Restaurant point of sale technology player Toast posted its first post-IPO earnings this week. For the third quarter, the company showed revenue growth of 105% over Q3 2020. This lagged slightly behind the pace of GPV volume growth of 123%.
The earnings call offered a glimpse into where Toast goes next in the local restaurant software space. And the answer appears to be deeper into the back office.
Toast emerged in Boston back in 2012. It went public in September, priced at about $40 per share. Today, the company’s market cap is $29.7 billion.
An Underinvested Industry
Toast’s leaders see a massive remaining opportunity to move restaurants off of legacy systems and pen and paper. And from there onto a full suite of SaaS tools.
Toast provides its comprehensive suite for the roughly 40,000 restaurant locations its serves. In addition to POS, the company offers online ordering, inventory management, payroll and personnel management, payments, and marketing tools. There is also Toast Capital. This product extends credit to Toast’s restaurant customers. In this regard, Toast is following in the footsteps of Square and other fintech players. It’s increasingly routine for fintechs to leverage their unique access to business performance data to make credit decisions.
My colleague Neal Polachek analyzed Toasts S-1 prior to its IPO. His assessment was that Toast has done more in less time than some of its SaaS peers to drive high annual recurring revenue from a comparatively small customer base.
Neal noted Toast’s metrics made a strong argument for going to market with vertically focused versus horizontally focused SaaS solutions. Here is what Neal wrote:
Toast is a SaaS solution built entirely for the restaurant industry. The company’s focus on this single vertical has resulted in truly impressive APRU. EverCommerce, on the other hand, chose a strategy of building and selling SaaS to three broad categories of small businesses. This led them to a much lower APRU. Albeit, with a much larger customer base — 500,000 versus 29,000 for Toast.
Massive TAM Attack
So based on its own estimates, Toast has barely scratched the surface of the addressable. The company estimates there are about 860,000 restaurant locations in the United States. And they believe restaurants have among the lowest share of revenue invested in technology across all industries. Based on this, Toast figures its TAM will hit $55 billion by 2024 in the U.S. alone.
“In the U.S., as of the end of Q2, we were only 6% market penetration for the TAM in the U.S.,” CEO Chris Comparato said in the earnings call. “So, we see a broad-based opportunity to go after the majority of TAM.”
“We believe at least two-thirds of [the estimated 860,000 U.S. restaurants] are accessible to Toast today. That is both in SMB and mid-market. And I’d say, the lower end of enterprise. So, we think there’s a very long runway for TAM adaption and location acquisition. And we’ve seen broad-based momentum across the U.S.”
Glengarry Glen POS
So in order to attack this opportunity, Toast has deployed a local sales force.
“Knowing that the restaurant market is hyperlocal, we’ve invested in a sales force and a customer success team of localized, field-based industry experts trusted by these local communities,” Comparato said. “Our employees live in these communities and dine in these restaurants night in and night out and are true partners to our customers.”
The restaurant space is a competitive sales environment. This is true for everything from supplies to delivery solutions to POS systems. So we imagine that Toast’s salesforce has more hunters than farmers among its ranks.
Comparato did, however, say that referrals remain a significant source of new customers, which helps keep sales costs down.
“Approximately two-thirds of our new locations come from inbound channels and one-fifth from customer or partner referrals. This creates further efficiency in our go-to-market motion,” he said. “And our sales productivity typically increases as our positive reputation spreads within a local restaurant community.”
Automating the Back Office
On the Q3 earnings call this week, CEO Chris Comparato talked about Toast’s product roadmap. He said product decisions are based on insights Toast gleams from the restaurants using its platform. He said Toast’s overall mission is to make restaurants more efficient with technology.
On the call, Comparato emphasized how the investments Toast is making will help address some of the most acute challenges restaurants (and other businesses) face today. These challenges include rising costs, supply chain disruptions, and labor shortages. These issues are making it much harder for restaurants to achieve profitability. Even in the best of times, restaurants operate on razor-thin margins.
“In a survey, over half of our customer community told us that high operating costs and food costs were a top challenge,” Comparato said on the earnings call.
Toast made two acquisitions recently in order to shore up its back office. These are StraEx for payroll management and xtraCHEF for invoice and accounts payable solutions.
“We’re investing pretty heavily in backing innovation in and around what I would call accounts payable automation, as well as food cost optimization, ” Comparato said.
“We think there’s a unique opportunity to automate even more of the back office…Running a restaurant is really difficult. And if you think about razor-thin margins and the focus on operational efficiency, we think xtraCHEF really is that the cornerstone of back-office automation. So, we’re super excited about investing in that roadmap.”
