Restaurant software platform Toast (NYSE:TOST) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 53.1% year on year to $819 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $935 million at the midpoint, 3.44% above what analysts were expecting. Toast made a GAAP loss of $81 million, down on its loss of $23 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) Q1 FY2023 Highlights:
- Revenue: $819 million vs analyst estimates of $763.1 million (7.32% beat)
- EPS: -$0.16 vs analyst estimates of -$0.17 (7.35% beat)
- Revenue guidance for Q2 2023 is $935 million at the midpoint, above analyst estimates of $903.9 million
- The company lifted revenue guidance for the full year, from $3.62 billion to $3.76 billion at the midpoint, a 3.87% increase
- Free cash flow was negative $65 million, compared to negative free cash flow of $29 million in previous quarter
- Gross Margin (GAAP): 21.2%, up from 16.8% same quarter last year
“Toast’s first quarter results marked a strong start to the year, coming in ahead of expectations thanks to the consistent execution of our core strategy: driving location growth, more deeply serving our customers across all segments of the restaurant industry, and pushing the industry forward through product innovation. Toast is positioned for lean, durable growth going forward given the healthy demand for restaurants, our differentiated go-to-market engine driving strong location growth in all segments of the industry, and our commitment to driving efficiencies,” 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. Hotels and other hospitality providers are another example.
As you can see below, Toast's revenue growth has been incredible over the last two years, growing from quarterly revenue of $282 million in Q1 FY2021, to $819 million.
And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 53.1% year on year. On top of that, revenue increased $51 million quarter on quarter, a very strong improvement on the $16 million increase in Q4 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 38.5% year on year to $935 million, slowing down from the 58.5% 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 28.2% 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.
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 21.2% in Q1.
That means that for every $1 in revenue the company had $0.21 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Key Takeaways from Toast's Q1 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 $10.2 billion and more than $950 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We liked to see that Toast beat analysts’ revenue expectations pretty strongly this quarter. And we were glad that the revenue guidance for the next quarter also exceeded analysts' expectations. Beat and raise is more rare these days and it was good to see Toast deliver good results. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 7.34% on the results and currently trades at $20.9 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.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.
The author has no position in any of the stocks mentioned.