Toast Reports Strong Q2 2024 Results, Raises Full-Year Guidance

Toast (TOST) Q2 2024 Earnings Call Transcript | The Motley Fool

Good afternoon. My name is Brika, 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. Michael Senno -- Senior Vice President of Finance Thank you, operator. Welcome to Toast's earnings conference call for the second quarter ended June 30th, 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 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. Aman Narang -- Co-Founder and Chief Executive Officer Thank you, Michael, and thank you, everyone, for joining us this afternoon. We had a strong second quarter. We added a record 8,000 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. At about 13% share in U.S. restaurants, we have an incredible opportunity out of us 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. And 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. And 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. Bezoria, a growing fast-casual concept in Great 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 five minutes. And as a result, Bezoria estimates that they have increased revenue by 25% across our locations. Switching gears. Our second priority is expanding our offering to restaurants with products and experiences customers love. Our platform and partner ecosystem serves all the restaurant stakeholders, operators, guests, employees and suppliers and creates 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 adopt -- how our customers adopt our products. We're starting to see this have an impact. For example, since we launched our digital storefront suite in the spring, approximately 30% of those locations upgraded to our Pro tier, which includes our new website product. And 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, in turn, help us drive product attach and 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 Kiosk. Attach rates are surpassing expectations. As an example, nearly half of international June bookings adopted Toast Online Ordering. Tahini's is a Canadian quick-serve restaurant that's already rolled out Toast across 42 locations. The plan is to double our location count next year. One of the highlights for Tahini's has been a 15% increase in check sizes on their kiosk versus ordering at a POS terminal. They credit this increase to our kiosk's ability to prompt for data-driven upsells via beautiful custom images of their dishes for items that go better together. And this growth in revenue has helped them invest more back into their business to support their ambitious growth goals. Our team has plans to roll out more products internationally this year, including guest marketing, restaurant retail, Toast tables, as well as our hotel PMS integration. And with 2,000 live locations as of Q2, we are excited about our progress and continue to remain bullish on 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 Wetzel's Pretzels by signing an extension for another 100 stores, in addition to the 300 locations already on our platform. We continue to roll our Toast across a number of marquee brands, including Wetzel's and BBQ Holdings, which are part of fast-growing MTY brands. And the improvements we have made to our platform, combined with our strong pipeline, gives 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 see 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 the segment. And 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 into 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 of time. And 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 toward 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. Elena Gomez -- Chief Financial Officer 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 toward 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 the 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 core net take rate flat year over year at 45 basis points. Our nonpayment 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 and expected 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, 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 businesses and capture our growth investment and efficiency gains. We plan to build off of our full year 2024 margin and steadily progress toward 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. Operator Thank you. [Operator instructions] Your first question comes from Tien-Tsin Huang with J.P. Morgan. You may proceed. Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst Hey, 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. Elena Gomez -- Chief Financial Officer Yeah, thanks, Tien-Tsin, for the question. So in Q2, our GPV per location was down 3%. And as we head into Q3, it's in that same range, so it's been relatively consistent. We're -- and our guidance reflects that as I laid out on the call. That said, the macro is dynamic, and we also know a couple of the data points about our restaurants. We've proven to be resilient through various economic cycles. But of course, we're going to continue to monitor it. And just zooming out, as we think about GPV growing 26%, that's $40 billion this quarter, we just have a lot of confidence in our ability to manage the business through to various economic cycles. Operator Your next question comes from Dan Dolev with Mizuho. Dan Dolev -- Analyst Hey, guys, thanks for taking my question. I wanted to ask about subscription ARR. I think, it looks pretty strong and annual number looks actually really good. I wondered what kind of products are resonating with your customers today because the upsell performance, at least from what we're seeing here, looks pretty good in the context of the same-store sales allocation. Aman Narang -- Co-Founder and Chief Executive Officer Thanks for the question, Dan. Yes. Look, there's a broad range of capabilities we shared across our platform at analyst day. And this is everything from things like data and AI, we shared our benchmarking tool and how the feedback from our customers has been positive. Generative AI and leverage that 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. And then, across our platform, we've talked about how the platform has commerce, guests, employee cloud and fintech. And across all of those areas, there are -- there's work the team is putting in to help continue to refine and iterate on the products. So on guest, for example, our Toast Tables product, catering, online ordering, CRM, our new website product. There's been good feedback on. On the employee cloud side, there's a lot of focus on our payroll product working in conjunction with our scheduling and our Tips product. We're continuing to work on the product market fit in our supplier and accounting product. And I'll just wrap by saying a lot of the focus we have as a team, all the work we are doing in suites is really to make sure that we're driving strong ARPU growth in the medium and long term. We recognize this is an important growth driver for the business. Operator Your next question comes from William Nance with Goldman Sachs. Your line is open. William Nance -- Analyst Hey, guys, I 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. And I guess, when you think about adding additional head count to go-to-market functions, like how do you think about sort of the mix of net adds and those that are coming from sort of new restaurant openings versus competitive takeaways? And I guess, the genesis of the question is, have you seen any impact on just sort of the opportunity out there as sort of new restaurant location formation sort of slows? Are you actually seeing that in the numbers? And how do you kind of marry that with the decision to accelerate investments in the back half? Aman Narang -- Co-Founder and Chief Executive Officer Yeah, great question. Well, thanks for asking. In terms of like the mix of NROs and existing, we've continued to see not a fundamentally different pattern. And our team is -- has the ability to sign and convert both existing restaurants and NROs. If it just zoom out, you think about like the progress we've made, like, one thing I just want to start by saying is I'm really proud of the team's performance. We had a record 8,000 net adds in Q2. And I was reflecting on how 8,000 is an important milestone for us. If you look at our ARPU at 12,000-plus, and we're approaching $100 million in ARR that we added in the quarter. And you think about sustaining this level of growth quarter after quarter for the next decade, I think it's a great outcome. In Q2, specifically, a lot of the net adds came from our core U.S. SMB and mid-market business. As you can imagine, it's taken us a decade to build our SMB business. And as I mentioned on the call, one of the things I'm really proud of is our Top 10 flywheel markets continue to be really productive. In fact, it's at 50% more wins versus non-flywheel markets and flywheel markets have expanded five times in the last three years. So while we're excited about adding capacity, sales capacity in international retail, and we will look to do that in the second half, really proud of the progress we've made in our core SMB business. And to your question about investing, I think it's a fair question, like ultimately, we see really healthy factors and unit economics in our core business. And we see nice growth drivers in some of these new segments that we're getting into. And so, as long as we continue to see our unit economics be healthy, we're going to look to continue to invest. Operator Your next question comes from Stephen Sheldon with William Blair. Your line is open. Stephen Sheldon -- Analyst Hey, thanks, and nice work in the quarter. As you kind of expanded some of these adjacent markets in grocery, convenience stores, etc., I think, Aman, you talked about the big opportunities to replace legacy on-prem solutions. So just wanted to broaden that and ask if there -- as you look at the end markets Toast is pursuing, are there specific portions where there's bigger legacy replacement opportunities than others if you think about SMB restaurants, enterprise restaurants, international and again, those adjacent markets, which you -- I think you hit on in your prepared comments? Aman Narang -- Co-Founder and Chief Executive Officer Yeah, thanks for the question, Stephen. I think, we've mentioned in the calls in the past that the enterprise segment, the conversion cycles are slower, so there is more legacy upmarket. We also see that within retail, there are some very specific needs, and there isn't a great cloud provider that has taken over the space. In fact, reminds me a little bit of what the restaurant business was like 10 years ago. And so, those are the two segments that I see a lot of opportunity in. But even if you look at the international markets, for larger restaurants with higher GPV, the trend and pattern we see is a lot of legacy still out there. And so, one of the big challenges for us is to really think about asset allocation right across all of these growth vectors, and the thing that we are focused on is what is the customer feedback we're getting? What are our payback periods? What are our unit economics? What is our NPS? And those are some of the drivers that help us determine how we allocate capital across these different growth vectors. And where we see ultimately long term, the biggest growth potential across these market segments. Operator Your next question comes from Tim Chiodo with UBS. Your line is open. Tim Chiodo -- Analyst Great. Thank you for taking the question. I have an upfront question around the upsell teams in land and expand, but if you don't mind, I was hoping to also clarify something for the second half guidance. For the upsell teams in the land and expand, those are two things that you focused on last year, hiring more of the upsell folks in the fourth quarter, I believe. And maybe you could just talk a little bit about the progress that you're seeing with those teams as those additional heads that might have been brought on later last year probably becoming more productive and as we think about them contributing to SaaS ARPU or SaaS ARR per location in the back half of the year and beyond. And then, actually, I'll just throw in the guidance clarifier, if you don't mind. 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 maybe a downtick there. So is it fair to say that the guidance is actually absorbing a little bit more macro pressure and you were still able to raise the guide despite that incremental macro pressure? Elena Gomez -- Chief Financial Officer Yeah, I mean, that's a fair -- let me think about it. I'm trying to think about Q1, but that's a fair assessment, Tim. Our guidance does reflect our latest thinking. And what we've seen is it's been relatively consistent in terms of same-store sales. It's been in this narrow band GPV per location. So that's how we think about it, and we anticipate it to be in a narrow band for the back half of the year, but that's factored into our guidance on a year-over-year basis. Aman Narang -- Co-Founder and Chief Executive Officer And on upsell, Tim, on your question on upsell, two years in, we are -- I'll start by saying we're learning a lot. We'll continue to optimize this in conjunction with our new business team. And this team is a critical component of driving -- to drive ARPU growth because the new business team, first and foremost, is focused on growing locations. And as our platform continues to improve, I talked about -- to the question earlier about how do we think about the product portfolio and what customers are looking for as we continue to mature our platform and as we continue to invest in the suites to make our products easier to buy and sell. This upsell team is critical to making sure that we continue to drive ARPU growth to complement the great location growth that we're seeing. And the last thing is we've talked in the past about Toast shop and product-led growth. That's another thing that R&D team is very focused on, especially for products where the ability to adopt and activate is easier. So I think two years in, we're pleased with the progress the upsell team has made. There's still work to do, and we're committed to making sure that we continue to refine our land and expand motion across our new business team and our upsell team. Operator Your next question comes from Harshita Rawat with Bernstein. Your line is open. Harshita Rawat -- Analyst Good afternoon. Very strong location adds. Can you maybe expand upon the contribution also from new areas like food and beverage, retail and international? And then, Elena, how should we also think about location adds in 3Q? I know you've mentioned seasonality kind of driven headwind also in the second half of the year. Aman Narang -- Co-Founder and Chief Executive Officer Yeah, sure. Thanks, Harshita. International and retail are growing nicely as we said at our analyst day. International, we have 2,000 locations lives. Start to see the investments we're making to expand the platform that's resonating really well with our customers. And our team has got more to sell in their bag, which has been great. And we are going to continue to invest to bring more of our platform, as we've shared in the past internationally before we really put the pedal down in some of these markets on go-to-market capacity. And on retail, we again, really proud of the progress the team's made. This was a skunkworks project that's gotten to 1,000 locations booked relatively quickly. But if you remember that if you zoom out and think about this, our core business in the U.S., we've been at it for 11 years now relative to these new businesses that are still early and haven't had the same level of sales capacity, the same maturity in the product. And so, the bulk of the adds are coming from our core business. And the thing we talked about the five wheel effect is still the primary driver of our growth. And as you think about the next few years and you think about especially about the next decade, of course, our aspirations are to continue to expand not just in our core business, but also make these new areas more significant contributors, and we're working on that. Elena Gomez -- Chief Financial Officer Yeah. And Harshita, on your question on the second half, first of all, as Aman -- I'll just echo Aman's comments. We had a strong first half of the year on net location adds as the demand and funnel remains strong, and we're still on track to add more net locations in '24 than we did in '23, and that's off a bigger base. I'll just reiterate what I said in the script, which is Q2 quarterly net adds tend to be, obviously, higher than the rest of the year given seasonality. So just think about that as you plan your models for the second half, but confident the team is executing well. Operator We now have Josh Baer with Morgan Stanley. Your line is open. Josh Baer -- Analyst Great. Thank you for that question. Was hoping you could unpack GPV per location just a bit more. Any impact from mix -- changing mix on that metric? And then, I was hoping you could dig into the trends you're seeing just across exceeded diner number of ticket items and check sizes. Elena Gomez -- Chief Financial Officer Yeah, I'm happy to unpack that. So just to put it in context, Q2 was down 3% August year to date in the same zone, as I mentioned. And most of that -- the primary driver of that is same-store sales declining year over year, so that's the primary driver. There's a small portion related to mix, but it's mostly really same-store sales declining. And that trend has been relatively consistent. And in terms of the different pockets of our segments, we haven't seen a notable pattern that's different across our segments. Aman Narang -- Co-Founder and Chief Executive Officer And just to add to that, in terms of check size or in order side, there hasn't been any fundamental change. And I think if you look at these changes, these are very gradual and in a narrow band and I think, as Elena mentioned, have been a pattern that we've seen over the past year. Operator Your next question comes from Matt Coad with Autonomous. Matt Coad -- Analyst Hey, guys, thanks for taking the question here. 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 talked about how you've already made a lot of investments to kind of get the product parity there and build out the platforms and all the modules that you need, but it sounds like there's still a good amount of investment that needs to be done. So I was hoping you could touch on that and maybe use like a baseball analogy, right? Like what inning are we in, in terms of building out the platform for those two new verticals right now? Aman Narang -- Co-Founder and Chief Executive Officer Yeah, I think it's a fair question, Matt. I'm not going to use the baseball analogy, but I'll say that our core business in the U.S., we're in year 12 or 11 and we're in Year 2 and Year 1 for these other businesses to give you some context. But look, I'll start by saying like I think the customer reception has been amazing. It's been really positive. This Victory Hospitality story that I shared in the call, we see a lot of these stories across our customer base. And I think one of the big drivers is that there's a lot of legacy solutions and the ability to move it to this all-in-one approach in the cloud, it really resonates with our customers in the space. In terms of the features, I think one of the ones we shared at analyst day that continues to resonate a lot is the ability to manage inventory on the floor. We continue to hear feedback, but that's a feature and a capability, and there's some capabilities around that that adds a lot of efficiency for staff. On e-commerce also because you think of these retailers offering e-commerce capability is important. And so, having that built into the back end and integrated is really valuable. And then, Matt, your question on road map, there's work to do. If you think of the 220,000 locations we laid out, there's work to do on the field integrations that's an area we're working on. We're working on the payment side, supporting SNAP and EBT. There's some work in grocery around deli scale management, but we also get a lot on the platform. When you think about our platform, we get a lot across things like payroll and payments and scheduling that's built in that can really be reused. And so, we see this as a great opportunity where the return investment our ability to build in the segment is really, really high. And then, in international, I think it's not the same lift. I know I talked about a lot of products, but it's not nearly the same lift to be able to bring these products to market internationally. But as you can imagine, we've taken a decade to build this platform in the U.S. And so, to support internationalization, it's a gradual process that the team is working on. Elena Gomez -- Chief Financial Officer Yeah. The only thing I would build upon what you said, Aman, is, as I mentioned at analyst day, we take a very -- we take capital allocation, obviously, as a strategy and some guiding principles. And as we think about these emerging businesses, we have a very thoughtful gated way that we approach investing. And so, we wait to see signals before we incrementally invest. So that's just a discipline we have, and you'll continue to see that as we grow these businesses. Operator Your next question comes from David Hynes with Canaccord Genuity. Your line is open. David Hynes -- Analyst Hey, 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 with respect to interest and your opportunity with AI, whether that's Sous Chef or some of the other initiatives you have underway, and I guess, how you think these could contribute to the financial model over time. Aman Narang -- Co-Founder and Chief Executive Officer Yeah, thanks for the question, DJ. Look, I think it's still early. I think, we think of the world of AI, one of the things that the team is really focused on is how do we leverage AI to create value for our customers. That's a mantra that we've been reinforcing over and over with our team and just to really make sure that the work we are doing is landing with customers. And one great example of this is the work we did in our guest marketing tools. When you think of restauranteurs, they're not marketers. And so, the ability to have generative AI create great campaigns for them when they're on their floor and have that drive demand for them. And this is all the text and the ability to actually send out these campaigns. It's a great example of leveraging AI -- generative AI to actually create value and create -- help create demand for restauranteurs. We've seen examples already, it's early, where it's actually having a big impact on the activation adoption of the product. Another example on the data side is benchmarking, so as you can imagine, we've got 120,000-plus restaurants on the platform. And so, we've got this amazing data set that we can leverage. And the team is thinking through what are all the ways in which we can add value. And one of them is just leveraging the data to help restaurants be smarter. You think of how restaurants think about simple things like what to put on menus or how to price menus, how to think about inflation. There's not a lot of data that's been there historically. And so, the ability to actually log in into Toast and say, tell me in my ZIP code what's going on, has been really, really well received. And with Sous Chef specifically, the idea is it's an umbrella. Think of it like ChatGPT. It's like an umbrella where you can get prompts. You can get recommendations. You can also -- over time, you can search to get feedback in terms of how to run a better restaurant. And so, there are many ideas the team is considering within that umbrella and benchmarking or some of the work we are doing with CRM are examples of that where this prompt can give you recommendations on how to leverage data to be smarter or to drive demand. David Hynes -- Analyst yeah, it makes sense. We did the demo of the benchmarking product down in New York, and it's pretty slick. Hi. Good evening. Thanks for taking my questions. So Elena, I just -- 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? And I guess, any observation on what you saw in the second quarter around churn or retention metrics inside of the installed base? Elena Gomez -- Chief Financial Officer Yeah. Broadly speaking now, I think the team has been executing well, no material change in how we're thinking about the business. And on churn, we're slightly above the 10% range on an annualized basis, which is up slightly relative to a year ago but very similar to where it's been the last few quarters. And it continues to be predominantly out of business churn, so the impact to ARR is low, right, on an ARR basis. So we built that into -- the net adds that you see, we build in our churn assumptions and no material change there. Samad Samana -- Analyst Got you. And I apologize if I had missed this, but do you guys still have the view that you'll add more net adds this year than last year? I think you'd previously said that. And I'm not sure if I heard that on this call or not. Elena Gomez -- Chief Financial Officer Yes, I answered that a few minutes ago, so yes, you did hear that. Operator We will now take our last question from the line of Andrew Bauch with Wells Fargo. Your line is open. Conan Leon -- Analyst Hey, this is Conan on for Andrew. Thanks for taking the question. I wanted to focus a little bit on the macro again. Just in the case that we see slower restaurant spend environment materialize throughout the back half, what are some of the offsets built into the business or levers you can pull from the cost side to manage impacts near term? And what are you embedding into the guide? Elena Gomez -- Chief Financial Officer Yeah, no, thanks for the question, Andrew -- or Conan for Andrew. Look, at the highest level, let me start by saying the value of the Toast platform is durable during tough times, and we've proven that over cycles. But more importantly, we've proven that we're able to adapt the business quickly. So as we became more a lean company earlier in the year, it just positions us to absorb changes in the macro and enables us to move faster if we need to, so if we needed to take action, we would. That said, right now, what we're seeing is same-store sales decline is really what's driving the GPV per location. It was down 3% in Q2. We're seeing that same zone as we start the quarter here, and our guidance reflects that. We know the macro is dynamic, of course, and -- but we also know restaurants have proven to be resilient. So confident in the guide that we gave, and we'll just continue to monitor. Operator I would like to hand you back to management team for some final remarks.

Toast, Inc. (TOST) Q2 2024 Earnings Call Transcript

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. Michael Senno 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, 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. 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. At about 13% share in U.S. restaurants, we have an incredible opportunity out of us, 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. And 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. And 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 Great 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. And 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 serves all the restaurant stakeholders, operators, guests, employees and suppliers and creates 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 adopt -- how our customers adopt our products. We're starting to see this have an impact. For example, since we launched our digital storefront suite in the spring, approximately 30% of book locations upgraded to our Pro tier, which includes our new website product. And this website products 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, in turn, 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 kiosk. Attach rates are surpassing expectations. As an example, nearly half of international June bookings adopted Toast line ordering. Tahini is a Canadian quick-serve restaurant that's 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 kiosk 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. And this growth in revenue has helped them invest more back into their business to support their ambitious growth goals. Our team is planned to roll out more products internationally this year, including guest marketing, restaurant retail, Toast tables as well as our hotel PMS integration. And with 2,000 live locations as of Q2, we are excited about our progress and continue to remain bullish on 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 our Toast across a number of marquee brands, including wet soils and barbecue holdings, which are part of fast-growing MTY brands. And the improvements we have made to our platform, combined with our strong pipeline gives 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 see 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 the segment. And 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 into 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 of time. And 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. Elena Gomez 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 are recurring gross profit stream, also increased 29% year-over-year and totaled 344 million. Adjusted EBITDA was 92 million, representing a 27% margin on a recurring 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 the contributions across international, enterprise and food and beverage retail. As a reminder, Q2 is our seasonally strongest quarter of the year as restaurants repair 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 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 and expected 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, 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. [Operator Instructions]. Your first question comes from Tien-Tsin Huang with JPMorgan. You may proceed. Tien-Tsin Huang 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? Elena Gomez Yes. Thanks, Tien-Tsin, for the question. So in Q2, our GPV per location was down 3%. And as we head into Q3, it's in that same range. So it's been relatively consistent. We're -- and our guidance reflects that as I laid out on the call. That said, the macro is dynamic, and we also know a couple of the data points about our restaurants. We've proven to be resilient through various economic cycles. But of course we're going to continue to monitor it. And just zooming out as we think about GPV growing 26% that's 40 billion this quarter, we just have a lot of confidence in our ability to manage the business through to various economic cycles. Thank you. Your next question comes from Dan Dolev with Mizuho. Dan Dolev Hi, guys. Thanks for taking my question. I wanted to ask about subscription ARR. I think it looks pretty strong and 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? Aman Narang Thanks for the question, Dan. Yes. Look there's a broad range of capabilities we shared across our platform at Analyst Day. And this is everything from things like data and AI, we shared our benchmarking tool and how the feedback from our customers has been positive. Generative AI and leverage that in our CRM tool. Sous chef 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. And then across our platform, we've talked about how the platform has commerce, guests, employee cloud and SMA and fintech. And across all of those areas there are -- there's work the team is putting in to help continue to refine and iterate on the products. So on guess, for example, or Toast stables product, catering, online ordering, CRM, our new website product. There's been good feedback on. On the employee cloud side, there's a lot of focus on our payroll product, working in conjunction with our scheduling and our Tips [ph] product. We're continuing to work on the product market fit in our supplier and accounting product. And I'll just wrap by saying a lot of the focus we have as a team, all what we're doing in suites is really to make sure that we're driving strong ARPU growth in the medium and long term. We have recognize this is an important growth driver for the business. Your next question comes from William Nance with Goldman Sachs. Your line is open. William Nance Hi, guys. Appreciate for 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. And I guess when you think about adding additional head count to go-to-market functions like how do you think about sort of the mix of net adds and those that are coming from sort of new restaurant openings versus competitive takeaways? And I guess the genesis of the question is -- have you seen any impact on just sort of the opportunity out there as sort of new restaurant location formation sort of slows? Are you actually seeing that in the numbers? And how do you kind of marry that with the decision to accelerate investments in the back half? Aman Narang Yes. Great question. Well, thanks for asking. In terms of like the mix of NROs in existing, we've continued to see not a fundamentally different pattern. And our team is -- has the ability to sign and convert both existing restaurants and NROs. If it just zoom out, you think about like the progress we've made like one thing I just want to start by saying is I'm really proud of the team's performance. We had a record 8,000 net adds in Q2. And I was reflecting on how 8K is an important milestone for us. If you look at our ARPU at 12K plus and we're approaching 100 million in ARR that we added in the quarter. And you just think about sustaining this level of growth quarter-after-quarter for the next decade. I think it's a great outcome. In Q2 specifically a lot of the net adds came from our core U.S. SMB and mid-market business. As you can imagine it's taken us a decade to build our SMB business. And as I mentioned on the call one of the things I'm really proud of is our top 10 cyber markets continue to be really productive. In fact, it's at 50% more wins versus non-flywheel markets and flywheel markets have expanded 5x in the last 3 years. So while we're excited about adding capacity, sales capacity in international retail and we will look to do that in the second half. Really proud of the progress we've made in our core SMB business. And to your question about investing I think it's a fair question like ultimately, we see really healthy period in uneconomic in our core business. And we see nice growth drivers in some of these new segments that we're getting into. And so as long as we continue to see our unit economics be healthy, we're going to look to continue to invest. William Nance Makes total sense. Appreciate you taking the question. Your next question comes from Stephen Sheldon with William Blair. Your line is open. Stephen Sheldon Hi. Thanks and nice work in the quarter. As you kind of expanded some of these adjacent markets in grocery, convenience stores, et cetera, I think Aman you talked about the big opportunities to replace legacy on current solutions. So just wanted to broaden that and ask if there -- as you look at the end markets Toast is pursuing, are there specific portions where there's bigger legacy replacement opportunities than others do you think about SMB restaurants, enterprise restaurants, international and again those adjacent markets which you -- I think you hit on in your prepared comments. Aman Narang Yes. Thanks for the question, Stephen. I think we've mentioned in the calls in the past that the enterprise segment, the conversion cycles are slower. So there is more legacy upmarket. We also see that within retail, there are some very specific needs and there isn't a great cloud provider that has taken over the space. In fact, reminds me a little bit of what the restaurant business was like 10 years ago. And so those are the two segments that I see a lot of opportunity in. But even if you look at the international markets for larger restaurants with higher GPV the trend in pattern we see is a lot of legacy still out there. And so one of the big challenges for us is to really think about asset allocation right across all of these growth vectors and the thing that we're focused on is what is the customer feedback we're getting, what are our payback periods? What are your economics? What is our -- and those are some of the drivers that help us determine how we allocate capital across these different growth vectors. And where we see ultimately long term, the biggest growth potential across these market segments. Your next question comes from Tim Chiodo with UBS. Your line is open. Tim Chiodo Great. Thank you for taking the question. I have an upfront question around the upsell teams in land and expand, but 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 2 things that you focused on last year hiring more of the upsell folks in the fourth quarter, I believe. And maybe you could just talk a little bit about the progress that you're seeing with those teams as those additional heads that might have been brought on later last year, probably becoming more productive. And as we think about them contributing to SaaS ARPU or SaaS AR per location in the back half of the year and beyond. And then actually, I'll just throw in the guidance clarifier if you don't mind. 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 maybe a downtick there. So is it fair to say that the guidance is actually absorbing a little bit more macro pressure and you were still able to raise the guide despite that incremental macro pressure? Elena Gomez Yes. I mean that's a fair -- let me think about -- I'm trying to think about Q1. But that's a fair assessment, Tim, our guidance does reflect our latest thinking. And what we've seen is it's been relatively consistent in terms of same-store sales. It's been in this narrow band GPV per location. So that's how we think about it and we anticipate it to be in a narrow band for the back half of the year but that's factored into our guidance on a year-over-year basis. Aman Narang And on upsell, Tim, on your question upsell, 2 years then, we're -- I'll start by saying we're learning a lot. We'll continue to optimize this in conjunction with our new business team. And this team is a critical component of driving to drive ARPU growth because the new business team first and foremost is focused on growing locations. And as our platform continues to improve, I talked about the question earlier about how do we think about the product portfolio and what customers are looking for as we continue to mature our platform and as we continue to invest in the suites to make our products easier to buy and sell. This upsell team is critical to making sure that we continue to drive ARPU growth to complement the great location growth that we're seeing. And the last thing is, we've talked in the past about Toast shop and product let growth. That's another thing that R&D team is very focused on, especially for products where the ability to adopt to activate is easier. So I think 2 years in, we're pleased with the progress. The upsell team has made. There's still work to do and we're committed to making sure that we continue to refine our land and expand motion across our new business team and our upsell team. Thank you, Tim. Your next question comes from Harshita Rawat with Bernstein. Your line's open. Harshita Rawat Good afternoon. Very strong location adds. Can you maybe expand upon the contribution also from new areas like food and beverage retail international? And then, Elena, how should we want to think about location at in 3Q? I know you've mentioned seasonality kind of driven headwind also in the second half of the year. Thank you. Aman Narang Yes. Sure. Thanks, Harshita. International Retail are growing nicely as we said share at Analyst Day, international -- 2,000 locations lives start to see the investments we're making to expand the platform that's resonating really well with our customers. And our team has got more to sell in their bag, which has been great. And we're going to continue to invest to bring more of our platform as we've shared in the past internationally before we really put the pedal down in some of these markets on go-to-market capacity. And on retail, we again, really proud of the progress the team's made. This was a Stockworks project that's gotten to 1,000 locations booked relatively quickly. But if you remember that if you zoom out and think about this our core business in the U.S., we've been at it for 11 years now relative to these new businesses that are still early doesn't have the same level of sales capacity, the same maturity in the product. And so the bulk of the adds are coming from our core business. And the thing we talked about the 5 wheel effect is still the primary driver of our growth. And as you think about the next few years and you think about especially about the next decade, of course, our aspirations are to continue to expand not just in our core business but also make these new areas more significant contributors and we're working on that. Elena Gomez Yes. And Harshita, on your question on the second half, first of all, Aman -- il just echo Aman's comments, we had a strong first half of the year on that location as the demand and funnel remains strong, and we're still on track to add more new locations in '24 than we did in '23, and that's off a bigger base. I'll just reiterate what I said in the script, which is Q2 quarterly net adds tend to be obviously higher than the rest of the year given seasonality. So just think about that as you plan your models for the second half, but confident the team is executing well. We now have Josh Baer with Morgan Stanley. Your line is open. Josh Baer Great, thank you for the question. Was hoping you could unpack GPV per location just a bit more. Any impact from mix -- changing mix on that metric? And then I was hoping you could dig into the trends you're seeing just across exceeded diner number of ticket items and check sizes. Elena Gomez Yes. I'm happy to unpack that. So just to put it in context, Q2 was down 3% August year-to-date in the same zone as I mentioned. And most of that's the primary driver of that is same-store sales declining year-over-year. So that's the primary driver. There's a small portion related to mix but it's mostly really same-store sales declining. And that China has been relatively consistent. And in terms of the different pockets of our segments, we haven't seen a notable pattern that's different across our segments. Aman Narang And just to add to that, in terms of check size or in the order side, there hasn't been any fundamental change. And I think if you look at these changes, these are very gradual and in a narrow band. And I think, as Elena mentioned, have been a pattern that we've seen over the past year. Your next question comes from Matt Coad with Autonomous. Matthew Coad Thanks for taking the question here. 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 talked about how you've already made a lot of investments to kind of get the product parity there and build out the platforms and all the modules that you need, but it sounds like there's still a good amount of investment that needs to be done. So I was hoping you could touch on that and maybe use like a baseball analogy, right? Like what inning are we in, in terms of building out the platform for those 2 new verticals right now? Aman Narang Yes. I think it's a fair question, Matt. I'm not going to use the baseball analogy, but I'll say that our core business in the U.S. we're in your 12 or 11 and we're in year 2 and year 1 for these other businesses to give you some context. But look, I'll start by saying like I think the customer reception has been amazing. It's been really positive. The history hospitality story that I shared in the call, we see a lot of these stories across our customer base. And I think one of the big drivers is that there's a lot of legacy solutions and the ability to move it to this all in one approach in the cloud, it really resonates with our customers in the space. In terms of the features, I think one of the ones we shared at Analyst Day that continues to resonate a lot is the ability to manage inventory on the floor. We continue to hear feedback, but that's a feature and a capability and there's some capabilities around that, adds a lot of efficiency for staff. On e-commerce also because I think the retailers offering e-commerce capability is important. And so having that built into the back end and integrated is really valuable. And then, Matt, your question on road map, there's work to do. If you think of the 20,000 locations we laid out, there's work to do on the fuel integrations that's an area. We're working on the payment side, supporting SNAP and EBT. There's some work in grocery around deli scale management. But we also get a lot on the platform. When you think about our platform, we get a lot across things like payroll and payments and scheduling that's built in that can really be reused. And so we see this as a great opportunity where the return investment our ability to build in the segment is really high. And then in international, I think it's not the same lift I know I talked about a lot of products, but it's not nearly the same lift to be able to bring these products to market internationally. But as you can imagine, we've taken a decade to build this platform in the U.S. And so to support internationalization, it's a gradual process that the team is working on. Elena Gomez Yes. The only thing I would build upon what you said, Aman, is, as I mentioned at Analyst Day, we take capital allocation, obviously, as a strategy and some guiding principles. And as we think about these emerging businesses. We have a very thoughtful gated way that we approach investing. And so we wait to see signal before we incrementally invest -- so that's just a discipline we have, and you'll continue to see that as we grow these businesses. Your next question comes from David Hynes with Canaccord Genuity. Your line is open. David Hynes 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 with respect to interest and your opportunity with AI, whether that's Sous Chef or some of the other initiatives you have underway? And I guess how you think these could contribute to the financial model over time? Aman Narang Yes. Thanks for the question, DJ. Look, I think it's still early. I think we think of the world of AI, one of the things that the team is really focused on is how do we leverage AI to create value for our customers. That's a mantra that we've been reinforcing over and over with our team and just really make sure that the work we're doing is landing with customers. And one great example of this is the work we did in our guest marketing tools. So you think of restaurateurs, they're not marketers. And so the ability to have generative AI create great campaigns for them when they're on their floor and have that drive demand for them. And this is all the text and the ability to actually send out these campaigns. As a great example of Leveraging AI, Generative AI to actually create value and create demand for restaurants. And we've seen examples already it's early where it's actually having a big impact on the activation adoption of the product. Another example on the data side is benchmarking. So as you can imagine, we've got 120,000 plus restaurants on the platform. And so we've got this amazing data set that we can leverage. And the team is thinking through what are all the ways in which we can add value. And one of them is just leveraging the data to help restaurants be smarter. You think of how restaurants think about simple things like what to put on menus or how to price menus, how to think about inflation. There's not a lot of data that's been there historically. And so the ability to actually log in a Toast and say, tell me my Zip code what's going on, has been really, really well received. And with sue chef specifically, the idea is it's an umbrella, Think of it like ChatGPT, it's an umbrella where you can get prompts. You can get recommendations. You can also, over time, you can search to get feedback in terms of how to run a better restaurant. And so there are many ideas the team is considering within that umbrella and benchmarking or some of the work we're doing with CRM are examples of that where this prompt can give you recommendations on how to leverage data to be smarter or to drive demand. David Hynes Yes, it makes sense. We did the demo of the benchmarking product down in New York, and it's pretty slick. So, thanks for the color. Thank you. We now have Samad Samana with Jefferies. Samad Samana Hi, good evening. Thanks for taking my question. So 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? And I guess, any observation on what you saw in the second quarter around churn or retention metrics inside of the installed base? Elena Gomez Yes. Broadly speaking now, I think the team has been executing well. No -- no material change in how we're thinking about the business. And on churn, we're slightly above the 10% range on an annualized basis, which is up slightly relative to a year ago, but very similar to where it's been the last few quarters. And it continues to be predominantly out of business churn, so the impact to ARR is low, right, on an ARR basis. So we built that into the net adds that you see, we build in our churn assumptions and no material change there. Samad Samana Got you. And I apologize if I had missed this, but do you guys still have the view that you'll add more net adds this year than last year. I think you'd previously said that. And I'm not sure if I heard that on this call or not? Elena Gomez Yes. I answered that a few minutes ago. So yes, you did hear that. We will now take our last question from the line of Andrew Bauch with Wells Fargo. Unidentified Analyst This is Conan [ph] in on for Andrew. Thanks for taking the question. I wanted to focus a little bit on the macro again. Just in the case that we see slower restaurant spend environment materialize throughout the back half some of the offsets built into the business or levers you can pull from the cost side to manage impacts near term? And what are you embedding into the guide? Thanks. Elena Gomez Yes. No, thanks for the question, Andrew or Conan for Andrew. Look, at the highest level, let me start by saying the value of the Toast platform is durable during tough times, and we've proven that over cycles. But more importantly, we've proven that we're able to adapt the business quickly. So as we became more a lean company earlier in the year, it just positions us to absorb changes in the macro and enables us to move faster if we need to. So if we needed to take action, we would. That said, right now, what we're seeing is same-store sales decline is really what's driving the GPV per location was down 3% in Q2. We're seeing that same zone as we start the quarter here and our guidance reflects that. We know the macro is dynamic, of course, and -- but we also know restaurants have proven to be resilient. So confident in the guide that we gave, and we'll just continue to monitor. I would like to hand back to your management team for some final remarks. This does conclude today's call. Thank you all for joining. You may now disconnect your lines, and enjoy the rest of your day.