Toast, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Toast operates a cloud-based restaurant technology platform combining software, payment processing, hardware and related services. At quarter-end, it served approximately 93,000 restaurant locations; trailing-12-month gross payment volume (GPV) was approximately $110 billion.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $978 million | $675 million | $1,797 million | $1,210 million |
| Gross profit | $208 million | $113 million | $382 million | $202 million |
| Operating loss | $80 million | $99 million | $173 million | $200 million |
| Net loss | $98 million | $54 million | $179 million | $77 million |
| Adjusted EBITDA (non-GAAP) | $15 million | $(33) million | $(3) million | $(78) million |
| Net cash used in operating activities | Not provided for quarter | $5 million | $68 million | |
| Free cash flow (non-GAAP) | Not provided for quarter | $(26) million | $(80) million |
Q2 revenue grew 45% year over year; subscription services increased 59% to $121 million and financial technology solutions increased 44% to $808 million. Hardware revenue was $41 million, up 37%. GPV was $32.1 billion, up 38%; annualized recurring run-rate (ARR) was $1.14 billion at June 30, up 45% year over year. ARR is a company-defined operational measure, not a GAAP revenue forecast.
Gross margin was approximately 21.3% in Q2 versus 16.7% a year earlier, calculated from reported revenue and gross profit. Operating expenses were $288 million, up 36%, including higher personnel costs and a $12 million net charge related to terminating part of the Boston headquarters lease. Stock-based compensation was $72 million in Q2 and $135 million for the first half.
Net loss worsened despite improved operating loss, in part because warrant remeasurement produced a $26 million expense in Q2 2023 versus a $44 million gain in Q2 2022. For the first half, warrant remeasurement was a $23 million expense versus a $123 million gain in 2022; these non-cash fair-value movements materially affect period comparisons.
At June 30, cash and cash equivalents were $488 million and marketable securities were $502 million. These totaled $990 million, excluding $91 million held on behalf of customers and $43 million of restricted cash. Total assets were $1.795 billion, total liabilities $716 million, and stockholders’ equity $1.079 billion. No amount was drawn under the revolving facility; $330 million was available, subject to a $250 million minimum-liquidity covenant. Management said available funds and borrowing capacity should cover needs for at least 12 months. The filing reports no outstanding drawn debt.
Changes, outlook and notable matters
- Revenue growth reflected more locations and products adopted by customers, as well as higher GPV per processing location. Costs of financial technology solutions rose with GPV; hardware costs rose with shipment volumes.
- Operating cash use improved to $5 million for the first half from $68 million in 2022, while free cash flow improved to $(26) million from $(80) million. Working capital use included higher receivables and deferred costs.
- Toast Capital credit exposure increased: first-half credit loss expense was $22 million, and the contingent expected-credit-loss liability was $22 million at June 30, compared with $5 million a year earlier. Toast may have to purchase certain defaulted partner-originated loans, subject to contractual limits.
- The company acquired Delphi Display Systems for $10 million in February; its results were not material to the consolidated statements. In Q2, Toast agreed to terminate part of its Boston headquarters lease, paying a net fee of $11 million and recording a $12 million net charge. Subsequent to quarter-end, it entered a sublease with an approximately $17 million aggregate obligation through June 2028.
- No specific revenue or earnings guidance was provided in the filing. Management noted continued uncertainty from inflation, interest rates, supply-chain conditions and consumer spending, and seasonality in payment revenue, historically stronger in Q2 and Q3.
- Disclosure controls were deemed ineffective at quarter-end due to an unresolved material weakness in IT general controls, particularly user access over systems supporting revenue reporting. Management expected remediation by fiscal year-end 2023, subject to implementation and testing.
- Management said it did not expect pending claims with reasonably possible adverse outcomes to have a material impact; it also noted ordinary-course litigation risks. Other key risks include restaurant SMB closures and economic sensitivity, competition and payment-processing dependence, cybersecurity and service outages, third-party processor and supplier dependence, financial-product credit exposure, and evolving financial-services and privacy regulation.
Investor verification priorities
- Track whether GPV, location growth and ARR translate into durable gross profit and improved GAAP profitability; review the non-GAAP adjustments in Adjusted EBITDA and free cash flow.
- Monitor Toast Capital credit-loss expense, loan-purchase obligations and the related reserve as the product grows.
- Confirm remediation and independent testing of the IT-control material weakness, and whether disclosure controls become effective.
- Assess liquidity and working-capital trends, including receivables and deferred costs, against the facility’s minimum-liquidity covenant.
- Evaluate the recurring cost and cash impact of the Boston lease changes and the subsequent sublease commitment.
- Consider warrant-liability fair-value volatility, stock-based compensation and potential equity dilution; Class B shares carry ten votes per share and represented approximately 80% of voting power at June 30.