TOST | PRE IPO NOTES

Toast raised the price range for its IPO from $30-33 to $34-36 earlier in the week. The offering price was subsequently raised again to $40. Shares opened trading at $65 today.

Shares opened above the price range we highlighted in our pre-IPO Black Book. Comparing to publicly traded peers we thought the shares could trade up significantly. Not only did Toast have a larger TAM in the restaurant sector, but it also is set up to have a more dominant competitive position. Our valuation matrix was:

Below I have provided the link to the replay, slide deck, and notes from our TOST Pre-IPO deep dive presentation. 

CLICK HERE for event replay.

TOST | Pre-IPO Deep Dive

Significant growth opportunity

• Managing a restaurant is a tricky business. Adding technology to a small restaurant was only a dream for many operators until Covid.
• Toast's "restaurant-specific" platform is fully integrated across POS, digital ordering and delivery, marketing and loyalty, labor management, financial technology solutions, and platform services to provide restaurant operators everything they need to run their business.
• Toast has democratized operational technology so that restaurants of all sizes can compete on an even playing where even small concepts can affordably boost restaurants' top line and margins.
• Toast was in 48,000 restaurants at the end of Q2.

How the pandemic has altered the landscape

• COVID-19 has forever altered the restaurant industry's landscape, forcing participants to implement technology to survive.
• More than 17% of restaurants were said to have closed during the pandemic.
• New restaurants are taking over closed storefronts and deploying new technology to drive sales and profitability.
• Those restaurants that did survive can fully appreciate that the future is digital and that menus, orders, payments, finances, inventory, payroll, and loyalty must be integrated when possible.
• Toast is well equipped to take advantage of both new and old restaurants seeking assistance from technology.
• The landscape has numerous competitors, development costs are high, customers are sticky, and scale can be leveraged and highly advantageous.

Valuation is a function of future TAM and the ability to execute

• Toast's valuation has tripled since Feb 2020, but customer adoption has accelerated due to the pandemic.
• Toast is in the early innings of customer adoption in the US but is still in the first inning of full product suite adoption.
• It is easier to upsell a customer than win a new one, providing visibility into a promising future.
• An estimated 22 million restaurant locations generate more significant than $2.6 trillion in annual sales in 2021.
• Domestically nearly 800,000 restaurants are generating over $710 billion in sales.

Company Background and Product Offering

• Cloud-based technology platform for the restaurant industry
• Toast is a restaurant-specific platform fully integrated across POS, operations, digital ordering and delivery, marketing and loyalty, team management, financial technology solutions, purchasing, and platform services.
• Toast's client base
• Toast has 48,000 restaurant locations and 29,000 customers in NA, processing over $38B of gross payment volume in the trailing 12 months.
• Toast currently has about 6% of restaurant locations on its platform.
• Position in the industry
• Toast's stakeholders are the restaurant operators, employees, and customers.
• Toast facilitates everything from faster table turns to customer loyalty programs to order processing.
• Toast's products improve customers' revenues and costs, quickly becoming a must-have for the industry.
• Capital efficient
• New customers generally have payback periods of 18 months.
• Toast's products offer restaurants capital-efficient solutions for their operations.
• Toast's own capital needs are declining as it leverages its product development.
• Restaurant TAM
• Toast sees its Serviceable Addressable Market at $15B, its Total Addressable Market at $55B.
• Globally the company sees its TAM as at least double that of the US.
• There are an estimated 22 million locations globally and four times the spending.
• The TAM includes software, payments, and loans.
• Toast Acquisitions
• Toast acquires StratEx July 2019
• Acquired for $250 million
• StratEx is an HR/payroll software company.
• The company provided Toast the important aspect of payroll integration with their POS system.
• Payroll is a difficult industry to enter from scratch since mistakes cannot be made in payroll.
• Toast acquires xtraCHEF June 2021
• Toast paid 570,000 shares and $28,000 cash.
• xtraCHEF is a provider of restaurant-specific invoice management software that helps restaurants track expenses.
• This acquisition was to provide restaurant owners with easier expense tracking and insights.

Restaurant Industry Thesis, TAM and Set-Up

• $659B: Restaurant industry sales in 2020, down $240B from expected levels.
• 12.5 million: Restaurant industry employees at the end of 2020, down 3.1 million from expected levels.
• 110,000: Restaurant locations that are temporarily or permanently closed
• 9 in 10 restaurants have fewer than 50 employees
• 7 in 10 restaurants are single-unit operations.
• 8 in 10 restaurant owners started their industry careers in entry-level positions
• 9 in 10 restaurant managers started in entry-level positions.
• Restaurant employment is still behind.
• Restaurant employment at 11.3 million remains one million lower than pre-pandemic levels.
• There are 15.1 million restaurant industry employees in the US.
• 1.6 million new restaurant jobs will be created by 2028.
• The restaurant workforce makes up 10% of the overall US workforce
• 3 in 10 restaurants cite staffing as a challenge
• 76% of restauranteurs are looking for labor-management tools in their restaurant point of sale
• The Direct Ordering Opportunity
• Pickup is a $240B market
• Delivery pales in comparison to takeout
• 59% of restaurants in 2020 added curb-side options
• Pick-up will slow as dining rooms re-open.
• Restaurant employment growth is decelerating.
• The number of employees working in the industry has not fully recovered
• Tech spend in restaurants has lagged
• Restaurants in the US spent an estimated $25B on technology in 2019, less than 3% of total sales.
• The demand for technology adoption in restaurants has increased over recent years. However, the industry is still considered a laggard with one of the lowest levels of digitization across all sectors.
• Toast expects the technology spending in the industry to increase to $55B by 2024, closing the gap to the median of other industries at 5% of revenue.

Enterprise customers

• Larger chains are more difficult to sign up for 3^rd party SaaS for several reasons:
• They negotiate lower margins
• They require more custom work
• They want more ownership of their data, CRM, and systems
• They are hesitant to share a cut of the revenue
• They have more resources to hire their engineers.

Revenue Strategy & Execution

• ARR vs. One-time
• One-time
• Toast sells its proprietary hardware below costs to customers.
• Professional services are for the installation of Toast's hardware, business process mapping, and training.
• ARR
• Toast's subscription SaaS revenues are driven by locations and the number of products each location adds. Toast charges a rate per location that varies based on the number of software products purchased, the hardware configuration, and employee count. Contracts are generally 1-3 years.
• Financial technology solutions revenue includes transaction-based payment processing. Restaurants are charged a transaction fee for payment processing based on the total transaction amount and a fixed fee per transaction. In addition, the interchange fee, network assessment fee, processing fee, and bank settlement fees are costs of revenue. Toast's take rate, on average, is 55bps. Financial technology solutions revenue also includes fees from customer loans.

Toast Pricing Model

• The fees for POS system and guest-facing displace are $999 cost.
• For any additional hardware, there is a hardware cost of the following:
• POS+CC processor: $599 + $45/month
• Server tablet: $389 + $50/month
• Kitchen display: $499 + $25/month
• Software add-on pricing:
• Digital Orderings: $75/month
• Gift Cards: $50/month
• Loyalty: $50/month
• Email marketing: $75/month
• Location Growth is the first step
• Revenue growth begins with location growth.
• As of June 30, 2021, the company had 47,942 locations (29,000 customers).
• 2/3rds of new locations added in the past year came through organic, paid, field, and referral channels.
• Over 20% are through the referral network.
• According to Toast, only 6% of the 860,000 restaurant locations currently have Toast.
• As Toast's customers open new locations, Toast's platform will grow.
• The focus becomes upselling.
• Toast's numerous products interact with each other facilitating adding more products over time.
• Toast's sales team is organized into three main functional areas: customer acquisition focused by location and size, upselling focused on the customer, and growth-focused on sales enablement and operations.
• 54% of Toast customers are using four or more of these products.
• Subscription revenue of 62% outpaced hardware growth of 16%. However, in the six months ended June 30, 2021, subscription revenue growth of 52% lagged behind hardware growth as increased locations, and greater hardware upsells to existing locations lagged the 62% hardware growth.
• Upselling drives the NRR > 100%
• Future Growth Opportunity – payroll
• In 2019 the food service industry had 8% of US workers on the payroll. Calculating the industry's labor cost based on 30-35% of sales, payroll was roughly $280B pre-pandemic
• The average tenure at a restaurant is less than two months, creating significant record keeping.
• Toast's payroll offering tracks hours and labor costs for the restaurant. Tips need to be synced with the POS.
• In the restaurant industry, restaurant labor laws are subject to a lot of change. Issues like tip wages shared tips, and minimums can be complex for small operators.
• Toast's offering can handle taxes, timesheets, tips, etc
• Future Growth Opportunity – Toast Capital
• Toast makes working capital loans to its customers through a partnership with a bank.
• Toast Capital loans have a target maturity of 90 days and a maximum repayment term of 150 days.
• Toast pre-qualifies customers for loans. Personal credit scores are not affected.
• Loans range from $5,000 to $250,000
• Loans have one fixed fee – no late fees, compounding interest
• Toast can automatically deduct a % of a day's credit card sales to repay the loan.
• Toast estimates the market opportunity as $29.5B in outstanding public banks' restaurant loans and an average annual interest rate on small business loans of 1.4%-7.2%.
• Toast acts as a marketer and services and receives a fee based on the loans' outstanding balance and credit performance. Toast is obligated to purchase loans that have been charged off unless it exceeds 15% of the original principal amount.

Competitive Landscape

• The global restaurant management software market is forecast to reach nearly $7B by 2025. This represents a forecast CAGR of 14.6% from 2019 to 2025. The main drivers for this expected growth are a growing awareness by restaurant operators of the benefits of increased efficiencies from software systems. Also, the covid pandemic will bring forward significant demand for integrated restaurant management systems to streamline processes while providing restaurant services in a more omnichannel approach to customers.
• Major competitive or other industry participants include:
• Square (SQ)
• Square's primary focus is not restaurant POS systems; the focus is on POS as a whole. Only other company to offer payroll.
• Square and Toast are the only companies offering integrated POS and payroll.
• Restaurant POS is a low-priority item for Square. However, the word restaurant was mentioned once in their 2Q21 earnings report, and it was regarding restaurant PPP loans.
• Their 2020 10k was their last mention of restaurant POS.
• Square POS systems are not tailormade for restaurants.
• TouchBistro
• Touch Bistro does not do payment processing themselves do you must work with their 3^rd party.
• Clover Network
• Clover has a low credit card processing fee but does not offer integrated payroll.
• Lightspeed POS (LSPD)
• Lightspeed allows restaurants the most flexibility in terms of hardware a restaurant may already own.
• Oracle/Micros (ORCL)
• Oracle offers a cloud-based POS system that continues to run even when offline.
• NCR (NCR)
• NCR specializes in POS systems offering systems in a variety of industries, including retail and food.
• PAR Technology (PAR)
• Heartland Payment Systems
• Shift4 Payments (FOUR)
• Toast is deemed as the best overall system according to Nerd Wallet
• On-premise dining card processing is relatively similar amongst various POS providers
• Toast only has the optimal pricing model when an average check is very high
• TouchBistro has the worst pricing on on-premise dining fees
• All other POS systems have identical pricing models.
• Off-premise dining does drive significant revenue with very high fees with a variation. I am assuming 500 transactions per month.
• Toast has competitive pricing for the smaller average check, but Clover has best.
• Pricing is much more fragmented in off-premise dining, but TouchBisto or Lightspeed is best overall.
• Clover is known for best on and off-premise transaction fees.