TOST - NYSE

Good afternoon. My name is Cameron, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast First Quarter 2024 Earnings Conference Call. Today's call will be 45 minutes. I'll now turn the call over to Michael Senno, Senior Vice President of Finance. You may now begin your conference.

Thank you, Cameron. Welcome to Toast's earnings conference call for the first quarter ended March 31, 2024. On today's call are CEO and Co-Founder, Aman Narang; and CFO, Elena Gomez, who'll open with prepared remarks, which will be followed by 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 Act and the Exchange Act. All statements other than statements of historical facts are forward-looking statements, including those regarding management's expectations of future financial and operational performance and operational expenditures, location growth, future profitability, time line and margin outlook, anticipated impact of our restructuring plan and share repurchase program, expected growth and business outlook, including our financial guidance for the second quarter and full year 2024. 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 uncertainty that could cause actual results to differ materially from our expectations. During this call, we will discuss certain non-GAAP financial measures, including but not limited to, non-GAAP subscription services gross profit and non-GAAP financial technology solutions gross profit, which we refer to collectively as our recurring gross profit streams. These are the basis for our top line guidance. These non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release and SEC filings for detailed reconciliations 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, sales and marketing expense, research and development expense, and general and administrative expense are on a non-GAAP basis. Finally, the press release can be found on the Investor Relations website at investors.toasttab.com. After the call, a replay will be available on our website. And with that, let me turn the call over to Aman.

Thank you, Michael, and thank you, everyone, for joining us this afternoon. 2024 is off to a great start with first quarter results ahead of expectations across the board. We added over 6,000 net locations to our platform, our recurring gross profit streams increased 33% year-over-year, and adjusted EBITDA came in at $57 million, a $74 million improvement versus Q1 last year. I'm really proud of how the whole team performed, and we are well positioned to continue to scale and have a terrific year. Our mission at Toast is to help restaurants delight their guests, do what they love and thrive. We continue to innovate and drive value for our restaurant community, including with the recent launch of our restaurant management suite and upgraded digital storefront suite and a marketing suite, which for the first time, is leveraging AI to help our customers stay one step ahead. We're looking forward to sharing more about our longer-term vision and strategy at our Investor Day on May 29. We've increased our outlook for the full year based on our performance in Q1, and we are all focused on the 4 strategic priorities I laid out in our February earnings call: one, scaling locations and market share in our core business; two, driving ARR through platform growth; three, expanding addressable market into new adjacencies; and four, setting up the company to scale and deliver ongoing operating leverage. First, scaling restaurant locations and gaining share in our core business. We added over 6,000 net locations in the quarter, driven by the combination of our purpose-built restaurant platform and our local go-to-market engine. As we gain momentum in local markets across the country, we continue to see a pliable effect with higher rep productivity and faster market share gains, which gives us confidence in sustaining healthy location growth. Let me share 2 recent customer stories that speak to our momentum and the value we create for customers. Pickles Pub is a busy full-service restaurant and bar in downtown Baltimore near Camden Yards and M&T Bank Stadium. They switched to Toast to partner with a technology partner that could handle their volume, streamline operations and increase speed of service, particularly on those busy game days. On opening day for the Orioles, they blew through their previous sales record and credit the uplift in part to faster speed of service after implementing Toast Go Handhelds, Mobile Order & Pay and Kitchen Display Systems. Since switching to Toast, they have reduced order to delivery times for drinks to under a minute. And in addition, the addition of Mobile Order & Pay has opened up a new service model with 20% of food and drink orders coming in directly from guests scanning QR codes at the table and placing the orders themselves. I'm also excited to announce our agreement with Snooze Eatery, a breakfast and lunch concept with over 70 locations nationwide. Snooze needed a technology partner that could support their growth plans and provide a better guest experience with faster and more accurate service. They're rolling out Toast across their footprint. And for the locations they've taken live, they're already seeing benefits. Toast handhelds have increased server capacity, leading to higher sales, higher tips and greater earnings. As these 2 stories highlight, our focus on creating products that drive value for our customers continues to drive our growth. Our second priority is driving ARR and ARPU by building products and experiences our customers love. Earlier this year, we launched a suite-based approach to packaging that simplifies the sales process for customers and our sales reps alike. Our suites are designed with good, better, and best tiers and creates a path for customers to adopt more of our platform over time as well as provide a framework for us to roll out and monetize new products and features. They cover the breadth and depth of our customers' needs across restaurant operations, guest experience, as well as employee and supplier management. Let's walk through how the suites are adding value for our customers. The restaurant management suite helps multi-location operators access the latest version of our above-store management tools, and for the first time, access powerful benchmarking data across all restaurants on our platform. Our digital storefront suite helps restaurants take control of their online business, and our marketing suite helps them bring their guests back more often. These launches are scratching the surface of how Toast can leverage one of the best data sets in the restaurant industry to create value for customers. To bring this to life with an example, Whisk is a neighborhood restaurant North of Dallas that recently adopted our AI-powered writing assistant included in our marketing suite. The writing assistant not only does a great job of describing Whisk's food and atmosphere, it has cut the time required to send out a guest engagement campaign by more than half. Our recent AI-enhanced marketing campaign drove over $2,500 in sales for Whisk in April alone. Moving to our third priority, expanding our addressable market into new adjacencies. We continue to gain momentum across the first 3 international countries we launched in, the U.K., Canada, and Ireland and remain confident in the potential these markets have to help us drive growth. In Q1, we expanded the platform internationally with the launch of our integrated online ordering capability, which has been received incredibly well by our customers. And as the year progresses, we expect to launch more of our platform across both in-restaurant operations as well as the guest experience. This should help us drive further product differentiation and expand ARPU across these international markets. Within enterprise, we continue to gain momentum across a broad range of customers. The launch of the enterprise tier of our management suite allows our customers to manage their operations at scale and reduce the administrative workload on their corporate teams. Our pipeline in the segment remains strong, and we have confidence that we'll continue to increase penetration over time. And beyond international and enterprise, we're also investing to open up new opportunities where our vertical platform and our local go-to-market team can be a competitive advantage. Our fourth priority is setting up the company to scale and deliver ongoing operating leverage to complement our growth. As I mentioned, we delivered over $57 million in adjusted EBITDA in the past quarter, a $74 million improvement versus Q1 last year. We have aligned our resources on our most important priorities and are building a culture where everyone across the organization is taking efficiency seriously. This allowed us to increase our full year guidance and puts us on track to expand margins by over 13 percentage points to the midpoint versus last year without sacrificing our most important growth and innovation initiatives. To wrap up, I'll leave you with a few thoughts: one, I'm confident in how we're executing and thrilled to be leading this team; and two, we're still in the early innings of what is possible and have the foundation in place to capitalize on this incredible opportunity ahead. I want to thank every Toaster for their continued dedication and passion for our mission. It wouldn't be here without you. Our customers who are entrusting us to support you all, and our investors for believing in us and the potential in this business. Thank you, and now I'll turn the call over to Elena to share more about this quarter's results.

Thank you, Aman, and to everyone for joining today. To start, I'll reiterate a thank you to our entire Toast team, whose hard work and continued execution led to another successful quarter. Top and bottom line results exceeded expectations, evidence of our operating momentum and disciplined approach at driving both growth and profitability. In the quarter, ARR grew 32%, and total fintech and subscription gross profit, our recurring gross profit streams increased 33% year-over-year. Adjusted EBITDA was $57 million in the first quarter, a 19% margin on our recurring gross profit streams, up 26 percentage points from Q1 last year. In Q1, we executed on reshaping our cost structure, better aligning our investments with our highest priorities and positioning ourselves to go faster on key growth initiatives. We now expect slightly higher annualized run rate savings and to capture more in-year savings in 2024 than initially estimated, including in Q1. The first quarter also included onetime cost benefits related to the restructuring. Those factors coupled with stronger-than-expected GPV as the quarter progressed, led to significant adjusted EBITDA outperformance in Q1 and contributed to the increase in our full year outlook. Our conviction in the opportunity ahead is stronger than ever. We will reinvest part of the incremental savings in key growth areas. We added over 6,000 net locations in Q1, increasing total live locations to approximately 112,000, up 32% year-over-year. Our focused vertical strategy and differentiated go-to-market engine, coupled with consistent execution, continue to drive location growth as we deepen penetration across the full breadth of the restaurant TAM. And with Toast in only 13% of U.S. restaurants and just scratching the surface internationally, we continue to have an opportunity to significantly increase share as we execute our playbook. SaaS ARR grew 39% year-over-year, driven by strong location growth and a 5% increase in SaaS ARPU on an ARR basis. And we continue to expect SaaS ARPU on an ARR basis to be in the mid-single digits in the near term. Payments ARR and fintech gross profit both grew 26% in the first quarter. GPV increased 30% to $34.7 billion with GPV per location down 2% year-over-year. After a softer January related to weather, GPV trends bounced back to similar levels we saw exiting 2023 and consistent with seasonal patterns. Net take rate was 55 basis points and other fintech products contributed 10 basis points. Our non-payments fintech solutions led by Toast Capital contributed $34 million in gross profit. Toast Capital continues to perform well. Customers value the fast, low-friction access to capital to grow their business, driving healthy demand for the product. As we scale the program, we will diversify and broaden our funding sources. In addition to our existing model, we recently added a forward flow model where a portion of Toast Capital loans are sold to third parties. For loans sold to a third party, we do not take credit risk. As a result, there is a slightly lower revenue take rate and typically no associated bad debt. On the P&L, compared to our current model, that translates to lower recurring gross profit for forward flow originations with nearly 100% flow-through. We plan to balance both models of the scale originations and continue to optimize for maximizing risk-adjusted returns. Expense growth moderated in the first quarter as we continue to drive efficiencies and cost discipline, coupled with savings from the restructuring actions. As we drive efficiency and increase profitability, we'll prudently invest in our highest priority growth areas, including product innovation, our go-to-market engine and new growth vectors to expand our TAM. Sales and marketing expenses were up 13% year-over-year. We continue to grow our upsell and international sales teams and make targeted investments in our U.S. new business team to drive deeper penetration. The Q1 restructuring actions impacted our R&D and G&A expense lines more than other parts of the business, resetting the expense growth trajectory in these areas. We expect R&D expenses will grow at a more moderate level as we continue to make targeted investments to drive product innovation and add value for our customers. G&A was down 13% year-over-year, excluding $15 million of bad debt and credit-related expenses, primarily related to reserves for Toast Capital. We expect ongoing operating leverage in G&A, reflecting our continued focus on driving efficiency in G&A as we scale, including through automation and global diversification of our workforce. Free cash flow was negative $33 million in the quarter due to the timing of cash bonus payments and severance payments in Q1. We expect free cash flow to be positive for the remainder of the year and broadly mirror adjusted EBITDA on a full year basis. Turning to guidance. For the second quarter, we expect total subscription and fintech gross profit to increase in the 20% to 24% range year-over-year and adjusted EBITDA to be $55 million to $65 million. Our top line growth rate is negatively impacted by a few points due to adding forward flow and comping a small onetime benefit last year. As a result of our strong start to the year, we raised our full year outlook. At the midpoint, we now expect 26% growth in fintech and subscription gross profit and $260 million in adjusted EBITDA, a margin of 19%, marking a 13 percentage point improvement versus 2023. After executing the restructuring, we now have visibility on higher in-year savings than expected and reset the guidance higher to reflect that. This also factors in our plans to reinvest in key areas of the business to drive sustained growth going forward. With our increased profit expectations for the year and progress on containing stock-based compensation, we are now on a path to be close to breakeven on GAAP operating income by the end of the year. To wrap up, we are making significant progress executing against our goals and are positioned to deliver strong top and bottom line results in 2024. Our top focus remains delivering value to customers, and we are well positioned to drive durable growth across our core business while building new growth curves. We announced our first Investor Day will be held on May 29, at which time you will hear more from our leadership team on our market opportunity, strategy, and growth plans. We are incredibly excited about what lies ahead for Toast and look forward to sharing with you more then. Now I'll turn the call back over to the operator. Thank you.

[Operator Instructions] Your first question is from the line of Josh Baer with Morgan Stanley.

Congrats on a good quarter. Wanted to ask about net take rates from 2 perspectives. I was hoping you could comment on the interchange settlement and how that should impact take rates as well as an update just around taking price as far as the tactical approach of going back to select customers that have off-market contracts.

Yes, sure. I can take that. So in terms of the Visa-Mastercard settlement, it's really early and not final. Our early signal is it's most likely going to impact us in the second half of 2025. That's the early read. And also, I would also comment that it won't impact our entire volume of GPV, just at the highest level. So just keep that in mind as you guys update your models. But in the context of pricing, I think your question on take rate, as we've said, we're going to take pricing over time, it's going to be an ongoing cadence of small steady changes in price. No step function change in pricing this year. We're going to start with fintech in the second half of the year. And just keep in mind, it won't have a meaningful impact in 2024. But over time, you should see us execute against a steady cadence of price adjustments, in particular, in places where customers are out of market.

Just to build on that, Josh, as we think about growth, it's really a combination of, if you think about our growth algorithm, it's a combination of product attach rates, product innovation and pricing. And we're thinking about all three of them as we think about where we are with 13% market share in the industry.

The next question is from the line of David Koning with Baird.

I guess first of all, it looked to me like Q2 recurring GP growth is actually a little lower than the back half year. It looks to me like you're calling for a re-acceleration in the back half. Is that right? And what would that be attributed to?

Yes, so a couple of things. One, recurring -- let me just start giving context for the full year and Q2, there's some dynamics at play. But yes, if you look at the full year, our full year guidance at 26% at the midpoint would imply that, obviously, our GP grows over time. Q2, there's a few dynamics at play. One is the implementation of forward flow, which we talked about, and we're comping this onetime benefit to SaaS revenue in Q2. So those are contributing to a lower recurring gross profit in Q2. Then we talked about targeted fintech pricing towards the back half of the year. And that will be slight and gradual.

Got you. And just maybe as a follow-up, you talked about GPV per location being down a bit, just especially because of January. What is kind of April, May, June? Would we expect acceleration just because you don't have January, obviously, in Q2?

Yes. So I think -- so you're right, Josh. What happened in Q1, recall, January was a lighter -- we had a weather pattern that impacted January. As the quarter progressed, we saw GPV get back to sort of sustained levels or seasonal levels. So overall GPV was down, on a per location, down 2% in Q1. As we enter into the first part of Q2, down low single digits as we enter into the quarter. So that's what I would say. And then back to the question on the guidance on GPV, just keep in mind, GPV towards the back half of the year, that started to decrease in the back half of last year on a per location. So when you look towards the back half of the year, you'll see the GPV compares improve.

The next question is from the line of David Hynes with Canaccord Genuity.

Aman, I'd love to ask about the new suites that were rolled out, management suite, digital storefront, marketing suite. As you think about kind of sizing the opportunity in the installed base, how do you think about that? And then maybe you could talk about, are there incumbent technologies there? Is it more of a greenfield opportunity? Like what are the competitive dynamics?

Yes. DJ, thanks for the question. If you look back the past couple of years, we've launched a lot of products. And really, the driver behind these suites was to simplify. And so we've introduced these suites to package our products and really simplify the sales process, both for our go-to-market team and our customers in terms of how easy it is to adopt and leverage the platform. The suites are organized into good, better, and best tiers to help both let our customers start off, for example, at one tier and then, over time as they see value, adopt more of it. And also as our team is driving more innovation, having a framework where our team can deliver more capabilities without just continuing to launch more and more products. I think it simplifies it for everyone. And in terms of like the types of products and areas we're investing in, of course, we're going to continue to invest in the lines of business and products we offer. This is across commerce, restaurant operations, guest experience, have launched a lot of products there, employee experience, fintech and supplier as well. And then I think the other thing that we're tracking very closely is how does AI and data play a role. So one of the things that we think is really powerful is we've got one of the most, if not the most powerful data set in the restaurant industry. And so how do you leverage that to help restaurants be more successful? One example is in our management suite. We've added restaurant management suite, we've added data benchmarking to help restaurants better understand how they benchmark relative to their peers, both on sales data, menu data, even what to put in menus and so just helping them be smarter by leveraging the data. And then on things like our guest management suite, we're leveraging AI to drive campaigns, again leveraging all that guest data that's in our platform. So that's another big area of focus for the team.

Your next question is from the line of Harshita Rawat with Bernstein.

So Elena, you talked about 30% to 35% margin target long term as you think about percentage of gross profit. As now we think about the operating leverage you're achieving in the business and also kind of driving the gradual adjustment as a component, is there a change in thinking about that long-term profitability target? And also, how should we think about long-term GAAP profitability as well?

Sure, great question. So I'll provide context on our long-term financial profile at Analyst Day. But just sort of pivoting back to 2024, our guidance shows significant progress on margin. And you've seen us deliver that efficiency and scale over the course of the last several quarters. So we're going to continue with that discipline. And you heard Aman talk about his strategic priorities as he's laid out. We're positioning the company really to drive ongoing operating leverage while we're balancing that with growth and innovation. So I don't have an update today but we'll update you at Analyst Day. And you had a question on GAAP, actually, that's a really good point. You had a question on GAAP. Overall, just keep in mind, we've been very focused on stock-based comp as well as you've heard us talk about that. So that's really what's driving our confidence in the updated guidance on GAAP on this call.

Your next question is from the line of Tien-Tsin Huang with JPMorgan.

Sorry, can you hear me?

Yes. Now we can.

Just on the -- I was following up on Dave's question on GPV per location. Beyond the second quarter, I know some of the compares will help. We do see that on our side as well. But just given some of the mix shifts and different focus upmarket, downmarket, any sort of directional view on GPV per location structurally beyond the macro?

Yes, Tien-Tsin, thanks for the question. Nothing material to report there. I mean, if you look at the bulk of our growth, that is still being driven by our core SMB business. And the same effect we've talked about is as we gain share, we're seeing the same flywheel effect. It's taken us a decade to get -- build a business we've built in our SMB business. And while we're excited about the potential internationally in enterprise and other segments of the market, that's not what's materially driving any changes in GPV. I mean, I think some of this is just if you think about restaurant sales trends, they're stable, but year-over-year, there was some small decel that we saw. Now it's stabilized in a narrow band.

Yes, and I would just add that as we extend the different parts of the TAM, any mix shift will be very gradual over a long period of time.

Makes sense. Yes, you got a big base here. Okay, just my quick follow-up maybe for you, Aman. Just we get a lot of questions on competitive intensity and a lot of your peers are upgrading tech and verticalizing and adding more software content around these verticals. Are you seeing any change there? And does it change your sort of focus around product velocity or going into adjacencies, that kind of thing?

Yes. I mean, look, we're also investing in a big way to continue to innovate for our customers. I talked about some examples with how we're leveraging data and AI to just really help this customer community with this unique data asset that we have. And we had a good -- maybe I'll start by saying that a great quarter. You saw 6,000 net adds, I think great momentum in the business. Back to our -- this really speaks to the team's execution but also our platform and our go-to-market engine. And this is always -- we've said this before in calls but it's always been a competitive market. I think we continue to see great execution, good win rates, productivity from our team is strong. And we continue to believe the biggest thing, the biggest factor that's going to drive our growth long term is our own execution, getting more of these markets into flywheel, getting word-of-mouth, getting customer experience to be the best it can be. So nothing material to report. We track a lot of this very closely across competitors, nothing material to report at the moment.

Your next question comes from the line of Peter Heckmann with D.A. Davidson.

Some of my questions echo what we've already heard, but when you think about that roughly 850,000 restaurant locations in the U.S., I guess how do you feel about how much of that is addressable by your current solution, either the turnkey option or software, hardware but not with payments? I guess, how difficult is it for -- will it be as you move upmarket to displace more modern software or more modern payment players?

Yes. Thanks for the question, Pete. Look, I think if you look at the overall TAM, we see there's a lot of room for us to continue to grow in our core TAM. Overall, Toast is about, I think, 13% of U.S. restaurants, as Elena mentioned. Within SMB and mid-market, that penetration is a little bit higher in mid to high teens. And of course, enterprise is still nascent and it's early. Even in these markets that are the most penetrated where we've got 25%, 30% share, these are the flywheel markets we talked about, we still see some of the strongest growth in terms of net adds in those markets. And so the #1 focus of the team is to get all of our markets into flywheel state. As we think about in enterprise, you asked about upmarket, I think at least what we see is that the adoption of cloud upmarket is lower. There's more of legacy solutions. And I think part of why we have expanded our platform to support a partner like FreedomPay is to make the platform more accessible in ways that customers want to buy, so we're more flexible upmarket based on what our customers need. And of course, we've got hundreds of partners as well that are on top of our platform that can build on our solution as well. So I think certainly, like it's -- as we think about going upmarket, it's -- we're happy with the momentum and the progress we're making. But we also want to be balanced about making sure that the customers we take on are in line with where the platform is going. So we don't want any one customer to take over our road map, for example.

Okay, that's helpful. And then have you talked about what's implied from a net revenue retention basis in your annual guidance that you think we can see that uptick after the downtick in 2023?

Yes. We haven't commented on that specifically so nothing new to report on that today.

Your next question is from the line of Stephen Sheldon with William Blair.

Maybe I want to start with you, Aman. Want to get some more detail on the benchmarking analytics. How robust could those capabilities become? And how does this support even more differentiation for your platform relative to competing vendors? It seems like you've been a very favorable spot for buying benchmarking, given your size and scale. So how important could these capabilities be to your restaurant owners, operators? And is this a capability that they've been asking for?

Yes. Thanks for the question, Stephen. They have been asking for it. I think at the scale that we're at, we've got likely one of the best data sets in the restaurant industry. And so our team is thinking about what are ways in which we can apply to really add value for restaurants. And one of the use cases that, frankly, have come up for years at this point is how can you leverage this data to better understand things like, what are you seeing in terms of sales trends? What are you thinking in terms of inflation and price adjustments? What are you seeing in terms of what's on the menu, pricing on the menu? And so there's a whole host of use cases where our customers value understanding that data across their geographies, zip codes, nationally. And so that's really what's driving that benchmarking initiative. And the early signs from our customers has been very positive. Again, it's early so we're still iterating on the product based upon customer feedback but it's leveraging the data that we have.

Very helpful. And then maybe a quick follow-up for Elena on location growth. What's your level of confidence now in being able to surpass 2023 net adds? Are you still on track for that, given the outperformance in the first quarter and what you're seeing in the pipeline?

Yes. No, absolutely, Stephen. As Aman said, we had a strong start to Q1, and we're seeing a lot of great momentum from the sales team on the ground. Q2 is typically seasonally stronger and we don't see any reason why that will be different. Seen really good demand and the funnel is strong, so overall, we have no reason -- we still believe that we'll add more locations in 2024 than we did in 2023.

Your next question is from the line of Tim Chiodo with UBS.

I want to talk a little bit about the sales team. So you mentioned investing behind the upsell team, the international sales teams. I believe the last time that you formally disclosed the size of the overall sales and marketing organization was at the time of the IPO. It was about 730 people and a subset of that would have been the actual quota-carrying salespeople. Could you just give some directional color on how large that team may be now? How large the 730 might have grown to? Anything to give us some context on the overall size and breadth of the sales team?

Yes. So thanks, Tim, for the question. We've continued to add to the team, of course, since the IPO as you've seen as our locations grown. But keep in mind, this dynamic around flywheels allows us to grow ARR without adding reps. So we're gaining that efficiency and productivity from our sales reps all the while, to the point you made, growing our upsell team, investing behind international and enterprise. So while I can't give specificity at the highest level, we feel like we're really balanced across both our new business team, our upsell team, and now these early investments in international. So overall, we're managing the payback periods as we always do, and that's how we're thinking about surgically adding to our sales force over time.

Great. And if you don't mind, just a brief numbers follow-up. The forward flow for Toast Capital, you mentioned a little bit of an impact for Q2. But just broadly speaking for the rest of the year, roughly what would that have been in terms of gross profit or recurring gross profit impact, i.e., would the recurring gross profit guide have been a point or two higher absent the forward flow change?

Yes, it's early, Tim, so the impact in 2024 won't be as meaningful as I would give you that context for the balance of the year.

Your next question is from the line of Jason Kupferberg with Bank of America.

Just wanted to follow up on the location adds. Obviously, you beat your first quarter guide there, I think, by about 10%. Was hoping you could talk about which segments of the end market drove the upside. And what is your specific expectation for Q2 net adds?

Yes. Thanks, Jason. We had, as I mentioned earlier, the bulk of the growth came from our core business. Within our core business, we continue to see, as we get more markets with higher share, it's driving our productivity. And our team's focus is really getting more and more of our markets into this viable state so that we can keep on benefiting from the scale that we're at. Seeing early good momentum within international and enterprise as well. And those teams, I'd say, are, compared to our SMB business, just early. So while there's good momentum, you could zoom out and think about our core SMB business, we've been at this for a decade. And so these new businesses, while they're contributing and over time, you should expect them to contribute more as a percentage, the bulk of the growth today is really still coming from our core SMB business.

Yes. And in terms of Q2, it's seasonally higher, Jason, but nothing specific. But our momentum is strong.

Any update on just the percent of locations that are using 6 or more of the elective products? I know you've been giving that each quarter. And I think, if I recall, it kind of stabilized around the second half of last year. So just any updates on how that's trending?

Yes. Sure, Jason. I think that, that metric overall is just less relevant for us. We've added more and more products that now we've packaged up, as I mentioned, to these suites just because it's simpler for our sales reps to sell, our customers to adopt. We added these good, better, best tiers where they can start with one version, take as an example, digital storefront suite, you can start with the version and then add advanced capabilities like websites and advanced versions of online ordering. And so really, the better metric now is adoption of suites at different levels. And of course, we're tracking that with ARPU.

Your next question is from the line of Matt Coad with Autonomous.

I wanted to ask one more on capital. Curious, if we looked at it from a different perspective so not the dollars of gross profit but rather the dollars of contribution margin, so thinking gross profit less your reserve build, do you think this forward flow agreement will help you kind of like expand that contribution margin percentage and grow contribution margin going forward?

Yes. At the highest level forward flow, the model is such that we don't take credit risk so the margin profile is healthy. And just kind of zooming out when you think about the capital program, we're really trying to optimize or maximize our risk-adjusted returns. So as we scale, we're going to build more partners, and in this case, workflow offers us a really healthy margin profile and still allows us to scale the business as well. So hopefully, that answers your question.

Yes, that's helpful. And then just for my follow-up. Elena, sorry if this is you repeating yourself, but curious if you could provide an update, of the $100 million of annualized cost savings from the risk, how much of that did we see in 1Q?

In 1Q, did I say -- I don't think we've given the quarterly guidance, to be honest. But I will tell you, because of the fact that we had -- I talked about on the script some onetime benefits. We had a little bit higher savings than we anticipated, roughly around $10 million of incremental savings from the $100 million. And just keep in mind, 1/3 of it is related to stock-based comp.

Your next question is from the line of Dominic Ball with Redburn Atlantic.

Great job on taking market share as always. So it seems like in the SMB, the breadth and depth of products offered by Toast is clearly market-leading. My question is for larger merchants, be that upper mid-market or enterprise, are there any product gaps that you would like to fill? I asked this because the recent restaurant management suite put release, the benchmarking tool was really interesting. So should we expect more product releases in the future specifically geared to larger merchants?

Dominic, thanks for the question. That is the plan gradually as we continue to invest across the whole TAM, including enterprise. The goal of the restaurant management suite was to provide a capability where we can start to drop in more and more of the capabilities into the suite. And so whether it's our above-store management tools, whether it's our extensibility and our APIs, food security and compliance, config management, there's a whole host of capabilities that we're investing in to make our product a better fit upmarket, including, by the way, drive-through capabilities as well over time. And so this is the plan in the long term. And the restaurant management suite allows us to package all of it up into a suite that can be used upmarket.

That's super interesting. And just one more, if that's okay. For international growth, how should we think about the product pipeline, the product parity with the U.S. and then the subsequent OpEx attached to that? So what I mean is, because in the U.S., you sort of build these products from scratch and now that isn't the case when you go international, is there a lower cost of growth or because there's different markets that are actually a higher initial cost of growth?

Yes. I think, look, maybe I'll just say that we -- if you looked this quarter, we announced the online ordering, integrated online ordering, which is a big feature request from our customers internationally, it's been really well received. And there's a road map to continue to invest and expand the product both from a guest experience standpoint and in restaurant operations perspective to support our international customers. A lot of that is driven by our customer base. I think the incremental investment to go -- to build out the product, certainly not the same as building the product for the U.S. market, given we're building on top of what we've built here over the past decade. And also, I think one more thing I'll call out is we've built a framework here where whether it's language or currency or location-specific requirements, payments, for example, is one, the capabilities reusable across new market. So as we enter the next scale of markets over time, it should actually allow us to go even faster.

We will now take our last question from the line of Sheriq Sumar with Evercore ISI.

I just wanted to ask about the cadence around the SaaS ARPU for this year. Like is there any kind of fluctuation that we could expect? And probably -- I mean, I know it's kind of a bit too early but thinking beyond 2024, I mean, just wanted to get a sense on the upsell strategy that could we expect to see any kind of potential improvement in the SaaS ARPU growth trend from here?

Yes, Sheriq, I'll take that. So in the near term, we've said mid-single digits on an ARR basis, and that's still -- we feel confident in delivering on that in the near term.

Operator, I think that ramps up our call for today.