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Toast (NYSE:TOST) Delivers Impressive Q2, Stock Jumps 10.6%


Kayode Omotosho /
2022/08/11 4:13 pm EDT
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Restaurant software platform Toast (NYSE:TOST) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 58.9% year on year to $675 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $715 million at the midpoint, 7.8% above what analysts were expecting. Toast made a GAAP loss of $54 million, improving on its loss of $135.5 million, in the same quarter last year.

Is now the time to buy Toast? Access our full analysis of the earnings results here, it's free.

Toast (TOST) Q2 FY2022 Highlights:

  • Revenue: $675 million vs analyst estimates of $647.6 million (4.22% beat)
  • EPS (GAAP): -$0.11
  • Revenue guidance for Q3 2022 is $715 million at the midpoint, above analyst estimates of $663.2 million
  • The company lifted revenue guidance for the full year, from $2.52 billion to $2.64 billion at the midpoint, a 4.55% increase
  • Free cash flow was negative $30 million, compared to negative free cash flow of $50 million in previous quarter
  • Gross Margin (GAAP): 16.7%, down from 21% same quarter last year

"Toast had another great quarter, sustaining our operating momentum with a record number of net new locations and strong revenue growth, both of which highlight the power of our industry leading digital platform for restaurants. We continue to balance disciplined investments to enhance our platform and drive sustained growth, with a commitment to increasing efficiency, which was evident in our healthy Adjusted EBITDA margin improvement in the second quarter,” said Toast CEO, Chris Comparato.

Founded by three MIT engineers at a local Cambridge bar, Toast (NYSE:TOST) provides integrated point of sale (POS) hardware, software, and payments solutions for restaurants.

Enterprise resource planning (ERP) and customer relationship management (CRM) are two of the largest software categories dominated by the likes of Microsoft, Oracle, and Salesforce.com. Today, the secular trend of mass customization is driving vertical software that customizes ERP and CRM functions for specific industry requirements. Restaurants are a prime example where a set of customized software providers have sprung up in recent years to create unique operating systems that blend tax and accounting software, order management and delivery, along with supply chain management.

Sales Growth

As you can see below, Toast's revenue growth has been incredible over the last year, growing from quarterly revenue of $424.7 million, to $675 million.

Toast Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 58.9% year on year. On top of that, revenue increased $140 million quarter on quarter, a very strong improvement on the $23 million increase in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Toast is expecting revenue to grow 47% year on year to $715 million, slowing down from the 105% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 31.5% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Toast's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 16.7% in Q2.

Toast Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.16 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.

Key Takeaways from Toast's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Toast’s balance sheet, but we note that with a market capitalization of $9.44 billion and more than $1.17 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the very optimistic revenue guidance Toast provided for the next quarter. And we were also excited to see the really strong revenue growth this quarter. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is up 10.6% on the results and currently trades at $20.06 per share.

Toast may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.