And then we've got humans reviewing and approving those workflows. And so as we've gotten some early scale, we've already seen the gross margins improve. And frankly, I have no concerns long term about what the gross margins of that business could be. We're a lot more focused right now to your earlier question about product market fit and looking at the funnel really closely to make sure that there's a path here to really accelerate growth on that product.

Thanks, Rashida. All right, we'll move on. we'll take our next question from Will Nance at Goldman Sachs.

Thanks for taking the question, guys. I wanted to ask a question on margins. I think delivering a pretty clear message tonight about the continued runway you have to drive efficiencies while also maintaining the top line growth rates and reinvesting into the business. I heard the commentary on sustained rule of 60 performance, margins in the core already being higher than 40%. And so I guess with the incremental commentary today, I'm wondering if you could just talk qualitatively about where some of that confidence is coming from. For instance, is it coming more from the unlock of seeing more potential in the core to drive leverage over time? Or have you seen some more evidence on some of the expansion verticals that make you think that margins can trend significantly higher. I'm sure it's a mix of both, but maybe just qualitatively, you know, what are some of the examples you've seen that's giving you that anchoring confidence? Thanks for taking the question.

Yeah, thanks, Will, for the question. So the short answer is it's both, right? So we are really proud of being, you know, really disciplined in terms of capital allocation. And like zooming out our framework is we're really positioning the company to be, you know, a much bigger company or we're building a generational company where we believe we can be much bigger than we are today. And some of that comes from both the way we manage our capital allocation and the discipline that we see, but also to the point you made, our new TAMs are showing incredible signal already. Aman talked about reaching 200 million in ARR. So So we've always said to the extent that we see success, we're going to actively choose to invest. And that's exactly what we're doing. And now we're going to do it in a very sustained, in a very disciplined way where we're going to sustain growth, but at the same time deliver gradual margin expansion. And so we're seeing all of the proper signals. And then, of course, AI presents an opportunity for us as a business to reimagine how we work and continue this effort that we've had for many years really around efficiency. And we think we can unlock even more efficiency. That's why the commentary and the script is around meaningfully higher margins. That's because we're going to continue this focus on efficiency, but also as we become an AI-native company, AI-first company, we'll see some benefit from that as well.

Thanks for taking the question.

Thanks, Will. We'll move on to our next question. Darren Peller at Wolf. Darren, take it away.

All right. Thanks, Michael. Look, it's really nice to see the strength in the location ads this quarter. Can you just touch on the composition of the net ads look like? How would you assess the performance in the core then versus the expansion? I know you certainly are highlighting the success you're having in the ARR side, but just in terms of number of users that are showing up there and how that's contributing. Thanks, guys.

Of course, yeah. First off, the results we have in Q2 and really the first half are really, really strong. Really proud of the sales team's performance. I think we had a new watermark, 9,500 net ads this quarter. I think previously the watermark was 8,500. And really, if you look at it, the majority of that came from our core business, right? This is the SMB and mid-market business. We continue to see really strong win rates. We see, you know, I think we're taking stronger GPB share gains versus anyone else in our core business. Haven't seen anything fundamentally change on the competitive side. I think this goes back to something I said earlier, which is, I think one point that's maybe underappreciated a bit is if you look at why customers choose Toast, it's not just because of the point of sale. they're picking this all-in-one platform. That's what drives our win rate. It's capabilities around the operations of the restaurant, both front of house and back of house. It's the guest experience and all the tools there. It's the employee experience, the suppliers. It's the fintech products. It's the lending product. And now increasingly, it's products like Toast AQ Grow. And so for us, that's the focus, is to continue to drive more and more value for our customers. We're big believers in continuing to be customer-obsessed and not competition-obsessed, and that's showing up in our win rates and the productivity of the sales team.

Thanks, Aaron. Thanks, Aaron. We'll turn to Stephen Sheldon at William Blair for our next question.

Taking my question, I guess just wanted to go back to GROW, and I'm just curious what the early learnings have been around getting customers to implement and optimize around these agendic capabilities? I know Grow is the only solution you have out there right now from the agendic side, but how much hand-holding are you needing to provide to get customers up and running? Is that going to be pretty common as we look forward?

Yeah, we're still learning. I'll just start by saying, I think it's in the context of our business and our scale, even though ToastSky Grow is growing at a rapid clip, it's still very early. I think what we see is, I'll go back to what I said earlier, actually, which is if you look at how we build software, we have incredible tools, but we still need human oversight on top of those tools to make sure we're getting the most out of AI. And I think it's the same mindset where our customers are coming to us and saying, look, we're outsourcing this work of marketing to somebody already. If you could take that on and you can do it better, right, that's awesome. And so our approach is we're using all the data context we have, and we are letting AI drive the first task of what, for example, a great website looks like, or what are the ways in which you have great online ordering and digital presence? What are the right offers you need to generate? What's the best attempt at a marketing campaign or an ad on social? And then you've got our marketing success managers reviewing and approving that work. I think one of the reasons we've been able to see such strong impact where customers that switch to a post-IQ grow increase same-store sales is because we've got really unique data. An example is we're looking at the restaurant's data in terms of when they're busy, when they're not, what are the things that make that brand and that restaurant, what it is. On the guest side, we know guest preferences so that over time these campaigns can get hyper-personalized. And I think we're learning a lot about what creates the best possible campaigns. And I expect that over time, it'll get better and better in terms of the quality of these campaigns, the conversion rates. But the early traction so far has been really positive. This business is running positive margins already. It's increasing. And of course, the growth has been stellar.

Good to hear.

Thanks, Stephen. All right.

We'll take our next question from Dan Dolov at Mizuho.

Dan Dolov Oh, hey, guys. Great to see those results. I just wanted to ask a question about the hardware optimization costs. Maybe, Elena, can you unpack, be a little more specific on some of the savings, and then maybe any initial views on the 2017 impact? We're getting that a lot from my investors today. I really appreciate it. Great results again.

Yeah, thanks, Dan, for the question. Definitely a very, I would say, fluid environment. I would expect the P&L impact in 27 to be greater than 26, just based on how we account for inventory. I think there's really three things I'll leave you with. One, and I said this in my remarks, I'll just reinforce a few points. One is we've done a lot of work to improve the impact that we originally shared for both 26 and 27. And that's really the great work from the hardware ops team deploying mitigation strategies. I can talk about those. Two, we feel very confident about the supply and we have supply for both 26 and 27. And then three, a really important point, because we've done this deep dive over the long term, we're really confident that this work will lead to improved hardware margins over the long run after the memory market stabilizes. So we've done a lot of work to not only impact the near term, but also structurally what the hardware margins look like over the long term. So I feel really great about the work, and we're going to continue to do that and optimize anywhere we can really across the hardware P&L.

Thanks, Sam.

Thanks, Sam. We'll take our next question from Adam Frisch at Evercore.

Hey, guys. Thanks for taking the question. Your message is crystal clear in the sense that you're investing for growth and for good reason. But for some who may question that, I thought I'd ask it a little bit differently. If you could ballpark it, how much of your increased operating cost is by choice, like your choice to invest in sales and product development and stuff like that, and how much is out of your control, like memory costs? And then the question that we're getting tonight is, are you considering a resource rationalization in the coming quarters? Thank you.

Yeah, I'll take these. So number one, while hardware is an important part of our P&L, like zooming out, there's a much bigger cost structure that we're managing, and we're actively choosing to invest. And we've sort of laid out the reasons why. We have a ton of conviction around not only these new plans replacing Horizon 3 bets, but if you just think about the position we're in, we're in an incredibly strong position as a company with our core business at 40% margins operating at rule of 60. And now we're in this position where we want to sustain growth over the long term, but also do that in a very disciplined way, which is why we've said we'll always have some gradual margin expansion. But we're seeing great signal. It's a positive sign that means we're investing behind that great signal. So that's sort of the overarching kind of theme you should take from it. In terms of headcount and, you know, rationalization of headcount, we're always incredibly disciplined, frankly, around every headcount we hire, and that's not going to change. And as we consider AI, that allows us to reimagine how we work and consider across the company how we can scale even more efficiently. So I do feel very confident in our ability to drive improved, drive to meaningfully higher margins over the long term as we begin to adopt AIA across the company. And that's not just for our customers, but just even in how we work. I hope I got most of your questions answered.

Yeah. Just to build on what you said, just to get specific for a second, right? Like if you look at our plan this year, we saw some opportunity based on the performance in our strategic cuisines, this is the non-English speaking reps, and we've added some additional investment. With retail, we see opportunity increase in sales investment. We've been green-lighted that. So PsyQ grows similarly. We've seen some great early signal with our AI products. And so back to your question about a lot of it's our choice. We are leaning into areas that will allow us to grow over the long term. And I think, as you can imagine, for example, in our new town getting from 100 to 200 million this year gives us even more conviction right to say let's actually try to move even faster and um and while there's always puts and takes in terms of the even in year and like you know you know at least my expectation is hardware over time will normalize back to um what the margins were pre this memory issue like the the thing to take away is a lot of the focus investment in fact even beyond is a right into investment some investments in consumer, for example, or these new verticals beyond the ones we're in today are by choice because we believe in the long-term potential.

Thanks, guys.

Thanks, Adam. We're going to take our last question today from Tinjin Wong at J.P. Morgan.

Thanks a lot, Michael. Appreciate that. Kind of building on Adam's question there, I understand the incremental investment, building on what you just responded to. just I'm curious just prioritization of your incremental investments where are you seeing the fastest ROI it sounds like there's a lot of interesting things going on like sports and entertainment you've mentioned fuel payments things like that just yeah I think first of all like we want to make sure that any opportunities that exist in our core business to maximize growth or we're focused on that so we talked about some sales capacity in our core in strategic

cuisines the non-english part of the time so sick you grow we've seen some really early signal that's really positive and we actually unlock some investment there. And some of that is actually also more broadly on AI products beyond TosaQ Grow. See, that'll take time to materialize, but we're seeing the signal that we can take on some of the work that's beyond the software and take on some of the services work for restaurants over time with AI. And in our new TAMs, I think it's the, I get this question internally a lot about prioritization too, but I think that maybe I'll start by saying in our retail business, we've got SAS Arpoo's already there closest just within a couple of years to our core business. And so we look at the self-capacity we have and the productivity of the team that we have, and we say we should try to go faster, especially because I think the team's building conviction that as we get to scale, we're going to see some of those flagpole effects where, you know, once you get to 3%, 4%, 5% market share and grow, we expect there to be tailwinds on top of funnel on conversion, on win rate. And so we're leaning in there. And then I think internationally at an enterprise uh we're being opportunistic you said sports entertainment is one example uh to find areas where we can invest um and then i think in the whether you look at the future you know we've elena talked about this horizons framework i think lots of investment in our core investments against our new terms and then we've also got some investments against uh that's that set up longer term future growth so for example in in in retail you see fuel expansion, for example, recently, you know, leaning into grocery. We're looking at additional sub-verticals. We're looking at best around consumer. We didn't talk a lot about that in today's call, but, you know, we've seen really good monthly active user growth on that app as it's post-local. And so really across the board, where we see opportunity, we're leaning in. And, you know, Elena and team do a great job of making sure that while we're leaning into growth, we're also looking at all the opportunities to drive efficiency in the business, especially with what AI will make possible.

Thanks, Sean. Thank you.

Thanks, Sinjin. That wraps up our call for today. Thanks, everyone, for joining. Please reach out with any questions, and I hope everyone has a great evening.

This concludes today's call. Thank you for attending. You may now disconnect.