Toast, Inc. (TOST) Earnings Call Transcript

Good afternoon. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast Third Quarter 2026 Earnings Conference Call. Today's call will be 45 minutes. I will now turn the call over to Emily Woodward, Vice President of Strategic Finance and Investor Relations. You may begin your conference.

Thank you. Welcome to Toast's Third Quarter 2026 Earnings Call. We'll start with prepared remarks from Toast's CEO, Aman Narang; and CFO, Elena Gomez. Toast's incoming CFO, Michael Senno, will join a momentarily for Q&A. Before we start, I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks and uncertainties and reflect our views and assumptions only as of today. These forward-looking statements include expectations around financial and operational products, business and investment strategy and guidance. Actual results may vary significantly, and we expressly disclaim any obligation to update the forward-looking statements made today. For a detailed discussion of risks, please refer to the cautionary language in today's press release and our SEC filings. 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. With that, let me turn the call over to Aman.

Thanks, Emily, and thank you all for joining us today. We delivered another strong quarter in Q3. Recurring gross profit streams grew 27% year-over-year, and we expanded GAAP operating income margin into 26%. We added 8,500 net new locations in the quarter with share gains across every customer segment. We continue to add world-class brands to the Toast platform, including star restaurants concept, the Nora Hotel in Florida with 6 different food and beverage formats, Jean-Georges' portfolio, including iconic restaurant like John George's, ABC Kitchen, JoJo and Perry Street as well as Ruby Tuesdays. We're also bringing that same caliber of brands to Toast across our new market segments, including renowned deli and specialty retailer, Zingerman's Deli, Outback Steakhouse Australian locations. And in enterprise, we are thrilled to welcome Bagel Brands 800 stores to Toast. We are evolving Toast to do more for our customers, moving tools that help operators run their businesses towards agents that take on the work for them. This quarter, we added new agents to Toast IQ Grow and launched Toast IQ Team, which helps operators manage scheduling and staffing. Each step brings us closer to a platform that not only supports customers but actively delivers results for them. Our top priorities for 2026 remain unchanged. Number one, expand what Toast can do for customers with AI from software to an agentic platform that takes on critical work and delivers business outcomes for customers. Number two, expand the markets we serve. And lastly, reinvent how we work with AI to accelerate our most important goals and drive durable growth. Our this year show our priorities at work as a vertically integrated platform across software, hardware, payments and lending, we have a foundation you can match. And our momentum across these priorities reinforces our confidence in delivering durable long-term growth. Okay. Let's jump into our priorities. Number one, expand what Toast can do for customers. Toast IQ Grow was built to help restaurants attract new guests and keep them coming back from reaching new diners through ads to bringing them back to personalized marketing. Our latest launches build on that foundation, giving operators more ways to grow and measure what's working. An SEO agent that helps restaurants improve their visibility across traditional and AI-powered search, our agent helps turn guest experiences into reviews that influence where diners choose to eat and an offers agent that recommends offers to help convert first-time guests or win back last one. Morning Mugs, named Baltimore's best coffee shop for the last 5 years, came to Toast in 2024 to consolidate operations onto a single platform and find a partner invested in its growth. The owner wears many hats, something we often see among our SMB operators and did not have the time to invest in marketing beyond social media. Since adopting Toast IQ Grow, Morning Mugs has increased its reach and grown marketing to sales by almost $100,000 year-over-year. These outcomes are why Grow is seeing tremendous success. It remains our fastest-growing product on track to reach $10 million in ARR by the end of the year. Toast IQ Team is our first step in doing the back office work that can fully cost operators money through overtime and overstaffing. Great operators run their businesses week-to-week off a forecast. They anticipate demand and plan around it. Managing a team is also one of the most time-consuming parts of running a great restaurant and labor is often the largest cost restaurant face. Yet operators often piece together forecasting, scheduling, time tracking, payroll and tips across separate tools. Toast has these pieces in one plan, along with the sales data that drives forecasting. Toast IQ Team brings it all together for operators to make staffing decisions based on expected demand and make labor costs more predictable. The scheduling agent builds a complete schedule in second based on expected sales, employee availability and overtime risk. And we are already seeing great results. Restaurants using our Toast IQ Grow solution averaged 41% fewer overtime hours per employee, which opens up valuable savings for restaurants running on thin margins. Let me give you an example. Madi Group in San Diego is known for their well beloved breakfast and lunch restaurants and recently opened a new location in Pacific Beach. They're using Toast IQ Team to help manage labor costs and the director of our operations points to data-driven scheduling capabilities automatic overtime flags and whether an event forecast to inform staffing decisions as a contributor in reducing the labor costs as a percentage of sales from 28% to almost 24%. Toast IQ Team is our starting point in tackling back-office work. Over time, we expect to take on more of these workloads such as inventory management and bookkeeping. We're building towards a team of agents that drive results for our customers, traffic marketing campaigns, forecasting demand with staffing to match, flagging low inventory before an out-of-stock and protecting margin from swings in costs. That's an exciting future for an industry known for slim margins and long hours. It also opens a market well beyond software. Restaurants already pay for marketing, scheduling and payroll and bookkeeping services, often several times what they spend on software. Toast has a structural advantage here. As our customers' system of record, Toast sees how restaurants operate, sales, guess, staffing, orders and many changes. Our data and restaurant expertise show us which problems to solve and how the best operators work, and we built solutions designed specifically for them. Okay. Let's shift gears and talk about a second priority, which is to expand the markets we serve. In our core U.S. SMB and mid-market customer segment, our momentum continues. Our win rates are strong. We're taking GPV share faster than any major competitor, and our largest share gains are coming from restaurants with over $2.5 million in sales. The award-winning Starr Restaurant Group, already a Toast partner at over 35 iconic high-volume financing locations, including Pastis, Le Diplomate and the Michelin-starred Le Coucou is expanding its partnership with Toast for one of their most ambitious projects yet, 6 food and beverage concepts at the Nora Hotel in West Palm Beach. Star relies on Toast innovative hardware, intuitive user interface and first-class support to operate their complex locations and is enthusiastically embraced Toast IQ. They use automated custom reporting to run complex data quarries such as server sales performance or chef prep lists, saving them valuable time as the team manages multiple restaurants and openings across the East Coast. We're also excited to welcome the legendary Ruby Tuesday to toast. They're modernizing their technology across their restaurants to increase speed of service, as well as accuracy to improve the guest experience. Across our new TAMs, enterprise, international and retail, our vertical playbook is gaining steam every quarter. Collectively, these 3 new markets are scaling to million in ARR in about 4 years and will double for the second straight year, showing we have strong product market fit. Internationally, we're welcoming Outback Steakhouse Australian restaurants. They chose Toast to modernize their operations and use a single platform across their footprint. In retail, Zingerman's Community of Businesses in Ann Arbor, Michigan, operates concept spanning from sandwich shops to a cafe to a specialty grocer. Zingerman's expanded their footprint with Toast this quarter into retail and moved their 3,000 SKU specialty grocer onto our platform. And lastly, in enteprise, Bagels brands will launch Toast in 800 locations across the delivered brands like Einstein Bros. Bagels, Bruegger's Bagels, Manhattan Bagel and Noah New York Bagels. In total, we've already opened up a bigger market opportunity across the Horizon 2 areas than the core market, and we're investing to expand the product market fit across that opportunity. Two recent examples. Our launch in Quebec with a fully translated French product and our new fuel offering in retail. We plan to methodically expand the addressable market from here across both new countries verticals. We are incredibly proud of the progress we're making. With each new TAM in the early stages of a meaningful opportunity, we're prioritizing market share gains and building towards the same flywheel benefits we have in the core as we scale we are proactively managing payback periods, and we'll continue to see meaningful efficiencies from leveraging the core platform. Okay. Let's shift to our last priority, which is to reinvent how we work with AI to accelerate our most important goals and drive durable growth. We are on track for another incredible year. We are delivering world-class growth and margins at scale, driven by our decisions over the last several years to lean into high-performing growth opportunities while driving efficiency. In the core, we're gaining market share, increasing ARPU and our new AI offerings opened up more opportunities to scale ARR over time. We're behind the success in our new tons and seeding long-term bets where our scale and platform advantage give us a unique opportunity to compete and win. These are earlier-stage opportunities. We will remain disciplined in how we invest, and we'll keep you updated as they progress. With opportunities across multiple growth factors, we had a clear path to driving durable compounding growth for many years to come. We'll keep the capital allocation discipline that got us here. Core margins keep expanding, funding new TAMs and emerging bets that we expect to add to long-term growth and cash flow. I want to thank every for the dedication and commitment to Toast. We would not be here without all the amazing work. and thank you as well to our customers and investors for your continued support. Before I turn the call over to Elena, I want to thank her for an incredible nearly 6-year run at Toast. Elena has been instrumental in guiding Toast through a period of tremendous growth and transformation. She has been a steady hand to me and the entire management team, and we are incredibly grateful for all of our contributions. I'm also excited for Michael Senno to become our next CFO at the start of the year. Over Michael's nearly 5 years at Toast, he has become a trusted member of our leadership team. He knows Toast business inside and out and has been decided late in shaping its financial strategy and investment approach. And with that, I'll turn the call over to Elena.

Thank you, Aman, and thanks to everyone joining us today. Q3 was another great quarter, and I'm proud of our consistent execution quarter after quarter. ARR increased 24% and recurring gross profit grew 27% year-over-year. Adjusted EBITDA was $240 million and GAAP operating income nearly doubled year-over-year to $165 million, reaching a 26% margin. With our recurring gross profit growth plus operating margin at 55%, we continue to operate above the Rule of 50 on a GAAP basis. We added 8,500 new locations, a double-digit growth in net adds from a year ago and ended Q3 with approximately 189,000 locations, up 21%. In addition to gaining share and winning new customers, we're also continuing to deliver more value for our customers in expanding monetization. Total take rate measured by recurring gross profit as a percentage of GPV reached 104 basis points in Q3, up 6 basis points from a year ago. In recent years, the total take rate has steadily increased with growing contributions from our monetization engine, software, payments and capital as customers adopt more of our all-in-one platform. We expect motivation to continue to expand as we innovate and deliver outcomes for our customers. SaaS ARR grew 28% year-over-year driven by location growth and consistent mid-single-digit ARPU expansion. Subscription gross profit grew 36% and SaaS margin increased 320 basis points from a year ago. AI tools are handling a growing portion of support tickets providing a better customer experience and are an important contributor to that margin expansion. Payments ARR and fintech gross profit both increased 21% in the third quarter versus a year ago with GPV up 20% to $62 billion. Fintech net take rate was 61 basis points. Payments take rate was 50 basis points, up 1 basis point from a year ago, driven by the same levers we've seen over the last several quarters, growing production, processing cost efficiencies and small targeted price moves. None's Fintech solutions led by Toast Capital contributed $69 million in gross profit and 11 basis points to take rate. The demand for capital remains strong with defaults within our expectations. Moving down the P&L. Hardware and Professional services gross profit was negative 12% of recurring gross profit streams. We are continuing to execute on our hardware cost mitigation strategies and expect to structurally improve hardware margins longer term as a result of our efforts. Rating expenses grew 16% year-over-year, excluding $35 million of bad debt and credit-related expenses. Sales and marketing increased 23%, fueling our location momentum and a continued build-out of our go-to-market presence in our new customer markets. R&D grew 15% with investment focused on our agentic platform, product depth in each new TAM and scaling internal AI tools. Adjusted EBITDA grew 36% to $240 million and margins expanded 260 basis points to 37%, reflecting strong top line execution and continued discipline across the structure. As a reminder, margins are typically higher in 3Q due to the seasonality of payments. GAAP operating income was $165 million, nearly doubling from a year ago, and GAAP diluted EPS was $0.29, up from $0.16. The increase reflects our strong top line growth complemented by operating leverage down the P&L, including lower stock-based compensation expense as a percentage of recurring gross profit. Free cash flow totaled $181 million, a 75% conversion from adjusted EBITDA. Conversion was lower than a year ago from our strategic decision to acquire and hold more hardware inventory in the near term. We expect conversion to improve in 4Q. Over time, we expect to see a corresponding benefit to free cash flow and higher conversion rates when we choose to scale down inventory to more normalized levels. Now on to our outlook. For Q4, we expect subscription and fintech gross profit growth of 22% to 24% year-over-year and adjusted EBITDA of $200 million to $210 million. We're raising our full year outlook to reflect the strong 3Q results and momentum in the business. We now expect recurring gross profit to grow 26% and adjusted EBITDA of $840 million to $850 million. We're positioned to deliver durable top line growth over the next 5 to 10 years. We have a tremendous runway across the core and Horizon 2 TAMs and the opportunity to build new S curves keeps growing as we scale and expand. We will remain disciplined capital allocators and manage our investments across these multiple horizons. Horizon 1 is our core. The growth algorithm continues to deliver and we're operating in over 40% that we expect to keep expanding. Horizon 2 is our new TAM enterprise and retail. Aman touched on the attractive growth trajectory, and we're confident these businesses will have an equally attractive long-term financial profile. As these businesses scale, we expect the margins to converge with the core margin. The formula is straightforward. We plan to manage payback periods to 20 months or lower, ensuring strong unit economics and expect significant leverage on R&D and G&A from our core platform and central functions. We have a proven playbook to improve payback periods and a clear road map in each area. First, the retail and international go-to-market motions will gain efficiency as we reach steady-state sales capacity build the flywheel effect and drive up rep productivity. Second, each new TAM has a path to expand ARPU as we launch more products. Third, we will gain efficiencies in hardware and onboarding as we scale. We've already taken steps to improve unit economics. For instance, international ARPU is growing at a healthy clip as we roll out more products, and we're improving the enterprise onboarding experience to lower the cost of acquisition. Across R&D, our new TAMs are built on the same platform we spent more than a decade developing and we continue to innovate. They leverage the horizontal products and features we build for the core like payments and fintech hardware and Toast IQ. The incremental investments for new TAM is on the vertical-specific features should drive differentiation in each customer group. We're seeing that leverage come through. Horizon 2 will reach $200 million in ARR with 25% less direct R&D investment than what it took for the core to reach that same milestone. And we expect that leverage to amplify as we scale. We have a multibillion-dollar growth opportunity with strong customer signal, a clear path to improving payback periods and increasing leverage from our core platform and functions. Together, this gives us confidence our new customer segments will deliver both meaningful growth and cash flow generation over time. With momentum in our core, new TAMs on a rapid growth trajectory and emerging long-term growth opportunities, we're more excited than ever about the future and confident we will continue to deliver significant shareholder value. Thank you to all our employees who execute tirelessly every day and have us on track for an excellent year. Before we move to Q&A, I'd like to take a moment to share some closing thoughts. It's been a privilege to serve as CFO of Toast and work alongside Aman and this incredible leadership team, and I'm proud of what we've accomplished together. While I'm stepping away, I couldn't be more confident in the company's future and incentive to work alongside this leadership team to continue building this generational company. Senno has worked alongside me in close partnership for several years, and I'm confident this will be a seamless transition. With that, I'll turn it over to Senno.

Thank you, Elena. I'm humbled and honored to step into the CFO seat. I want to thank Aman and the Board for your trust and support. Elena has made an indelible mark across business and culture and is a key part of our success. It's been an absolute privilege to partner with her on this journey for nearly 5 years and to learn from one of the best. As both Aman and Elena outlined, we have great momentum, and I'm excited for the incredible opportunity ahead. Now we'll start Q&A.

[Operator Instructions] I will now turn the call over to Emily Woodward for the Q&A.

We'll take our first call from Stephen Sheldon with William Blair.

I guess just first, can you give an update on the traction and interest levels you're seeing across the existing location base on the agent side for Toast IQ Grow and Team, although I know it's very early for Teams. I think many had some good customer ROI examples in the prepared remarks. But curious if those are representative of ROI, most early adopters are seeing and along with, I guess, the effectiveness you're seeing from Toast investment in an FTE model to give customers more hand-holding that they get set up and optimize. Would just love any additional color there.

Stephen, so first off, we are seeing with this really good adoption of Toast IQ within our customer base monthly active users continues to grow month after month and they really value the interface to be able to get reports, engage with the back end, get -- make changes at the back end of the platform. So that's been really positive. And then I think in terms of our agentic capabilities, whether it's IQ Grow or IQ Teams, one of the reasons it's such a natural fit is we are typically displacing work that these restaurants were outsourcing. So outsourcing, for example, to a marketing success manager or to a back-office accountant or a payroll expert. And the early data that we've seen has been really, really powerful. We in fact, measure for customers in IQ Grow. We have a data science team that's looking at this, what the sales lift is by deploying IQ Grow relative to a control sample that is not using IQ Grow, and we've seen really good revenue growth, and this is because our tools have the data, and we're setting up a great first-party presence around things like Europe. We like you grow your website, your online ordering, your SEO, more recently with reviews agents to make sure that restaurants are getting as much profitable first-party demand as possible. On IQ teams, it's the -- again, very early. But again, we're seeing some data that shows that customers that deploy IQ Teams. And this is really -- if you think about our back office products, their scheduling, there's payroll, there's tip automation. It's a lot of work to manage these schedules. And so what Toast IQ is doing automating the work to manage those schedules. And we've seen a 41% reduction over time hours, which is obviously very valuable for our restaurant industry, which runs on the margin. So again, really good early progress. These products are new. Even though it's great to see, for example, Toast IQ Grow on path to fast and $10 million in ARR this year in the scale of our business, obviously, it's still early, and we see tremendous opportunity for growth ahead.

Next question comes from DJ Hynes with Canaccord Genuity.

[Operator Instructions]

Alright, we'll move on. Next question comes from Rayna Kumar with Oppenheimer.

Can you talk about attach rates you're seeing on Toast IQ Grow and Toast Local? And what are you baking into guidance from these products for the rest of the year?

The Toast IQ Grow product, you asked about attach rates in IQ Grow in local?

Yes. Correct.

So Toast Local is available to all of our customers. It's really an app that we offer on top of all of our customers, where customers can place orders for pick up or delivery, they can get track loyalty. They can track loyalty. And so really, that's available to all of our customers. And IQ Grow, primarily that's being sold to our upsell team. So our upsell motion has matured over the years. As you know, that we've invested in a big way in our expand motion. And that's really the team that's focused on IT Grow. Part of the reason we've seen, by the way, an inflection in ARPU growth in our core business. If you look at ARPU growth this year, year-over-year, we're up and we're actually set up really well for next year. And a lot of that is, of course, driven by our whole platform. But specifically, the impact that IQ Grow is having. And that's because the opt to win and the growth that we're seeing in IQ Grow, has been incredibly meaningful, but it's low in the upsell team versus attaching on new business attach.

The next question comes from Samad Samana with Jefferies.

Elena, good luck on a well-deserved break and next opportunity. Maybe transitioning just in terms of the net adds, they were strong. I was wondering if you could just give some color on Horizon 1, Horizon 2 and maybe what drove the strength in the quarter? And I'll sneak in an extra one, just last year, you guys gave an early outlook into '26. I'm curious that there wasn't anything on '27? Any contours that you want to set like last year? And if not, I'm just curious maybe what was the change in philosophy you're not giving an early outlook?

Yes. So Samad, the net adds in our core business continue to be incredibly strong. Our win rates are strong. We're taking share faster than any other competitor in this space and just really proud of the team's progress there. And then these new TAMs, the reason they're on track to double is because we've seen accelerating net adds in our new business. So overall, really proud of the progress in terms of the progress we've made on that as this quarter and really throughout this year. And as I look to the future, I think we're incredibly confident in where we are in the market and our ability to continue to grow.

Samad, I'll take your question on '27. So there's no change in philosophy, and we've shared some color as the year goes on. But on the top line side, we've had a really strong year in '26. You're seeing consistent strong results quarter after quarter. We're exiting the really good momentum. And on both top and bottom line, we'll give formal guidance for '27 on the February earnings call. But on the RGP side, we're set up to execute the same growth algorithm in '27 that you saw us deliver this year. Core delivering share gains complementing that with continued ARPU expansion, which has been really healthy, as Aman just pointed out. On top of that, we're seeing rapid growth across our new TAMs that we are set up to continue. So we're confident in the 20% plus framework that we've provided. And we think we're set off for a really good '27. And then on the margin side, we're going to finish this year at about 36% EBITDA margin. That's already above the medium-term target from our Investor Day and the pace of margin expansion over the past couple of years has actually been faster than we had anticipated. We're sitting on what we believe is a generational Opportunity. We have the financial profile that positions us to lean into investments to go after that opportunity. Our margins in a really healthy spot. And as a result, we expect very modest margin progression next year. I'll give you a little bit more context underneath how we're thinking about it, improving the operating leverage in our business model. Core margins are already over 40% and expanding each year. And the company margin is going to depend on how much we choose to invest in these new growth vectors and in long-term bets. And as we go into next year, we want to retain flexibility so we can offensively lean in where we see opportunities, all in service of really driving durable long-term growth and building these franchises with strong cash flow generation. But underneath that, we're going to use the same disciplined capital allocation approach that you've seen from us. Our investments are only going to be focused where we see strong long-term growth opportunities and really good ROI potential.