Business Breakdowns
· 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?
· Sean Barrett
[00:00:00] S1: I think this is probably a part of the story that deserves more time. At Counter, we talk a lot about product and profits, companies that can lead with innovation, lead with product-led growth, but also do it with really high profitability. There aren't that many companies in the world that can do that, that can sustain really high growth with great profitability at the same time. Toast is definitely one of those companies. We talked about 97th percentile gross profit growth in public markets, pretty exceptional, and management says they can maintain 20-plus percent growth for many years ahead. They just actually said that yesterday at a conference again. At the same time, margins have gone from -16% in 2022 to roughly 35% today, going to 40-plus percent, which management has said is a line in the sand, and then they'll continue from there. There's a ton of operating leverage in this business. Where they've seen operating leverage is certainly in sales and marketing, where that number has come down a lot as a percent of revenue. G&A, naturally, as a company scales, you've seen G&A come down quite a bit as a percent of revenue. And then R&D, this has been a really interesting new lever for them as they've incorporated AI into the business internally. They've shipped more product in the last two years than I've ever seen them ship. We'll get into their AI offering. It's super advanced. It's very impressive. And in the last two years, R&D expense in dollar terms has barely grown. So you've had a business that's doubled in size, and R&D has been relatively flat. They're starting to grow R&D again. They'll continue investing. This is an innovative team that thinks super long term. They're not gonna sacrifice their long-term opportunity. But there's been a lot of operating leverage in the business, and we just see that continuing as the business scales.
· Matt Reustle
[00:00:00] S0: Maybe you can get into that AI offering and what they're shipping. How does that show up? It's interesting to hear. We hear a lot about experimentation. I think we're all doing a lot of experimentation. It's another thing to ship things that your customers are using. So how does it show up in the business, and what does it look like for customers?