Toast, Inc. (TOST) Earnings

Management highlights

### Overall Financial and Operational Performance - Posted better-than-expected Q2 2026 results across all key metrics, with 25% year-over-year total ARR growth and 28% year-over-year growth in total recurring gross profit streams. - Added a record 9,500 net new locations in the quarter (1,000 more than the prior company record), growing total locations to ~180,000, a 22% increase year-over-year. - GAAP operating income hit $152 million with a 26% margin; adjusted EBITDA grew 38% year-over-year to $221 million with a 37% margin. The company exceeded the Rule of 50, with recurring gross profit growth plus GAAP operating margin reaching 57% in Q2. - Total take rate (recurring gross profit as a percentage of GPV) rose 5 basis points year-over-year to 98 basis points, showing ongoing monetization improvement. - Year-to-date 2026, the company repurchased 19 million shares for $486 million, with ~$100 million remaining in the current share repurchase authorization. ### AI Product Development and Expansion - Toast IQ Grow, the company's first AI agentic marketing product, is on track to become the fastest-growing product to reach $10 million in ARR in Toast's history. The product improves restaurants' digital presence, SEO, ordering, and social marketing using proprietary customer and transaction data, delivering measurable same-store sales growth and reducing customer third-party marketing costs. - Management plans to build out a full ecosystem of AI agentic products that take over operational work restaurants currently outsource to third parties, including scheduling, payroll, tax, inventory management, and bookkeeping. These products leverage Toast's unique data advantage and 14 years of restaurant industry context to outperform third-party providers. - Internal deployment of AI tools is driving operational efficiency and productivity gains across the business, supporting long-term margin expansion. ### Market Expansion Strategy - Core restaurant SMB and mid-market segment continues to deliver strong performance, with accelerating GPV share gains versus competitors driven by Toast's fully integrated all-in-one platform value proposition. - New TAM segments (enterprise, international, retail) are scaling faster than the core restaurant business did at the same maturity stage, with total ARR across new TAMs on track to nearly double to $200 million in 2026. Key wins include an endorsement as the preferred provider for Best Western hotel restaurants, expanded UK partnership with TGI Fridays, and first deployment of fuel payment processing for gas station convenience stores. - Enterprise segment location count has doubled over the past year, with particular strength in sports and entertainment venues, an estimated $500 million ARR opportunity in the U.S. alone. Retail is focused on grocery, convenience, and bottle shops, with sales capacity doubled over the past year to meet demand. ### Capital Allocation and Priorities - Core business already generates over 40% gross margins, with a clear path to sustained Rule of 60 performance (20%+ growth plus 40%+ margins) and further long-term margin expansion. - Management maintains a three-horizon investment framework: invest to drive growth and AI innovation in the proven core business, scale high-potential new TAMs, and seed early-stage long-term bets with a gated, disciplined approach that only increases capital as product-market fit is confirmed. - The company is strategically building a generational, long-term compounding business targeting $10 billion in ARR and beyond, with a focus on balancing sustained growth with gradual margin expansion.

Guidance

- For Q3 2026, management expects total subscription and FinTech gross profit to grow 22-24% year-over-year, and adjusted EBITDA to come in between $210 million and $220 million. - Management raised full-year 2026 guidance following a strong first half performance. Full-year 2026 recurring gross profit is now expected to grow 23-25% year-over-year, and adjusted EBITDA is projected between $805 million and $825 million. The adjusted EBITDA increase was smaller than the Q2 beat because the company is reinvesting the $10 million unanticipated tariff refund into high-ROI long-term growth initiatives. - Free cash flow conversion from adjusted EBITDA is expected to improve in the second half of 2026, after near-term elevated hardware inventory purchases reduced Q2 free cash flow to $130 million. - Management reaffirmed its long-term target of 40%+ adjusted EBITDA margins, with the timing of further margin expansion controlled by the company based on investment performance.

Segment performance

1. **Subscription and Software (SAS):** SAS ARR grew 27% year-over-year, driven by net new location growth, higher volume, and consistent mid-single-digit ARPU growth. Subscription gross profit increased 32% year-over-year, outpacing ARR growth, with SAS gross margins expanding 240 basis points year-over-year from operational optimization including AI-powered customer support improvements. 2. **Payments and Financial Technology (FinTech):** Payments ARR grew 23% year-over-year, and FinTech gross profit increased 26% year-over-year. Total gross payment volume (GPV) was $61 billion, up 22% year-over-year, with GPV per location flat. FinTech net take rate was 59 basis points, with a 50 basis point payments take rate (up year-over-year from new product adoption, cost optimization, and targeted pricing adjustments). Non-payments FinTech led by Toast Capital contributed $57 million in gross profit, adding 9 basis points to the total take rate. Default rates on Toast Capital loans remain within expectations. 3. **Hardware and Professional Services:** Gross profit for this segment was negative, equal to 11% of total recurring gross profit streams. The company received an unanticipated $10 million tariff refund during the quarter, which represented the majority of expected future tariff refunds.

Risks & headwinds

- Elevated dynamic memory market costs have negatively impacted hardware cost of goods sold, though the company has implemented mitigation steps that have reduced the 2026 and 2027 cost impact relative to original expectations.

Analyst Q&A

• Q: What is the long-term ARPU growth opportunity from additional AI agentic products beyond Toast IQ Grow? /

  A: Management's long-term vision is to build an entire platform of AI agentic tools that take over operational work restaurants currently outsource to third parties, such as scheduling, payroll, tax, inventory, and bookkeeping. Toast's unique advantage is its proprietary data from 150,000+ locations and deep industry context, which allows AI tools to outperform third-party providers. This creates a large new monetization opportunity, as restaurants currently pay multiple times more for these outsourced services than they pay for core restaurant software.

• Q: What is the conversion rate from trial to paid for Toast IQ Grow, what incremental ARPU does it deliver, and what are its long-term gross margin prospects? /

  A: While the product is still early, it is on track to become the fastest product to hit $10 million ARR, driven by strong conversion from upsell to existing customers, who see clear same-store sales growth benefits. The product uses a mixed AI-human model, where AI generates initial marketing assets and human teams review and approve workflows. Gross margins are already improving as the product scales, and management has no concerns about long-term margin potential, and is currently focused on confirming product-market fit to accelerate growth.

• Q: What is driving management's confidence in long-term meaningful margin expansion, and does it come from core leverage or new vertical margin improvements? /

  A: Confidence comes from both core business leverage and improving new TAM unit economics. Management maintains a disciplined capital allocation framework that prioritizes sustained growth alongside gradual margin expansion. AI is unlocking additional efficiency opportunities both for customer products and internal operations, allowing the company to reimagine workflows and scale more profitably over time.

• Q: What is the geographic and segment composition of the record Q2 net new location additions, and how is core performing versus expansion segments? /

  A: The large majority of Q2 net new location growth came from the core SMB and mid-market restaurant segment, where Toast continues to gain GPV share faster than any competitor. Strong win rates are driven by customer preference for Toast's fully integrated all-in-one platform, which now includes new AI capabilities like Toast IQ Grow in addition to core POS, operations, and fintech tools. New TAMs are growing quickly but still represent a smaller share of total net location adds at this stage of maturity.