Good afternoon. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the Toast Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I'll now turn the call over to Michael Senno, Senior Vice President of Finance. You may begin the conference.

Thanks Kate. Welcome to Toast's earnings conference call for the fourth quarter and full year ended December 31st, 2023. On today's call are CEO and Co-Founder, Aman Narang; and CFO, Elena Gomez. We'll open our 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 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 or future financial and operational performance and operational expenditures, location growth, future profitability timeline and margin outlook, anticipated impact of our restructuring plan and share repurchase program, expected growth and business outlook, including our financial guidance for the first 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 uncertainties 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 topline 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 and our earnings presentation can be found on the Investor Relations website at investors.toasttab.com. We will no longer publish an earnings presentation on a quarterly basis going forward. After the call, a replay will be available on our website. With that, let me turn the call over to Aman.

Thank you, Michael. Good afternoon everyone and thank you for joining today's conference call. This is my 12th year since we launched Toast in my basement with Steve Forde and Jonathan Grimm back in 2012. I'm honored to be here today with all of you and lead this great business as CEO on my first earnings call. Before I recap 2023 and look ahead to 2024, I want to address one topic upfront. We've made the difficult but right decision to reduce our headcount by 10%. As you know, Toast grew rapidly over the past three years to support our growing customer community. As we've taken a look across the organization, it has become clear that we grew our team too quickly in some areas, and we need to restructure the organization to best align with our most important priorities. The changes we announced today primarily focus on noncustomer-facing roles and we remain committed to achieving healthy topline growth and delivering a best-in-class customer experience. I want to thank every Toaster past and present, including those who are leaving us for the important part each of you played in getting us to where we are today. In the very immediate term, my priority is to ensure we navigate today's decision with empathy and support for those affected. As we work through this transition, I'm confident we can tap into a renewed sense of optimism for the opportunities ahead. Our design challenge for 2024 is to operate with a shared urgency against our mission, raise the bar on how we collaborate, and maintain a relentless focus on our customers. Over the past decade, we've built a leading integrated software platform for the restaurant industry. Since our IPO in September 2021, we've launched much innovation to help restaurants thrive, products like reservations, websites, scheduling, retail capabilities for restaurants, a full redesign of our POS experience, and more recently, our Toast-style operator app, to name a few. This focus on platform innovation has allowed us to double the number of restaurants on our platform to 106,000 and more than double our ARR to over $1.2 billion. As we look ahead, our conviction in the future is as strong as ever. We are well on our way to becoming the technology platform of choice for the entire restaurant industry. Continuing to deliver on our mission and serve as the technology backbone for restaurants will lead to significant value creation for all our stakeholders, our customers, our shareholders, and of course, our Toasters that support our community each and every day. To accomplish this, we're focused on four strategic priorities: first, scaling restaurant locations within our core business; second, driving ARR and ARPU by building products and experiences our customers love; third, expanding our addressable market by launching and scaling new growth vectors; and fourth, setting up the company to scale and deliver ongoing operating leverage. Now, let me walk through this in more detail. First, we will continue to win market share and scale restaurant locations within our core business. We added over 6,500 net locations in Q4 and ended the year with approximately 106,000 locations, a 34% increase versus 2022. Our ability to sustain over 30% location growth at this scale is a testament to our competitive differentiation, our all-in-one platform, our localized go-to-market approach, and the consistent execution by our sales and customer success teams. The momentum in our SMB segment has allowed us to double the number of flywheel markets over the past year, with 30% of our markets now in flywheel which is defined by over 20% SMB market share. Our rep productivity in flywheel markets is over 10% higher than other markets, leading to faster share gains. Even in our most penetrated markets where we have over 30% market share, we are still gaining share at a healthy pace. These markets are a benchmark for how we expect other markets to evolve over time and give us confidence in sustaining healthy location growth. The foundation of our success starts with high-value full-service restaurants, which our go-to-market team is prioritizing. Additionally, we're gaining traction across the broader total addressable market as we expand our product offerings to serve different restaurant types. We expect ARPU to continue to increase and GPV permission to remain above industry averages. Our team is committed to ensuring we maintain healthy unit economics as we scale locations across these categories. In addition to our SMB market segment, which is our largest segment and remains the primary driver of net additions, we continue to see growth in our mid-market segment, including brands such as Wetzel's Pretzels, The 99, Dirty Dough, Romano's Macaroni Grill, that have joined Toast in the past year. One example is Urban Prime, a marketplace and restaurant honored by Chef Ercan Ekinci in Florida that opened in October. Urban Prime is an upscale FSR with large indoor and outdoor dining areas, along with a broader market featuring a butcher shop, sushi, and wine. After extensive research, Urban Prime selected Toast to consolidate their business across their thriving restaurant and gourmet market and are leveraging our POS terminals, Toast handle devices, pitch-display systems, online ordering, gift cards, and marketing. By using our restaurant's retail product, they were able to consolidate POS systems across their restaurant and markets to simplify their front and back office operations and consolidate all the streams into a single backend. In addition, they have recently switched to Toast payroll to further streamline and simplify their business. It's rewarding to see Urban Prime expand with Toast and refer several restaurants to us. Our second priority is driving ARR and ARPU by building products and experiences our customers love. To complement our strong location growth, we are laser-focused on increasing ARR at scale. In 2023, we grew total ARR 35% year-over-year. We believe there is runway in our existing markets to continue scaling locations while also increasing both SaaS and Fintech ARR through product innovation, pricing, and our continual investment in upselling existing customers through our growth sales team. Product attach rates are an important factor in ARPU. Many of our existing products have substantial runway to scale, and our product teams continue to act on customer feedback to enhance and expand their terminal attach potential across our customer base. Earlier this month, we rolled out simpler product packaging that will enable our new business reps to maximize initial product attach and ARPU while ensuring strong location growth. For existing customers, we are considering price adjustments as a new lever to build into our ongoing ARPU strategy. We will take a holistic approach across both SaaS and Fintech, and you should see progress from us in 2024 as we move forward. One customer that has extended and adopted more of the platform is Angelo's Ristorante in Massachusetts. Angelo's is a classic Italian eatery, half fine dining, half tea cafeteria that has joined Toast. On a busy Friday night, Angelo's may send 40 to 50 tickets to the kitchen in a short 15-minute period. To support this volume, they were searching for a new POS. After reviewing 10 different systems, they chose Toast because we met their needs. Since joining Toast, Angelo's SaaS ARR has nearly doubled. Angelo, the restaurant owner, has worked closely with us to add more products to grow revenue, including online ordering, catering events, and Toast Tables. With Toast Tables, Angelo's hosts can manage table turnover more efficiently and bring in more reservations. As a new payroll customer this year, Angelo is excited about the timing and cost savings we've seen so far. Shifting to our next priority, our third priority is expanding our total addressable market by launching and scaling new growth vectors. To complement our success across restaurants, our product team is hard at work making Toast an even better fit across enterprise, hotel restaurants, and international markets. Last week, we announced an agreement with Choice Hotels. Toast will be the brand standard for Cambria and Radisson Hotels as well as a qualified vendor for other choice brands. Cambria and Radisson will leverage the best of the Toast platform, including Toast Online Ordering, Mobile Order & Pay, Kiosk, and Toast Payments to support the various dining options across their properties. We are also thrilled to welcome Caribou Coffee to Toast. They chose us to maximize speed of service across their coffee shops and partner with a scalable restaurant platform to support their expansion plans. Internationally, I'm excited to share that we have reached 1,000 locations as of the fourth quarter. The team has worked hard to establish the Toast brand in Canada, the UK, and Ireland using the same localized go-to-market approach that has worked domestically. The customer reception in these markets has been terrific and it reminds me of what we saw here in the US in the earlier days. As more of our platform is available in international markets, online ordering, guest marketing, and reservations, we expect to drive higher ARPU and further improve our payback trajectory and margins. This is a major priority in 2024, and we are confident that the enterprise and international markets represent significant growth opportunities for Toast. Additionally, we're looking to leverage our differentiated go-to-market engine, our all-in-one platform, and our growing scale to open new opportunities. We are seeding investments in new areas of our total addressable market where we believe our market position provides a competitive advantage. Restaurant retail is a good example of this, and these early initiatives could complement our growth potential over the long term. Next, our fourth priority is setting up the company to operate and scale to deliver ongoing leverage. In 2023, we grew ARR 35% and adjusted EBITDA to $61 million, which was a $175 million improvement year-over-year. Our progress shows the scalability of our business as we balance growth and profitability. As we continue to grow, we are committed to the ambitious priorities I laid out above while delivering increased operating leverage, including GAAP operating income profit by the first half of 2025. This effort includes managing our stock-based compensation expense with the same discipline we apply to all our expense lines. Additionally, as we begin to scale free cash flow, our capital allocation approach will evolve. This includes prioritizing organic investments in areas where we have confidence and conviction that we can grow, considering M&A if we identify the right opportunities, and returning capital to our shareholders. To support this, our Board has approved a $250 million share repurchase authorization, which we will leverage opportunistically based on market conditions. We plan to regularly evaluate and optimize our capital allocation priorities with a disciplined and transparent approach. To wrap up, I want to leave you with a few points that I covered today. We have a large opportunity ahead and have built the foundation to capitalize on it. As we execute our playbook to deliver continued market share gains in our core business, we will invest in parallel and leverage our strengths to open up additional total addressable market and build new growth curves. We will sustain ARPU and ARR growth through a combination of product attach and pricing, and we are confident we have a scalable business model that will continue to balance growth and profitability. I want to thank all our Toasters, including those leaving us for your dedication and contributions to Toast. As I said earlier, this week is a tough week. But I'm confident that we will move past this and, over time, build a stronger Toast. I also want to thank our customers for entrusting us with this incredible community, and I want to thank our shareholders for believing in us and the potential of this business. Thank you and now I'll turn it over to Elena.

Thank you, Aman and to everyone for joining. I'd like to thank all of our Toasters for their hard work and commitments, including those we are saying goodbye to today. Organizational changes like these are hard, but this is a necessary step to streamline how we operate and position us to move faster in capitalizing on the opportunities ahead. In 2023, we demonstrated our ability to balance durable growth and profitability. For the year, Toast processed over $125 billion in payment volume, up 38%. ARR grew 35%, and total fintech and subscription gross profit, our recurring gross profit streams, increased 49% for the year. We are efficiently scaling the business and driving cost discipline, delivering adjusted EBITDA of $61 million, a 6% margin on our recurring gross profit stream, which is 22 percentage points better than 2022. Over the past two years, we've embedded durable efficient growth as a principle of how we operate the business. The midpoints of our 2024 guidance suggest 24% growth in our recurring gross profit streams and $210 million in adjusted EBITDA reinforces this and gets us on track for GAAP operating income profitability by the first half of 2025. As you heard from Aman, we are still in the early stages of our growth potential and are committed to maintaining the same approach as we lean into the growth opportunity while continuing to scale. The three main areas I want to cover today are our fourth-quarter results, our guidance and the impact of our restructuring plan, and our capital allocation approach, including the $250 million share repurchase program we announced today. Starting with our fourth-quarter results, we added over 6,500 net locations, increasing our total locations to approximately 106,000, representing a 34% year-over-year increase. SaaS ARR grew 43% year-over-year, driven by strong location growth and a 7% increase in SaaS ARPU as we balance customer acquisition momentum with ARPU growth. Our SaaS net retention rate remained in a healthy range at 117%, led by solid contributions from upsell and location expansion from existing customers. Fourth-quarter payments ARR grew 28%, and fintech gross profit increased 29%. Fourth-quarter GPV rose 32% to $33.7 billion, and GPV per location declined modestly year-over-year, in line with our expectations and consistent with trends exiting the third quarter. As a reminder, fourth-quarter GPV per location is seasonally lower than in the third quarter, and payment ARR reflects the same seasonality. The net take rate was 52 basis points in the quarter. Our non-payment fintech solutions, led by Toast Capital, contributed $34 million in gross profit in Q4, reflecting steady healthy demand. We continue to take a balanced approach to growing Toast Capital, leveraging our unique position with real-time access to POS data to monitor the health of restaurants and prudently balance risk while helping our customers grow with fast, flexible access to capital. ARR remains our North Star. As Aman outlined, our two growth vectors are locations and ARPU; we have multiple levers to sustain healthy ARR growth over time. We will prioritize the highest-value locations to extend our success in this segment of the market. At the same time, the breadth of our integrated platform and ongoing product innovation opens up the entire restaurant total addressable market to us, and we plan to capitalize on that opportunity to drive further share gains. As we expand, we will remain grounded in unit economics and tightly manage payback periods across our portfolio to ensure we drive incremental profit as we scale our locations. In 2023, our dollar-based payback period was 14 months, in line with our target for the quarter and an improvement from 2022, even as we expanded into more parts of the TAM and increased our international investments. In fintech, our long-term growth drivers for increasing core net take rate remain in driving towards the lowest cost per transaction and leveraging our unique customer relationships to provide additional fintech solutions. We anticipate SaaS ARPU growth to be in mid-single digits over the near term, driven by increasing product attach rates and pricing. Across both SaaS and fintech, pricing is a lever we will use methodically to monetize the value we provide to customers. As Aman described, this is a capability we are building as an ongoing part of our growth equation over time. Regarding our expenses, we manage hardware and services as customer acquisition costs and provide these on a discounted basis to offer an easy, low-friction on-ramp for customers. Q4 hardware and services gross margin improved by 19 percentage points compared to last year, primarily reflecting lower shipping costs and ongoing operational efficiencies. Sales and marketing expenses increased 18% year-over-year in Q4 as we continue to invest in our upsell and international sales teams and make targeted investments in our U.S. new business team to drive deeper penetration. Sales and marketing costs as a percentage of our recurring gross profit streams improved by 400 basis points in Q4 relative to last year. Our go-to-market strategy is a competitive differentiator and is a crucial part of our ability to efficiently scale the business, enabling us to sustain healthy ARR growth while moderating investments in sales and marketing. R&D expenses grew by 17% year-over-year in the fourth quarter. Our product investments align with our priorities to serve more of the total addressable market to expand ARPU by increasing product addressability for more customer needs, while also focusing on long-term growth initiatives. Complementing these priorities is our emphasis on delivering best-in-class customer experiences and building scalable, resilient infrastructure to support hundreds of thousands of locations. G&A expenses grew by 5% year-over-year in the quarter, excluding $20 million of bad debt and credit-related expenses primarily related to reserves for Toast Capital. G&A was up 3%. That reflects our ongoing efficiency efforts and prudent management of overhead expenses. Adjusted EBITDA was $29 million in the quarter, a 10% margin on our recurring gross profit streams marked by a 19 percentage point improvement from Q4 last year, driven by a combination of continued strong topline growth and operating leverage as we efficiently scale the business. Free cash flow totaled $81 million in the quarter and $93 million for the full year. We converted over 100% of adjusted EBITDA to free cash flow, with working capital benefiting from stronger GPV trends in December. Over time, we anticipate that the trajectory of free cash flow will broadly mirror our adjusted EBITDA. Free cash flow is typically lower in the first quarter each year due to seasonality in our payments business and the timing of cash bonus payments. This year in Q1 will also include severance payments. Given these factors, we expect free cash flow to be negative in Q1, but then accelerate as the year progresses. Regarding the restructuring we announced today, we anticipate recognizing $45 million to $55 million in restructuring and related charges for the year, with most of it falling in Q1. Overall, we expect over $100 million in annualized savings from the restructuring and lower hiring, with a portion of savings reinvested into our highest conviction growth initiatives. Our 2024 topline guidance is for the combination of subscription and fintech non-GAAP gross profit, our recurring gross profit streams, which is the P&L metric that most closely aligns with ARR. In Q1, we expect 22% topline growth and $20 million in adjusted EBITDA at the midpoint. This reflects slower GPV trends in January due to weather-related headwinds across many parts of the country. GPV has stabilized over the past few weeks, and we continue to closely monitor that. Net location additions in 2024 will follow the typical seasonal pattern, with an expected lower Q1 similar to last year in the 5,500 range, peaking in Q2 as restaurants prepare for the busy season. More broadly, with a healthy pipeline, consistent go-to-market execution, and increasing contributions from new segments as the year progresses, we are well-positioned to add more locations to our platform in 2024 than last year. On a full-year basis, the $210 million midpoint of our adjusted EBITDA guidance reflects a nearly $150 million improvement and margin expansion of 10 percentage points relative to 2023. As we drive efficiency and increase profitability, we'll prudently invest in our highest priority growth areas, including product innovation and our go-to-market approach. Additionally, we will continue to invest in longer-term initiatives where we have conviction, including international expansion and the enterprise segment, and will plant seeds in newer initiatives where we see a clear right to win to expand our market opportunity and extend our growth potential. Stock-based compensation is an area we are managing with the same rigor and discipline as other expenses. Through a combination of disciplined headcount management, including the restructuring plan announced today, changes to equity granting practices, and the roll-off of large grants made in 2021 and 2022 over the next couple of years, our goal is for stock-based compensation to decline from 27% in 2023 to low double digits as a percentage of our recurring gross profit streams over the medium term. Managing our equity program will also improve dilution. We are committed to maintaining net share dilution of total fully diluted share count, which includes all stock awards, below 2% annually. With ongoing adjusted EBITDA margin expansion and leverage in our stock-based compensation, we are on track for GAAP operating income profit by the first half of 2025. Lastly, let me turn to capital allocation. As our free cash flow profile grows, our capital allocation strategy will evolve. Our top priority continues to be investing organically in our business to drive sustainable long-term growth. Even as we strategically invest, we are committed to driving increasing free cash flow. With excess free cash flow, we will evaluate M&A. However, we will hold a high bar given the strong organic growth outlook, and we are adding the option to return capital to shareholders to our capital allocation toolkit with a $250 million share repurchase authorization. We do not have a timetable on repurchases and will act judiciously and opportunistically. We plan to regularly optimize across these priorities to do what's best for the business at any given time and always optimize for long-term shareholder value. To wrap up, we are executing across the board, growing our location count, driving value for our customers, seeding new long-term growth initiatives, and positioning the company to operate fast and agile moving forward. We are planning to host an Analyst Day during the second quarter where we will dive deeper into our business and share more about our market opportunity and strategy. I'm incredibly excited about what lies ahead for Toast. Thank you. And now I'll turn the call back to the operator to begin the Q&A.

Thank you. Your first question will be from Will Nance with Goldman Sachs. Your line is now open.

Hey guys. Appreciate all the color today and congrats on the strong results. You mentioned pricing a couple of times in the prepared remarks. So maybe you could just kind of expand a bit on how you're thinking about pricing. I know it's something you guys have been talking about in the past couple of quarters. And then, Aman, maybe just a numerical clarification on the guidance, the mid-single-digit ARPU. Is that on an ending basis, kind of like we discussed last year? Or is that more on an ongoing basis over the course of the year? Thanks.

Sure. Thanks, Will. I'll start by saying, if you look at pricing, it's an important lever for us, but we plan to use it gradually as part of a broader strategy. We've been at this for over a decade, and we're continuing to invest in our restaurant-specific platform to help restaurants drive growth. I think our customers understand that we continue to invest in this platform and that we will increase prices over time. If you look at our new customers that are joining our platform, they're paying us more across both SaaS and Fintech. Over time, we expect that existing customers will also see gradual adjustments, and it's going to be a lever we will use over time.

Yes. Will, to answer your question about SaaS and whether it's an ending point or more of a yearly average, we expect it to be in that mid-single-digit range over the course of this year.

Got it. I appreciate both of those. And then maybe just a follow-up question on Toast Capital. That's been, I think, a little over a year since you rolled out the longer-duration products. You kind of mentioned prudently managing that. Just wondering if you could kind of talk about your expectations for that product? Is there something you guys are kind of looking to get more data on or kind of more history? And how should we think about kind of the potential for that product as you continue to scale it? Thanks.

Yes. Thanks Will for the question. So, at the highest level, we're really pleased with the performance of Toast Capital and customer demand has been really steady, with default rates in line with our expectations. We launched the 360 program last year, and now that we've lapped that, we are more in a steady state with the business, still seeing healthy demand. I would expect that over the course of this year, it will grow more in line with the rest of the business. But we'll scale it prudently, as you mentioned. In the longer term, we have an opportunity to evolve and offer more fintech solutions to our customers, but for now, we are focused on optimizing this program.

Operator, we'll take the next question.

Thank you. The next question will be from the line of Harshita Rawat with Bernstein. Your line is now open.

Good afternoon. Thank you for taking my question. Elena, can you talk about the dynamics on the gross profit on the fintech side? It looks like the net take rates came down a little bit. I know there's some seasonality here, but can you discuss the drivers here, especially looking forward? I know some of your peers have commented on a favorable pricing environment. And then just as a follow-up, Aman, can you talk about the overall data for Toast regarding new business formation, which has been running above trend over the last period? Thank you.

I'll cover the first question. On the take rate, it was 52 basis points in Q4, with 10 basis points of that attributed to Toast Capital. Our core take rate was 42 basis points, and we had some customer credits that affected that take rate. There's nothing structural to consider over the long-term. Looking ahead, we expect the same seasonal pattern we do in Q1, which is higher because of debit. However, as the year progresses, we should see it improve, primarily due to our ongoing cost optimization efforts and some surgical price adjustments planned for the latter half of the year. Longer term, we always focus on improving our take rate steadily over time. Your second question, could you please repeat it?

Yes, of course. So, it was about your beta to overall new business formation and location adds. I know overall, if I look at the new business formation in restaurants, it's been running higher versus trend on the long-term trend. So, just any comments there. Thank you.

Yes. Thanks Harshita. We've seen a balanced mix between new openings and existing restaurants. Post-COVID, we've seen some tailwind from new restaurants, but that has not diminished in any material way. Furthermore, consider that we've been in this space for over a decade. We're the first to build a vertically innovative restaurant-specific platform, and we will continue to invest. What we see is across both existing restaurants and new restaurants, our sales team is effectively creating market share. This is true for both full-service restaurants and quick-service restaurants. Even in a world where there's some movement in terms of the number of new openings, we're confident in our ability to continue to gain share.

Thank you. The next question is from the line of Tien-Tsin Huang with JPMorgan. Your line is now open.

Thank you, and I appreciate the profitability focus here. So, my question is for Elena. You were spot on with your location outlook here in the second half of 2023. You mentioned you're going to add more in 2024 than in 2023. A question I often get is how did the new location additions differ from what you've seen in the past year or two years ago. I think there's always this question of other smaller GPV potential locations. Can you maybe just comment on that big picture? Thank you.

Yes. I'm happy to answer that, Tien-Tsin. If you think about our mission, we've been at this for 12 years now. We're the first ones to develop a platform purpose-built for the restaurant industry. Our team continues to invest to make it accessible to all restaurants, starting in the US and over time globally. In the near-term, SMBs continue to drive the majority of our growth, and we see significant opportunities as we gain share. We've discussed how we see more and more markets getting into a flywheel state, which is defined by markets with over 20% share. We're also expanding our products to target the broader total addressable market, starting with the US TAM, including the enterprise market, mid-market segment, and international markets as well. The effect on GPV as we expand the total addressable market is expected to be minimal and gradual. Our average location's GPV should remain above industry averages. We expect ARPU to continue to grow in 2024 alongside our location growth.

Great. No, thanks for going through that. I didn't mean to be redundant, but just wanted to cover that. Then just maybe as a follow-on with that ARPU comment, just the attached products. Is that evolving as well? I know the 43% using 6-plus has remained solid, but is the composition of products being taken changing at all? I know that a lot of your peers are pushing some of the higher-end offerings like payroll as well. Any update there? Thank you, and I'll jump off.

Sure. Thank you, Tien-Tsin. We have recently introduced Pricing and Packaging 3.0, which is helping our new business representatives to drive growth in both locations and ARPU. At the same time, we're scaling our upsell team. In terms of product attach rates, there haven't been any significant changes. We're witnessing healthy growth across our Employee Cloud, Fintech, and Guest products. Our R&D team is focused on gathering customer feedback to enhance product attachment and market fit as we expand our locations. Overall, we are seeing robust growth across our entire product portfolio. Thank you, Tien-Tsin. Operator, we are ready for the next question.

Thank you. The next question is from the line of Stephen Sheldon with William Blair. Your line is now open.

Hey, thank you. It's great to hear that you're now over 30% SMB market share in some markets. You've noted that, in those markets, you're still seeing healthy share gains. I’m curious if market share gains seem to be slowing down once you hit a threshold like that, or if you reach some level of saturation where it becomes harder to grow locations in some of those markets?

Yes. Thanks for the question, Sheldon. As I mentioned in my prepared remarks, even in our markets where we have the highest SMB penetration, which is over 30%, we are still seeing some of the strongest rep productivity and some of the strongest conversion rates. A lot of this is driven by the social proof we create as we make more customers successful in these markets. We continue to enjoy strong growth, so we haven't seen any change in the rate at which customers are adopting our platform.

Got it. That's helpful. And then a follow-up question on international monetization, which seems to be picking up. I think you noted a thousand locations in those three markets. How are you thinking about expansion into other markets beyond those you've been focusing on thus far?

Yes, it's a good question. For the moment, we’re focused on the markets that we are currently in. We're still in the early days there, focusing on our go-to-market strategy and building out the platform. We want to continue our efforts in these initial markets before we consider expanding beyond them, but we will keep you updated.

The only thing I would add is that, in those markets, we see tremendous potential for growth. It's still early days, and the reception we've received from customers is very similar to what we saw in the US in our early days. We want to make sure we can establish strong foundations in these markets before expanding further.

Thank you. The next question is from the line of Dave Koning with Baird. Your line is now open.

Yes. Hey guys, great job. I guess my first question is, the flow-through on recurring GP growth was about 70% to EBITDA the last two quarters. So, you're achieving incredible margin capture. I guess I'm wondering if that level is sustainable and if there’s some sort of metric like EBITDA percentage regarding GP that we could see you provide at some point? Is there a target on that?

Yes. I would point you to our guidance. We're really confident in the guidance we've provided, which reflects our ambition to reach 30% to 35% long-term recurring gross profit growth. That’s something we’ve discussed before, and we’ve been tracking toward that based on the leverage you've seen in the business over the last several quarters and the guidance we've shared today. So, our ambitions for EBITDA guidance long-term remain unchanged.

Great. Thanks. And then I guess on the fintech yield, I think Harshita asked a little about this, too. It seems to be down a little this year. Is the seasonal impact mainly in Q1 being the highest then declining through the year? Or due to some pricing actions, could we see a divergence in the normal yield progression through the year?

Yes, Q1 typically is higher because of seasonal factors. As the year progresses, we will be making some targeted adjustments, including pricing moves in the second half of the year. Additionally, we continually optimize costs, which forms part of our normal operations.

Got it. Thanks. Great job.

Thank you.

Thank you. The next question is from the line of Tim Chiodo with UBS. Your line is now open.

Great. Thank you. I want to dig into the mid-single-digit SaaS ARR per location outlook a bit. There are two components I want to explore further: first is the newer customer cohort and secondly, the potential from upselling the existing customer base. Regarding the newer customers, can you provide more detail on what sort of SaaS ARPU those new customers are coming in at relative to the total company or the last year's new cohort? On the existing customers, given you've added to the growth team and the upsell team, could you discuss their contribution to the mid-single-digit growth for the existing customer base?

Sure. Thanks for the question. I think we mentioned this in our last earnings call as well. As we optimize our land and expand strategy, the new customers joining Toast have a slightly lower ARPU, and it's complemented by our upsell team, who focus on driving attach rates across our product portfolio. If you zoom out and think about the growth potential in the business, we believe we can sustain ARR growth across both locations and ARPU, both of which will support each other as we improve our capabilities across our product offerings and enhance our pricing and packaging strategies.

Okay. Thank you, Aman. Essentially, the new customer cohort will be a bit of a drag on that mid-single-digit ARPU growth, with the other two levers being the primary growth drivers. Is that a fair characterization for this year?

Yes, that’s a fair characterization. You should view pricing as a gradual lever to complement both location growth and product attach rates.

Thank you. The next question is from the line of Samad Samana with Jefferies. Your line is now open.

Great. Good evening. Thanks for taking my question. Maybe just on the international side. I know it's only 1,000 locations. But how does the average SaaS ARPU for those locations look versus your broader installed base? Similarly, how does GPV per location compare? How should we think about that evolving over time as you make more progress in the international markets?

Yes. Thanks Samad for the question. We're really pleased with what we're seeing internationally and are focusing on establishing our brand. Since we are early in this stage, the average ARPU is lower, but as we add more features, we expect this figure to approach what we see in the US over time. We're optimistic about our future growth and are bringing more to our platform in 2024, which should positively impact our ARPU in subsequent years. The customer profiles internationally don’t differ much from our US customers.

Yes, great. And then, on the cost side, please continue.

Please, you finish.

My question was about cost savings measures beyond the headcount reduction and whether there were any additional savings initiatives you're implementing as the year progresses. Thanks.

We have terminated a lease, but in general, I'd like to reiterate that the restructuring is just one of many efficiency efforts we've been working on for several quarters. We delivered over $175 million of leverage this year, and we're committed to operating in a disciplined manner and won’t view this restructuring as a one-time efficiency move but rather how we run our business moving forward.

Thank you. The next question will be from the line of Josh Baer with Morgan Stanley. Your line is now open.

Great. Thanks for the question. Two on restaurant retail, I guess: first, any context for the mix of locations that might have retail or the addressable GPV opportunity not currently on the platform?

Yes. Hey Josh, thanks for the question. As I mentioned earlier, SMBs continue to drive the majority of our growth, and we see tremendous runway ahead. A lot of this growth and expansion into restaurant retail has come from existing restaurants, many of which also offer markets and grocery and wine and wanted a single platform across all these businesses. We believe that the GPV and ARPU potential in these businesses is stronger. However, in terms of where focus will continue to be, SMBs will drive most of our net additions, followed by the mid-market, enterprise, and then retail.

Got it. And the follow-up in regard to retail: perhaps with a robust restaurant retail offering, are you part of the way there to more fully serving the retail vertical? Is that a total addressable market expansion opportunity you're considering down the road? Thanks.

Yes. I think so over time. Our capabilities and offerings started by building a purpose-built platform for the restaurant vertical, which has enabled us to grow and gain market share. As we expand our product offerings and go-to-market strategies, we certainly believe there's an opportunity to expand beyond, but our focus right now remains in the food service markets. The lines between restaurants and retail are blurring, and many of these hybrid concepts want a single system to manage their operations effectively.

Thank you. The next question is from the line of Darrin Peller with Wolfe Research. Your line is now open.

Thanks, guys. I'd love to hear a little bit more about what's going so well on the enterprise side for a moment. Obviously, you brought up hotels and Caribou. Perhaps you could provide more color on your expectations for that and any product gaps or opportunities you see in that category that can add ARPU as well?

Yes. Thanks for the question, Darrin. We're proud of the team's progress with new brands like Choice and Caribou, which I mentioned earlier, along with expansions with existing brands like Nothing Bundt Cakes and MTY. We started investing into the enterprise side just a couple of years ago, and it's fantastic to see the progress we've made. We're also seeing a healthy pipeline and inbound requests from potential customers. However, keep in mind that these are enterprise clients, which often involve longer sales cycles. We want to ensure that we partner with customers who align with our vision without distracting our R&D teams with extensive custom work that could hinder product development. Our core capabilities will continue to develop in enterprise config management, publishing security, compliance, and data APIs. Over time, I believe many of the reasons SMBs choose Toast will also resonate in the enterprise market.

That makes sense. Maybe just a very quick follow-up is regarding the competitive landscape. More specifically for SMB, we continue to hear about a pause that seems to be applicable to the restaurant space. But given your customer adds, it appears you're showing strong traction. What are you observing in that competitive environment?

Yes. I think we've always faced competition, but what we're seeing in our data is as we execute and enter more markets, restaurants still maintain a local focus. The more share we gain, the more social proof we create, fueling a positive flywheel effect. Our team actively tracks win rates and competitive dynamics, but we have been in this business for so long, and our vertically integrated platform strategy is what really drives our growth.

Okay. Thanks, guys.

Thank you.

Thank you. We will now take our last question from the line of Dominic Ball with Redburn Atlantic. Your line is now open.

Hey guys. Thanks for the question. Great job on execution when it comes to location growth and winning market share. My question is, since the summer, you have been making significant price increases. How do you approach this process? Are you raising software prices for old or new merchants? Is it on payment rates? Is it monetizing free products? Any more detail on your approach would be great. Thank you.

Yes. Thanks, Dominic, for the question. Pricing is an important lever, but it's only one part of our broader strategy. Our focus continues to be gaining market share and scaling by optimizing terminal attach rates. Regarding pricing specifically, as we evaluate new customers joining our platform, we see them paying more across both SaaS and fintech compared to our existing customer base. We expect gradual adjustments for existing customers in the future as part of our growth strategy.

Yes, that's great. And just one more, if that's okay. I recall in your response about a potential expansion into the retail vertical. Is the strategy to make Toast the retail restaurant’s platform, paving the way for entering the retail market potentially?

Yes, as I mentioned earlier, we’ve seen demand from our existing customers to pull us into these hybrid restaurant retail concepts because many of them also offer packaged goods. They want a single platform to manage their businesses effectively, and we see opportunities to create value in these areas. We believe there’s future potential, but we are currently focused on food service markets where we have experience and strong positioning.

Yes, thanks guys, and again, great work. Cheers.

Thank you.

Thanks, everyone.

This concludes this conference call. You may now disconnect.