Business Breakdowns
· 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.
· Sean Barrett
That's a real innovator's dilemma for DoorDash all of a sudden. DoorDash has close to a 15% take rate for their deliveries, but all in from a customer and restaurant perspective, it can be 30% of the order that goes to fees. Toast just flipped that whole thing on its head. We think 80,000 customers, or half of the Toast restaurant base now, has signed up for the Toast ordering module, which effectively gives you free delivery in partnership with Uber Eats from the restaurant perspective. We always try to go out and do our homework on the ground, and so we ask the question of which restaurants would be likely to switch from Toast to DoorDash if DoorDash were to offer POS for free even? There are a few things worth noting. One, the unit economics of switching from Toast to DoorDash are non-rational. You're effectively saying you might save 50 bips on payments, which is not substantial, to go over to DoorDash, where you're paying 13 to 15% take rate on deliveries, and that's a really meaningful difference, that take rate. You can actually do this, Matt. So if you go to your favorite local restaurant, decent chance now that they have Toast deliveries and DoorDash deliveries enabled. Pull up the delivery on DoorDash. You can get all the way to the order page. A $40 delivery on DoorDash will usually cost you something like $30 to $35 if you continue to the delivery page on Toast. It's a really great offering. Restaurant customers love Toast. Net promoter scores of 50, customer satisfaction rates of 95-plus percent. Those customer satisfaction rates are substantially higher than what we see in our surveys on DoorDash. The third thing is we always put boots on the ground to test our hypothesis. So my colleague actually went up to San Francisco the other day, just this week, and walked into 30 or 40 restaurants that have DoorDash and Toast enabled, bought something — be a good customer — but asked them, "How likely would you be to switch from Toast to DoorDash if it was free?" We couldn't find a single customer that said they would switch if DoorDash offered free point of sale. We think both these companies can coexist and grow and be successful. Where I think DoorDash will find more success is in quick service restaurants that are delivery-first restaurants versus where Toast plays really well in the full-service neighborhood restaurant.
· Matt Reustle
[00:00:00] S0: I can speak from personal experience, the frustrations that have existed from delivery fees from restaurants over the years are quite strong, too, and vocal, and it's just not something you hear as it relates to any other part of the business. I think that's out there. I respect the channel checks 101 boots on the ground that remains alive. That's incredibly interesting information to get back. On that whole concept of switching and whether we call it churn, how much does the industry switch year to year? I'll almost put aside the fact that the restaurant industry sees a lot of turnover. We have a lot that goes out of business, a lot that comes into business. But do you have any concept on how sticky it is and just general churn?