Prepared remarks
Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to Toast Second Quarter 2026 Earnings Conference Call. Today's call will be 45 minutes. I will now turn the call over to Michael Senno, Senior Vice President of Finance. You may begin your conference.
Thank you. Welcome to Toast Second Quarter 2026 Earnings Call. First, CEO, Aman Narang; and CFO, Elena Gomez, will open with prepared remarks followed by Q&A. Before we start, I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks and uncertainties and reflect our views and assumptions only as of today. These forward-looking statements include expectations around financial and operational metrics, products, business and investment strategy and guidance. Actual results may vary significantly, and we expressly disclaim any obligation to update the forward-looking statements made today. For a detailed discussion of risks, please refer to the cautionary language in today's press release and our SEC filings. 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. And with that, let me turn the call over to Aman.
Thanks, Michael, and thank you all for joining us today. We had another great quarter. In Q2, we grew recurring gross profit streams over 28% and expanded GAAP operating income margins to 26%. We had a record 9,500 net location adds in the quarter, 1,000 more than our previous high watermark. Our core business continues to scale. Our new markets are growing rapidly, and we're reinventing our platform with AI to build agents and software working together to drive real business outcomes for customers. For example, Toast IQ Grow, our marketing agent, is the fastest-growing product we have ever launched, and it's giving us more conviction in our AI opportunity and its potential to scale ARPU over time. I'm so thankful for our incredible Toast team who continue to execute and deliver at a very high level. We're excited to announce a number of notable new customers to Toast across the different market segments we serve.
In our core business, we welcome Kung Fu Tea, a brand with over 300 locations. In Enterprise, we're thrilled to become an endorsed provider by a leading hospitality brand, Best Western, to continue our momentum across hotels. And internationally, we expanded our relationship with TGI Fridays in the U.K. In addition to this momentum across our restaurant segments, in retail, we continue to see really strong traction including our very first gas stations where we're processing fuel payments for the very first time. We've had a great first taste, and our top priorities heading into the back half of 2026 remain unchanged. Number one, expand what Toast can do for customers with AI, from software to an agentic platform that takes on critical work and delivers business outcomes for customers. Number two, expand the markets we serve. And lastly, reinvent how we work with AI to accelerate our most important goals and drive durable growth.
We are well positioned as a vertically integrated platform across software, hardware, payments and lending. Customers recognize the role we play as the most important technology partner and are looking to us to help them take advantage of the opportunity AI creates. I continue to believe executing against these priorities sets us up to scale Toast to $10 billion in ARR and beyond. Okay. Let's jump into the priorities. Number one, expand what Toast can do for customers. Toast has spent 14 years evolving from a point-of-sale system to a system of record, software that helps restaurants manage their operations, staff, guests and suppliers. But many of our customers don't have the time to leverage everything that offers and end up outsourcing important functions, functions such as marketing, payroll and bookkeeping. With AI, we are showing that we can take on some of that work and do it even better.
Digital marketing is the first agentic workflow we launched, and we have seen tremendous success thus far. In fact, Toast IQ Grow is on track to become the fastest-growing product to $10 million in ARR. The early customer reception reinforces that we're solving a real problem and have a large opportunity to monetize our offerings. Toast IQ Grow brings together the tools and capabilities to improve a customer's website, SEO, digital ordering and social presence, leveraging the customer's data to build effective marketing campaigns that drive better guest conversion. I'll give you an example. Spirits Food & Friends is a family-owned restaurant in Louisiana that started with Toast in 2025, consolidating more than 10 disparate systems onto a single platform across POS, payroll, scheduling and more. Now they're using Toast IQ Grow to power their marketing. For the first time ever, they are segmenting marketing campaigns using their data and are able to conduct these campaigns directly tied to sales.
As a result, they have not only cut their monthly agency spend by 70%, they've also generated over $100,000 in marketing-attributed sales in just under two months. We are uniquely positioned to bring the benefits of Toast IQ Grow to restaurants across our platform. We can optimize the full revenue cycle: the digital presence that gets restaurants discovered, drives orders and reaches new guests; the customized advertising; the point-of-sale system that captures transactions in-store and online; and the multichannel marketing engine that brings guests back. Fueled by transaction data, we know what guests ordered, how often they return and when they stop coming back. We know the restaurants too — the sales trends, the slow nights and the overall capacity. Toast IQ Grow will use all of that to drive guests back across email, text, push notifications and social, moving us towards personalized marketing at scale.
And because we power the point of sale, we can close the loop with each campaign tied directly to the orders it drives. As you can see, our success with Toast IQ Grow comes out of two things: data and context. That is the foundation of our Toast IQ ecosystem. First on data: as a customer's system of record, Toast understands how it operates — sales, guest preferences, scheduling, order flow — and many changes are recorded as they happen. But data alone isn't the advantage. The context from that data and knowing how to read it is. Over 14 years, we've watched good and bad operators run their businesses long enough to learn what they do and how the best ones think and adapt. We know what a smart menu change looks like versus a bad one, when a staffing pattern signals trouble and which pricing moves hold up in a given market. Over time, we plan to build on Toast IQ Grow and roll out a series of agent products on top of our software platform using our data and context advantage.
This opens up a market opportunity beyond software — marketing, scheduling, payroll, bookkeeping and tax are services restaurants often pay for today. And in many cases, they're spending a multiple of what they spend on software. Longer term, imagine a series of agents across these services. Working in concert, they'll be able to build restaurants' projected demand, look at food cost and availability, labor schedules and projected guest patterns to drive suggestions that improve profitability. That's an incredibly exciting future, especially in an industry known for slim margins and long hours. Okay. Let's shift gears now to our second priority, which is to expand the markets we serve. In our core business, our sales team continues to drive strong win rates. We're gaining GPV share faster than any other major provider in our space. Kung Fu Tea is a great example of a growing brand that chose Toast because they saw us as a leader and an innovative partner that will help them invest in automation and surface actionable intelligence to keep them a step ahead.
Across our new TAMs — enterprise, international and retail — the vertical playbooks that built our restaurant business, product depth, operational expertise and local go-to-market approach are working just as well. In fact, ARR in each of the new TAMs is both larger than the core was and scaling faster than the core did at the same stage of maturity. Internationally, we expanded our partnership with TGI Fridays in the U.K. They are one of dozens of customers that have locations with us across multiple countries now. These operators tend to be in the largest global cities around the world where average restaurant sales are higher, which is best aligned with our value proposition. As we expand Toast to more of these Tier 1 markets, I'm confident we can continue to drive durable growth with strong payback periods. In enterprise, we have momentum across the market in restaurants, hotels as well as sports and entertainment venues.
We're excited to become an endorsed food and beverage vendor for Best Western giving us the opportunity to go after the thousands of hotel restaurants they have across the U.S. and Canada. Sports and entertainment is a large TAM in the enterprise space, estimated to be a $500 million annual opportunity in the U.S. alone. These customers across stadium and corporate dining environments like schools, museums and theme parks represent an adjacent market to the traditional restaurant TAM we serve. And we have roughly doubled our location count in this market over the past year. It's brands such as VenuWorks, whose portfolio of arenas and stadiums include the Ford Center, which runs on Toast, or an Alaskan tour company, Allen Marine Tours, running our Toast Go 3 devices on their excursion vessels. Next, shifting gears to retail. We continue to see great progress here as well with ARPUs that are closest to our core business.
We have doubled our retail sales capacity over the last year, and we expect that to continue to scale to meet the market opportunity we see. Today, we're primarily targeting grocery, convenience stores and bottle shops. Grocery remains a priority for us given that this part of the market has particularly attractive GPV and ARPU. We also recently launched fuel payments, bringing our first two gas station convenience stores onto the platform, a large opportunity for us over time. We're also testing into other parts of the broader retail TAM and will expand further where we see product-market fit. Internally, we talk a lot about how Toast emerged as the leading provider for restaurants over the past decade and how we have a broader opportunity to continue to scale within restaurants and to support local businesses of all types with our platform. Over time, you should expect to see us launch in more sub-verticals just as we have within grocery, convenience stores and bottle shops.
All right. To wrap it up, our third priority is to reinvent how we work, scale with AI and invest in durable growth. We are delivering world-class growth and margins at scale. The results are the product of decisions we've made over time, leading to growth opportunities while simultaneously driving efficiency across the business. Our core growth algorithm continues to deliver great results. We're gaining market share, increasing ARPU and our new AI offerings open up more opportunities to scale ARR over time. The margins in our core business are already over 40%, and we expect the margin to continue to scale and be meaningfully higher longer term. In our new TAMs, we're scaling quickly and on a path to nearly $200 million ARR this year. Given the strong market demand and the progress we have made on our unit economics, we're investing behind them to scale faster and expect them to be even larger drivers of growth over time.
In addition, we're also seeing longer-term bets in areas such as consumer and new retail TAMs where our scale and platform advantage gives us a unique opportunity to compete and win. Given these are earlier stage opportunities, we will be disciplined in how we invest, and we'll keep you updated as they progress. As we have shared with you before, we want to compound this business over time to $10 billion in ARR and beyond. As margins continue to scale in our core business, we will remain disciplined in how we invest back into our newer TAMs and emerging bets and apply the same rigor around capital allocation that got us here. I want to thank every Toaster for their dedication and commitment to Toast. We would not be here without all of your work. And thank you to our customers and investors for your continued support as well. With that, I'll turn the call over to Elena.
Thank you, Aman, and everyone, for joining us today. I want to start by recognizing our team. Q2 came in ahead of expectations across the board, and our results reflect the consistent execution happening throughout the company every day. We posted strong top- and bottom-line results in the second quarter. ARR grew 25%, and our recurring gross profit streams increased 28% year-over-year. Adjusted EBITDA grew to $221 million and GAAP operating income was $152 million, a 26% margin. On a GAAP basis, we are operating above Rule of 50 with recurring gross profit growth plus operating margin reaching a high of 57% in Q2, demonstrating the strength of our business model and persistent focus on balancing durable growth and profitability. We added a record 9,500 net new locations in Q2, growing total locations 22% from a year ago to approximately 180,000. Our net add momentum reflects demand for the Toast platform and the strength of our go-to-market execution across our core and new TAMs.
The breadth of our platform and the value we provide customers is also driving sustained growth in monetization. Total take rate measured by recurring gross profit as a percentage of GPV was 98 basis points in Q2, up 5 basis points from a year ago. SaaS ARR grew 27% year-over-year, driven by location volume and consistent mid-single-digit ARPU growth. Subscription gross profit increased 32%, outpacing subscription ARR and revenue growth, benefiting from continued margin expansion. SaaS gross margins were up approximately 240 basis points year-over-year from ongoing optimization efforts, including leveraging AI to transform customer support. Payments ARR grew 23% and fintech gross profit increased 26% in the second quarter versus a year ago. GPV was $61 billion, up 22% with GPV per location flat. In the core, GPV came in better than expected with strong same-store sales trends throughout the quarter, including a modest benefit from the World Cup at the end of June.
Fintech net take rate was 59 basis points with Payments take rate at 50 basis points. Payments take rate grew year-over-year from the same levers we've seen over the last several quarters: adoption of new products, cost optimization efforts and small targeted pricing moves. Non-payments fintech solutions led by Toast Capital contributed $57 million in gross profit and 9 basis points to take rate. Customer demand for capital remains strong and defaults remain within our expectations, thanks to our data advantage and disciplined underwriting approach. Moving down the P&L. Hardware and Professional Services gross profit was negative at 11% of our recurring gross profit streams. During the quarter, we received a tariff refund of approximately $10 million that was not contemplated in our Q2 guidance. Based on the current landscape, this represents the bulk of the refunds we expect to receive.
With respect to the dynamic memory market, we've taken several mitigation steps to manage hardware COGS in our supply chain and have already reduced the memory cost impact for 2026 and 2027 versus our original expectations. A few examples of actions we've taken: leveraging earlier generations of our hardware, transitioning certain hardware to lower-cost memory, and opportunistically buying at attractive prices in the spot market to complement our direct vendor relationships. We'll continue to pull these levers and evaluate other areas to lower costs while meeting customer demand and maintaining our best-in-class hardware. When the memory market stabilizes, we're going to come out with structurally better hardware margins than before, thanks to the optimization work we're doing across hardware product costs and supply chain. Operating expenses increased 19% from a year ago, excluding $29 million of bad debt and credit-related expenses.
Our investment priorities remain consistent: fueling continued share gains in the core, scaling our new TAMs, building the AI product capabilities that will differentiate Toast for years ahead and seeding long-term bets. Sales and marketing expenses increased 22%, reflecting incremental investments to support our sustained strong location growth. In the core, we're growing our upsell and account management teams and going deeper across subsegments of the TAM like non-native English speaking customers, plus we're increasing our go-to-market presence across new TAMs. R&D expenses grew 23%. We're investing to deepen the product capabilities that matter most: our agentic platform, vertical-specific innovations in each new TAM and AI tooling across the organization to improve productivity. The early results with products like Toast IQ Grow give us confidence in our right to win when we harness our data and AI capabilities to do more for our customers.
In Q2, adjusted EBITDA grew 38% to $221 million and margins expanded 240 basis points to 37%. This reflects strong top-line execution, continued discipline across the cost structure and the tariff refund benefit. Free cash flow was $130 million in the second quarter, down versus a year ago from our strategic decision to acquire and hold more hardware inventory in the near term. We expect the conversion of adjusted EBITDA into free cash flow to improve in the back half of 2026. Over time, we expect to see a corresponding benefit to free cash flow with higher conversion rates when we choose to scale down to more normalized inventory levels. GAAP operating income was $152 million, and GAAP EPS was $0.26, both nearly doubling from a year ago. We're complementing strong growth with leverage down the P&L, reflecting disciplined expense management, including stock-based compensation and a lower diluted share count.
SBC was 10% of recurring gross profit, down 400 basis points from a year ago, a function of disciplined equity grant practices and lapping the elevated grant values following our IPO. Year-to-date, we repurchased over 19 million shares for $486 million. Approximately $100 million remains on our share repurchase authorization. We will continue to opportunistically buy back shares based on market conditions to support long-term shareholder value. Turning to guidance. For the third quarter, we expect total subscription and fintech gross profit to grow 22% to 24% year-over-year and adjusted EBITDA to be $210 million to $220 million. On the back of our strong first half results, we're raising our full year 2026 outlook. We now expect recurring gross profit to grow 23% to 25% and adjusted EBITDA to be $805 million to $825 million. We strategically chose to reinvest the tariff refund into key growth initiatives and to seed long-term growth.
As a result, we're increasing our full year adjusted EBITDA guidance by less than the Q2 beat. Let me provide some context on our guidance and how we're managing the business for the long term. We're building a generational company that compounds top-tier growth rates over the next five to ten years. We have a tremendous runway in front of us across core and Horizon 2 and the opportunity set to build new growth curves keeps growing as we scale and expand. We remain disciplined capital allocators and manage our investments across these multiple horizons. The core business is Horizon 1 with a proven growth algorithm and strong cash flow generation. It operates at Rule of 60 with over 20% growth and over 40% margins. We're balancing ongoing efficiency gains with investments in AI products to unlock the significant opportunity to do more for customers. Deploying AI tooling internally will unlock more efficiency and productivity gains as we automate work and teams reimagine how they operate.
This positions us to sustain Rule of 60 in the core with healthy growth and ongoing margin expansion on the path to meaningfully higher margins over time. New TAMs — international, enterprise and retail — are Horizon 2; we expect total ARR to nearly double to $200 million this year, and each is on a path to healthy unit economics at scale. Given the positive signal, we're investing to scale even faster and accelerate our path to be a market leader in each. With the potential for billions of ARR across these businesses and high terminal margins given the leverage they get from our core, we're confident these investments will have significant ROI. Lastly, we're seeing longer-term Horizon bets like consumer and other retail verticals. As we scale and add capabilities, our right to win across more areas of local commerce expands. Our goal is for these businesses to become key growth drivers for the company three to five years out.
We'll take the same gated approach to incubating them like we did with retail and international, only deploying more capital as we find product-market fit and meet certain success criteria. If we don't see success over a period of time, we'll pull the investment back and either redeploy to the next opportunity or expand margin. With our momentum and the opportunities ahead, we believe reinvesting upside into long-term growth areas with high potential ROI is the best path to maximize our long-term enterprise value. In 2026, we're managing to modest margin expansion, consistent with the framework we laid out coming into the year and reiterated with today's guidance. We plan to continue operating with this general framework focused on sustained growth and gradual margin expansion as long as our investments are meeting our expectations. That keeps us on a path to 40% plus long-term adjusted EBITDA margins with the timing firmly in our control.
With the strength of our core and confidence in the margin potential in new TAMs, we believe there's a path to a much higher margin profile over time. The first half of this year was a strong chapter for Toast. We're entering the back half with momentum and confidence in where we're headed, and we're incredibly excited about the opportunity ahead. Now I will turn the call back over to the operator to begin Q&A.
All right. We'll get our Q&A started. First question is from Tim Chiodo at UBS.
Questions and answers
Great. So Toast IQ Grow, this is a great example of an AI tool that has a human aspect as well. It supports the restaurants, it supports your ARPU growth. You hit on this a little bit during the prepared remarks, meaning Toast IQ Grow might just be the first of many of these types of tools that could be supportive of both the restaurants and post-ARPU. You touched on bookkeeping, tax, payroll scheduling. Maybe you could just talk a little bit more about these potential additional modules, if you will, and what they could mean to longer-term ARPU growth?
Tim, sure. That's exactly the vision over the long term to build out our agentic platform. Maybe just to zoom out for a second and look at the context of how we got here. Toast started off as a point-of-sale system and then evolved to be really this broader platform. And customers love the fact that it's an all-in-one integrated platform that's got a single point of support. And that's what buys a lot of our growth today. One of the pieces of feedback we've gotten from operators over the past year is they find it hard to leverage everything Toast offers; they spread thin just to run their businesses. And so even when they're using the Toast software, they might outsource the function of marketing, for example, or payroll and tax or inventory management or bookkeeping to a third-party provider. And so we saw that as an important opportunity for us where we said, could Toast take on not just the software that helps them run the business, but actually take on some of that work, and we started off with this marketing agent, which is Toast IQ Grow.
And I think what has been really powerful about Toast IQ Grow is that, one, we're leveraging data across — and learning across 150,000-plus customers to figure out, okay, what are the best ways to have a great online ordering presence or a website, optimized SEO, advertising, marketing. And we're also leveraging data on both when the restaurant is busy and when it's not as well as data on guests. And that's what's really allowing us to build a platform where it's actually outperforming what humans can do. Restaurants that switch to our Toast IQ Grow platform, agents rather, are seeing better results, and are seeing same-store sales growth. And so as we go beyond Toast IQ Grow, we're using the same approach and framework, and we're looking at what are areas where we cannot just provide software but start to take out some of that work. It's early. But you look at something as simple as voice AI, for example, picking up the phone in the restaurant or the drive-through.
Over time, we're looking at use cases around scheduling and payroll and tax. So think about forecasting demand to be smarter about scheduling employees and then making sure that we're getting the best employees, the best shifts. And then we're also looking at use cases around inventory management, bookkeeping and accounting. And really, what we're focused on is, one, what are areas where restaurants are leveraging third-party services today and we have a right to win and create value that's outsized because of the data and context we have.
Thanks, Tim. We'll take our next question from Harshita Rawat at Bernstein.
Just a follow-up on Toast IQ Grow. I know it's early days, but any indications on kind of how many locations are converting from trial to paid and how should we also think about the incremental ARPU here, because considering that some of the products are kind of all that restaurants are paying for, and then also considering the dedicated marketing manager, how should we also think about the long-term gross margin potential for this product considering some of the costs?
Yes. Great question, Harshita. One, as I shared, this product, incremental to the software we provide, is on track to be the fastest product to $10 million ARR. And that's really driven by very good traction, especially in our upsell funnel where customers see the value. The main driver of that is we're showing that when customers take our platform, they're seeing same-store sales growth. I think in terms of margins, if you look at AI products out there in the market today, it's often a combination of AI and humans. It's the same approach that we've taken, where the AI is generating work leveraging all the data and context we have, and humans review and approve those workflows. As we've done some early scale, we've already seen the gross margins improve. And frankly, I have no concerns long term about what the gross margins of that business could be. We're much more focused right now on product-market fit and looking at the funnel really closely to make sure that there is a path here to accelerate growth for that product.
Thanks, Harshita. All right. We'll move on. We'll take our next question from Will Nance at Goldman Sachs.
I wanted to ask a question on margins. I think delivering a pretty clear message tonight about the continued runway you have to drive efficiencies while also maintaining the top-line growth rates and reinvesting into the business. I heard the commentary on sustained Rule of 60 performance, margins in the core already being higher than 40%. And so I guess with the incremental commentary today, I'm wondering if you could just talk qualitatively about where some of that confidence is coming from. For instance, are you seeing — is it coming more from the unlock and seeing more potential in the core to drive leverage over time? Or have you seen some more evidence on some of the expansion verticals that make you think that margins can trend significantly higher? I'm sure it's a mix of both, but maybe just qualitatively, what are some of the examples you've seen that's giving you that increased confidence?
Yes. Thanks, Will, for the question. So the short answer is it's both. We are really proud of being disciplined in terms of capital allocation. Zooming out, our framework is that we're positioning the company to be a much bigger company over time. Some of that comes from the way we manage our capital allocation and the discipline that we have, but also to the point you made, our new TAMs are showing incredible signal already. Aman talked about reaching $200 million in ARR. So we've always said to the extent that we see success, we're going to actively choose to invest, and that's exactly what we're doing. We're doing it in a very sustained and disciplined way: we're going to sustain growth, but at the same time deliver gradual margin expansion. We're seeing all of the proper signals. And then, of course, AI presents an opportunity for us as a business to reimagine how we work and continue this effort that we've had for many years around efficiency. We think we can unlock even more efficiency. That's why the commentary is around meaningfully higher margins: we're going to continue this focus on efficiency, and as we become an AI-native company, we'll see some benefit from that as well.
We'll move on to our next question, Darrin Peller at Wolfe.
All right. Look, it's really nice to see the strength in the location adds this quarter. Can you just touch on what the composition of the net adds looked like? How would you assess the performance in the core NIM versus the expansion? I know you certainly are highlighting the success you're having in the ARR side. But just in terms of number of users that are showing up there and that's contributing?
Of course. First off, the results we have in Q2 and really the first half are really strong. Really proud of the sales team's performance. We set a new watermark at 9,500 net adds this quarter. Previously, the watermark was 8,500. The majority of that came from our core business — the SMB and mid-market business. We continue to see really strong win rates. I think we're taking GPV share faster than anyone else in our core business. We haven't seen anything fundamentally change on the competitive side. One point that's maybe underappreciated is why customers choose Toast: it's not just because of the point-of-sale, they're picking an all-in-one platform. That's what drives our win rate — capabilities around the operations of the restaurant, both front of house and back of house; the guest experience and all the tools there; the employee experience; suppliers; fintech products; the lending product; and now increasingly, products like Toast IQ Grow. For us, the focus is to continue to drive more and more value for our customers. We're customer-obsessed and not competition-obsessed. And that's showing up in our win rates and the productivity of the sales org.
We'll turn to Stephen Sheldon at William Blair for our next question.
I guess just wanted to go back to Grow. And I'm just curious what the early learnings have been around getting customers to implement and optimize around these agentic capabilities. I know Grow is the only solution you have out there right now from the agentic side. But how much handholding are you needing to provide to get customers up and running? And is that going to be pretty common as we look forward?
Yes, we're still learning. I'll start by saying that in the context of our business and our scale, even though Toast IQ Grow is growing rapidly, it's still very early. If you look at how we build software, it's incredible tools, but we still need human oversight on top of those tools to make sure we're getting the most out of AI. Our customers are coming to us and saying, look, we're outsourcing this work of marketing to somebody already. If you could take that on and you can do it better, that's valuable. Our approach is we're using all the data and context we have, and we are letting AI drive the first half of what, for example, a great website looks like or what are the ways in which you have great online ordering and digital presence. What are the right offers you need to generate? What's the best attempt at a marketing campaign or an ad on social? Then our marketing success managers review and approve that work.
One of the reasons we've been able to see such strong impact where customers that switched to Toast IQ Grow increased same-store sales is because we've got really unique data. For example, we're looking at the restaurant's data in terms of when they're busy and when they're not, and what makes that brand and restaurant unique. On the guest side, we know guest preferences. Over time, these campaigns can get hyper-personalized. We're learning a lot about what creates the best possible campaigns, and I expect that over time it will get better and better in terms of conversion rates. Early traction so far has been really positive. This business is running positive margins already and it's growing solidly.
We'll take our next question from Dan Dolev at Mizuho.
Great to see those results. I just wanted to ask a question about the hardware optimization cost. Maybe, Elena, can you unpack — be a little more specific on some of the savings? And then maybe any initial views on the '27 impact? We're getting that a lot from investors today. Really appreciate the great results again.
Yes. Thanks, Dan, for the question. It's definitely a fluid environment. I would expect the P&L impact in '27 to be greater than '26 just based on how we account for inventory. There are three things I'll leave you with, which I said in my remarks and I'll reinforce. One, we've done a lot of work to improve the impact that we originally shared for both '26 and '27. That's the work from the hardware ops team deploying mitigation strategies — I can talk about those. Two, we feel very confident about the supply, and we have supply for both '26 and '27. And three, because we've done this deep dive over the long term, we're really confident that this work will lead to improved hardware margins over the long run after the memory market stabilizes. So we've done a lot of work to not only impact the near term but also structurally improve hardware margins over the long term. We will continue to optimize across the hardware P&L.
We'll take our next question from Adam Frisch at Evercore.
Your message is crystal clear in the sense that you're investing for growth and for good reason. But for some who may question that, I thought I'd ask it a little bit differently. If you could ballpark it, how much of your increased operating cost is by choice — like your choice to invest in sales and product development and stuff like that — and how much is out of your control like memory costs? And then the question that we're getting tonight is, are you considering a resource rationalization in the coming quarters?
Yes. I'll take these. So number one, while hardware is an important part of our P&L, zooming out there is a much bigger cost structure that we're managing, and we're actively choosing to invest. We've laid out reasons why we have a ton of conviction around not only these new TAMs but also Horizon 3 bets. If you just think about the position we're in, we're in an incredibly strong position as a company with our core business at 40% margins, operating at Rule of 60. Now we're in this position where we want to sustain growth over the long term, but do that in a very disciplined way, which is why we said we'll always have some gradual margin expansion. We're seeing great signals, and that means we're investing behind that signal. In terms of head count and rationalization of head count, we're always incredibly disciplined around every head count we hire, and that's not going to change. As we consider AI, that allows us to reimagine how we work and consider across the company how we can scale even more efficiently. So I do feel very confident in our ability to drive improvements to meaningfully higher margins over the long term as we begin to adopt AI across the company. And that's not just for our customers, but even in how we work.
Just to build on what Elena said and be specific: if you look at our plan this year, we saw some opportunity based on performance in our strategic cuisines and the non-English-speaking reps, and we've added some additional investment. With retail, we see opportunity to increase sales investments; we've green-lit that. Toast IQ Grow similarly: we've seen great early signal with our AI products, and so we are unlocking some investment there. A lot of this is by choice. We are leaning into areas that will allow us to grow over the long term. For example, our new TAMs getting from $100 million to $200 million ARR this year gives us even more conviction to try to move faster. While there's always puts and takes in terms of EBITDA in a year, my expectation is hardware over time will normalize back to pre-memory-issue margins. The key takeaway is that much of the incremental investment is our choice to accelerate long-term growth.
We're going to take our last question today from Tien-Tsin Huang at JPMorgan.
I appreciate that. Building on Adam's question, I understand the incremental investment created by the tariff refund. It seems like the visibility on expenses is better, so building on what you just responded to, I'm curious about the prioritization of your incremental investments. Where are you seeing the fastest ROI? It sounds like there's a lot of interesting things going on like sports and entertainment. You mentioned fuel payments, things like that. Just hoping you could reorganize where you're seeing the fastest ROI, if that makes sense?
Tien-Tsin, I think first of all, we want to make sure that any opportunities that exist in our core business to maximize growth are prioritized. We talked about some sales capacity in our core and strategic cuisines — the non-English part of the TAM. Toast IQ Grow has shown positive early signals and we are unlocking investment there. Some of that is also on AI products beyond Toast IQ Grow; it will take time to materialize, but we're seeing signal that we can take on work that goes beyond software and take on services for restaurants with AI. Our new TAMs are another area. In retail, our SaaS ARPU is already closest to the core business, so when we look at sales capacity and team productivity we say we should try to go faster, because as you get to scale you get additional leverage on funnel and conversion and win rate. International and enterprise are opportunistic; sports and entertainment is one example where we can invest.
We are balancing investments across core, new TAMs, and longer-term bets. For example, in retail you see fuel expansion recently and grocery remains a focus. We're also looking at consumer, where monthly active user growth on our consumer app has been strong. Across the board, where we see opportunity we're leaning in, and Elena and the team are ensuring that while we're leaning into growth, we're also looking at opportunities to drive efficiency in the business, especially with what AI will make possible.
That wraps up our call for today. Thanks, everyone, for joining. Please reach out with any questions, and I hope everyone has a great evening.
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