Business Breakdowns
· 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?
· Sean Barrett
[00:00:00] S1: AI is the best thing to happen to Toast since their founding probably. Product has always had advantages versus the incumbents and versus the competitors. But you fast-forward to today, the product has substantial data advantages, so they have 160,000 restaurants on the platform. They see local data everywhere. But they can see that because it's a multi-tenant SaaS cloud platform. Not to get too advanced here, but with multi-tenant SaaS, you can see all the data in real time, you can give product updates in real time, and then the gap against your competitors gets much wider. If you look at an on-premise offering, OpenAI is coming out with a new model every week. Claude's coming out with a new model every week or two. If you're an on-premise platform and you have to send a technician out to a restaurant to update the server every couple weeks, good luck. It's not gonna happen, and it doesn't make any sense. It's not rational from a financial perspective. So AI is widening the gap for Toast versus its competitors. I think just to give you a couple examples of where they're innovating and what they've done in AI, the first thing they came out with was something called Toast IQ, which is their AI offering. Customers love it. It's effectively a conversational AI offering that combines it with a system of action. So you can talk to your Toast IQ. You can ask it questions. You can make menu changes across the board. That sounds simple, but if you have multiple locations and you wanna change prices or change menu items and you're also hooking up to the marketplaces, that used to take an owner all weekend. Now you can just talk to your Toast IQ and make it in real time. You can have real-time analytics. You can have custom analytics. So let's say you have multiple locations and you wanna say, "Hey, Toast IQ, can you tell me what this location is doing year over year with these menu items?" And you can break it down into a bunch of ways of looking at it. It also has real-time inventory management, where if the restaurant's running out of produce of a certain kind at night, the system will automatically order fresh produce from Instacart Business or other local vendors. It's agentic in nature. It's an advanced AI model. And the customers absolutely love it. We've heard 50% of customers are actively using Toast IQ on a weekly basis.
· Sean Barrett
The new offering that just came out that's super exciting is called Toast Grow, and it's within the AI offering. It's an automated marketing engine for restaurants. Restaurants spend a lot of money on marketing. Generally, a restaurant will spend $1,000 to $2,000 a month with a marketing agency for Instagram and local marketing, and they don't see a lot of uplift. They still have nights of the week that are just gonna be empty or gonna be more quiet by nature of local behaviors. What Toast Grow does is look ahead. It takes data from the past, and it takes data from restaurants around you, and it might look and say, "Okay, this next winter Tuesday in Boston historically is really, really quiet. Let's go out and do a local promo with SMS texting to people who have been here before. Let's put up deals on the website. Let's do an Instagram promotion." It does it all in real time automatically, and it does that for about $500 a month. Historically, just over the last month or two as people have started using this, they've seen an eight percent uplift in total revenue. Remember, we talked about a restaurant on average for Toast doing about $1.3 million of revenue. So this product that costs $500 a month as a SaaS module, by the way, nice uplift, could be 100% uplift to SaaS ARPU, gives you about a 20X ROI right out the gate. So that's the kind of stuff they're doing in AI. We talked about some of the internal leverage as well that they're getting with R&D, but the product roadmap is largely AI-driven. It's largely agentic-driven, and then management would tell you, as they did at a conference yesterday, that this is gonna be the next leg of their revenue opportunity as well.
· Matt Reustle
[00:00:00] S0: The eight percent, whether you measure it in 20X or just think about restaurants, the margins that they operate at, how razor-thin it can be, it is material for that customer base. On the competitive landscape, I truly failed to appreciate how much Toast was doing for customers, just in terms of how deep into the restaurant's operating activities they could be when it relates to inventory management, marketing, all of these different things. How do you define the competitive landscape? And I'm curious how many others are doing quite as much, just in terms of the breadth of different activities.
· Sean Barrett
[00:00:00] S1: The competitive landscape, I think, is a real strength of the story here. Just to start out, before we jump into specific competitors, big question is, why does Toast win? They win because they have great product that we talked about. They have happy customers. And then importantly, they have more profitable customers. A typical restaurant might have ten percent margins. It's a low-margin business, as you mentioned. A typical Toast customer from our work has something more like 15% margins, so they're taking home 50% more dollars for the restaurant owner. It also means that Toast restaurants survive more often. That leads to higher retention for Toast, and it leads to happier customers. The interesting thing about the competitive set, I would break it into legacy and modern. You've got about half of the market that's still on legacy platforms. So that's stuff like NCR Aloha, Oracle Micros. Those are companies with on-premise software, on-premise servers. Generally, as we talked about, a bad fit for a kitchen. You don't want a hot server sitting in the back of your kitchen or in a closet near your kitchen. That's what really opened up the door for Toast to be the first successful scaled cloud-based disruptor. On the more modern side, you've got Square. They have about five to ten percent of the restaurant market. They do really well in the lower end or the smaller end of the market, where it's a less advanced offering, really more just a payments dongle. Now, they are innovating, and they're innovating at a more rapid pace than they used to because I think they see the restaurant industry as actually really attractive. They aren't winning from Toast. They're mostly winning from legacy and we think from Clover. Clover has about a 15% share. That's the subsidiary of Fiserv. It's been publicly noted that Fiserv's been over-levered. They've acquired a lot. The stock has been a mess, and I think they have some real issues to deal with with regards to leverage if they wanna survive. As a result, they're not innovating, and customers have noticed, and so they've been losing share, even on the modern side. One player to watch right now is DoorDash. It's no secret DoorDash has been out piloting POS solutions with their customers, but I think maybe they did that in response to Toast, which very famously about a year ago started offering free delivery.