Toast, Inc. (TOST) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon. My name is Sam and I will be your conference operator today. At this time, I would like to welcome everyone to the Toast Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'll now turn the call over to Michael Senno, Vice President of Investor Relations and Treasury. You may begin your conference.

Thank you, Sam. Welcome to Toast earnings conference call for the first quarter ended March 31, 2022. On today's call, our CEO, Chris Comparato and CFO, Elena Gomez will open with prepared remarks. They will then be joined by our COO, Aman Narang for our Q&A session. Before we start, I'd like to draw your attention to the Safe Harbor statement included in today's press release. During this call, we'll make statements related to our business that may be considered forward-looking within the meaning of the Securities and Exchange Act. All statements other than statements of historical fact are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, expected growth, and business outlook, including our financial guidance for the second quarter and full year 2022. Forward-looking statements reflect our views only as of today and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today's press release and our SEC filings for a discussion of the risks and uncertainties that could cause actual results to differ materially from our expectations. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for GAAP results. Please refer to our earnings release and SEC filings for detailed reconciliation of these non-GAAP measures to the most comparable GAAP measures. Unless otherwise stated all references on this call to cost of revenue, gross profit and gross margin, selling and marketing expense, research and development expense and general and administrative expense are on a non-GAAP basis. Finally, both the press releases and a replay of this call, including the accompanying investor presentation will be available on our Investor Relations website at investors.toasttab.com. With that, let me turn the call over to Chris.

Thank you, Michael and good afternoon, everyone. Toast delivered a strong first quarter coming in well ahead of expectations across the board. We added a record number of net new locations to our platform, as we continue to lead the digitization of the $800 billion restaurant industry and penetrate our $55 billion market opportunity. Our performance is a function of continued execution on our three core growth drivers, increasing the number of restaurant locations on our platform, delivering product innovations, so restaurants use more of our platform to drive success with all of their stakeholders and deepening our ability to serve all segments of the market. Despite being one of the largest industries in the world, restaurants have been underserved by technology with one of the lowest levels of digitization of any sector. Running a restaurant is also an incredibly complex and competitive business, the pandemic, a tight labor market, supply chain constraints and inflation have only magnified the challenges. The stakes have never been higher for restaurant owners to embrace technology to help them improve operational efficiency and increased sales, so they can thrive in this dynamic new world. Over the next several years, we expect every restaurant to operate on a unified digital platform. And just like we've seen in other industries, restaurants that embrace a digital platform perform better. As the restaurant industry goes through this wholesale digital transformation, we expect restaurant spend on technology to increase, closing the gap with other industries. Amid the secular shift to digital and the cloud Toast is executing on a generational opportunity to become the trusted partner restaurants need and to serve as the industries technology backbone. We are leaving restaurants into a new era of hospitality. With our laser focus on restaurants and a proven track record of innovation, we've built the best-in-class platform that offers restaurants everything they need to win, to delight their guests, attract and retain employees, manage supplier relationships and ultimately do what they love and thrive. We understand the unique needs of restaurants of any size or concept in a way that no other platform can and we are adding more capabilities to help serve every segment of the market and expand our reach. Now turning to our results for the quarter. Revenue increased 90% year-over-year to $535 million in the first quarter, and ARR increased 66% year-over-year to $637 million. This was driven by an acceleration in subscription revenue growth from the addition of new locations and continued customer adoption of our growing portfolio of products, as well as strong growth in GPV. Customers using four or more core modules beyond point of sale and payments reached 60% in Q1, contributing to the robust 103% year-over-year growth in subscription revenue. GPV on our platform increased 98% year-over-year to $18 billion in Q1. And for the first time ever, we exceeded 5,000 net new locations in a quarter. We ended Q1 with approximately 62,000 live locations on our platform, up nearly 45% year-over-year and we're still just scratching the surface of this massive long-term opportunity. Even as our ARR has more than tripled over the past two years, it still represents only about 1% of our $55 billion market opportunity in the U.S. On the back of our strong start to the year, we increased our full year revenue guidance by 6% at the midpoint of the range, which implies 48% year-over-year growth. We also improved our adjusted EBITDA outlook as we focus on driving efficient growth. I want to add additional context on our investment levels this year. Our Q1 results are further evidence of the momentum in our business and the reason we have conviction to invest to capture the massive market opportunity in front of us. At the same time, the current environment calls for heightened discipline and we're actively evaluating our spend to make sure we scale in a sustainable efficient manner. That means identifying efficiency opportunities throughout our business and directing our investments only to areas that drive growth and have a proven return profile. We've shown in the past, we can grow efficiently and deliver profits, with a proven go-to-market approach that gains leverage with scale, healthy unit economics and disciplined cost management. We're confident we will drive sustained strong growth and healthy long-term profitability. Our updated guidance implies a margin improvement in the second half of the year and we expect to continue on that trajectory moving forward. Now I want to turn to how we're executing on our core growth drivers. As the restaurant industry undergoes the secular shift to digital and the cloud, driving location growth is a key priority and we're leaning into this in a number of ways to build on our momentum. We continue to benefit from our proven scalable go-to-market formula. The restaurant industry is a uniquely local business and our model feeds on that. As we've seen in our most established markets, as our penetration increases and more customers in a market experience our superior product offering, the number of referrals and inbound leads accelerate, creating a flywheel effect that drives strong and efficient growth. We're investing in less developed markets to build that same flywheel as we build this muscle broadly across more markets. We expect it to continue to drive efficient location growth. Not only are we rapidly adding locations, we are seeing that our new customers are leveraging more of our products from the onset, a strong signal of the demand for our broader platform. Software ARPU for locations booked in Q1 approximately doubled from just two years ago. We've seen strong uptake for our guests modules as we've significantly enhanced our products to help customers cater to the evolving guest needs over the past two years. Our payroll and team management offering is also building momentum. And we continue to see a significant opportunity to attach more products to our existing customer base, an important indication of our long-term ARPU growth potential. Let me share with you a few examples of the strong demand we are seeing across restaurant segments. This quarter, we expanded our relationship with Union Square Hospitality Group, which has created some of New York's most beloved restaurants cafes and bars. They are expanding Toast to 16 total locations, including Gramercy Tavern, Union Square Café, the modern and their daily provisions concepts. In addition to our Toast Go handheld point of sale and kitchen operations USHG will manage their multiple concepts and menu configurations using our Multi-Location menu management. They’re also planning on using Toast for hotel restaurants to manage their mark-to-location, allowing them to seamlessly charge to hotel rooms during the payment process. This quarter, we also expanded our Nothing Bundt Cakes, a national bakery chain. Nothing Bundt Cakes expanded its relationship with Toast purchasing our product for 70 new locations in Q1, which will increase our partnership to over 500 locations in the next 12 months. They are using Toast to drive revenue and help build a seamless purchase process for their guests. [indiscernible] a growing fast casual Mexican food chain expanded with Toast in Q1. They were live with Toast in 30 locations, using our Toast Go our Toast Flex and Multi-Location Management products and they signed a contract to add several more locations in the next 12 months using all of these products. Additionally [indiscernible] is adding our Kitchen Display System in their current locations. In addition to our broad and growing platform, we also continue to grow our extensive partner ecosystem which now includes more than 180 partners across large national food and beverage suppliers, technology integration partners and local partners. This quarter, we extended our reseller partnership with U.S. Foods, a leading foodservice distributor that works with approximately 250,000 restaurants and foodservice operators. We focused on continuing to strengthen our partner network to give our customers seamless access to every product and service they need further enhancing the value our platform provides. Shifting to product innovation. I talked to many of our customers every quarter and a consistent theme I hear is they didn't get into the restaurant industry because they love technology, but they do realize that the industry is going through a digital transformation and they need a partner who they can grow it, so they can do what they love. That's why we consider Toast an extension of R&D for the restaurant industry. We give restaurants all the tools they need to run their business, integrated point of sale and payments, mobile ordering and delivery, marketing and loyalty, team management, friction access to -- frictionless access to capital and a growing array of integrated services to meet the evolving needs of our customers. We've built in array of products that serve restaurant owners at their core, but also create a better experience for all stakeholders in the restaurant ecosystem, guests, employees and suppliers there tends to be a flywheel between happier employees leading to happier restaurant guests and both contributing to more successful better run restaurants. We're continuing to invest in products to further differentiate our platform by enhancing and deepening the touch points between restaurants and each stakeholder. And with our integrated platform, as restaurant add more of our products, it strengthens the flywheel, creating powerful network effects for our customers. In supplier management, we're making great progress with our extra chef products, which provides accounts payable automation and inventory management. With restaurant space and supply chain challenges and inflation, we're seeing just how important it is to help our customers manage profitability by easily comparing the cost of a menu item versus what they're charging. In longer term, we have opportunities to expand the services we offer restaurants in this area and further optimize and automate their supplier management. Our payroll and team management products speed up employee onboarding, simplify payroll and ensure employees are paid on time. With restaurants still facing labor challenges, if you're not providing a great employee experience and paying your employees quickly, it will be more difficult for you to hire and retain great talent, which impacts the guest experience in sales. We believe both selling payroll into our existing customer base and continuing to innovate in this space to help restaurants offer employees even more services that can differentiate them in this tough labor market, represent meaningful growth opportunities going forward. As we continue to build scale and drive growth in our core segments, another key growth strategy is to position Toast to increase penetration in all restaurant segments and expand to new markets. With our laser focus on serving the restaurant industry, we're uniquely able to adapt our platform to meet the specific needs of different types of restaurants. One example from this quarter is targeted for quick service restaurants. We've built an offering that better suits the needs of these restaurants and helps them get results even quicker. As I mentioned, we also announced Toast for hotel restaurants, a new solution designed to meet the unique needs of hotel restaurant operators. Toast now integrates with several hotel management software providers, allowing us to better serve this segment and we're focused on continuing to adapt our product and packaging to serve the specific needs of each type of restaurant in order to drive deeper penetration across segments. In addition, as we discussed last quarter, we've seeded an initial investment in international this year. We believe our best-in-class product offerings and go-to-market approach translates well to other markets, which will enable us to tap into our broader TAM and become another driver -- growth driver longer term. Before closing, I wanted to thank our customers and employees. The restaurant industry remains resilient even amid the many macro challenges across the globe and we are incredibly proud to be able to partner with our customers as they navigate these challenges. And thank you to our great employees for helping get Toast off to a great start in 2022 and build on our terrific operating momentum. We're still very early in our journey and we're confident that by continuing to relentlessly execute on our strategy will create significant value for our customers and shareholders over the long term. Finally, before I pass the call over to Elena to go through our financials, I want to congratulate her on her one-year anniversary at Toast. What an incredible year it's been. Elena, I'm excited to partner with you on this journey ahead. And now, Elena, I'll turn it over to you.

Thanks, Chris. One year went really fast and equally excited about the partnership. And thank you everyone for joining. To start, I wanted to echo Chris in thinking both our customers for their continued partnership and the entire Toast team, whose dedication and tireless work led to another great quarter. Thanks to them that we got off to a great start in 2022 coming in ahead of our expectations across our key metrics. This is evidence of our solid operating momentum and the power of our industry-leading platform. We're still in the very early stages of this massive opportunity to provide restaurants of all the products and services they need as the industry transitions to digital and navigate new challenges. As Chris mentioned, the number of net new locations added to our platform accelerated in Q1 to over 5,000 and we ended the quarter with approximately 62,000 locations. Driving location growth is one of our key priorities and we're investing to build on this momentum and continue to efficiently increase our market penetration. Total revenue grew 90% year-over-year to $535 million and ARR hit $637 million as of the end of Q1, up 66% from last year. As we discussed, ARR is our core operational metrics and the best indication of our underlying growth. And we continue to see healthy trends in both our recurring revenue stream, SaaS and payments, which underpins our ARR growth. Subscription services revenue growth accelerated to a robust 103% in the first quarter, driven by our strong growth in new locations, as well as increasing adoption of our portfolio of SaaS products by new and existing customers. As of March 31, 2022, 60% of our Toast locations use four or more core products. On top of our integrated POS and payment solution, compared to 51% a year ago, reflecting the benefit of our continued product innovation. With customers using more of our end-to-end platform, our SaaS ARPU continues to increase at a healthy clip. The growing ARPU is particularly evident in our new book locations. The average SaaS ARPU for new bookings in Q1 has more than doubled in just two years to nearly 6,000, as customers continue to adopt more of our products at booking. In addition, we still have a meaningful opportunity to drive deeper product adoption among our existing customer base over time. We believe the trends in new bookings and the upsell opportunity point a long runway to drive continued ARPU growth. One example is the growing adoption of our payroll product which Chris alluded to. In Q1, approximately 30% of our total bookings included Toast payroll on initial sale, up from 15% last year. We're seeing early benefits from expanding our sales efforts to focus on existing restaurants that switch to the Toast platform. In addition, the majority of new restaurant openings coming onto our platform continue to attach Toast payroll at the time of booking. We're still early in this opportunity and as an example, while we can continue to increase attach rates at booking and drive upsell to existing customers to drive further ARPU growth. Longer term, we have the potential to layer on more features and services for our restaurant employees helping our customers differentiate themselves in a tight labor market, while unlocking incremental monetization on our platform. Moving to financial technology solutions. Revenue grew 93% to $438 million. FinTech solutions gross profit, which is net of payment transaction costs and what we operationally as -- what we operationally as a second component of our recurring revenue was $91 million in the quarter, a 66% year-over-year increase. That was driven by GPV growth of 98% to $18 billion. Annualized GPV per processing location remains strong at an average of $1.2 million. As a reminder, we typically see seasonally higher GPV per processing location in the second and third quarter. As we noted last quarter, our debit and credit mix has returned to pre-COVID trends. While the mix of card-not-present volumes continues to moderate when consumers increasingly returning to dining in restaurants. Total gross profit grew 38% year-over-year and 23% quarter-over-quarter to $101 million. Gross margin improved by over 250 basis points compared to Q4 to 18.9%m boosted by improvements across our subscription services, FinTech solutions and hardware margins. Looking at our recurring revenue stream subscription and FinTech gross profit totaled $135 million for a 73% increase year-over-year, reflecting the strong customer growth and healthy ARPU increases across both SaaS and FinTech solutions. Turning to our customer acquisition costs. We are focused on maintaining efficient unit economics as we invest to scale the business. And our track record of attractive payback periods continue to give us the confidence to lean into the significant opportunity in front of us. As a reminder, operationally, we manage our hardware and professional services gross profit as customer acquisition costs. Hardware costs remain elevated and increased year-over-year due to higher freight and product costs related to supply chain dynamics. Compared to Q4, hardware cost improved quarter-over-quarter as freight expenses decline of peak levels and we benefited from one-time adjustments. We're in the process of strategically increasing our hardware inventory enabling us to shift to a lower -- to lower shipping methods, while continuing to deliver products to our customers in a timely manner. While we expect hardware costs to remain high over the next few quarters, we believe they will normalize over time as we leverage lower cost shipping methods and focus on optimizing other parts of our supply chain. Sales and marketing is our other customer acquisition of funds. After reducing our sales force at the onset of COVID, we're investing to rebuild the team in order to continue to drive market share. As part of that investment we're strengthening our process in less penetrated areas. The power of our go-to-market approach is that we increased market share in a territory, we see increasing inbound lead to referrals and from brand awareness, resulting in higher productivity for our sales reps. That flywheel effect enables us to scale efficiently as we gain traction and we're investing to build the foundation to kick start our flywheel in more and more markets. Even as we increased investment in sales and marketing, we've maintained consistent efficiency. We believe measuring sales and marketing expense as a percentage of recurring revenue is the best indication of how we're executing. Sales and marketing as a percent of recurring revenue decline significantly after the cost cuts in the first half of 2020, and has now held in the same range seven quarters since then. That's been driven by an increasing number of new locations we are adding to the platform each quarter and continued growth in ARPU. This gives us further conviction to lean into the large opportunity we have ahead. As we do so, we continue to manage our unit economics and we're confident that as we gain scale will deliver a leverage on our sales and marketing costs over time. Moving down the P&L, we're also investing in research and development to build out our platform. This includes deepening the integration and features on year products like payroll and extra chef, (ph) which we believe represent strong monetization opportunity longer term. In addition, as Chris mentioned, we're adding capabilities to better serve different restaurant segment, which will position us to penetrate segments where we've typically had less of a presence. Similar to last quarter, the increase in general and administrative costs were mainly due to public company related expenses. Overall adjusted EBITDA of negative $45 million in Q1 was better than our expectations. The outperformance reflects continued strength in GPV and SaaS revenue growth. In addition to the progress on reducing hardware costs, as we navigate the challenging macro environment. Now let me turn to guidance. For the second quarter, we expect revenues to be in the range of $635 million to $665 million, which represents 53% year-over-year growth at the midpoint. We expect adjusted EBITDA to be in the range of $60 million to negative $59 million. For the full year, we are increasing our revenue expectations by 6% at the midpoint, to reflect the momentum in software revenue growth and our expectation for GPV growth to remain strong. We now expect full-year revenue to be in the range of $2.5 billion to $2.55 billion, which represents 48% year-over-year growth at the midpoint. Following our strong Q1 performance, we're also raising our adjusted EBITDA guidance to be in the range of negative $195 million to negative $175 million for 2022. This reflects the targeted investments we're making across sales and marketing and research and development to drive the core growth strategies that Chris highlighted. Given the incredible demand for our product growing ARPU as customers do more with us and the massive market opportunity in front of us. We're confident that these investments will deliver strong returns. While these investments are resulting in higher burn today, make no mistake, we remain focused on working towards long-term profitability in the current environment has only increased urgency. We're actively driving efficiencies across the company and tightly managing all discretionary spend in order to help fund our key growth initiatives while improving profitability. Making sure, we have a lean cost structure is a priority. It will enable us to stay nimble as we rapidly grow and gain operating leverage with scale. Our guidance implies that EBITDA margins will improve by 200 basis points in the second half of the year compared to the first half. And we're positioning the business to continue to deliver consistent margin improvement with durable top line growth in 2023 and beyond. In closing, we're off to a great start in 2022, evidence of our strong execution and industry-leading platform. The restaurant industry is going through a generational shift to digital and our priority is to further cement our leadership position as the trusted platform of choice for the restaurant industry. We believe through our portfolio of offerings, we can help restaurants boost sales, improve efficiency, retain employees and thrive in one of the most competitive industries. And as we execute on that, we believe it will translate into strong, durable growth and healthy profits over the long term. Now, I'll turn the call back over to the operator to start our Q&A.

Thank you, Elena. [Operator Instructions] Your first question is from the line of Tien-Tsin Huang of JPMorgan. Tien-Tsin, your line is open.

Hey. Thank you so much for the great results here. Appreciate all of your comments. Chris, I wanted to ask about your -- I think about down your driving efficient growth, heightened discipline, those kinds of things, I think, Elena you also talked about watching discretionary, but can you just elaborate on what that might look like? What investments are non-negotiable for you in terms of growing and where you might see a little bit of belt tightening, if you want to call it that? Thank you.

Yeah, Chris, I can comment if you [Multiple Speakers].

Sure.

So at the highest level, great question, so things that are not something we would not invest in, right. We're going to really focus, continue to focus in sales. We're going to continue to focus in R&D. We're going to focus on areas that really drive high ROI. That's really important. It's non-negotiable for us to not go after this market opportunity, given the momentum we're seeing, given the signals that we're getting from our customers et cetera. So those are non-negotiable for us. Areas where we're focused on discretionary on managing tightly are things such as overhead discretionary expenses, of course, the typical T&E type of things and also over time really trying to gain leverage in our G&A functions.

Perfect. Thank you for that. My quick follow-up, just the 1000 net new locations, records ahead of where we had. Can you keep it up, is that nominal level sustainable given what you see any callouts on return or types of restaurants or channels that did especially well? Thank you.

Yeah, so I can chime in from. My answer is that. Okay. I was going to say absolutely, we believe what we're grabbing market share in multiple segments. Our core segment, our core SMB segment is performing extremely well and it continues to drive the largest portion of opportunity. And then we're continuing to see success upmarket and midmarket and enterprise and we're seeing some pull in that market. So we absolutely believe that we can sustain the growth that we're seeing on location acquisition. I'll remind you that we're still very early in our TAM penetration. Today, we're only about 7% of the 860,000 restaurants across the U.S. So we're certainly focused on consistent execution and our unit economics tell us that we should continue to go fast on that loans.

Appreciate it. Thank you.

Thank you, Tien-Tsin. The next question is from the line of Stephen Sheldon with William Blair. Stephen, your line is open.

Hey. Thanks for taking my questions. I wanted to kind of follow up on the location additions. Great results there and you just talked about some areas seeing growth. Curious, if you've seen any changes on the churn levels. I mean, I think you have some natural churn, just given the heavy weighting towards SMB, but your customers I think fair significantly better than industry average during the pandemic, so curious if you continue to see moderation there and just general outperformance versus industry averages?

Yeah. No, we've actually not seen that. We've actually seen churn remained low something we're really proud of and it's just a testament to the power of the platform. So we're really encouraged by the fact that churn has remained relatively low.

Got it. That's great to hear. On the expansion in the QSR, I guess, from a product side, are you need to build out or develop anything new to support these customers. And I guess just as an example, clearly QSRs have a much bigger focus on drive through. So just curious what the expansion in the QSR could mean, when you think about the product roadmap?

Yes. So we have a solid QSR customer base today, but we feel we have the potential to grow faster moving forward. So think of the platform as, we have this restaurant for us in depth platform. But now we're adapting it to specific segments to further accelerate our growth. So take QSR, it's basically a tailored set of products that are packaged and priced in a way that makes sense for QSR businesses. So tying mobile ordering to KDS and then the ability to SMS, text message a guest when the order is ready. That's a super-fast flywheel and we're seeing results where restaurants are telling us, a good example is, there is a restaurant chain called Bultaco. They're telling us when they apply that packaging and configuration to their concept, they are increasing throughput by more than 20%. So really think about our segmentation work as adapting the platform to be really concept specific which allows these concepts to then move faster. So that's really what's happening with the segmentation strategy, which is, QSR is just one example, Toast for hotel restaurants is yet another example.

It's great to hear. Congrats on the results.

Thank you, Stephen. Next question is from the line of Timothy Chiodo of Credit Suisse. Timothy, your line is open.

Great. Thanks a lot for taking the question. I wanted to ask about what's implied in the guide in terms of the payback periods have been incredibly impressive and stable. I was just wondering if you would, if you would just give a comment on what might be implied there for that stability for the rest of the year, particularly in light of the comments that you made around some of the cost savings initiatives in terms of the shipping cost that you might be looking at and also the potential for the hardware costs to normalize, maybe not this year, but over time? Thanks a lot.

Yeah. Great question. Thanks. So we actually have very healthy payback periods and consistent with what we've -- and that's despite the elevated hardware costs that we've experienced over the last couple of quarters. Our goal, as I mentioned in the last call, continues to be in the mid-teens and we have confidence, we'll be able to accomplish that through this year.

Excellent. Thank you and a very helpful. And a follow-up is on the financial technology solutions stake, [indiscernible] little bit higher than maybe some of us would have expected, may be you could just comment on, was there anything that came through there may be from the capital side that might have contributed or is that really just more of the pure payments net take rate was a little bit higher than maybe we had forecasted?

Yeah. The Toast Capital continues to be just not material for our total results. But as I mentioned, some of the debit, we had a little bit higher debit in Q1 than typical. So that, that's really the dynamic that is causing our take rates to be what it is. I would just tell you that we believe the take rates that you see in Q1 is a reasonable take rate for the near term. And then I would also just take this opportunity to make sure to zoom out and just think about take rate is, is just one dimension of our business, right. We really think about our business beyond take rate and you saw the performance in our SaaS business as well. So I would just encourage you to look at the broader picture beyond take rate.

Excellent. Really helpful, look like there might have been something else there, but that's really helpful, clarify. Thank you.

Sure.

Thanks, Timothy. The next question is from the line of Josh Baer of Morgan Stanley. Josh, your line is open.

Great. Thanks for the question and congrats on a great quarter. Wanted to talk about GPV. I guess to what extent from your data, were restaurants able to pass on some higher cost to the customers and just thinking about the benefit to you as far as your payments revenue stream from GPV. And then I have a follow-up.

We had a -- so thanks for the question. We've seen really healthy GPV per processing location and obviously, we know that it's an inflationary environment and we're seeing our customers of course, play with pricing, but really the demand has been really strong. So we're encouraged by that and that's really what's reflecting in our confidence and our guide, but also just strong execution in Q1 and really strong demand all the way around.

Great. And that's clear, especially given on Omicron impacts or real in January in Q1. I guess like on the strong guide maybe thinking month-to-month throughout Q1 or into April or even into May. Just wondering, if you are seeing like any signs of consumer weakening, just given the focus on macro environment inflation, thinking about forward expectations on GPV.

I can jump in. Yeah. So we've not seen any material impact on the current sort of macro trends. There is no evidence of a slowdown from our perspective on restaurant spend. In fact like we feel restaurants are seeing healthy demand from consumers and a good example is, dine-in, if you look at restaurants across the U.S. running Toast dine-in is up 46% year-over-year from Q1 of 2021 to Q1 of this year. So that's a really healthy dynamic that tells us that consumers are going back into restaurants and doing it quite frequently especially post-COVID. So we think that trend will continue. And we think the consumer demand is high and we believe that restaurants have pricing power, the play with pricing to continue to serve those consumers. So we don't see any, any evident for the slowdown or material risk on that front.

Very helpful, thank you.

Thank you, Josh. Your next question is from the line of Will Nance with Goldman Sachs. Will your line is open.

Hi, guys. Good afternoon and good evening. Thank you for taking my question. I wanted to maybe ask a few questions on the efficiency initiatives that you guys talked about obviously, very nice to hear, particularly in the current environment about taking a second look at spending, I'm sure that will be well received. I guess my question is more longer term and I totally get that, investing in profitable growth is the focus for now and there is no reason to slow down. And I don't think [indiscernible] want to pin you down on a near-term target of profitability. But as you guys look out farther and how this business can kind of scale to profitability over time. How do you think about the long-term profitability profile and maybe what's sort of the path of the building blocks to getting there?

Yeah. Great question. I'll take that. So we don't have a specific target to share today. But it's really important, so we're balancing sustain sort of durable growth, with improving profitability, which is a key priority growth, which I hope came through in our scripts. And at the highest level, we're positioning the business for consistent margin improvement as we look into the back half of 2022 which was reflected in the guide. And going forward from there, we want to focus on consistent improvement in our margin profile. In longer term, we believe an integrated model, which we always talk about and we have multiple monetization streams, which will be highly profitable in a steady state. So when you look at the various components, you think about strong unit economics, you think about investing in R&D and then really getting scale in our G&A. So there is a bunch of levers we have, but we are focused on building a lean cost structure, which will allow us to pivot and really continue to sustain this high growth profile with a very lean cost structure along the way. So with that, I would say that we will see consistent improvement in margin over time. But I'm not going to share a specific timeframe or target today.

Got it. Okay. I appreciate the question. And, yeah, no, definitely came across in the script. Second question on related is more on the software side, interesting stat on that new business coming out of around 6,000 ARPU is like 50% higher than where the business is today. As you look, maybe could you talk a little bit about the process of upsell on the existing customer base. What does that look like? And what's the success you've had in getting some of the existing customers to adopt say something like the payroll products or additional modules.

Yeah. We've -- monolithic comment as well. But we've been investing in upsell. We started an upsell team in 2020. We also have an ability for our customers to go on to shop, which allows them to buy products online as well but our upsell team is very much focused on building that muscle of selling incremental products to our existing installed base and payroll has been a great example that were early in that opportunity, but we're definitely and this upsell team was an investment we made in 2020 built-on it in 2021 and continue to invest and see good signal there as well and that's what's reflected in our of our overall ARPU growth and as well even in the consistency of our execution and positioning the entirety of the platform, not really having impact across our entire sales base, but I'll let him on comment.

Thanks, Will. I think you made it actually, like, we are focused on scaling up sales and marketing team, both on new business [indiscernible] and we are also scaling up our top service capability and include e-commerce and Toast to let our customers buy from us they want.

Got it. Thanks for taking my questions. Appreciate all the color and very nice results today.

Thank you.

Thank you, Will. Your next question is from the line of Dave Koning with Baird. Dave, your line is open.

Hey, guys. A couple of questions. I guess first of all a little similar to the last one, your subscription revenue up 103%. I think it was mid '40s growth in locations and mid '40s growth in average revenue per location, but how much of that is just bigger locations. And then how much of it is kind of what you described before, just a lot more selling to your kind of existing group of locations. [Multiple Speakers]

Go ahead, Elena, if you want.

It's a little bit of both. I mean, first, kudos to the sales team for their great execution and what you're seeing in the fast growth being over a 100 -- up 100% and having record locations. It's really adoption from both new and existing customers and also higher sale of booking, which is, which we talked about on the script. And that's really coming back to the positioning of the entirety of the platform upfront, which is obviously really important and an indicator of our competence in our ability to position on tariffs the entirety of the platform, and have a higher booking -- ARPU booking at upfront yeah.

Yeah. One clarification is, it's not -- one clarification it's not bigger locations. It's just doing a much better job at selling the entirety of the platform both upfront, as well as downstream. But it's not as if we're going after a bigger, bigger locations. It's really just making doing a better job at some of the platform story to existing locations that are similarly size.

Yes. Got you. So that's what I was kind of getting at. So that's really, that's great. And I guess my second question, sequentially, I think your guidance is revenue up something like 19% to 24% I guess that's very normal seasonality to be up, but is our all segments, expected to be up kind of in that same range or is there going to be somewhat divergence?

Yeah, I would say we're seeing strength across our entirety of our business.

Okay. Got you. A great job. Thank you.

Thank you, Dave. Your next question is from the line of Josh Beck with KeyBanc. Josh, your line is open.

Thank you for taking the question. I wanted to drill down on the subscription ARPU. Certainly, it continues to grow at a really nice clip, even though the multi-product adoption just very slightly expanded less so does this mean that your customers are gravitating towards some of these larger products just not sure if there is any a call out on the drivers there?

Yeah, I mean I think…

Yeah. I think what I'm here -- sorry, Josh, effectively our customers are telling us that they want more and more from the platform. So I think what you're seeing is, as you're seeing us better position the platform story upfront, as well as downstream and then they're telling us that they want to see even more innovation within those modules across the platform. So a good example is, what Elena referenced for payroll. We're doing a much better job at attach and payroll upfront, as well as upselling it downstream, but then restaurants are coming back to us saying over time. We'd love for you to, when you look at the employee value proposition to recruit onboard, developed manage pay, retain employees that has its own road map of opportunity and that will be over the long haul that we continue to innovate on top of the existing ARPU base. So, we expect we will continue to see the modules used by average customer tick up, but then we'll continue to evolve that module landscape over time.

Okay. Great. And maybe just a follow-up on the guidance, certainly you are taking up the full-year revenue at the midpoint, a nicely above the [indiscernible] I think it's about $95 million just listening to the answers that it sounds like it's pretty broad based across the business. Any callouts where things just materialize quite a bit better than what you were maybe forecasting 90 days ago to drive this kind of upward revision in the full year.

Yeah, No, I think heading into the year, if you think back 90 days ago, we had a little bit of Omnicom ahead. There is a big macro that we factored into our guidance. And what we've really seen is strong GPV growth and strong momentum in our business. And so that's really what's reflected in the guide. And actually I would say that what we're balancing now is the same thing we're balancing the macro, we're balancing -- making sure we're investing in a lean cost structure and just being prudent with what we see.

Fantastic. Thank you both.

Thank you, Josh. Your next question is from the line of Brent Bracelin Piper Sandler. Brent, your line is open.

Thank you. I guess one for Chris and a follow up for Elena. Chris, you were excited about payroll, I think nine months ago. Clearly, payroll continues to kind of perform well both you would new customer attach and now it sounds like better cross on the installed base. You have 62,000 locations, today looking out three to five years, what's the potential here, do you think a third of those locations could can attach the payroll. Could you get the 50% penetration I’d love to better understand based on 90 to have success here where could look like in five years?

I'm not going to give you a number, but what I know in talking to restaurants every day is that they need more technology capability to not just pay their employees, but to recruit onboard develop them, plan their schedules, pay them and then retain them. So we see that value chain just within the employee stakeholder and we've built out a roadmap from there on what this piece of the platform could become and that excites us because we know every restaurant needs us, like every restaurant needs to get off of manual processes and spreadsheets to better attract and retain their employees and pay their employees and employees want to be paid faster. So we're excited about this section of the platform that continues to perform well, but there is a long journey ahead on its potential. I'm not going to give you a number, except that every restaurant grapples with how to attract and retain their employees and we see opportunity there.

Got it. So like payroll, just the start of a much bigger ambition you have relative to [indiscernible] software.

Exactly.

Elena as a follow-up, clearly, everyone is asking about the cost structure and payback and philosophy. So I'm mean I'm going to ask it a slightly different way. If I look at the plan here to lean in, you clearly are going to have some heavier free cash flow investments here this year and next, but you do have a strong balance sheet, $1.2 billion in cash even with those two years of heavy investments, it looks like you're going to have about $900 million in cash exiting 2023. My question for you is, with that much cash even after two years of heavy investments, is the model fully funded to a path to free cash flow or do you think you'd have to raise more money, just trying to better understand how much cash you actually need to get a positive free cash flow state? Thanks.

Yeah. No, it's a fair question and I feel like we're in a good position where -- with our performance and consistent execution. We're looking to get to free cash flow breakeven over the near term, I would say brent. So I'm not worried about additional funding needed to help us succeed and go after this opportunity.

That's helpful. Thank you. That’s all I had.

Thank you, Brent. Next question is from the line of Andrew Bauch with SMBC Nikko. Andrew, your line is open.

Hey, guys. Thanks for taking my question. Just wanted to touch upon the international opportunity that you guys are starting to invest in this year. I mean maybe what have you learned over the first three months and what's sort of timeline we should think about before you're --actually launching live locations outside the U.S.?

Yeah, No, that's a great question. We're in the early, early innings. And I would, just remind you that our 2022 years is really a foundational year for us. We've got a few customers live and we're getting some really great, great feedback and we're learning that the demand is strong. But that said, we're in the early innings. And this is sort of a multi-year journey for us. So I think we're aways from having meaningful impact on our P&L, but we're encouraged by the early signal from the customers that we're engaging with.

Yeah, absolutely. I mean, even having a couple live is a good test run. And then touch kind of more modeling point you mentioned that the hardware cost of goods sold came down pretty considerably as freight costs kind of came off peak, I mean it's even more impressive on a net new location basis. So how confident are you that that line item kind of remains relatively stable through the rest of 2022 and does even have room to come down over time?

Yeah. Then we -- so you're right, we had some benefit in Q1, some one-time benefits and also we had lower freight costs in Q1. I do expect a little bit of a tick up in Q2. But over the long term. I feel like we can keep -- definitely keep our payback periods in order, which is a goal of ours, but also I would remind you that we do anticipate hardware costs to remain elevated, but definitely something we can manage, and we've been strategically shifting to having more inventory, which is allowing us to lower that shipping cost. So I have a bit more visibility into that, but other than the uptick in Q2, I think we've got a good handle on it.

Great. Fantastic quarter. Thank you.

Thank you, Andrew. We’ll now take our last question from the line of Harshita Rawat of Bernstein. Harshita, your line is open.

Hi. Good afternoon. I want to ask about B2B so you acquire extra share last year. COGS a significant portion of the restaurant expense base. Tell us about how you cross selling extra share into restaurants and more importantly, what we've can you participate in B2B AP automation flows. Thank you.

Yeah. Great question. I'll remind everyone that it's still early for extra chef and we're excited about the opportunity ahead. We just enabled our entire sales force to position and sell extra chef in Q1. So we're excited about their performance. It was ahead of our plan in Q1, but we're very much in the early stages of the product roadmap on B2B. For example, extra chef today does a great job of AP automation. Great job at inventory management and recipe management, so we can do really good food cost optimization, but over time, the opportunity for this section of the platform is very similar to payroll, if you think about the opportunity to better manage the books and work with accountants. The opportunity to better work with suppliers and consider bill pay to suppliers. So we see a tremendous opportunity in the back office around supplier management and we're very much in the infancy of this product roadmap. So that's exactly why we went after extra chef and they've been an integral part of our Toast team and building out this vision, but a really good question.

Thank you.

Thank you, Harshita. I would like to turn the call back over to the presenters at this time.

Just thank, everyone [Multiple Speakers] Yeah. I think we are good. Thank you, everyone.

That concludes the Toast first quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.