Good afternoon. My name is Cameron, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast First Quarter 2024 Earnings Conference Call. Today's call will be 45 minutes. I'll now turn the call over to Michael Senno, Senior Vice President of Finance. You may now begin your conference.

Thank you, Cameron. Welcome to Toast's earnings conference call for the first quarter ended March 31, 2024. On today's call are CEO and Co-Founder, Aman Narang; and CFO, Elena Gomez, who'll open with prepared remarks, which will be followed by our Q&A session. Before we start, I'd like to draw your attention to the safe harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of the Securities Act and the Exchange Act. All statements other than statements of historical facts are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, location growth, future profitability, 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 second quarter and full year 2024. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our SEC filings for a discussion of the risks and uncertainty that could cause actual results to differ materially from our expectations. During this call, we will discuss certain non-GAAP financial measures, including but not limited to, non-GAAP subscription services gross profit and non-GAAP financial technology solutions gross profit, which we refer to collectively as our recurring gross profit streams. These are the basis for our top line guidance. These non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release and SEC filings for detailed reconciliations of these non-GAAP measures to the most comparable GAAP measures. Unless otherwise stated, all references on this call to cost of revenue, gross profit and gross margin, sales and marketing expense, research and development expense, and general and administrative expense are on a non-GAAP basis. Finally, the press release can be found on the Investor Relations website at investors.toasttab.com. After the call, a replay will be available on our website. And with that, let me turn the call over to Aman.

Thank you, Michael, and thank you, everyone, for joining us this afternoon. 2024 is off to a great start with first quarter results ahead of expectations across the board. We added over 6,000 net locations to our platform, our recurring gross profit streams increased 33% year-over-year, and adjusted EBITDA came in at $57 million, a $74 million improvement versus Q1 last year. I'm really proud of how the entire team performed, and we are well positioned to continue to scale and have a terrific year. Our mission at Toast is to help restaurants delight their guests, do what they love and thrive. We continue to innovate and drive value for our restaurant community, including with the recent launch of our restaurant management suite and upgraded digital storefront suite and a marketing suite, which for the first time, is leveraging AI to help our customers stay one step ahead. We're looking forward to sharing more about our longer-term vision and strategy at our Investor Day on May 29. We've increased our outlook for the full year based on our performance in Q1, and we are all focused on the four strategic priorities I laid out in our February earnings call: one, scaling locations and market share in our core business; two, driving ARR through platform growth; three, expanding addressable market into new adjacencies; and four, setting up the company to scale and deliver ongoing operating leverage. First, scaling restaurant locations and gaining share in our core business. We added over 6,000 net locations in the quarter, driven by the combination of our purpose-built restaurant platform and our local go-to-market engine. As we gain momentum in local markets across the country, we continue to see a favorable effect with higher rep productivity and faster market share gains, which gives us confidence in sustaining healthy location growth. Let me share two recent customer stories that speak to our momentum and the value we create for customers. Pickles Pub is a busy full-service restaurant and bar in downtown Baltimore near Camden Yards and M&T Bank Stadium. They switched to Toast to partner with a technology partner that could handle their volume, streamline operations and increase speed of service, particularly on those busy game days. On opening day for the Orioles, they broke through their previous sales record and credit the uplift in part to faster speed of service after implementing Toast Go Handhelds, Mobile Order & Pay, and Kitchen Display Systems. Since switching to Toast, they have reduced order to delivery times for drinks to under a minute. Additionally, the addition of Mobile Order & Pay has opened up a new service model with 20% of food and drink orders coming in directly from guests scanning QR codes at the table and placing the orders themselves. I'm also excited to announce our agreement with Snooze Eatery, a breakfast and lunch concept with over 70 locations nationwide. Snooze needed a technology partner that could support their growth plans and provide a better guest experience with faster and more accurate service. They're rolling out Toast across their footprint, and for the locations they've activated, they're already seeing benefits. Toast handhelds have increased server capacity, leading to higher sales, higher tips, and greater earnings. As these two stories highlight, our focus on creating products that drive value for our customers continues to drive our growth. Our second priority is driving ARR and ARPU by building products and experiences our customers love. Earlier this year, we launched a suite-based approach to packaging that simplifies the sales process for customers and our sales reps alike. Our suites are designed with good, better, and best tiers and create a path for customers to adopt more of our platform over time as well as provide a framework for us to roll out and monetize new products and features. They cover the breadth and depth of our customers' needs across restaurant operations, guest experience, employee, and supplier management. Let's walk through how the suites are adding value for our customers. The restaurant management suite helps multi-location operators access the latest version of our above-store management tools and, for the first time, access powerful benchmarking data across all restaurants on our platform. Our digital storefront suite helps restaurants take control of their online business, and our marketing suite helps them bring their guests back more often. These launches are just the beginning of how Toast can leverage one of the best data sets in the restaurant industry to create value for customers. To bring this to life with an example, Whisk is a neighborhood restaurant north of Dallas that recently adopted our AI-powered writing assistant included in our marketing suite. The writing assistant not only effectively describes Whisk's food and atmosphere, but it has also cut the time required to send out a guest engagement campaign by more than half. Our recent AI-enhanced marketing campaign drove over $2,500 in sales for Whisk in April alone. Moving to our third priority, expanding our addressable market into new adjacencies. We continue to gain momentum across the first three international countries we launched in—the U.K., Canada, and Ireland—and remain confident in the potential these markets have to help us drive growth. In Q1, we expanded the platform internationally with the launch of our integrated online ordering capability, which has been received incredibly well by our customers. As the year progresses, we expect to launch more of our platform across both in-restaurant operations as well as the guest experience. This should help us drive further product differentiation and expand ARPU across these international markets. Within enterprise, we continue to gain momentum across a broad range of customers. The launch of the enterprise tier of our management suite allows our customers to manage their operations at scale and reduce the administrative workload on their corporate teams. Our pipeline in the segment remains strong, and we have confidence that we'll continue to increase penetration over time. Beyond international and enterprise, we're also investing to open up new opportunities where our vertical platform and our local go-to-market team can be a competitive advantage. Our fourth priority is setting up the company to scale and deliver ongoing operating leverage to complement our growth. As I mentioned, we delivered over $57 million in adjusted EBITDA in the past quarter, a $74 million improvement versus Q1 last year. We have aligned our resources on our most important priorities and are building a culture where everyone across the organization is taking efficiency seriously. This allowed us to increase our full-year guidance and puts us on track to expand margins by over 13 percentage points to the midpoint versus last year without sacrificing our most important growth and innovation initiatives. To wrap up, I'll leave you with a few thoughts: I'm confident in how we're executing and thrilled to be leading this team; we're still in the early innings of what is possible, and we have the foundation in place to capitalize on this incredible opportunity ahead. I want to thank every Toaster for their continued dedication and passion for our mission. It wouldn't be here without you, our customers who are entrusting us to support you all, and our investors for believing in us and the potential in this business. Thank you, and now I'll turn the call over to Elena to share more about this quarter's results.

Thank you, Aman, and to everyone for joining today. To start, I'll reiterate a thank you to our entire Toast team, whose hard work and continued execution led to another successful quarter. Top and bottom line results exceeded expectations, evidence of our operating momentum and disciplined approach at driving both growth and profitability. In the quarter, ARR grew 32%, and total fintech and subscription gross profit, our recurring gross profit streams increased 33% year-over-year. Adjusted EBITDA was $57 million in the first quarter, a 19% margin on our recurring gross profit streams, up 26 percentage points from Q1 last year. In Q1, we executed on reshaping our cost structure, better aligning our investments with our highest priorities and positioning ourselves to move faster on key growth initiatives. We now expect slightly higher annualized run rate savings and to capture more in-year savings in 2024 than initially estimated, including in Q1. The first quarter also included one-time cost benefits related to the restructuring. Those factors, coupled with stronger-than-expected GPV as the quarter progressed, led to significant adjusted EBITDA outperformance in Q1 and contributed to the increase in our full-year outlook. Our conviction in the opportunity ahead is stronger than ever. We will reinvest part of the incremental savings in key growth areas. We added over 6,000 net locations in Q1, increasing total live locations to approximately 112,000, up 32% year-over-year. Our focused vertical strategy and differentiated go-to-market engine, coupled with consistent execution, continue to drive location growth as we deepen penetration across the full breadth of the restaurant Total Addressable Market (TAM). And with Toast in only 13% of U.S. restaurants and just scratching the surface internationally, we continue to have an opportunity to significantly increase share as we execute our playbook. SaaS ARR grew 39% year-over-year, driven by strong location growth and a 5% increase in SaaS ARPU on an ARR basis. We continue to expect SaaS ARPU to be in the mid-single digits in the near term. Payments ARR and fintech gross profit both grew 26% in the first quarter. GPV increased 30% to $34.7 billion with GPV per location down 2% year-over-year. After a softer January related to weather, GPV trends bounced back to similar levels we saw exiting 2023 and consistent with seasonal patterns. Net take rate was 55 basis points, and other fintech products contributed 10 basis points. Our non-payments fintech solutions led by Toast Capital contributed $34 million in gross profit. Toast Capital continues to perform well. Customers value the fast, low-friction access to capital to grow their business, driving healthy demand for the product. As we scale the program, we will diversify and broaden our funding sources. In addition to our existing model, we recently added a forward flow model where a portion of Toast Capital loans are sold to third parties. For loans sold to a third party, we do not take credit risk. As a result, there is a slightly lower revenue take rate and typically no associated bad debt. On the P&L, compared to our current model, that translates to lower recurring gross profit for forward flow originations with nearly 100% flow-through. We plan to balance both models of the scale originations and continue to optimize for maximizing risk-adjusted returns. Expense growth moderated in the first quarter as we continue to drive efficiencies and cost discipline, coupled with savings from the restructuring actions. As we drive efficiency and increase profitability, we'll prudently invest in our highest priority growth areas, including product innovation, our go-to-market engine, and new growth vectors to expand our TAM. Sales and marketing expenses were up 13% year-over-year. We continue to grow our upsell and international sales teams and make targeted investments in our U.S. new business team to drive deeper penetration. The Q1 restructuring actions impacted our R&D and G&A expense lines more than other parts of the business, resetting the expense growth trajectory in these areas. We expect R&D expenses will grow at a more moderate level as we continue to make targeted investments to drive product innovation and add value for our customers. G&A was down 13% year-over-year excluding $15 million of bad debt and credit-related expenses, primarily related to reserves for Toast Capital. We expect ongoing operating leverage in G&A, reflecting our continued focus on driving efficiency in G&A as we scale, including through automation and global diversification of our workforce. Free cash flow was negative $33 million in the quarter due to the timing of cash bonus payments and severance payments in Q1. We expect free cash flow to be positive for the remainder of the year and broadly mirror adjusted EBITDA on a full year basis. Turning to guidance, for the second quarter, we expect total subscription and fintech gross profit to increase in the 20% to 24% range year-over-year, and adjusted EBITDA to be $55 million to $65 million. Our top line growth rate is negatively impacted by a few points due to adding forward flow and comping a small one-time benefit last year. As a result of our strong start to the year, we raised our full-year outlook. At the midpoint, we now expect 26% growth in fintech and subscription gross profit and $260 million in adjusted EBITDA, a margin of 19%, marking a 13 percentage point improvement versus 2023. After executing the restructuring, we now have visibility on higher in-year savings than expected and reset the guidance higher to reflect that. This also factors in our plans to reinvest in key areas of the business to drive sustained growth going forward. With our increased profit expectations for the year and progress on containing stock-based compensation, we are now on a path to be close to breakeven on GAAP operating income by the end of the year. To wrap up, we are making significant progress executing against our goals and are positioned to deliver strong top and bottom line results in 2024. Our top focus remains delivering value to customers, and we are well positioned to drive durable growth across our core business while building new growth curves. We announced our first Investor Day will be held on May 29, at which time you will hear more from our leadership team on our market opportunity, strategy, and growth plans. We are incredibly excited about what lies ahead for Toast and look forward to sharing with you more then. Now I'll turn the call back over to the operator. Thank you.

Congrats on a good quarter. Wanted to ask about net take rates from two perspectives. I was hoping you could comment on the interchange settlement and how that should impact take rates as well as an update just around taking price as far as the tactical approach of going back to select customers that have off-market contracts.

Yes, sure. I can take that. So in terms of the Visa-Mastercard settlement, it's really early and not final. Our early signal is it's most likely going to impact us in the second half of 2025. That's the early read. I would also comment that it won't impact our entire volume of GPV, just at the highest level. So just keep that in mind as you guys update your models. But in the context of pricing, I think your question on the take rate, as we've said, we're going to take pricing over time, it's going to be an ongoing cadence of small steady changes in price. No step-function change in pricing this year. We're going to start with fintech in the second half of the year. And just keep in mind, it won't have a meaningful impact in 2024. But over time, you should see us execute against a steady cadence of price adjustments, particularly in places where customers are out of market.

Just to build on that, Josh, as we think about growth, it's really a combination of, if you think about our growth algorithm, it's a combination of product attach rates, product innovation, and pricing. And we're thinking about all three of them as we consider where we are with 13% market share in the industry.

I guess first of all, it looked to me like Q2 recurring GP growth is actually a little lower than the back half year. It looks to me like you're calling for a re-acceleration in the back half. Is that right? And what would that be attributed to?

Yes, there are a few points to address. First, let me provide some context regarding the full year and Q2, as there are several factors influencing this. Our full-year guidance suggests a 26% growth at the midpoint, which indicates that our gross profit is expected to grow over time. In Q2, we are seeing some dynamics at play. One factor is the implementation of forward flow, which we've discussed, along with a comparison to a one-time benefit we experienced in SaaS revenue during Q2. These factors are contributing to a lower recurring gross profit for Q2. Additionally, we mentioned that we will be introducing targeted pricing for fintech in the latter half of the year, which will be a gradual and slight adjustment.

Got you. And just maybe as a follow-up, you talked about GPV per location being down a bit, just especially because of January. What is kind of April, May, June? Would we expect acceleration just because you don't have January, obviously, in Q2?

Yes, you're correct, Josh. In the first quarter, January's performance was affected by a weather pattern. As the quarter went on, we saw GPV return to more typical levels. Overall, GPV per location declined by 2% in Q1. As we move into the early part of Q2, it's down by low single digits. Regarding our guidance on GPV, keep in mind that we saw a decrease in GPV per location during the second half of last year. Therefore, as we look at the latter part of this year, you can expect improvement in GPV comparisons.

Aman, I'd love to ask about the new suites that were rolled out, management suite, digital storefront, marketing suite. As you think about kind of sizing the opportunity in the installed base, how do you think about that? And then maybe you could talk about, are there incumbent technologies there? Is it more of a greenfield opportunity? Like what are the competitive dynamics?

Yes. DJ, thanks for the question. If you look back the past couple of years, we've launched a lot of products. And really, the driver behind these suites was to simplify. We've introduced these suites to package our products and really simplify the sales process, both for our go-to-market team and our customers in terms of how easy it is to adopt and leverage the platform. The suites are organized into good, better, and best tiers to help both let our customers start off, for example, at one tier and then, over time as they see value, adopt more of it. As our team is driving more innovation, having a framework where our team can deliver more capabilities without just continuing to launch more and more products, simplifies it for everyone. And in terms of the types of products and areas we're investing in, of course, we're going to continue to invest in the lines of business and products we offer. This is across commerce, restaurant operations, guest experience, fintech, and supplier as well. And then I think the other thing that we're tracking very closely is how does AI and data play a role. One of the things that we think is really powerful is we've got one of the most, if not the most powerful data set in the restaurant industry. How do you leverage that to help restaurants be more successful? One example is in our management suite. We've added data benchmarking to help restaurants better understand how they benchmark relative to their peers, both on sales data, menu data, even what to put in menus, thus helping them be smarter by leveraging the data.

So Elena, you talked about a 30% to 35% margin target long-term. As you think about the operating leverage you're achieving in the business and also kind of driving the gradual adjustment as a component, is there a change in thinking about that long-term profitability target? And also, how should we think about long-term GAAP profitability as well?

Sure, great question. I'll provide context on our long-term financial profile at Analyst Day. But just sort of pivoting back to 2024, our guidance shows significant progress on margin. You've seen us deliver that efficiency and scale over the course of the last several quarters. We're going to continue with that discipline. You heard Aman talk about his strategic priorities as he's laid out. We're positioning the company really to drive ongoing operating leverage while balancing that with growth and innovation. I don't have an update today, but we'll share more at Analyst Day. And you had a question on GAAP; overall, just keep in mind, we've been very focused on stock-based compensation, which has driven our confidence in the updated guidance on GAAP on this call.

Sorry, can you hear me?

Yes. Now we can.

I wanted to follow up on Dave's question regarding GPV per location. Looking beyond the second quarter, I know some comparisons will be beneficial. We are seeing that on our end as well. However, considering the shifts in our mix and our varying focus on different market segments, do you have any insights on GPV per location structurally, aside from the broader macro environment?

Yes, Tien-Tsin, thanks for the question. Nothing material to report there. If you look at the bulk of our growth, that is still being driven by our core SMB business. The same effect we've talked about is as we gain share, we're seeing that flywheel effect. It's taken us a decade to build the business we have in our SMB segment. While we're excited about the potential internationally in enterprise and other segments of the market, that's not what's materially driving any changes in GPV. I think some of this is just about restaurant sales trends; they're stable, though year-over-year, there was a small deceleration that we observed. Now it's stabilized in a narrow band.

And I would just add that as we extend to the different parts of the TAM, any mix shift will be very gradual over a long period of time.

Yes. I mean, look, we're also investing in a big way to continue to innovate for our customers. I talked about some examples of how we're leveraging data and AI to help this customer community with our unique data asset. We had a great quarter; you saw 6,000 net adds, indicating great momentum in the business. This speaks to the team's execution and our platform and go-to-market engine.

Some of my questions are similar to what we've already discussed, but considering the approximately 850,000 restaurant locations in the U.S., how do you perceive the portion of that market that is accessible with your current solution, whether it’s the turnkey option or the software and hardware, excluding payments? How challenging will it be as you target larger clients to compete against more modern software or payment providers?

Yes. Thanks for the question, Pete. Look, I think if you look at the overall TAM, we see there's a lot of room for us to continue to grow in our core TAM. Overall, Toast is about 13% of U.S. restaurants, as Elena mentioned. Within SMB and mid-market, that penetration is a little bit higher in the teens. Of course, enterprise is still nascent and it's early. Even in these markets that are the most penetrated where we've got 25%, 30% share, these are the flywheel markets we talked about; we still see some of the strongest growth in terms of net adds in those markets. The #1 focus of the team is to get all of our markets into a flywheel state. As we think about in enterprise and upmarket, we see that the adoption of cloud solutions is lower. There are more legacy solutions in place.

Yes. We haven't commented on that specifically, so nothing new to report on that today.

Maybe I want to start with you, Aman. I want to get some more detail on the benchmarking analytics. How robust could those capabilities become? And how does this support even more differentiation for your platform relative to competing vendors? It seems like you've been in a very favorable spot for buying benchmarking, given your size and scale. So how important could these capabilities be to your restaurant owners and operators? Is this a capability that they've been asking for?

Yes. Thanks for the question, Stephen. They have been asking for it. I think at the scale that we're at, we've got likely one of the best data sets in the restaurant industry. Our team is thinking about ways to apply this data to really add value for restaurants. One of the use cases that, frankly, has come up for years is how can you leverage this data to better understand sales trends, inflation pressures, and pricing adjustments. There are a host of use cases where our customers value understanding that data across their geographies, zip codes, and nationally. That's what's driving that benchmarking initiative. The early signs from our customers have been very positive. It's early, so we're still iterating on the product based on customer feedback, but we're leveraging the data that we have.

Yes, no, absolutely, Stephen. As Aman said, we had a strong start to Q1, and we're seeing great momentum from the sales team on the ground. Q2 is typically stronger seasonally and we don't see any reason why that will be different. We're seeing really good demand, and the funnel is strong, so overall, we have no reason to believe we won't add more locations in 2024 than we did in 2023.

I want to talk a little bit about the sales team. You mentioned investing behind the upsell team, the international sales teams. The last time that you formally disclosed the size of the overall sales and marketing organization was at the time of the IPO. It was about 730 people, a subset of that would have been the actual quota-carrying salespeople. Could you just give some directional color on how large that team may be now? How large the 730 might have grown to? Anything to give us some context on the overall size and breadth of the sales team?

Yes. Thanks, Tim, for the question. We've continued to add to the team since the IPO as you've seen with our location growth. But keep in mind, this dynamic around flywheels allows us to grow ARR without adding reps. We're gaining that efficiency and productivity from our sales reps all the while, to the point you made, growing our upsell team, investing in international and enterprise. While I can't give specifics at the highest level, we feel like we're really balanced across both our new business team, our upsell team, and these early investments in international. Overall, we're managing the payback periods as we always do, and that's how we're thinking about gradually adding to our sales force over time.

I wanted to ask one more on capital. Curious, if we looked at it from a different perspective—so not the dollars of gross profit but rather the dollars of contribution margin, thinking gross profit less your reserve build, do you think this forward flow agreement will help you expand that contribution margin percentage and grow contribution margin going forward?

Yes. At the highest level, forward flow, the model is such that we don't take credit risk, so the margin profile is healthy. Just zooming out, when you think about the capital program, we're optimizing to maximize our risk-adjusted returns. As we scale, we're going to build more partners, and in this case, forward flow offers us a healthy margin profile and still allows us to scale the business as well. So hopefully, that answers your question. In Q1, I don't think we've given the quarterly guidance, to be honest. But I will tell you, because we had some one-time benefits, we had a little bit higher savings than we anticipated, roughly around $10 million of incremental savings from the $100 million. And just keep in mind, one-third of it is related to stock-based compensation.

Great job on taking market share as always. In the SMB, the breadth and depth of products offered by Toast is clearly market-leading. My question is for larger merchants, be it upper mid-market or enterprise, are there any product gaps that you would like to fill? I ask this because the recent restaurant management suite release, the benchmarking tool was really interesting. Should we expect more product releases in the future specifically geared to larger merchants?

Dominic, thanks for the question. That is the plan gradually as we continue to invest across the whole TAM, including enterprise. The goal of the restaurant management suite was to provide a capability where we can start to drop in more and more of the capabilities into the suite. Whether it's our above-store management tools, extensibility and APIs, food security and compliance, config management, there's a whole host of capabilities we're investing in to make our product a better fit for upmarket, including drive-through capabilities over time. This is the plan in the long term, and the restaurant management suite allows us to package all of it up into a suite that can be used upmarket. If you look this quarter, we announced the online ordering—integrated online ordering—which is a big feature request from our customers internationally; it's been really well received. There's a roadmap to continue to invest and expand the product both from a guest experience standpoint and in-restaurant operations to support our international customers. A lot of that is driven by our customer base. The incremental investment to build out the product is certainly not the same as building the product for the U.S. market, given we're building on top of what we've built here over the past decade. We've also built a framework that allows for language, currency, or location-specific requirements, such as payments, to be reusable across new markets. As we enter the next scale of markets over time, it should allow us to go even faster.

I just wanted to ask about the cadence around the SaaS ARPU for this year. Is there any kind of fluctuation that we could expect? I know it's a bit too early, but thinking beyond 2024, I just wanted to get a sense on the upsell strategy that could lead to potential improvement in the SaaS ARPU growth trend from here.

Yes, Sheriq, I'll take that. In the near term, we've said mid-single digits on an ARR basis, and we still feel confident in delivering on that in the near term. Zooming out, when you think about our opportunity long-term, there are a few things we think about. One is optimizing our product breadth and working on product market fit, our upsell team, pricing, and packaging. Then there's innovation; we're continuing to invest in R&D to drive future innovation. We've talked about implementing a steady cadence of small price changes over time, on the SaaS side and even on the fintech side. So we have an opportunity over time to grow our ARPU, but mid-single digits remains the right proxy on an ARR basis in the near term.

Operator, I think that ramps up our call for today.

This concludes today's conference call. You may now disconnect.