Toast, Inc. (TOST) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reflects a positive sentiment due to strong financial performance, strategic partnerships, and growth in new and existing markets. Despite a sequential decline in EBITDA due to strategic investments, the overall guidance remains optimistic. The Q&A section highlights confidence in product innovation and market expansion, with analysts showing interest in Toast's strategic direction. The raised full-year guidance and new partnerships, such as with Amex, further support a positive outlook. Given these factors, the stock price is likely to experience a positive movement in the short term.

Key Financial Performance

Recurring Gross Profit Grew 35% year-over-year. This growth reflects consistent execution across the company and increased market share in core and new customer segments.

Adjusted EBITDA Delivered $161 million, with margins expanding 8 percentage points year-over-year to 35%. This reflects strong execution and scalability of the business.

GAAP Operating Income Reached $80 million, up from $14 million a year ago. This increase is attributed to strong adjusted EBITDA and prudent management of stock-based compensation.

Annual Recurring Revenue (ARR) Grew 31% year-over-year. This growth is driven by location growth and a 5% increase in SaaS ARPU on an ARR basis.

Net Location Additions Added approximately 8,500 net new locations, ending Q2 with 148,000 locations, up 24% from a year ago. This reflects deeper penetration in core customer segments and growing momentum in new customer segments.

SaaS ARR Grew 30% year-over-year, driven by location growth and a 5% increase in SaaS ARPU on an ARR basis.

Subscription Revenue Increased 37% year-over-year, with gross profit growing 43%. This was driven by improved ARR to revenue conversion.

Payments ARR Increased 32% year-over-year. This growth is attributed to ongoing optimization efforts, small targeted pricing moves, and new products, including surcharging.

Gross Payment Volume (GPV) $50 billion, growing 23% year-over-year. GPV per location was down 1% versus last year.

Free Cash Flow $208 million, driven by strong adjusted EBITDA and a benefit from working capital due to the seasonality of the payments business.

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Operating Highlights

Toast Go 3: A new handheld device with ToastIQ, built-in cellular connectivity, lighter, faster, more durable, and a 24-hour battery life. It enhances restaurant operations by providing real-time guest context and seamless connectivity.

ToastIQ: An AI-powered intelligence engine integrated into Toast Go 3, providing real-time guest insights to improve restaurant operations.

Catering & Events product: A product that integrates seamlessly into the Toast platform, helping restaurants like Supper Club increase catering sales by 40%.

International expansion: Launched operations in Australia, marking the fourth international market after the U.K., Ireland, and Canada. The first customer in Australia is Graze Craze, which transitioned from a local provider to Toast.

Enterprise and retail growth: Added notable brands like Firehouse Subs and Zabar's, showcasing the platform's versatility. Enterprise and retail segments are on track to surpass $100 million in ARR by year-end.

Recurring gross profit growth: Increased by 35% year-over-year, reflecting strong operational performance.

Adjusted EBITDA: Achieved $161 million in Q2, with a margin of 35%, showcasing operational efficiency.

American Express partnership: Collaboration to integrate reservation listings into Local by Toast app and provide personalized experiences for diners, including Amex card members.

Focus on AI and data: Investments in AI-powered tools like ToastIQ to drive differentiation and improve customer outcomes.

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Risk or Challenges

Market Conditions: Potential risks from economic uncertainties and market conditions that could impact restaurant operations and consumer spending.

Competitive Pressures: Intense competition in the restaurant technology space, requiring continuous innovation and differentiation to maintain market share.

Regulatory Hurdles: Potential challenges related to international expansion, including compliance with local regulations in new markets like Australia.

Supply Chain Disruptions: No explicit mention of supply chain disruptions, but implied risks exist in scaling hardware products like Toast Go 3.

Economic Uncertainties: Dependence on restaurant industry health, which is sensitive to economic downturns and consumer behavior changes.

Strategic Execution Risks: Risks associated with scaling new customer segments and international markets, as well as maintaining profitability while investing in growth.

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Guidance & Outlook

Future Financial and Operational Performance: Management expects continued strong top-line growth and expanding profitability for the remainder of 2025. Adjusted EBITDA for Q3 is projected to be between $140 million and $150 million, with a full-year adjusted EBITDA target of $575 million, reflecting a 32% margin.

Location Growth: Toast anticipates more net location additions in 2025 compared to 2024, driven by consistent go-to-market execution and a comprehensive product offering.

New Customer Segments: The company expects new customer segments, including enterprise, international, and food and beverage retail, to surpass $100 million in ARR collectively by the end of 2025. These segments are projected to become increasingly meaningful parts of the business over time.

SaaS ARR Growth: SaaS ARR is expected to grow 30% year-over-year, driven by location growth and a 5% increase in SaaS ARPU on an ARR basis.

Payments and Fintech Growth: Payments ARR is projected to increase by 32%, with fintech gross profit expected to grow 30% in 2025. Toast Capital's contribution to net take rate is expected to remain in the 10 basis point range.

International Expansion: Toast plans to expand into new geographies, with Australia being the latest market. The company aims to leverage learnings and infrastructure from previous international markets to accelerate growth.

Product Innovation: Toast will continue to invest in product differentiation, including enhancements to Toast Go 3 handhelds and the ToastIQ intelligence engine, to drive customer adoption and operational efficiency.

Margin Expansion: Toast has reached its medium-term margin guidance ahead of plan and expects to balance long-term growth investments with margin expansion over time.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you provide context on the retail ARPU being over $10,000 and the breakdown between payments and software?

A:Aman Narang explained that the retail ARPU exceeding $10,000 demonstrates a significant opportunity, leading to increased investment in sales capacity. He highlighted the applicability of products like payments, capital, payroll, and scheduling, as well as specific products for subcategories within retail, such as inventory management for grocery and liquor stores. He expressed confidence in the business potential.

Q:Can you provide a breakdown of GPV per location trends across the base?

A:Aman Narang stated that GPV trends have been largely flat, with GPV per location down 1%. Retail GPVs are higher than restaurants, while international GPVs are lower. He emphasized the focus on unit economics, payback periods, and margins, expressing confidence in the long-term opportunities.

Q:Why is third-quarter EBITDA expected to be sequentially down?

A:Elena Gomez attributed the sequential decline in third-quarter EBITDA to increased investments in customer segments to accelerate progress, including tariffs having a bigger impact in the second half of the year. She emphasized the conviction to invest for sustained long-term growth.

Q:Will Toast Go 3 lead to an upgrade cycle or be more about attaching to new sales?

A:Aman Narang stated that Toast Go 3 will cater to both new customers and existing customers during hardware refresh cycles. The device's features, such as cellular backup and dual Wi-Fi and cellular usage, are appealing to customers.

Q:What are incumbent vendors doing to counter Toast's momentum in the enterprise market?

A:Aman Narang noted that legacy on-premise solutions are still prevalent, and the adoption of cloud technology is driving Toast's growth. He emphasized Toast's focus on customer needs and modern technology. Elena Gomez added that Toast's capabilities, such as improving staff efficiency and guest experience, have matured, leading to enterprise wins like Firehouse Subs.

Q:How long does it take to implement large enterprise wins like Firehouse Subs?

A:Elena Gomez explained that implementation timelines depend on customer readiness and can range from 4-6 quarters to up to 2 years. Firehouse Subs already has some locations live.

Q:What is the strategy for go-to-market coverage in major cities and beyond?

A:Aman Narang stated that Toast has coverage in most major markets but is adding coverage in underpenetrated areas, including metro and suburban regions. He emphasized the importance of owning the end-to-end experience and noted that 20% of new customers come from referrals through partners.

Q:What is the strategy for pricing SaaS ARPU and driving growth?

A:Elena Gomez highlighted that SaaS ARPU grew by 5% in Q2, driven by ARR and location growth. Pricing is a small part of ARPU growth, with a focus on delivering value to customers. Upselling, innovation, and leveraging data and AI are key growth levers.

Q:Why was the nonpayment portion of gross profit down in Q2?

A:Elena Gomez attributed the decline to seasonal dynamics and softer demand at the start of the quarter. She emphasized that the Toast Capital program remains healthy, with defaults in line with expectations.

Q:What products are being adopted by Firehouse Subs, and is payments included?

A:Elena Gomez confirmed that Firehouse Subs is adopting payments, handhelds, KDS, and the restaurant management suite, showcasing the breadth of Toast's platform.

Q:Is Australia part of a broader wave of international expansion?

A:Aman Narang stated that Australia is part of Toast's international strategy, leveraging localized products. While not announcing new countries, he expressed long-term aspirations for global expansion.

Q:What is driving record net adds, and what is the composition of the 10,000 location goal?

A:Aman Narang explained that the core business drives most growth, with retail, international, and enterprise contributing more as they scale. He noted healthy momentum across all three areas, with investments to unlock long-term opportunities.

Q:What is driving SaaS ARPU growth, and how is it distributed between new and existing customers?

A:Elena Gomez stated that SaaS ARPU growth is driven by both new and existing customers, with upselling playing a significant role. She emphasized optimizing product-market fit and expanding the product suite.

Q:What are the moving parts for recurring GP growth in Q4 and beyond?

A:Elena Gomez noted that ARR conversion benefited the first half of the year, and GPV exceeded expectations in Q2. Investments are aimed at sustaining long-term growth, with a focus on prudence in guidance.

Q:How do July trends compare to expectations?

A:Aman Narang stated that July trends are in line with expectations.

Q:How does the Amex partnership enhance the Toast platform?

A:Aman Narang explained that the partnership combines inventory from Resy, Tock, and Toast Tables into Toast Local, providing a single platform for restaurant bookings. It also enables personalized guest experiences using data, such as preferences and recommendations.

Q:What is the progress and feedback on the Sous Chef AI-powered assistant?

A:Aman Narang reported positive feedback on Sous Chef, highlighting its ability to provide insights, recommendations, and actionable changes. The goal is to build the best GPT-like interface for restaurants, with plans to launch later this year.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the question about whether Australia is part of a broader wave of international expansion. Aman Narang stated that they are not ready to announce new countries but expressed long-term aspirations for global growth, leaving the immediate strategy unclear.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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