it. That's really helpful. And then my follow-up is on ARPU trends into 2023. How should we think about the pace of location adds in 2023 and the cadence for the year?

Yes. In terms of location adds, like, first of all, again, a compliment to the execution by the sales team in 2022, and we continue to see momentum heading into 2023. The funnel is strong, and the sales team is executing well. So the one thing I would point you to is Q1 is seasonally typically lower than Q2 and Q3. So just keep that in mind. But we continue to believe we've got momentum in the business at this point.

Our next question comes from Stephen Sheldon with William Blair.

I wanted to start with, I guess, a more high-level question. And I know you're still early in gaining market share across most markets. But if you just looked at some of your more mature markets, does it seem like location market share caps out or slows down in a certain threshold? And maybe it's still too early to know that, but I guess asked another way, do you think it's harder to get that initial 20% location market share in a certain market, or is it harder to get the next 20% if you more frequently have to unseat another SaaS incumbent, and I guess even with some of the flywheel dynamics that you're clearly seeing?

Yes, Stephen, great question. Look, I think we continue to see the same dynamic where as we gain market share and get market density and rep tenure up in these markets, the productivity of our reps and our ease continues to improve. That's the trend we continue to see. And I think that's not only in terms of the productivity, but also the win rates we see against our competitors. And so there is nothing in our data that we're seeing that says that we can continue to grow into plywood markets. And I think in terms of your question, whether it's the first 20% or the last 20%, I'll tell you the first 10% is what's the hardest.

Got it. That's really helpful. And just a follow-up, great to see the order with Google integration, would love to get your thoughts on how big of an opportunity that might be, what kind of topline growth implications there could and whether there’s any notable impact on unit economics for orders and payments that flow through there relative to your existing online ordering solutions?

Yes, it's a good question. I think it's super important for any restaurant to meet the guest and consumer where they are. So we're pretty bullish on the opportunity with Google. Seamlessly integrating with them so as our consumer is on Google Maps or searching on Google and then connecting to the restaurant's first-party online ordering capability is a critical success factor and it streamlines both the revenue attach as well as the productivity of the teams. It also eliminates third-party fees that restaurants should be taken advantage of, and we think it's a unique opportunity in the market.

The next question comes from Timothy Chiodo with Credit Suisse.

I want to talk a little bit about the net take rate for fintech. So 54 basis points in the quarter. And the comment was that next year, the expectation is for that take rate to be roughly in that same range. But given some of the pricing comments by Clover and Fiserv overall in the last quarter, they saw a big yield uptick and took some pricing. There's also the ramping of Toast Capital. And there's also been some reports of tests of price increases that you've been considering in the marketplace. Those three factors suggest that maybe there could be some upside to that take rate. And I was hoping you could just comment on those factors and the pricing changes in particular.

Yes. No. So good question, Tim. Thanks for the question. First of all, I want to compliment the Toast Capital team for the momentum and really the fact that we're meeting the demand that we're seeing from our customers on Toast Capital, and that definitely plays into the take rate for the quarter. And just remember that Q4 credit is seasonally higher. So in Q4, we had in our core take rate a bit of a lower take rate, of course. But just keep in mind, year-over-year, our take rate has increased. And then I think what we often talk about, and I'll just remind everyone, we're always focused on both pricing and cost optimization, but cost optimization is important over the long term. And that's just a muscle that we have built in the company that we're focused on. And then finally, I would just zoom out and say that the take rate overall, there's an opportunity to--a longer-term opportunity to offer products to drive more payment volume and drive more digital transactions. And then, of course, there's opportunity to optimize pricing.

Sure. Thanks, Elena. Tim, look, we're focused on gaining market share, right? And we're always testing pricing. Pricing and packaging is something we're always optimizing, but there's nothing material to report in terms of changes in our pricing and our take rate.

Okay. I really appreciate that. The very, very brief follow-up is you mentioned the $24 million, I believe, for Q4 for Toast Capital and take card, and it was $17 million last quarter. So I might have missed it. Did you give a full year number for those or just the second half?

No, we haven't given the full year.

Our next question comes from Rayna Kumar with UBS.

You gave some really helpful detail on the macro backdrop. Just curious on your actual '23 guidance. Does that assume macro gets worse or it remains as is?

Yes, it's a fair question. We contemplated the macro, and our guidance was with that in the backdrop. We felt like our guidance was prudent just given that there's uncertainty out there. But we've seen resilience in our customers and restaurants in the past, so that's also in our calculus as well.

Got it. That's helpful. And then you continue to improve the percentage of customers using elective products. Can you talk a little bit about how demand has evolved for elective products in recent months? And are you finding it easier or more difficult to sell these products, given the macro environment we're in?

I think it's less about the macro environment, and it's more about restaurants wanting to adopt an all-in-one solution and then also have really strong--really strong partner ecosystem on top of that platform. So at the end of the day, if you think about the restaurant's challenges, they're facing labor challenges, inflation and how to drive top line growth. So having a platform that connects those dots and allows them to be much more efficient is what we're after. So we're seeing that value proposition resonate in the market, both for SMB as well as upmarket. And we want to make sure that we give them great technology at their fingertips to drive improvements and do that with our partner ecosystem as well. So we're seeing that broader adoption of modules based on that value proposition.

The next question comes from Tien-Tsin Huang with JPMorgan.

Great growth here. Just wanted to--I think, Elena, or Chris, you mentioned exciting new products for fiscal '23. Just curious, is that more of the Google variety or products on enterprise? Just hoping to give a little bit more flavor on the power of a map here for the year.

Yes. No, it's a good question. You're going to see pilots and opportunities across all lines of business. So both guest-facing. You think about the Delphi acquisition this morning, bringing Ken and the team into our fold so that we can more broadly serve QSR restaurants, specifically with drive-through capabilities. So you're going to see guest-facing opportunities, employee-facing opportunities within our employee cloud and payroll management solution. And then obviously, in the back office, as restaurants fight food cost inflation in and around Extra Chef, it's a unique opportunity to continue to show visibility and price tracking across the restaurant sector so that they can optimize their spend. So I'd say it's a broad-based attack on different opportunities across the different stakeholders. But again, with the mission of empowering restaurants of all types to improve their operations.

I appreciate that response. Just my quick follow-up then, maybe just thinking about--I know a lot of questions around the outlook here. But are you expecting a high level of any change in growth composition between location growth and ARPU in '23 versus '22? Just trying to get a sense of relative growth here and we should expect to change?

Yes. No, the composition sensing of our location should be relatively consistent. Like I think the one thing we said is the platform resonates with various parts of the market. So whether it's QSR, FSR, or whether it's smaller-format restaurants or larger format restaurants. So I think the breadth of our offering has allowed us to resonate in different parts of the TAM. And so we expect that to be consistent.

On the product side, we're just constantly investing to increase our TAM--and then SaaS, as Elena mentioned on the call, is up 20% year-over-year, and we continue--expect to continue to see that in '23 as well.

The next question comes from Josh Baer with Morgan Stanley.

Great. Thanks for the question. With Delphi coming on board and innovations around QSR and hospitality, not so long ago, what are some of the other big areas of innovation, product features, functionality that are needed to further unlock upmarket?

Yes. Very similar to what I just mentioned, Josh. I think you're going to see us push out solutions in our platform that help each stakeholder in the restaurants thrive. So guest-facing omnichannel experiences. We want restaurants to meet the guest where they are. So whether it's online through a search through Google or in drive-thru or in-store through kiosk or at the table, we want to make sure that we create an amazing set of guest experiences and service models that allow the restaurant to drive top line, but then also allow their staff to be productive. If you go inside the restaurant, a good example with Silver Diner, we're seeing progress on staff productivity amidst labor changes for restaurants gaining productivity through our platform so that they can better treat their guests, have staff productivity go up and then see happier consumers, happier employees, higher tips and wages, higher ticket sizes and a flywheel within the restaurant that improves the restaurant itself.

Is there any appetite to accelerate international expansion through M&A?

Right now, it's a fair question. I mean, I think just our overall M&A philosophy for international isn't different than it is for our overall business. So we're looking at is there something that gets us to market faster? Or is there something that's complementary to our product roadmap. Right now, our focus is building off of the foundation we started in 2022 internationally, and I don't anticipate that will have a material impact or a meaningful impact anyway in 2023.

The next question comes from Will Nance with Goldman Sachs.

Can you spend a little time on some of the macro trends that you guys saw throughout the fourth quarter and into the first quarter? We've heard from other SMB software-oriented names in the market talking about a temporary slowdown and uptake on new software platforms. I'd note the kind of software ARPU expansion was a little lower, net adds a little lower than in the third quarter. The recent retail sales data, particularly for dining, suggests that spending has been particularly robust in January or into 2023 though. So maybe you could just talk about some of the macro trends you're seeing and how things kind of progressed over the fourth quarter and whether you guys are seeing the same sort of traction in the end market so far in 2023?

Sure. Good question, Will. So we're not seeing meaningful changes in consumer demand or spending across our business. So restaurants are seeing demand, and it's in line with our expectations for what I would call historic seasonality trends. We continue to see consumers moving more spend to services like dining out versus food at home. Certainly, January, some of the signals from January on retail sales were strong with continued strength for food services, but we're not really seeing any material or meaningful impact in consumer demand or across restaurants. As we've mentioned before, I think we mentioned this last quarter, consumer spend on dining has proven pretty resilient during past economic slowdowns. So I think that keeps us optimistic that what we're seeing will hopefully continue. That being said, we're pretty mindful of the mixed macro signals, and we're monitoring things closely. I think the last point I would make is our platform really helps restaurants adapt and be resilient during tough times. And if you look at the past 2.5 years, we've been incredibly successful in allowing restaurants to adjust their business, adapt and have stronger survivability. So I think our platform becomes really valuable in tough market conditions, and that's what we're seeing with things like our SaaS ARPU growth and customers using more modules on the platform. So in general, it's stay the course and continue to be mindful of the signals that are out there.

Yes. And also, Josh, I would tell you two things. One is our location adds in Q4 were in line with what we expected and comparable to Q3. So not down and not below our expectations. And I'd also reinforce that our ARPU is up year-over-year, 20%, and up over 2 years, 50%. So just keep that in mind as you consider Q4.

Got it. Yes. I see those numbers. And then maybe a follow-up question on Toast Capital. The relationship, I think you mentioned on the timing and some of the rev rec on revenues, and most of that is upfront upon origination. Can you just talk through kind of the drivers of that bad debt expense on a quarterly basis? You kind of called out the sum total of all of credit-related expenses in the P&L. Like how do we think about the relationship between that and revenue? Is that also largely booked upfront?

Yes. So the way to think about that is--and so without we gave you sort of a proxy, but the way to think about what drives that is really the tenure of the loan. So if it's a 90-day, 270-day, or 360-day, that's going to have a different reserve, if you will. And then the creditworthiness of the customers, so all the typical underwriting that you would expect plays into how we reserve for potential future losses. That's the analysis that the team does.

Got it. And most of that is booked upfront at origination as opposed to over the life of the loan?

Correct.

Our next question comes from Darrin Peller with Wolfe.

Nice results. Could we just touch on the thought process around the profitability cadence again? I know you've talked about it and that was really helpful, the slide you gave us on the long-term margins. But just considering your views on trade-off on investments and timing on inflection and really just updated thoughts on when you think we could be showing more pronounced profitability levels would love to hear some thoughts.

Yes. Thanks for the question. So I think, hopefully, you can see from how we've executed in the last year that we've consistently delivered margin improvement. And so that's pretty intentional focus by this management team that won't change. And so we're going to continue to balance, and that's a really important thing I want people to hear is we're going to balance this opportunity because we have so much conviction about our opportunity at this moment. And so as you think about the next couple of years, we're going to continue to still have healthy growth, but at the same time, continue to deliver margin expansion with this idea that we're going to be balancing and exceeding the Rule of 40. That's how we--our ambition is to plan in that way. So that's what I would tell you. And I think it's important for you to realize that we will not--our path to that margin profile may not always be linear. So as opportunities present themselves, we want that flexibility to kind of lean into that investment.

That's helpful. And just a quick follow-up, and I appreciate that. I just--if you could just touch on how the front book ARPU has trended? Is it still around the 6,000 level you guys have spoken about in the past? Or has it changed at all?

No, we're definitely in that zone.

The next question comes from Josh Beck with KeyBanc.

I want to ask a little bit about the payback assumption. Certainly, a really good result this year in the mid-teens. And it sounds like efficiency-wise, you feel like there's more opportunity. So as we look forward into '23 and beyond, how important is headcount growth? And is that a good reference point just to think about in terms of efficiency?

Yes. I mean, I think--so a couple of things. One is we always sort of manage to that mid-teens, Josh. And the commentary we tend to make on flywheel markets is really important because as we see more rep tenure and we get deeper into a market, we're going to see productivity increase, and we're going to see that play out. And so as we continue to replicate these flywheel markets, the need to add capacity that we've added, like as an example that we've added in the last few years will be less, right? We should be able to continue to increase rep productivity, which will drive some of that leverage that we anticipate and will allow us to stay within the payback periods that we feel are healthy.

And just to add to that, Josh, we've been opportunistic. So the upsell team, for example, we've seen good progress in ARPU growth, good--the attach rates of our guest products are holding as we adding more locations. There's lots of upside on our Extra Chef and payroll products given they aren't penetrated in our base. So we're investing in some of the emerging markets and upsell--but to Elena's point, the biggest driver we feel in our mature markets is really driving market density and driving the tenure where reps up.

The next question comes from Andrew Bauch with SMBC Nikko.

First question on Delphi. How much of this are you contributing in the full year revenue guide or from the EBITDA perspective? And then have a quick follow-up after that.

Yes. Delphi is not material to our 2023 P&L. But it is important strategically to our QSR offering, so just consider that over the long term.

Got it. And then looking at the long-term financial profile, very helpful to kind of pick apart of these pieces. Could you give us a sense of what you're using there for your terminal fintech and subscription gross margins potentially on each line?

Yes, we're not going to give that detail. But overall, I think you should expect to see leverage in the entire business over time, but we're going to continue to balance that with investing in R&D and innovation, obviously, to continue to drive that ARPU over time.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.