Toast (NYSE:TOST) Reports Bullish Q3 But Stock Drops

Jabin Bastian /
2021/11/09 5:15 pm EST
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Restaurant software platform Toast (NYSE:TOST) beat analyst expectations in Q3 FY2021 quarter, with revenue up 105% year on year to $486.3 million. Guidance for next quarter's revenue was surprisingly good, being $480 million at the midpoint, 7.27% above what analysts were expecting. Toast made a GAAP loss of $252.4 million, down on its loss of $62.6 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) Q3 FY2021 Highlights:

  • Revenue: $486.3 million vs analyst estimates of $433.6 million (12.1% beat)
  • EPS (GAAP): -$1.05
  • Revenue guidance for Q4 2021 is $480 million at the midpoint, above analyst estimates of $447.4 million
  • Free cash flow was negative $21.1 million, down from positive free cash flow of $52.5 million in previous quarter
  • Gross Margin (GAAP): 17.1%, down from 20.4% same quarter last year

“In the third quarter, we delivered strong results across the board,” 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 $236.7 million, to $486.3 million.

Toast Total Revenue

This was another standout quarter with the revenue up a splendid 105% year on year. But the growth did slow down a little compared to last quarter, as Toast increased revenue by $61.6 million in Q3, compared to $72.8 million revenue add in Q2 2021. So while the growth is overall still impressive, we will be keeping an eye on the slowdown.

Analysts covering the company are expecting the revenues to grow 42.2% over the next twelve months, although estimates are likely to change post earnings.

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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 17.1% in Q3.

Toast Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.17 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 Q3 Results

With a market capitalization of $29.3 billion, more than $1.3 billion in cash and the fact it is operating close to free cash flow break-even, we're confident that Toast has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Toast outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this impressive quarter should have shareholders feeling very positive. But the market was likely expecting more and the company is down 6.38% on the results and currently trades at $56.99 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.