Restaurant software platform Toast (NYSE:TOST) announced better-than-expected results in Q2 FY2023, with revenue up 44.9% year on year to $978 million. Guidance for next quarter's revenue was also optimistic $1.03 billion at the midpoint, 2.3% above analysts' estimates. Toast made a GAAP loss of $98 million, down from its loss of $54 million in the same quarter last year.
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Toast (TOST) Q2 FY2023 Highlights:
- Revenue: $978 million vs analyst estimates of $944.8 million (3.51% beat)
- EPS: -$0.19 vs analyst expectations of -$0.14 (31.8% miss)
- Revenue Guidance for Q3 2023 is $1.03 billion at the midpoint, above analyst estimates of $1 billion
- The company lifted revenue guidance for the full year from $3.76 billion to $3.84 billion at the midpoint, a 2.26% increase
- Free Cash Flow of $39 million is up from -$65 million in the previous quarter
- Gross Margin (GAAP): 21.3%, up from 16.9% in the same quarter last year
“Toast delivered record results in the second quarter. In addition to exceeding $1B in ARR, Toast reached Adjusted EBITDA profitability and positive free cash flow for the first time since IPO as we remain focused on driving lean, durable growth. We’re still in the early stages of the opportunity ahead of us, and with proof points including our new Marriott deal and adding a record number of restaurant locations, we are more confident than ever in our ability to penetrate the entire restaurant TAM,” 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.
Sales Growth
As you can see below, Toast's revenue growth has been incredible over the last two years, growing from $426 million in Q2 FY2021 to $978 million this quarter.
Unsurprisingly, this was another great quarter for Toast with revenue up 44.9% year on year. On top of that, its revenue increased $159 million quarter on quarter, a very strong improvement from the $51 million increase in Q1 2023. This is a sign of re-acceleration of growth and great to see.
Next quarter's guidance suggests that Toast is expecting revenue to grow 36.3% year on year to $1.03 billion, slowing down from the 54.7% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 28.1% over the next 12 months.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 21.3% in Q2.
That means that for every $1 in revenue the company had $0.21 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite trending up over the last year, Toast's gross margin is poor for a SaaS business. We have no doubt that shareholders would like to see its improvements continue.
Key Takeaways from Toast's Q2 Results
With a market capitalization of $10.8 billion, a $990 million cash balance, and near-breakeven free cash flow status, we're confident that Toast is in a healthy financial position.
This was a milestone beat-and-raise quarter for Toast as it won a deal with Marriott, exceeded $1 billion in ARR, and reached adjusted EBITDA profitability and positive free cash flow for the first time since the IPO. On top of that, the company raised its revenue and adjusted EBITDA guidance for the full year, topping analysts' expectations. Overall, we think this was a really good quarter that should please shareholders. The stock is up 13.5% after reporting and currently trades at $22.93 per share.
So should you invest in Toast right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.