Toast: Sticky SaaS - [Business Breakdowns, EP.247]

**SPEAKER_1** (0:03)
This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick.
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**Matt Russell** (0:52)
This is Matt Russell, and today we are breaking down Toast.
My guest is Sean Barrett, founder and CIO at Counter Global. Counter Global manages a concentrated portfolio of businesses and developed markets. You may recall Sean from an episode last year where we spoke about a name in the alternative asset manager space EQT. Today, we are here to cover a business in a completely different industry, and that is Toast. It's a wide-ranging discussion. I think a lot of people are wondering what software names are particularly interesting in this moment in time, and Sean gets into that and much, much more. So please enjoy this episode.
All right, Sean, it is great to have you back. Today, we are talking about Toast, which is a name that we previously covered, and we do like to revisit names when there are noteworthy things going on, maybe the story's changed a little bit, and I think we'll get into some of that here. But maybe we could just start off with a simple introduction to Toast for those that aren't familiar and your own history with this business and what brought you to it, some of those dynamics just to set the stage.

**Sean Barrett** (2:09)
Matt, great to see you. Thanks so much for having me back. Very excited to talk about Toast today with you. It's just a phenomenal business. It's a 15% position for us at Counter Global, so it's also a high conviction name. But for those in the audience who don't know about it, Toast is really the category killer for F&B point of sale and software. And they're the operating system for their restaurant customers, super mission critical, super innovative category killer.
I've had a long history with Toast. I first invested in the business back in 2020 during COVID. And I remember management team sent me the model and I opened it up and I looked at it and I said, this can't be right, these numbers are too good. Retention's too high for the restaurant industry. I think I'm missing something here. And I called them and I said that. And their response was, nope, you're not missing anything. These are the numbers. So look, it was a great business back then. I think it's an even better business now.
Super excited to break it down with you today.

**Matt Russell** (3:07)
Yeah, I think you got into some of the words, which make it thematically very interesting, which we'll get into. But maybe fast forward to today and you could set the stage in terms of the financials of the business, just a snapshot or overview about where they are today. Any comparison to where they were in 2020 and how much the dynamics have changed? I'm just curious if you could share that as well.

**Sean Barrett** (3:31)
Oh my gosh, yeah, the business has changed a ton in the last five or six years. Today, it's about a $12 billion enterprise value. There is some accounting noise in there. So when you open the 10K, you'll see that they have to account for interchange revenue as their own. But if you parse through that noise, the business does about $2 billion of reoccurring gross profit with about 35% EBITDA margins, minimal capbacks, really high customer retention, as we mentioned on both the gross and net basis. It's night and day from 2020 In 2020 and 2021, they were in hyper growth stage. Even as a public company in the early days, EBITDA margins were substantially negative. Stock-based comp was really high at 30-plus percent of revenue.
Today, you have a company that is still growing very, very quickly.
25-plus percent gross profit growth. We think that can continue for a bunch of years, but it has high quality of earnings.
So we're looking at 18 times next year's gap PE right now. We'll get into the valuation at some point, but 18 times next year's gap PE for a durable 20-plus percent revenue compounder and 30-plus percent EPS compounder. So it's a phenomenal business and it's remarkably cheap at this point.