Business Overview and History: Toast, Inc. (TOST) is a leading provider of a comprehensive, cloud-based digital platform designed specifically for the restaurant industry. Founded in 2011, the company has emerged as a trailblazer, leveraging its innovative technology to transform the way restaurants operate and engage with their customers.
Toast's journey began in 2011 when co-founders Steve Fredette, Aman Narang, and Jonathan Grimm recognized the need for a more integrated, technology-driven solution to address the unique challenges faced by the restaurant industry. The company was officially founded in 2013 with the mission of helping restaurants delight their guests, do what they love, and thrive. Toast developed a cloud-based, all-in-one digital technology platform purpose-built for the restaurant industry, which includes software-as-a-service (SaaS) products, financial technology solutions, integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners.
In its early years, Toast focused on building its core restaurant operating system, connecting front-of-house and back-of-house operations across various restaurant service models. The company worked to establish itself as a trusted technology provider for small and medium-sized restaurants, leveraging its local go-to-market approach to gain traction. By 2019, Toast had grown to serve over 48,000 restaurant locations across the United States.
The COVID-19 pandemic in 2020 presented significant challenges for the restaurant industry and Toast's customers. However, the company navigated this difficult period by supporting its customers, accelerating product innovation, and maintaining financial discipline. Despite the headwinds, Toast continued to grow its customer base and expand its platform capabilities during this time.
As of June 30, 2024, Toast had approximately 120,000 live locations on its platform, representing a 29% increase year-over-year. The company's Annualized Recurring Revenue (ARR) also grew 29% year-over-year, driven by strong location growth and continued ARPU expansion. Toast has translated its deep understanding of the restaurant industry into a comprehensive technology platform, establishing itself as a leader in the restaurant technology space. The company has also expanded into adjacent verticals, such as grocery, convenience stores, and bottle shops, leveraging its core platform capabilities to serve a broader set of customers in the food and beverage industry.
Financial Overview: Toast's financial performance has been impressive, with the company reporting consistent revenue growth over the past several years. In the most recent fiscal year (2023), the company reported annual revenue of $3.87 billion, a 29% increase compared to the previous year. This growth was driven by a combination of strong location expansion, increased adoption of Toast's comprehensive platform, and the continued success of its fintech solutions.
In the most recent quarter (Q2 2024), Toast reported revenue of $1.24 billion, up 27% year-over-year. The company also achieved net income of $14 million, marking a significant improvement in profitability. Operating cash flow for the quarter was $104 million, while free cash flow reached $108 million, up substantially from $26 million in Q2 2023.
Despite the company's rapid growth, Toast has also demonstrated a commitment to financial discipline and operational efficiency. In Q2 2024, the company reported an adjusted EBITDA of $92 million, representing a 27% margin on its recurring gross profit streams. This showcases Toast's ability to scale its business while maintaining profitability.
Liquidity: Toast's strong balance sheet, with $1.22 billion in cash and marketable securities as of the end of Q2 2024, provides the company with significant financial flexibility. This robust liquidity position allows Toast to invest in growth initiatives, fund research and development efforts, and weather potential economic uncertainties. The company's ability to generate positive adjusted EBITDA further strengthens its liquidity profile, as it demonstrates Toast's capacity to generate cash from its operations.
Additionally, Toast has access to a $330 million credit facility, further enhancing its financial flexibility. The company's debt-to-equity ratio of 0.03 indicates a conservative capital structure, while its current ratio of 2.27 and quick ratio of 2.12 suggest strong short-term liquidity.
Product Segments: Toast operates in three main product segments:
1. Subscription Services: This segment provides a suite of subscription-based SaaS products for the restaurant industry, including the core Toast Point of Sale (POS) system, Toast Payroll & Team Management, Toast Inventory, and Toast Order & Pay. In the first half of 2024, subscription services revenue increased 37% year-over-year to $318 million, driven by continued expansion of restaurant locations and increased product adoption.
2. Financial Technology Solutions: This segment encompasses Toast's integrated payment processing services, closely tied to the POS system. It includes features like payment processing, reporting, and data analytics. Financial technology solutions revenue grew 28% year-over-year in the first half of 2024 to $1.9 billion, attributable to the increase in restaurant locations and higher gross payment volume processed through Toast's payments services.
3. Hardware and Professional Services: This segment includes restaurant-grade hardware such as tablets, terminals, and other devices that integrate with the Toast POS system, as well as professional services revenue from system implementation, training, and consulting. Hardware and professional services revenue increased 18% year-over-year in the first half of 2024 to $104 million.
Competitive Landscape and Risks: Toast operates in a highly competitive environment, facing off against both legacy on-premise POS systems and other cloud-based solutions. Key competitors include Square, Clover (a Fiserv company), and Lightspeed. However, Toast's deep industry expertise, comprehensive platform, and strong customer relationships have allowed the company to maintain a competitive edge.
One of the primary risks facing Toast is its reliance on the restaurant industry, which can be susceptible to macroeconomic fluctuations and changing consumer preferences. The COVID-19 pandemic, for example, had a significant impact on the restaurant industry, with many establishments forced to adapt their operations to accommodate social distancing and takeout/delivery demands. While Toast weathered the storm, the company remains vulnerable to any future disruptions or downturns in the restaurant industry.
Additionally, Toast faces the risk of technological disruption, as the pace of innovation in the software and fintech industries remains rapid. The company must continually invest in research and development to ensure that its platform remains at the forefront of the industry, and it must also be vigilant in protecting its intellectual property and maintaining its technological advantages.
Recent Developments and Outlook: In Q2 2024, Toast reported impressive results, with revenue growing by 27% year-over-year and adjusted EBITDA reaching $92 million, representing a 27% margin on the company's recurring gross profit streams. This performance was driven by continued location expansion, with Toast adding a record 8,000 net new locations during the quarter, as well as strong ARPU growth and the successful execution of the company's operational efficiency initiatives.
Looking ahead, Toast remains optimistic about its long-term growth prospects. The company has outlined four strategic priorities to guide its future development: 1) scaling locations and market share in its core business; 2) expanding its product offerings for restaurants; 3) expanding its addressable market into new adjacencies, such as enterprise restaurant chains and food and beverage retail; and 4) delivering ongoing operating leverage as the business scales.
Toast has provided guidance for Q3 2024, expecting total subscription and fintech gross profit to increase 23% to 27% year-over-year, and adjusted EBITDA to be $70 million to $80 million. For the full year 2024, Toast has increased its outlook, now expecting 27% to 29% growth in fintech and subscription gross profit, and $285 million to $305 million in adjusted EBITDA, representing a 22% margin at the midpoint. The company also expects to be around breakeven on a GAAP basis for the remainder of 2024.
It's worth noting that Toast currently operates primarily in the United States, with no material international revenue disclosed. However, the company has mentioned growth investments in new areas like international expansion as part of its future strategy.
Industry Trends: The restaurant technology industry has seen strong growth in recent years, with a compound annual growth rate (CAGR) of over 20%. This growth has been driven by increasing adoption of cloud-based solutions by restaurants of all sizes, as they seek to streamline operations, enhance customer experiences, and gain better insights into their businesses. Toast's comprehensive platform and focus on the restaurant industry have positioned it well to capitalize on this trend.
Conclusion: Toast's impressive growth and innovative approach to the restaurant industry have positioned the company as a true disruptor in the market. With its comprehensive, cloud-based platform, Toast has empowered restaurants of all sizes to streamline their operations, enhance customer experiences, and drive sustainable growth. The company's strong financial performance, robust liquidity position, and clear strategic vision demonstrate its potential for continued success. As Toast continues to execute on its strategic priorities and navigate the evolving competitive landscape, it remains well-positioned to maintain its leadership position and deliver long-term value for its shareholders.