Good afternoon. My name is Breeka, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast’s Second 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 begin your conference.

Thank you, operator. Welcome to Toast’s earnings conference call for the second quarter ended June 30, 2024. On today’s call are CEO and Co-Founder, Aman Narang; and CFO, Elena Gomez, who will 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 and margin outlook, anticipated impact of our restructuring plan, warrant repurchase and share repurchase program, expected growth and business outlook, including our financial guidance for the third 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 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. We had a strong second quarter. We added a record 8,000 net locations, our recurring gross profit streams increased 29% year-over-year, adjusted EBITDA came in at 92 million, and we’ve achieved GAAP income profitability ahead of expectations. I’m really proud of how the team performed, and we’re well positioned to continue to scale and have a strong second half. Our mission at Toast is to help restaurants delight their guests, do what they love, and thrive. At our first Investor Day in May, we shared the opportunity, strategy, and drivers behind our momentum. With about 13% share in U.S. restaurants, we have an incredible opportunity to scale and become the platform of choice serving this amazing industry. Our products and data assets, combined with our local go-to-market engine and customer success teams, uniquely position us to drive both location and ARPU expansion and sustained durable growth over the long term. In addition to scaling across U.S. SMB and mid-market restaurants, we’re thoughtfully laying the foundation to expand our TAM across key international markets, enterprise restaurant chains, as well as food and beverage retail. The team has done a great job of identifying segments of the market where we have a right to win without distracting from our ability to scale in our core market segments. These investments allow us to expand our TAM and support our ability to drive durable growth and shareholder returns. We’ve increased our outlook for the full year based on our performance in the first half, and we’re all focused on the four strategic priorities we laid out earlier this year. One, scaling locations and market share in our core business; two, expanding our offering for restaurants with products customers love; three, expanding our addressable market into new adjacencies; and four, setting up the company to deliver ongoing operating leverage as we scale. So first, scaling restaurant locations and gaining share in our core business. Our record 8,000 net adds in the second quarter were driven by 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 flywheel effect with higher rep productivity and faster market share gains. In fact, in our top 10 flywheel markets across the country with the highest market share, we saw 50% more wins on average in Q2 versus non-flywheel markets. This gives us confidence in our ability to continue to drive strong market share gains over time. We’re gaining share because restaurants see the impact we can have on their businesses. I’ll spotlight one recent example that speaks to the value we bring. Bizoria, a growing fast casual concept in Greater Atlanta, switched to Toast from another cloud provider to help fuel their next stage of growth. By complementing our POS terminals with self-ordering kiosks for guests and kitchen display systems across their food and prep lines, they’ve reduced average order times by 5 minutes. As a result, Bizoria estimates that they have increased revenue by 25% across their locations. Switching gears, our second priority is expanding our offering for restaurants with products and experiences customers love. Our platform and partner ecosystem serve all the restaurant stakeholders, operators, guests, employees, and suppliers and create value across many dimensions, including supporting new revenue streams, driving throughput, and simplifying operations. Last quarter, I talked about the launch of product suites across good, better, and best tiers to simplify how we sell and how our products get adopted by our customers. We’re starting to see this have an impact. For example, since we launched our digital storefront suite in the spring, approximately 30% of booked locations upgraded to our Pro tier, which includes our new website product. This website product works in concert with the rest of our digital suite to help restaurants build a great online presence. As we continue to mature our product suites, we’re confident we will see similar trends across our platform, which will help us drive product attach in ARR. Internationally, across the U.K., Canada, and Ireland, our team has been hard at work building out the platform to drive both differentiation and ARPU. In the first half, we launched several products, including online ordering, Mobile Order & Pay, gift cards, and kiosks. Attach rates are surpassing expectations. For example, nearly half of international June bookings adopted Toast online ordering. Tahini is a Canadian quick-service restaurant that has already rolled out Toast across 42 locations. The plan is to double our location count next year. One of the highlights for Tahini has been a 15% increase in check sizes on their kiosks versus ordering at a POS terminal. They credit this increase to our kiosks' ability to prompt for data-driven upsells via beautiful custom images of their dishes for items that go better together. This growth in revenue has helped them invest more back into their business to support their ambitious growth goals. Our team is planning to roll out more products internationally this year, including guest marketing, restaurant retail, Toast tables, as well as our hotel PMS integration. With 2,000 live locations as of Q2, we are excited about our progress and continue to remain optimistic about the long-term potential given how early we are in the international opportunity. Next, our third priority is expanding our addressable market into new adjacencies, including enterprise and food and beverage retail. We recently expanded our partnership with mussels pretzels by signing an extension for another 100 stores in addition to the 300 locations already on our platform. We continue to roll out Toast across a number of marquee brands, including Wetzel's Pretzels and BBQ Holdings, which are part of fast-growing MTY Brands. The improvements we have made to our platform, combined with our strong pipeline, give us confidence in steadily increasing enterprise penetration over time. As I mentioned in our Investor Day in May, the work we’ve put in over the past decade building on our platform has allowed us to enter new verticals, including grocery, convenience stores, and bottle shops. There are 220,000 locations and 660 billion in spend in these markets alone in the U.S. And so far, we’ve booked 1,000 new customers. We see a significant growth opportunity here, in part because so much of this market is still using legacy on-prem solutions and sees the benefits of an integrated cloud platform. For example, Victory Hospitality Group in Portland, Maine, recently launched three markets on Toast in addition to their portfolio of award-winning restaurants that have been with us since 2016. Since adding Toast, the staff has been able to offer better service to their guests by making back-office tasks, including inventory management, much more streamlined. We see examples like this across many of our early retail customers and have confidence that we can drive significant growth in this segment. Finally, our fourth priority is to deliver operating leverage in our core business as we scale both to drive shareholder returns and have the capital available to invest in our nascent market segments. Our adjusted EBITDA was 92 million in the second quarter, a 77 million improvement from a year ago. I’m very proud of the team’s ability to both drive strong growth and this level of margin expansion in a short period. As we look to the second half of the year, we will invest more back into our business to support our growth plans while working towards our long-term margin goals. To wrap up, I’m confident in how we’re executing. We’re still in the early innings and are prepared to capitalize on the opportunity ahead. I want to thank every Toaster for their continued dedication and passion for our mission. Our customers for entrusting us to support them. Our partners for helping us enable this great ecosystem and, of course, our investors for believing in us and the potential in this business. 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. I also want to thank our employees; your continued focus on execution delivered another strong quarter with top and bottom-line results above expectations. In the second quarter, ARR grew 29%, driven by strong location growth and continued ARPU expansion. Total fintech and subscription gross profit, our recurring gross profit stream, also increased 29% year-over-year and totaled 344 million. Adjusted EBITDA was 92 million, representing a 27% margin on our recurring gross profit streams. We reached GAAP profitability earlier than expected, an important milestone we have been working towards and further evidence of our ability to drive durable, efficient growth. In Q2, we added approximately 8,000 net locations, a new quarterly record, increasing our total locations to about 120,000, up 29% year-over-year. Location growth was primarily driven by continued share gains in our core U.S. SMB and mid-market customer segment, complemented by contributions across international, enterprise, and food and beverage retail. As a reminder, Q2 is our seasonally strongest quarter of the year as restaurants prepare for peak season, and we typically see lower quarterly net adds in the second half. SaaS ARR grew 35% year-over-year, driven by strong location growth and a mid-single-digit increase in SaaS ARPU on an ARR basis. Payments ARR grew 24%, and fintech gross profit increased 23% in Q2. GPV was 40.5 billion, up 26% year-over-year, with GPV per location down about 3% versus prior year, consistent with recent quarterly trends. Net take rate was 54 basis points, with the core net take rate flat year-over-year at 45 basis points. Our non-payment fintech solutions, led by Toast Capital, contributed 34 million in gross profit and 8 basis points to the net take rate. The net take rate contribution is slightly lower than prior periods due to the introduction of forward flow, which comes with a lower take rate per dollar of origination but carries no credit risk. Expanding capacity with diverse funding sources enables us to prudently grow the program and optimize across models to maximize risk-adjusted returns. We are on track for the targeted payments pricing increase we’ve discussed, which we expect to have a small impact on core net take rate in the second half of the year. Over time, ongoing price adjustments will be one of the several drivers of our long-term growth algorithm. Total operating expenses were up 2% year-over-year in the quarter, reflecting a full quarter of savings from restructuring actions taken earlier in the year. We anticipate operating expense growth will increase in the second half as we reinvest savings into our highest priority areas across go-to-market, product, and TAM expansion to drive sustained long-term growth. We’ll maintain the same disciplined investment approach we’ve employed and remain focused on driving efficiencies across the business to fund investments and drive margin expansion. Sales and marketing expenses increased 16% year-over-year in Q2 as we continue to grow our upsell and international sales teams and make targeted investments in our U.S. go-to-market motion to drive deeper penetration. R&D expenses declined 4% year-over-year in Q2. We expect to see the impact of reinvestment starting in Q3. We’re making targeted investments aligned with our product strategy to provide a differentiated platform for our core SMB and mid-market customers, innovate new products that create value for our customers, and expand into new TAMs. Excluding 50 million of bad debt and credit-related expenses, G&A was down 12% year-over-year. We will continue to drive efficiency within G&A, including through automation and global diversification of our workforce, and expect ongoing operating leverage. Bad debt associated with Toast Capital was lower relative to prior periods, benefiting from the addition of forward flow and the continued optimization of the program. Our progress in growing adjusted EBITDA, combined with containing stock-based compensation expenses, resulted in our first quarter of GAAP operating income profit reaching 5 million in the quarter. Free cash flow totaled 108 million in the second quarter, driven by strong adjusted EBITDA and a benefit from working capital due to the seasonality of our payments business. Moving to capital allocation. Year-to-date, we have repurchased 49 million in shares. At the start of Q3, we also opportunistically repurchased a warrant for 5.2 million shares expiring in 2027 for 60 million. The warrant repurchase aligns with our broader capital allocation strategy to maximize shareholder value, in part by reducing dilution. We view it as an accelerated, efficient share repurchase and use of cash we would have otherwise allocated for opportunistic stock repurchases. As a result, we anticipate a slower pace of buyback through the balance of the year, although we will remain opportunistic based on market conditions. Now turning to guidance. For the third quarter, we expect total subscription and fintech gross profit to increase in the 23% to 27% range year-over-year and adjusted EBITDA to be 70 million to 80 million. Following our strong first half performance, we are increasing our full-year outlook. We now expect 27% to 29% growth in fintech and subscription gross profit and 285 million to 305 million in adjusted EBITDA. At the midpoint, it represents a 22% margin, a 16 percentage point improvement versus 2023. We expect to be around breakeven on a GAAP basis for the remainder of the year. After benefiting from the restructuring savings in the first half of the year, our guidance includes investment in key areas of the business, which are concentrated in the back half of the year. This is also driving the quarterly fluctuations in adjusted EBITDA margins. Our expectations for the full-year margins are representative of how we are managing the business and capture our growth investment and efficiency gains. We plan to build off of our full-year 2024 margin and steadily progress towards our medium and long-term targets. To wrap up, we are extremely proud of our execution and momentum through the first half of 2024. We are on track for a strong second half of the year and well positioned to sustain high growth and margin expansion over the long term. Now I will turn the call back over to the operator to begin Q&A.

Your first question comes from Tien-Tsin Huang with JPMorgan. You may proceed.

Hi. Good afternoon. Good results here. Just wanted to ask on the second half and if there’s been any change in restaurant health in the last couple of months since we last got together, I understand the location addition seasonality comment, I know that you mentioned, but just any other observations on the macro side?

Thank you for the question, Tien-Tsin. In the second quarter, our gross payment volume per location decreased by 3%. As we move into the third quarter, it remains in that same range, indicating consistency. Our guidance reflects this, as I outlined in the call. However, the macroeconomic environment is changing, and we have some insights regarding our restaurants. We have shown resilience during various economic cycles, and we will continue to keep a close eye on it. Looking at our gross payment volume growing by 26%, reaching 40 billion this quarter, we have significant confidence in our ability to navigate the business through different economic conditions.

Hi, guys. Thanks for taking my question. I wanted to ask about subscription ARR. I think it looks pretty strong and the annual number looks actually really good. I wondered what kind of products are resonating with your customers today, as the upsell performance, at least from what we’re seeing here, looks pretty good in the context of the same-store sales allocation?

Thanks for the question, Dan. Yes. Look, there’s a broad range of capabilities we shared across our platform at Analyst Day. This includes capabilities like data and AI. We shared our benchmarking tool, and the feedback from our customers has been positive. Generative AI is leveraged in our CRM tool. Sous Chef is another area we’re excited about to help be an umbrella for all of our AI innovations. So that’s one area that the team is excited about. Across our platform, we’ve talked about how the platform encompasses commerce, guests, employee cloud, and SaaS, as well as fintech. In these areas, there’s ongoing work that the team is putting in to help continue to refine and iterate on the products. On the guest side, for example, our products like Toast Stables, catering, online ordering, and the new website product have received good feedback. On the employee cloud side, there’s a lot of focus on our payroll product, working in conjunction with our scheduling and tips products. We’re continuing to work on product-market fit in our supplier and accounting product. Overall, a lot of our focus as a team is to ensure that we drive strong ARPU growth in the medium and long term since we recognize this as an important growth driver for the business.

Hi, guys. Appreciate you taking the question. Nice to see another strong quarter. I wanted to ask maybe sticking with the macro from Tien-Tsin’s question a second ago, just on decisions to make some of the incremental investments. I think there’s been a lot of focus on the macro recently. When you think about adding additional headcount to go-to-market functions, how do you think about sort of the mix of net adds and those that are coming from new restaurant openings versus competitive takeaways? Have you seen any impact on the opportunity out there as new restaurant location formation slows? How do you marry that with the decision to accelerate investments in the back half?

Yes. Great question. Thanks for asking. In terms of the mix of NROs and existing restaurants, we’ve continued to see not a fundamentally different pattern. Our team has the ability to sign and convert both existing restaurants and NROs. Reflecting on our record 8,000 net adds in Q2, I want to say that I’m really proud of our team’s performance. 8K is an important milestone for us; if you look at our ARPU at 12K plus, we’re approaching 100 million in ARR that we added in the quarter. Sustaining this level of growth quarter-after-quarter for the next decade is a great outcome. In Q2 specifically, many of the net adds came from our core U.S. SMB and mid-market business. It’s taken us a decade to build our SMB business. Our top 10 flywheel markets continue to be really productive, with 50% more wins compared to non-flywheel markets. While we’re excited about adding capacity and sales in international retail, we’re proud of the progress we’ve made in our core SMB business. As long as we see our unit economics being healthy, we’ll continue to invest.

Hi. Thanks and nice work in the quarter. As you expand into adjacent markets like grocery and convenience stores, I think Aman, you talked about the big opportunities to replace legacy on-prem solutions. Are there specific portions where there are larger legacy replacement opportunities than others as you think about SMB restaurants, enterprise, international, and again, those adjacent markets?

Yes. Thanks for the question, Stephen. As we’ve mentioned in past calls, the enterprise segment does have slower conversion cycles, so there’s more legacy upmarket in that space. We also see specific needs within retail, where there isn’t a strong cloud provider that has taken over. It reminds me of what the restaurant business was like 10 years ago. We see significant opportunity within these two segments. Even in the international markets, larger restaurants with higher GPV still have a lot of legacy to contend with. Our focus is really on asset allocation across all of these growth vectors based on customer feedback, payback periods, and economics. Those are some key drivers that influence our capital allocation across these market segments.

Great. Thank you for taking the question. I have an upfront question around the upsell teams in land and expand. If you don’t mind, I was hoping to also clarify something for the second half guidance. For the upsell teams in the land expand, those are two things that you focused on last year, hiring more upsell folks in the fourth quarter, I believe. Could you talk a little bit about the progress you’re seeing with those teams? Regarding their productivity in contributing to SaaS ARPU or SaaS AR per location in the second half of the year and beyond. Also, if I’m not mistaken, the prior guidance would have implied GPV per location being a little bit better in the second half and now it’s slightly indicated maybe a downtick there. Is it fair to say that the guidance is absorbing a little bit more macro pressure and you were still able to raise the guide despite that incremental macro pressure?

Yes. That’s a fair assessment, Tim. Our guidance does reflect our latest thinking. We’ve seen that same-store sales and GPV per location have been stable within a narrow band, which we have factored into our guidance for the back half of the year.

On upsell, Tim, we’re learning a lot. We’ll continue to optimize this in conjunction with our new business team. This team is critical in driving ARPU growth. The new business team, first and foremost, focuses on growing locations while we optimize the upsell team to ensure that we drive ARPU growth to complement the location growth we’re seeing. We’ve also talked about Toast shop and product let growth. The upsell team has made great progress after two years. There’s work to do, and we’re committed to refining our land and expand strategy with both the new business and upsell teams.

Good afternoon. Very strong location adds. Can you expand upon the contribution from new areas like food and beverage retail international? And then, Elena, how should we think about location at in 3Q? I know you mentioned the seasonality-driven headwind also in the second half of the year. Thank you.

Yes. Sure. Thanks, Harshita. International retail is growing nicely. As we said at Analyst Day, we have 2,000 live locations and have started to see the impact of investments we’re making to expand the platform that resonates well with our customers. Our recent bookings in retail reached 1,000 locations quite quickly. However, you should remember that our core business in the U.S. has been developed over 11 years, while these newer markets are still emerging and do not have the same sales capacity and product maturity. The bulk of our location adds are coming from our core business. The top five wheel effect continues to be the primary driver of our growth. Over the next few years, we aim to expand into these other areas and make them significant contributors to our revenue.

Yes. And Harshita, on your question about the second half, first of all, I echo Aman’s comments. We had a strong first half of the year in terms of net location adds, and we’re still on track to add more new locations in 2024 than we did in 2023 off a larger base. Q2 quarterly net adds tend to be obviously higher than the rest of the year due to seasonality, so just consider that as you model for the second half. However, I am confident the team is executing well.

Great, thank you for the question. Was hoping you could unpack GPV per location just a bit more. Any impact from changing mix on that metric? Additionally, I'd like you to dig into the trends you're seeing just across exceeded diner numbers, ticket items, and check sizes.

Yes. I’m happy to unpack that. Just to put it in context, Q2 was down 3%, and year-to-date it’s been consistent as I mentioned. Most of that is driven by same-store sales declining year-over-year. That’s the primary driver. There’s a small portion related to the mix, but it’s mainly same-store sales declines which have been relatively consistent. In terms of our segments, we haven’t seen a notable pattern difference across them.

Just to add to that regarding check size and order side, there hasn’t been any fundamental change. These changes have been gradual, remaining within a narrow band. As Elena mentioned, we’ve observed this pattern consistently over the past year.

Thanks for taking the question. I wanted to dig in a little bit more on the investments needed in food and beverage retail and international. At the Investor Day, you mentioned how you’ve already made significant investments to achieve product parity there, but it sounds like there’s still a good amount of investment that needs to be made going forward. I hope you could expand on that and maybe use a baseball analogy. What inning are we in regarding building out the platform for these two new verticals right now?

Yes, I think that’s a fair question, Matt. In terms of baseball, I won't use that analogy, but I’d say our core business in the U.S. is in year 11 or 12, while these other businesses are in years 1 or 2 to give you context. The customer reception has been excellent; the feedback has been overwhelmingly positive. Our recent stories involving customers illustrate how we are addressing their needs effectively. One of our key strengths is our ability to migrate clients from legacy solutions to cloud-based all-in-one approaches, which has been well received in these sectors. We've focused on inventory management, e-commerce, and integrations with our payment solutions. Although there is work to be done to meet our targets, we are encouraged by the early reception and development of our platform. For international markets, the lift isn't as significant, but there is still a gradual process as we adapt the platform.

Yes. To build on what you said, Aman, as mentioned at Analyst Day, we are strategic with our capital allocation. We remain disciplined and await signal before making further incremental investments. That discipline is crucial as we scale these businesses.

Thanks for taking the question, guys. Excellent results. Aman, I’d love to get an update from you on what you’re hearing from customers regarding your AI initiatives, whether that’s Sous Chef or some other projects. Also, how do you envision these contributing to your financial model over time?

Yes. Thanks for the question, David. It’s still early, but we are keen on leveraging AI to create real value for our customers. A great example of this is our guest marketing tools, where we use generative AI to create effective marketing campaigns for restaurateurs. Those who run restaurants aren’t typically marketers, so having AI generate campaigns while they work on the floor is extremely beneficial. This has already had a big impact on product adoption. Another example pertains to our benchmarking feature, utilizing data from over 120,000 restaurants on our platform to provide valuable insights. This allows restaurateurs to make data-driven decisions ranging from menu pricing to inventory management. Sous Chef serves as an umbrella for AI initiatives, offering prompts and recommendations that help run restaurants efficiently. Our team is focused on using every opportunity to drive demand and enhance the value of our platform for customers.

Hi, good evening. Thanks for taking my question. Elena, I know I hear you on the back half guidance around net adds in the commentary. I just wanted to ask are you changing any of your assumptions around what you’re expecting for gross retention as you think about the back half on what the net adds ultimately look like? Any observations on what you saw in Q2 regarding churn or retention metrics inside of the installed base?

Yes. Broadly speaking, now, I think the team has been executing well. There’s no material change in how we’re thinking about the business. On churn, we’re slightly above the 10% range on an annualized basis. That’s up slightly compared to last year, but very similar to where it’s been for the last few quarters. The churn continues to be predominantly due to business closures, so the impact on ARR remains low. We’ve factored that into the net adds that you see, and we have built in our churn assumptions with no material changes. Yes, I answered that a few minutes ago. So, yes, you did hear that.

This is Conan in on behalf of Andrew. Thanks for taking the question. I wanted to focus a little bit on the macro again. If we see a slower restaurant spending environment throughout the back half, what offsets are built into the business or levers you can pull from the cost side to manage impacts near term? What are you embedding into the guidance?

Yes. Thanks for the question, Conan. At the highest level, I want to say that the value of the Toast platform is durable during tough times. We have shown that over cycles. Moreover, we’ve been flexible enough to adapt quickly to changing circumstances. As we have streamlined the company, it positions us to absorb macro changes and helps us move faster when necessary. Thus far, what we are observing, same-store sales are the primary driver for GPV per location being down 3% in Q2. Our guidance accounts for this issue, and we acknowledge the macro is dynamic, but we’re confident in the resilience of restaurants to weather these challenges. Thanks for joining us, everyone.

This does conclude today’s call. Thank you all for joining. You may now disconnect your lines, and enjoy the rest of your day.