Toast, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Toast provides cloud-based restaurant software, payment processing, hardware, and related services. At quarter-end, approximately 85,000 restaurant locations used its platform; trailing-12-month gross payment volume (GPV) was approximately $101 billion.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $819 million | $535 million |
| Gross profit / gross margin | $174 million / 21.2% | $89 million / 16.6% |
| Operating loss | $92 million | $101 million |
| Net loss | $81 million | $23 million |
| Adjusted EBITDA (non-GAAP) | $(17) million | $(45) million |
| Cash used in operating activities | $55 million | $47 million |
| Free cash flow (non-GAAP) | $(65) million | $(50) million |
Revenue grew 53% year over year. Subscription services revenue increased 70% to $107 million; financial technology solutions revenue rose 54% to $673 million; hardware revenue was $31 million, up 7%; and professional services revenue was $8 million, up 60%. GPV increased 50% to $26.7 billion, and annualized recurring run-rate (ARR) increased 55% to $987 million. The filing cautions that ARR is an operational measure, not GAAP revenue or a forecast.
Operating expenses rose to $266 million from $190 million, including higher employee-related costs and stock-based compensation. Stock-based compensation expense was $63 million, versus $53 million. General and administrative expense also reflected a $12 million increase in bad-debt and credit-related expense, mainly associated with growth in Toast Capital.
At March 31, cash and cash equivalents were $451 million and marketable securities were $499 million, totaling $950 million. This excludes $99 million of customer funds and $36 million of restricted cash. Toast had no borrowings under its revolving facility, with $330 million available and a $250 million minimum-liquidity covenant. Management stated that available resources should meet needs for at least the next 12 months. The filing reports no material change in debt outstanding.
Changes, outlook, and notable items
- Gross margin improved year over year as revenue grew faster than costs of revenue. The operating loss narrowed, while net loss increased; the comparison is affected by a $79 million warrant-liability fair-value gain in Q1 2022 versus a $3 million gain in Q1 2023.
- Operating cash use increased to $55 million from $47 million; free cash flow declined to $(65) million from $(50) million, reflecting operating cash use plus capitalized software and property purchases.
- Toast acquired Delphi Display Systems on February 14, 2023, for a stated purchase price of $10 million. The purchase-price allocation was preliminary, and Delphi’s results were not material in the quarter.
- No numeric quarterly or full-year financial guidance is provided in the supplied filing text. Management cited growth in locations, product adoption, and GPV, while warning that restaurant-industry demand, inflation, interest rates, supply chains, and consumer spending could affect results. Financial technology revenue is seasonal and has historically been stronger in the second and third quarters.
- Toast Capital’s bank-partner loan program exposes the company to limited loan-default repurchase obligations. The contingent expected-credit-loss liability rose to $19 million from $14 million at year-end; a further $8 million stand-ready liability was reported.
- A material weakness in internal control over financial reporting remained unremediated, and management concluded disclosure controls were not effective at quarter-end. The weakness relates to IT general controls, including user access. Management expected remediation before year-end 2023, subject to implementation and testing.
- Subsequent to quarter-end, Toast agreed to terminate part of its Boston headquarters lease and shorten the remaining term to December 31, 2024. It expects to pay a net $11 million fee; the expected income-statement impact was described as immaterial.
Key risks and contingencies
Key risks include continued losses and uncertain path to profitability; dependence on payment processing volume and third-party processors; restaurant and SMB exposure to economic conditions; competition and customer retention; loan-program credit and regulatory risk; cybersecurity, service availability, and supplier risks; and evolving financial-services, privacy, and payments regulation. The company reported no litigation or claims expected to have a material adverse effect, while noting ordinary-course legal matters may arise. It did not expect claims with reasonably possible adverse outcomes to have a material impact.
Important facts for investors to verify
- Whether GPV, restaurant-location growth, and ARR growth continue, and how these translate into GAAP gross profit and cash generation.
- Whether gross-margin improvement persists, particularly as payment costs, hardware pricing, and product mix change.
- Trends in operating cash use, free cash flow, credit losses, and Toast Capital’s loan-default exposure.
- Liquidity relative to the facility’s $250 million covenant, including the distinction between company funds and customer or restricted cash.
- Progress and testing of the IT-controls remediation plan, given the disclosed material weakness and ineffective disclosure controls.
- Final purchase accounting for Delphi and the actual cash and accounting effects of the Boston lease modification.