Business Breakdowns
· Sean Barrett
[00:00:00] S1: This business has really evolved, and at this point, it's firing on all cylinders. I think the biggest evolution that you're seeing today is the result of a ton of hard work that happened three to five years ago. So if you go back to 2020, unprofitable business, single TAM, really just focused on the core SMB restaurant customer in the US. You fast-forward to today, very profitable business, 35% EBITDA margins and growing, with five TAMs that the company has unlocked through a ton of innovation. So it started with SMB restaurants. They innovated, starting five or six years ago, building products for the enterprise, building products for grocery stores. Now they're selling into liquor stores. They've started quietly selling into gas stations. That's a new opportunity. They're selling into hotels, F&B and retail in hotels. And then they've built an international team and an international product that's already live in the UK, Ireland, Australia, and Canada, and they'll keep adding markets from there. What you had five years ago was a single TAM, highly unprofitable, hyper-growth business. Fast-forward, this business has been a 97th percentile grower for the last three years in public markets, and that's against a lot of hyper-growth semiconductor names. 97th percentile grower, while also taking margins from negative to substantially positive, while also innovating like crazy, expanding into a bunch of new markets. It's incredibly rare to find a 10X opportunity in public markets. We think we have one here just based on the current product offering.
· Matt Reustle
[00:00:00] S0: In terms of that offering and what they're doing for the customer, can you give that overview now in terms of everything that they're offering to their customer base? What's actually happening as they're selling in? What's on the other side of that offering?
· Sean Barrett
[00:00:00] S1: Toast is really the full operating system for their businesses. Think of it like Shopify for restaurants. It's the point of sale, digital ordering, payroll, automated inventory management, real-time reporting across multiple locations, and then they have complex hardware. We should get into the supply chain, but they've built a really great hardware business as well. And because it's a modern multi-tenant SaaS solution, they can code once and then deploy all the updates with new AI models and with new technologies rapidly to the whole customer base. They've got a huge data advantage that's really important as they go build new products, and that's already starting to show up in their AI offerings. And most people underestimate just how complex the customer workflow is at a restaurant. But most importantly, customers really love Toast. We do a ton of custom survey work on all our companies. Some notable takeaways as to why customers love Toast so much. Toast has a net promoter score of roughly 50, with 95% of respondents indicating they would recommend Toast. Just for reference, a net promoter score of 25 is considered really good. 30 to 50 is considered exceptional. They've got elite customer satisfaction metrics. On average, customers are using Toast for seven modules, so this isn't just a point-of-sale system like you might see with some of the competitors. It's a multi-product, mission-critical operating platform for its customers. Toast is sitting at about a 20% share of the US restaurant market with more than 160,000 locations, but they're actually winning roughly half of all new restaurant openings in the US. That's what really gets us excited. It's the definition of product-led growth that's leading to very rapid market share expansion, and the network effects in this industry have proven to be really strong over time. Usually, the top one or two players in the restaurant industry end up with 40 or 50% share. It's product-led, and they're gaining a lot of share on the back of the innovations that they made over the last five or ten years.
· Matt Reustle
[00:00:00] S0: Anybody that's spent time working in a restaurant as a high school or a college kid, being front of house, even just seeing how the point-of-sale systems work there, but how much it flows through when you step back and think about perishables, the inventory management, it runs your business. It's notable to think about that. You helped explain a little bit about the revenue model, recurring, reoccurring. With all of that different offerings coming into play now, what does the revenue model look like just in terms of what's transaction-based versus you're paying for this software? How do they go about that?
· 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.