Business Breakdowns
· Sean Barrett, Matt Reustle
[00:00:00] S1: The revenue model is really a mix of a bunch of the different offerings they have. From a high level, you have payments gross profit, you have SaaS or software ARPU, and then they have hardware, and then a small portion of revenue from lending to restaurants to help them grow, and that's a nice profitable business. The whole business is consumption-based, so it aligns well with the customers, it aligns well with where the world's moving with AI. But let's break down those revenue line items for a second. If you start with the payments piece, and you look at, let's say, a dinner order that's $100, something like three percent of that will be interchange, $2.50 will go to the banks and the networks and other costs as part of the interchange, and then about 50 cents or 49 basis points goes to Toast as a net take rate. That 49 basis points has been moving up over time as it's reasonably under-monetized versus what you see in the rest of the space. Most competitors charge 75 bips to 125 bips from a net gross profit take rate perspective. Toast also has some opportunities over time to optimize cost as they get bigger. They've got about $200 billion of volume on their platform now. That makes them, in aggregate, one of the biggest merchants in the US, so they should be able to optimize over time and increase that net take rate. [00:00:00] S0: On the net take rate, that 50 cents versus 75 cents, that delta there, who is that negotiated with?
· Matt Reustle, Sean Barrett
[00:00:00] S0: On the net take rate, that 50 cents versus 75 cents, that delta there, who is that negotiated with? [00:00:00] S1: It's effectively what they make from the customer, from the restaurant after all is said and done. So if an interchange fee is three percent and $2.50 goes to everyone else, they can take the 50 bips or the 50 cents at the end. But it's not a big negotiating point with restaurants. They tend to see it as reasonably priced, certainly against what they see in the market. [00:00:00] S0: The alternatives would be charging 3.25%, where it's netting out for the restaurant? Is that 75 bips showing up there? [00:00:00] S1: It could, and there's also a mix of card present, card not present, mix of credit and debit actually matter when you get into the nitty-gritty. But if you look at Square, for example, last I looked, Square was monetizing at something like a one percent gross profit net take rate across their business. Square has a nice business at the low end of the market for smaller merchants, but they're not offering a robust Toast-like operating system on top of it. That's a pretty pure payments comp that you can look at, and they're monetizing at about one percent gross profit take rate. [00:00:00] S0: Understood. I'll let you continue with the software side of things.
· Matt Reustle, Sean Barrett
[00:00:00] S0: Understood. I'll let you continue with the software side of things. [00:00:00] S1: On the software side, we talked about how robust the operating system is. Toast charges something like $300 a month to $500 a month to its customers to use the software suite as well. And depending on the customer, they might use different modules. They tend to bucket it into good, better, best type of packaging. But at the end of the day, when you combine those two things together, the customer is paying something like $10,000 a year to Toast on a total base of $1.3 million of revenue for the average customer. Hardware is a loss leader, so they do charge a nominal fee for their hardware when a customer starts up the business. There's kitchen display systems that connect the front and the back of house. There's Toast Go hardware, and it has to be pretty advanced, so it can deal with water, liquids, dropping, making sure it doesn't break. It's actually a complex engineering feat to build this kind of hardware. And then they make a little bit of money from lending to their customers to help them grow. From an investment standpoint, it's a very easy business to model and to predict, which is always nice from my seat. So you look at the five things that matter here. It's location count, payments, SaaS ARPU, margins, and multiple. All of those things historically have been pretty relatively predictable. We like it from a predictability and modeling perspective as well.
· Sean Barrett, Matt Reustle
[00:00:00] S1: On the software side, we talked about how robust the operating system is. Toast charges something like $300 a month to $500 a month to its customers to use the software suite as well. And depending on the customer, they might use different modules. They tend to bucket it into good, better, best type of packaging. But at the end of the day, when you combine those two things together, the customer is paying something like $10,000 a year to Toast on a total base of $1.3 million of revenue for the average customer. Hardware is a loss leader, so they do charge a nominal fee for their hardware when a customer starts up the business. There's kitchen display systems that connect the front and the back of house. There's Toast Go hardware, and it has to be pretty advanced, so it can deal with water, liquids, dropping, making sure it doesn't break. It's actually a complex engineering feat to build this kind of hardware. And then they make a little bit of money from lending to their customers to help them grow. From an investment standpoint, it's a very easy business to model and to predict, which is always nice from my seat. So you look at the five things that matter here. It's location count, payments, SaaS ARPU, margins, and multiple. All of those things historically have been pretty relatively predictable. We like it from a predictability and modeling perspective as well. [00:00:00] S0: On your hardware point, does every customer have to have Toast hardware? Is there anything that can run purely on their software?
· Matt Reustle, Sean Barrett
[00:00:00] S0: On your hardware point, does every customer have to have Toast hardware? Is there anything that can run purely on their software? [00:00:00] S1: Every Toast customer has to have the hardware. When you walk into a restaurant, you'll usually see some sort of payments dongle at the front desk. You might see some sort of bigger screen that the customer is using or the restaurant owner is using. And then you have kitchen display, and you have Toast Go handhelds for the waitstaff. Toast went down that road of building specialized hardware many, many years ago. It's funny because a lot of the competitors that came out over the years tried to leapfrog them and take the easy road, which was building an app and then asking their customers to just download the app on an iPad. Turns out iPads don't work very well in restaurants. They break all the time. They don't do well with water and liquid and heat. What was a shortcut at the beginning for some of those competitors actually led to their demise or made it so that they couldn't gain share. And in the end, the customers came back and said, "This hardware from Toast is actually really powerful. It's purpose-built for the restaurant, and I wouldn't want to use anything else." [00:00:00] S0: Interesting as it relates to the SaaSpocalypse as well, and how hardware makes a pretty big difference with some of these industries, and particularly those that can use it for their updates and whatnot. So interesting to hear there.
· Matt Reustle, Sean Barrett
[00:00:00] S0: Interesting as it relates to the SaaSpocalypse as well, and how hardware makes a pretty big difference with some of these industries, and particularly those that can use it for their updates and whatnot. So interesting to hear there. [00:00:00] S1: I totally agree with that. It's funny. It's not like a total halo business, hard asset, low obsolescence, but there are aspects of it. You have substantial hardware involved, you have physical presence, you have feet on the street, you're in the four walls of a brick-and-mortar restaurant. So to your point, I actually think it's an important part of the story. [00:00:00] S0: On the below-the-line profitability dynamics, how has that evolved over time? What have been the big drivers there in terms of the changing of the profitability profile?