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Toast (NYSE:TOST) Q1: Strong Sales, Stock Soars


Adam Hejl /
2022/05/12 4:13 pm EDT
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Restaurant software platform Toast (NYSE:TOST) reported results ahead of analyst expectations in the Q1 FY2022 quarter, with revenue up 52% year on year to $535 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $650 million at the midpoint, 13.4% above what analysts were expecting. Toast made a GAAP loss of $23 million, improving on its loss of $117.3 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 FY2022 Highlights:

  • Revenue: $535 million vs analyst estimates of $490.4 million (9.07% beat)
  • EPS (GAAP): -$0.20
  • Revenue guidance for Q2 2022 is $650 million at the midpoint, above analyst estimates of $572.7 million
  • The company lifted revenue guidance for the full year, from $2.37 billion to $2.52 billion at the midpoint, a 6.13% increase
  • Free cash flow was negative $50 million, compared to negative free cash flow of $34 million in previous quarter
  • Gross Margin (GAAP): 16.6%, down from 22.2% same quarter last year

“Toast delivered a strong first quarter, coming in well ahead of expectations across the board and adding a record number of net new locations to our platform as we continue to lead restaurants into a new digital era of hospitality,” said Chris Comparato, CEO, Toast.

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 $351.8 million, to $535 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 52% year on year. But the growth did slow down a little compared to last quarter, as Toast increased revenue by $23 million in Q1, compared to $25.6 million revenue add in Q4 2021. So while the growth is overall still impressive, we will be keeping an eye on the slowdown.

Guidance for the next quarter indicates Toast is expecting revenue to grow 53% year on year to $650 million, slowing down from the 192% 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 31.4% 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 16.6% in Q1.

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. 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

With a market capitalization of $6.48 billion Toast is among smaller companies, but its more than $757 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We were very impressed by the strong improvements in Toast’s gross margin this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 5.18% on the results and currently trades at $15 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.