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Toast (NYSE:TOST) Q4: Beats On Revenue But Stock Drops 11%


Adam Hejl /
2022/02/15 4:32 pm EST
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Restaurant software platform Toast (NYSE:TOST) beat analyst expectations in Q4 FY2021 quarter, with revenue up 111% year on year to $512 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $484 million at the midpoint, 3.76% above what analysts were expecting. Toast made a GAAP profit of $2 million, improving on its loss of $61 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) Q4 FY2021 Highlights:

  • Revenue: $512 million vs analyst estimates of $487.9 million (4.93% beat)
  • EPS (GAAP): -$0.23
  • Revenue guidance for Q1 2022 is $484 million at the midpoint, above analyst estimates of $466.4 million
  • Management's revenue guidance for upcoming financial year 2022 is $2.37 billion at the midpoint, beating analyst estimates by 4.02% and predicting 34% growth (vs 128% in FY2021)
  • Free cash flow was negative $34 million, compared to negative free cash flow of $21.1 million in previous quarter
  • Gross Margin (GAAP): 14.2%, down from 19.4% same quarter last year

“The restaurant industry was tested again in 2021, but as evidenced by our growth there is tremendous demand for the Toast platform as restaurant operators navigate the new normal,” 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 $242.5 million, to $512 million.

Toast Total Revenue

This was another standout quarter with the revenue up a splendid 111% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $25.6 million in Q4, compared to $61.6 million in Q3 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Toast is expecting revenue to grow 37.5% year on year to $484 million, slowing down from the 104% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $2.37 billion at the midpoint, growing 34% compared to 128% increase in FY2021.

There are others doing even better than Toast. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 150% since the IPO last December. 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 14.2% in Q4.

Toast Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.14 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 it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Toast's Q4 Results

With a market capitalization of $13.8 billion, more than $1.26 billion in cash and the fact it is operating close to free cash flow break-even the company is in a strong financial position to invest in growth.

We were impressed by the exceptional revenue growth Toast delivered this quarter. And we were also glad that the revenue guidance for the rest of the year exceeded expectations. On the other hand, the revenue guidance for next year indicates a significant slowdown and gross margin deteriorated. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 11% on the results and currently trades at $25 per share.

Should you invest in Toast 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.