Toast Q3 2026 Earnings Call Transcript
Toast (NYSE:TOST) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Toast Inc. reported a strong Q3 2026, with recurring gross profit streams growing 27% year over year and GAAP operating income margin expanding to 26%.
The company added 8,500 net new locations, achieving double-digit growth in net adds from a year ago, and ended Q3 with approximately 189,000 locations.
Strategic initiatives include expanding the Toast platform with AI-driven Toast IQ Grow and Toast IQ Team, focusing on improving customer outcomes and operational efficiencies.
Toast’s market expansion includes adding well-known brands like Star Restaurant, Ruby Tuesday, and Outback Steakhouse, with a focus on SMB, mid-market, and new TAMs such as Enterprise, International, and Retail.
Financial outlook for Q4 includes subscription and FinTech gross profit growth of 22% to 24% year over year and adjusted EBITDA of $200 to $210 million.
Toast Capital saw strong demand with defaults within expectations, and the company started buying performance loans to hold to maturity.
Management noted AI efforts in customer support and scheduling, contributing to operational efficiencies and margin improvements.
Toast responded to an FTC lawsuit, expressing confidence in their business practices and readiness to defend themselves.
The company is confident in delivering durable long-term growth, with continued focus on disciplined capital allocation and investment in high-priority areas.
Full Transcript
OPERATOR
The call will be 45 minutes. I’ll now turn the call over to Emily Woodward, Vice President of Strategic Finance and Investor Relations. You may begin your conference.
Emily Woodward (Vice President of Strategic Finance and Investor Relations)
Thank you. Welcome to Toast’s third quarter 2026 earnings call. We’ll start with prepared remarks from Toast CEO Aman Narang and CFO Elena Gomez. Toast’s incoming CFO, Michael Senno, will join Aman and Elena for 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. With that, let me turn the call over to Aman.
Aman Narang (Chief Executive Officer, Co-founder, and Director)
Thanks, Emily, and thank you all for joining us today. We delivered another strong quarter in Q3. Recurring gross profit streams grew 27% year over year and we expanded GAAP operating income margin to 26%. We added 8,500 net new locations in the quarter, with share gains across every customer segment. We continue to add world-class brands to the Toast platform, including Star Restaurant’s newest concept, the Nora Hotel in Florida, with six different food and beverage formats; Jean‑Georges’ portfolio, including iconic restaurants like Jean‑Georges’ ABC Kitchen, JoJo, and Perry Street; as well as Ruby Tuesday. We’re also bringing that same caliber of brands to Toast across our new market segments, including renowned deli and specialty retailer Zingerman’s Deli, Outback Steakhouse Australian locations, and in enterprise.
We are thrilled to welcome Bagel Brands’ 800 stores to Toast. We are evolving Toast to do more for our customers, moving beyond tools that help operators run their businesses toward agents that take on the work for them. This quarter we added new agents to Toast IQ Grow and launched Toast IQ Team, which helps operators manage scheduling and staffing. Each step brings us closer to a platform that not only supports customers but actively delivers results for them.
Our top priorities for 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. Our results this year show our priorities at work. As a vertically integrated platform across software, hardware, payments, and lending, we have a foundation few can match, and our momentum across these priorities reinforces our confidence in delivering durable, long-term growth.
Okay, let’s jump into our priorities. Number one, expand what Toast can do for customers. Toast IQ Grow was built to help restaurants attract new guests and keep them coming back, from reaching new diners through ads to bringing them back through personalized marketing. Our latest launches build on that foundation, giving operators more ways to grow and measure what’s working: an SEO agent that helps restaurants improve their visibility across traditional and AI‑powered search; our reviews agent, which helps turn guest experiences into reviews that influence where diners choose to eat; and an offers agent that recommends offers to help convert first‑time guests or win back lapsed ones.
Morning Mugs, named Baltimore’s best coffee shop for the last five years, came to Toast in 2024 to consolidate their operations onto a single platform and find a partner invested in its growth. The owner wears many hats—something we often see among our SMB operators—and did not have the time to invest in marketing beyond social media. Since adopting Toast IQ Grow, Morning Mugs has increased its reach and grown marketing‑attributed sales by almost $100,000 year over year.
These outcomes are why Grow is seeing tremendous success. It remains our fastest‑growing product, on track to reach $10 million in ARR by the end of the year. Toast IQ Team is our first step in doing the back‑office work that can quietly cost operators money through overtime and overstaffing. Great operators run their businesses week to week off a forecast—they anticipate demand, then staff and plan around it. Managing a team is also one of the most time‑consuming parts of running a great restaurant, and labor is often the largest cost restaurants face. Yet operators often piece together forecasting, scheduling, time tracking, payroll, and tips across separate tools.
Toast has these pieces in one platform, along with the sales data that drives forecasting. Toast IQ Team brings it all together for operators to make staffing decisions based on expected demand and make labor costs more predictable. The scheduling agent builds a complete schedule in seconds based on expected sales, employee availability, and overtime risk. And we’re already seeing great results. Restaurants using our Scheduling Pro solution averaged 41% fewer overtime hours per employee, which opens up valuable savings for restaurants running on thin margins. Let me give you an example. Maddie Group in San Diego is known for their well‑beloved breakfast and lunch restaurants and recently opened a new location in Pacific Beach.
They’re using Toast IQ Team to help manage labor costs, and the director of operations points to data‑driven scheduling capabilities, automatic overtime flags, and weather and event forecasts to inform staffing decisions as a contributor in reducing the labor costs as a percentage of sales from 28% to almost 24%. Toast IQ Team is our starting point in tackling back‑office work. Over time, we expect to take on more of these workflows, such as inventory management and bookkeeping. We’re building toward a team of agents that drive results for our customers—crafting marketing campaigns, forecasting demand with staffing to match, flagging low inventory before an out‑of‑stock, and protecting margin from swings in cost. That’s an exciting future for an industry known for slim margins and long hours.
It also opens a market well beyond software. Restaurants already pay for marketing, scheduling and payroll, and bookkeeping services, often several times what they spend on software. Toast has a structural advantage here as our customers’ system of record. Toast sees how restaurants operate—sales, guests, staffing, orders, and menu changes. Our data and restaurant expertise show us which problems to solve and how the best operators work, and we build solutions designed specifically for them.
Okay, let’s shift gears and talk about our second priority, which is to expand the markets we serve. In our core U.S. SMB and mid‑market customer segment, our momentum continues. Our win rates are strong, we’re taking GPV share faster than any major competitor, and our largest share gains are coming from restaurants with over $2.5 million in sales. The award‑winning Star Restaurant Group—already a Toast partner at over 35 iconic, high‑volume fine dining locations, including Pastis, Le Diplomate, and the Michelin‑starred Le Coucou—is expanding its partnership with Toast for one of their most ambitious projects yet: six food and beverage concepts at the Nora Hotel in West Palm Beach. Star relies on Toast’s innovative hardware, intuitive user interface, and first‑class support to operate their complex locations and has enthusiastically embraced Toast IQ.
They use automated custom reporting tools to run complex data queries, such as server sales performance or chef prep lists, saving them valuable time as the team manages multiple restaurants and openings across the East Coast. We’re also excited to welcome the legendary Ruby Tuesday to Toast. They’re modernizing their technology across their restaurants to increase speed of service, as well as accuracy, to improve the guest experience. Across our new TAMs—Enterprise, International, and Retail—our vertical playbook is gaining steam every quarter. Collectively, these three new markets are scaling to $200 million in ARR in about four years and will double for the second straight year, showing we have strong product‑market fit.
Internationally, we’re welcoming Outback Steakhouse’s Australian restaurants. They chose Toast to modernize their operations and use a single platform across their footprint. In Retail, Zingerman’s Deli, a community of businesses in Ann Arbor, Michigan, operates concepts spanning from sandwich shops to a café to specialty groceries. Zingerman’s expanded their footprint with Toast this quarter into retail and moved their 3,000‑SKU specialty grocer onto our platform.
And lastly, in Enterprise, Bagel Brands will launch Toast in 800 locations across their beloved brands like Einstein Bros. Bagels, Bruegger’s Bagels, Manhattan Bagel, and Noah’s New York Bagels. In total, we’ve already opened up a bigger market opportunity across the Horizon Two areas than the core market, and we’re investing to expand the product‑market fit across that opportunity. Two recent examples are our launch in Quebec with a fully translated French product and our new fuel offering in Retail.
We plan to methodically expand the addressable market from here across both new countries and verticals. We are incredibly proud of the progress we’re making with each new TAM in the early stages of a meaningful ARR opportunity. We’re prioritizing market share gains and building toward the same flywheel benefits we have in the core. As we scale, we are proactively managing payback periods, and we’ll continue to see meaningful efficiencies from leveraging the core platform.
Okay, let’s shift to our last priority, which is to reinvent how we work with AI to accelerate our most important goals and drive durable growth. We are on track for another incredible year. We are delivering world‑class growth and margins at scale, driven by our decisions over the last several years to lean into high‑performing growth opportunities while driving efficiency in the core. We’re gaining market share, increasing ARPU, and our new AI offerings open up more opportunities to scale ARR over time.
We’re investing behind the success in our new TAMs and seeding long‑term bets where our scale and platform advantage give us a unique opportunity to compete and win. These are earlier‑stage opportunities. We will remain disciplined in how we invest, and we’ll keep you updated as they progress. With opportunities across multiple growth vectors, we have a clear path to driving durable, compounding growth for many years to come. We’ll keep the capital allocation discipline that got us here—core margins keep expanding, funding new TAMs and emerging bets that we expect to add to long‑term growth and cash flow.
I want to thank every Toaster for their dedication and commitment to Toast. We would not be here without all of your amazing work, and thank you as well to our customers and investors for your continued support. Before I turn the call over to Elena, I want to thank her for an incredible nearly six‑year run at Toast. Elena has been instrumental in guiding Toast through a period of tremendous growth and transformation. She has been a steady hand to me and the entire management team, and we are incredibly grateful for all of her contributions.
I am also excited for Michael Senno to become our next CFO at the start of the year. Over Michael’s nearly five years at Toast, he has become a trusted member of our leadership team. He knows Toast’s business inside and out and has been beside Elena in shaping Toast’s financial strategy and investment approach. With that, I’ll turn the call over to Elena.
Elena Gomez (President & Chief Financial Officer)
Thank you, Aman, and thanks to everyone for joining us today. Q3 was another great quarter and I’m proud of our consistent execution. Quarter after quarter, ARR increased 24% and recurring gross profit grew 27% year over year. Adjusted EBITDA was $240 million and GAAP operating income nearly doubled year over year to $165 million, reaching a 26% margin. With our recurring gross profit growth plus operating margin at 55%, we continue to operate above the rule of 50.
On a GAAP basis, we added 8,500 net new locations, a double-digit growth in net adds from a year ago, and ended Q3 with approximately 189,000 locations, up 21%. In addition to gaining share and winning new customers, we’re also continuing to deliver more value for our customers and expanding monetization. Total take rate, measured by recurring gross profit as a percentage of GPV, reached 104 basis points in Q3, up 6 basis points from a year ago. In recent years, the total take rate has steadily increased with growing contributions from our monetization engine, software, payments, and capital as customers adopt more of our all-in-one platform.
We expect total monetization to continue to expand as we innovate and deliver outcomes for our customers. SaaS ARR grew 28% year over year, driven by location growth and consistent mid-single-digit ARPU expansion. Subscription gross profit grew 36% and SaaS gross margin increased 320 basis points from a year ago. AI tools are handling a growing portion of support tickets, providing a better customer experience, and are an important contributor to that margin expansion.
Payments ARR and FinTech gross profit both increased 21% in the third quarter versus a year ago, with GPV up 20% to $62 billion. FinTech net take rate was 61 basis points. Payments take rate was 50 basis points, up 1 basis point from a year ago, driven by the same levers we’ve seen over the last several quarters: growing product adoption, processing cost efficiencies, and small, targeted price moves. Non-payments FinTech solutions, led by Toast Capital, contributed $69 million in gross profit and 11 basis points to take rate.
Customer demand for capital remains strong, with defaults within our expectations. Moving down the P&L, hardware and professional services gross profit was negative 12% of recurring gross profit streams. We are continuing to execute on our hardware cost mitigation strategies and expect to structurally improve hardware margins longer term. As a result of our efforts, operating expenses grew 16% year over year, excluding $35 million of bad debt and credit-related expense. Sales and marketing increased 23%, fueling our location momentum and a continued buildout of our go-to-market presence in our new customer markets.
R&D grew 15%, with investment focused on our agentic platform, product depth in each new TAM, and scaling internal AI tools. Adjusted EBITDA grew 36% to $240 million and margins expanded 260 basis points to 37%, reflecting strong top-line execution and continued discipline across the cost structure. As a reminder, margins are typically higher in Q3 due to the seasonality of payments. GAAP operating income was $165 million, nearly doubling from a year ago, and GAAP diluted EPS was $0.29, up from $0.16.
The increase reflects our strong top-line growth complemented by operating leverage down the P&L, including lower stock-based compensation expense. As a percentage of recurring gross profit, free cash flow totaled $181 million, a 75% conversion from adjusted EBITDA. Conversion was lower than a year ago from our strategic decision to acquire and hold more hardware inventory in the near term. We expect conversion to improve in Q4. Over time, we expect to see a corresponding benefit to free cash flow and higher conversion rates when we choose to scale down inventory to more normalized levels.
Now onto our outlook for Q4: we expect subscription and FinTech gross profit growth of 22% to 24% year over year and adjusted EBITDA of $200 to $210 million. We’re raising our full-year outlook to reflect the strong Q3 results and momentum in the business. We now expect recurring gross profit to grow 26% and adjusted EBITDA of $840 to $850 million. We’re positioned to deliver durable top-line growth over the next five to 10 years. We have a tremendous runway across the Core and Horizon 2 TAMs, and the opportunity to build new S-curves keeps growing as we scale and expand. We will remain disciplined capital allocators and manage our investments across these multiple horizons. Horizon 1 is our core. The growth algorithm continues to deliver and we’re operating with margins over 40% that we expect to keep expanding.
Horizon 2 is our new TAMs—International, Enterprise, and Retail. Aman touched on the attractive growth trajectory, and we’re confident these businesses will have an equally attractive long-term financial profile. As these businesses scale, we expect their adjusted EBITDA margins to converge with the core margin. The formula is straightforward. We plan to manage payback periods to 20 months or lower, ensuring strong unit economics, and expect significant leverage on R&D and G&A from our core platform and central functions.
We have a proven playbook to improve payback periods and a clear roadmap in each area. First, the Retail and International go-to-market motions will gain efficiency as we reach steady-state sales capacity, build the flywheel effect, and drive up rep productivity. Second, each new TAM has a path to expand ARPU as we launch more products. Third, we will gain efficiencies in hardware and onboarding as we scale. We’ve already taken steps to improve unit economics.
For instance, International ARPU is growing at a healthy clip as we roll out more products, and we’re improving the Enterprise onboarding experience to lower the cost of acquisition. Across R&D, our new TAMs are built on the same platform we spent more than a decade developing, and we continue to innovate. They leverage the horizontal products and features we build for the core—like payments and FinTech, hardware, and Toast IQ. The incremental investments for new TAMs focus on the vertical-specific features to drive differentiation in each customer group.
We’re seeing that leverage come through. Horizon 2 will reach $200 million in ARR with 25% less direct R&D investment than what it took for the core to reach that same milestone, and we expect that leverage to amplify as we scale. We have a multibillion-dollar growth opportunity with strong customer signal, a clear path to improving payback periods, and increasing leverage from our core platform and functions. Together, this gives us confidence our new customer segments will deliver both meaningful growth and cash flow generation over time. With momentum in our core, new TAMs on a rapid growth trajectory, and emerging long-term growth opportunities, we’re more excited than ever about the future and confident we will continue to deliver significant shareholder value.
Thank you to all our employees who execute tirelessly every day and have us on track for an excellent year. Before we move to Q&A, I’d like to take a moment to share some closing thoughts. It’s been a privilege to serve as CFO of Toast and work alongside Aman and this incredible leadership team, and I’m proud of what we’ve accomplished together. While I’m stepping away, I couldn’t be more confident in the company’s future. Senno has worked alongside me in close partnership for several years, and I’m confident this will be a seamless transition. With that, I’ll turn it over to Senno.
Michael Senno (Chief Financial Officer)
Thank you, Elena. I’m humbled and honored to step into the CFO seat. I want to thank Aman and the board for your trust and support. Elena has made an indelible mark across Toast’s business and culture and is a key part of our success. It’s been an absolute privilege to partner with her on this journey for nearly five years and to learn from one of the best. As both Aman and Elena outlined, we have great momentum and I’m excited for the incredible opportunity ahead.
Now we’ll start Q&A.
OPERATOR
If you would like to ask a question, please press Star-1 to raise your hand. To withdraw your question, press Star-1 again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. I will now turn the call over to Emily Woodward for the Q&A.
Emily Woodward (Vice President of Strategic Finance and Investor Relations)
Thanks, Jonathan. We’ll take our first call from Steven Sheldon with William Blair.
Steven Sheldon (Analyst at William Blair)
Hey, thanks. I guess just first, can you give an update on the traction and interest levels you’re seeing across the existing location base on the agentic side for Toast IQ Grow and Teams? Although I know it’s very early for Teams, I think Aman had some good customer ROI examples in the prepared remarks. Curious if those are representative of ROIs most early adopters are seeing, and along with, I guess, the effectiveness you’re seeing from Toast investment in an FTE model to give customers more handholding as they get set up and optimized.
Would just love any additional color there.
Aman Narang (Chief Executive Officer, Co-founder, and Director)
Yeah. Hi, Steven. So first off, we are seeing just really good adoption of Toast IQ within our customer base. The monthly active users continue to grow month after month, and they really value this interface to be able to get reports, engage with the back end, make changes to the back end of the platform. So that’s been really positive. And then I think in terms of our agentic capabilities, whether it’s IQ Grow or IQ Teams, one of the reasons it’s such a natural fit is we are typically displacing work that these restaurateurs were outsourcing—so outsourcing, for example, to a marketing success manager or to a back-office accountant or payroll expert. And the early data that we’ve seen has been really, really powerful. We, in fact, measure for customers in IQ Grow—we have a data science team that’s looking at this—what the sales lift is by deploying IQ Grow relative to a control sample that is not using IQ Grow, and we’ve seen really good revenue growth.
And this is because our tools have the data, and we’re setting up a great first-party presence around things like your website, your online ordering, your SEO, and, more recently, with reviews agents to make sure that restaurants are getting as much profitable first-party demand as possible. On IQ Teams, it’s again very early, but we’re seeing some data that shows that customers that deploy IQ Teams—and this is really, if you think about our back-office products, there’s scheduling, there’s payroll, there’s tip automation. It’s a lot of work to manage these schedules. And so what Toast IQ Teams is doing is automating the work to manage those schedules. And we’ve seen a 41% reduction in overtime hours, which is obviously very valuable for our restaurant industry, which runs on thin margins.
So again, really good early progress. These products are new. Even though it’s great to see, for example, Toast IQ Grow on path to surpass 10 million this year, in the scale of our business it’s obviously still early, and we see tremendous opportunity for growth ahead.
Steven Sheldon (Analyst at William Blair)
Good to hear.
Emily Woodward (Vice President of Strategic Finance and Investor Relations)
Thank you, Steven. Next question comes from DJ Hines with Canaccord Genuity.
OPERATOR
As a reminder, please remember to unmute your device.
Emily Woodward (Vice President of Strategic Finance and Investor Relations)
You there, DJ? All right, we’ll move on. Next question comes from Raina Kumar with Oppenheimer.
Raina Kumar (Analyst at Oppenheimer)
Good evening. Thanks for taking my question. Can you talk about attach rates you’re seeing on Toast IQ Grow and Toast Local, and what are you baking into guidance from these products for the rest of the year?
Aman Narang (Chief Executive Officer, Co-founder, and Director)
The Toast IQ Grow product you asked about attach rates and IQ Grow and Local. Yeah. So Toast Local is available to all of our customers. It’s really an app that we offer on top of our platform where customers can place orders to pick up or for delivery. They can track loyalty. And so really that’s available to all of our customers. And IQ Grow, primarily that’s being sold through our upsell team. Our upsell motion has matured over the years. As you know, we’ve invested in a big way in our expand motion and that’s really the team that’s focused on IQ Grow. Part of the reason we’ve seen, by the way, an inflection in ARPU growth in our core business. If you look at ARPU growth this year, year over year, we’re up and we’re actually set up really well for next year. And a lot of that is of course driven by our whole platform, but specifically the impact that IQ Grow is having.
And that’s because the Optiwin and the growth that we’re seeing in IQ Grow has been incredibly meaningful. But it’s largely in the upsell team versus attach on new business.
OPERATOR
Thanks, Raina. The next question comes from Samad Samana with Jefferies.
Samad Samana (Analyst at Jefferies)
Hi, good evening and thanks for taking my questions. First, Elana, good luck on a well-deserved break in your next opportunity. Maybe transitioning just in terms of the net adds—they were strong. I was wondering if you guys could give some color on Horizon 1 versus Horizon 2 and maybe what drove the strength in the quarter. And I’ll sneak in an extra one. Just last year you guys gave an early outlook into ’26. I’m curious that there wasn’t anything on ’27.
Any contours that you want to set like last year? And if not, I’m just curious maybe what was the change in philosophy not giving early outlook? Thank you so much.
Aman Narang (Chief Executive Officer, Co-founder, and Director)
Yeah. So Samad, the net adds in our core business continue to be incredibly strong. Our win rates are strong. We’re taking share faster than any other competitor in this space and just really proud of the team’s progress. And then these new TAMs—the reason they’re on track to double is because we’ve seen accelerating net adds in our new business. So overall, really proud of the progress in terms of the progress we’ve made on net adds this quarter and really throughout this year.
And as I look to the future, I think we’re incredibly confident in where we are in the market and our ability to continue to grow.
Michael Senno (Chief Financial Officer)
And Samad, I’ll take your question on ’27. There’s no change in philosophy, and we’ve shared some color as the year goes on. But on the top-line side, we’ve had a really strong year. In ’26 you’re seeing consistent, strong results quarter after quarter. We’re exiting the year with really good momentum on both top and bottom line. We’ll give formal guidance for ’27 on the February earnings call. But on the RGP growth side, we’re set up to execute the same growth algorithm in ’27 that you saw us deliver this year—core delivering share gains, complementing that with continued ARPU expansion, which has been really healthy as Aman just pointed out. On top of that, we’re seeing rapid growth across our new TAMs that we are set up to continue. So we’re confident in the 20% plus framework that we’ve provided and we think we’re set up for a really good ’27.
And then on the margin side, we’re going to finish this year at about 36% EBITDA margin. That’s already above the medium-term target from our investor day, and the pace of margin expansion over the past couple of years has actually been faster than we had anticipated. We’re sitting on what we believe is a generational opportunity. We have the financial profile that positions us to lean into investment to go after that opportunity. Our margin’s in a really healthy spot and, as a result, we expect very modest margin progression next year.
I’ll give you a little bit more context underneath how we’re thinking about it. We’ve proven the operating leverage in our business model. Core margins are already over 40% and expanding each year, and the company margin is going to depend on how much we choose to invest in these new growth vectors and nascent long-term bets. And as we go into next year, we want to retain flexibility so we can offensively lean in where we see opportunities, all in service of really driving durable long-term growth and building these franchises with strong cash flow generation.
But underneath that, we’re going to use the same disciplined capital allocation approach that you’ve seen from us. Our investments are only going to be focused where we see strong long-term growth opportunities and really good ROI potential.
Samad Samana (Analyst at Jefferies)
Thanks for the color, Michael. Congrats on the promotion.
Michael Senno (Chief Financial Officer)
Thank you.
OPERATOR
Thanks, Samad. The next question comes from Jason Kupperberg with Wells Fargo.
Cassie Chan (Analyst at Wells Fargo)
Hey, this is Cassie Chan on for Jason—two quick ones. So just a follow-up from the previous question related to how you guys are thinking about memory costs. Just any updates or change in thinking in terms of obviously that’s been going a little better than you had anticipated and you’re still obviously building up your inventory there as well. So just seeing if there’s any updates for either ’27 or ’26 on that. And then just any thoughts or color you can offer on, obviously, the FTC lawsuit. I know you guys put out a response pretty swiftly after that, but just any thoughts on what you guys think the potential impact or changes could be on your business, or is there anything else you’d like to share there? Thank you.
Michael Senno (Chief Financial Officer)
Thank you. I’ll take the hardware question. So last quarter we gave an update, and nothing’s really changed. The team has done a tremendous job—kudos to that team for managing what I think is an incredibly dynamic environment. But like I said on the last call, we’ve improved the impact not only in ’26, but in ’27 versus our original expectations that we had shared earlier. And that’s as a result of us taking some very deliberate mitigation steps, whether that’s leveraging earlier generations of hardware, transitioning certain hardware to lower-cost memory, being active on the spot market.
So there are a lot of, I would say, initiatives within that organization that they’re executing against. And we’re really proud to say we’re maintaining excellent, best-in-class hardware. So overall I feel really good about our ability to absorb this and manage it, and no change from what we updated last quarter.
Aman Narang (Chief Executive Officer, Co-founder, and Director)
Yeah, thank you, Cassie. And on your question, Cassie, on the FTC, we are incredibly disappointed with the FTC’s decision to file the suit. We’ve been engaged with them and cooperating with them really over the past year and fundamentally believe their application of ROSCA is unprecedented for custom contracts in B2B, which is what we negotiate for every single customer. If ROSCA were to apply to custom negotiated contracts in a B2B context, it would have huge implications for the whole industry and business contracts in general.
We have a lot of confidence in our business practices and are ready to defend ourselves. And if you just zoom out and think about why we are where we are in the industry, we have built a purpose-built platform for the restaurant industry over the past 15 years. We’re industry leaders and it’s fundamentally grounded in customer impact. One of our values is we’re all in customer success. If you talk to our customers, one of the things they’ll tell you is that we really live that value, and that is why we continue to grow and take share at the rate we are.
And then lastly, we are here to build a generational company and what happens here and how we settle the suit is not going to change that over the long term.
Cassie Chan (Analyst at Wells Fargo)
Appreciate it. And echoing my
OPERATOR
Thanks. Next question comes from Adam Frisch with Evercore.
Adam Frisch (Analyst at Evercore ISI)
Hey guys, thanks for taking my question. You booked 6 million of severance in the quarter. Is that part of a broader cost reset and should we expect more of that in 4Q and into next year? And then on Toast Capital, this year you started buying performance loans to hold to maturity—so about, I think, 65 this quarter, 145 million year to date, with nothing on the balance sheet at the end of last year. So what drove that change in strategy, and how much better are the economics, and how big do you expect it to get? Thank you.
Michael Senno (Chief Financial Officer)
Yeah, sure. I’ll start with your first question. Look, we had a focused effort to optimize our resource allocation and align our investments with our top priorities, and periodically we’ll do that. The opportunity for us is to make sure we’re investing in our highest priorities—something we’re always going to pay attention to—and we’re going to reinvest back in the business. Just like Aman talked about in terms of our opportunity ahead, we want to continue to invest in those high-priority efforts.
And then in terms of Toast Capital and loans on our balance sheet, the program overall—Toast Capital—is doing really well, and we’ve continued to grow originations and continue to add and diversify our funding sources. Adding balance sheet was really a natural next step for us. And you’re right, the balance sheet has better profitability metrics for us because we retain all the economics; we’re not working with a third party. But overall, most of our originations will go through our CRT program.
If you just zoom out and say how will the Toast Capital program grow, I would say it will continue to grow as our business grows. So far the customer receptivity has been really positive—a lot of customers come back for renewed loans—and regardless of whether we use balance sheet or CRT, we’re managing across the same risk profile regardless of the program. So we feel really good about our ability to manage it as well.
OPERATOR
Thanks. Next question comes from Tientsin Huang with JP Morgan.
Tientsin Huang (Analyst at JPMorgan)
Hey, thanks Emily, and congrats to Senno and of course all the best to Elena. Just want to ask on the consumer two ways. One, any change in spend behavior month to month—any change in signals that you track? And then just on Local, Aman, it feels like you’re promoting a little bit more aggressively there, which we like. Are you getting the engagement that you’re seeking? Any interesting learnings so far in Local as you’re growing it?
Michael Senno (Chief Financial Officer)
Thanks, Tientsin. I’ll take the first one. You can see our GPV per location trends have been very stable—3Q into 4Q—and really for the better part of the year it’s been in the same zone. Even in the core, GPV per location has been slightly off year over year. For the majority of the year there’s been, you know, some mix as we add more in Horizon 2 and that impact’s been modest, and I expect it to be gradual over time. But similar story—GPV per location in a really tight batch and consistent throughout the year.
Aman Narang (Chief Executive Officer, Co-founder, and Director)
And on Local, monthly active users continue to tick up every month at a really healthy clip. I don’t think we’ve publicly shared exactly what that data is, but the rate of growth has been really, really strong. And really there’s a couple use cases. One is across all Toast restaurants, similar to what you get with the Starbucks app. You can get pickup on the app. People love that in that you get in-store prices and the experience of pickup is really seamless. Two is tracking loyalty. So a lot of our customers offer loyalty, and people love the fact that you can track loyalty across all of your restaurants in one place, which is harder to do without Local.
And then lastly for reservations, between Toast Tables, Resy, and Tock, we’ve got great inventory in the app to book a table and we’ve seen dramatic growth there as well. So really proud of the progress overall in Local and what the team is doing. They’re working hard. One other thing that I’ll add here is if you look at the Toast ecosystem, just on online ordering, we have almost 50 million active users that have signed up for an account on Toast online ordering when they order on a restaurant’s website. And so we’ve got lots and lots of users that over time could leverage Local to have an easy place to book tables, track loyalty, and order pickup at all of our great restaurants.
OPERATOR
Next question comes from DJ Hines with Canaccord. You there?
DJ Hines (Analyst at Canaccord Genuity)
All right, we’ll try this again. Can you guys hear me? Great. Awesome. Thank you guys. Elena, we’ll miss you. Congrats to you, Michael. Look forward to the transition. Aman, look, I look at the numbers, you guys are clearly taking share in the space. But I still get a lot of competitive questions from investors, and I think the gist of them is as AI lowers the barriers to building software and competitors expand beyond point of sale, what do you think will be Toast’s most durable competitive advantages, right?
Is it the data? Is it the depth and breadth of the workflows, is it distribution? How do you think about that and kind of frame that competitive debate for us?
Aman Narang (Chief Executive Officer, Co-founder, and Director)
Yeah, it’s a good question, DJ. I think first off, I’ll say, look, I just want to reinforce our execution is tremendous. You saw the results and you look at our net add growth, you look at in our core business, which is both now growing share but also expanding ARPU, it just shows that we’re executing at a high level. And if you look at what we’ve been about from day one, it’s been about how do we help restaurants thrive. We’ve been vertically focused on restaurants, and so we live and breathe these problems, I think, better than anybody else in the world.
And at its core, I think that is what it’s going to be one of our most important durable advantages long term. As an example of this, you think about Toast IQ Grow. It’s not just about launching some AI products. The most important thing we’re doing there is measuring whether or not these products are actually driving top-line sales for our customers. Similarly, we think about back office and you think about IQ Teams, over time we’ll launch inventory, we’ll launch bookkeeping. It’s all about improving bottom-line profitability. And to do this well, part of it’s understanding the workflows, understanding the use cases, but part of it’s also the data that we have and the learnings we have across approaching 200,000 restaurant locations.
I’ll just give you one example of this. You think about restaurant COGS, it’s really valuable to know across all of the different suppliers what it is that they’re paying to make it easier for them to have visibility into what their COGS are and where they benchmark. The only way to do that is to actually know where they stand relative to all the customers near them. And that data only exists in Toast. And there are numerous examples like this on on-demand and marketing, on back office, where I think our focus on the restaurant industry and our focus on driving profitability for our customers is what’s going to ultimately make us successful.
I think one of the other points we don’t share enough is really proud of the fact that if you look at those restaurants, they’re less likely to go out of business. They have more GPV on average than the average restaurant industry. And our focus is to make that even better.
DJ Hines (Analyst at Canaccord Genuity)
Yeah, very helpful. Thank you.
OPERATOR
All right, our last question will come from Andrew Bach with BMO.
Andrew Bach (Analyst at BMO Capital Markets)
Hey, thanks for taking the question. Wanted to ask on subscription gross margin, you had good expansion there, 320 bps year over year, and AI-driven efficiencies contributing, I guess. How much further runway do you kind of see in SaaS gross margin into ’27 and what could be the potential drivers, or should we just expect kind of a steady-state outlook?
Michael Senno (Chief Financial Officer)
Andrew, thanks for the question. And I’d say we’ve made really good progress on SaaS gross margins over the past couple years and you could see that consistent margin expansion. That is probably the one area inside the company where we’ve had the most traction. We’re furthest along on leveraging AI, just in both chat and starting to do voice AI and delivering a better customer experience along with that. I, you know, we’ll get into the full ’27 as we get into the February earnings call.
But you know there’s going to be a balance because we’re also spending on AI. But longer term I do think there’s continued opportunity in the gross margin. But I’d say that’s probably the area that we’ve seen the biggest impact so far internally from AI efficiency.
Andrew Bach (Analyst at BMO Capital Markets)
Congrats Mike and Elena. You will be missed.
Michael Senno (Chief Financial Officer)
Thank you.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
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