Toast, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Toast operates an integrated restaurant technology platform combining SaaS, payment processing, hardware, and related services. At quarter-end it reported approximately 99,000 restaurant locations and $118 billion of trailing-12-month gross payment volume (GPV).
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1.032 billion (+37%) | $752 million | $2.829 billion (+44%) | $1.963 billion |
| Gross profit / margin | $226 million / 21.9% | $151 million / 20.1% | $608 million / 21.5% | $353 million / 18.0% |
| Operating loss | $59 million | $85 million | $231 million | $285 million |
| Net loss | $31 million | $98 million | $210 million | $175 million |
| Adjusted EBITDA (non-GAAP) | $35 million | $(19) million | $32 million | $(97) million |
| Operating cash flow / free cash flow (non-GAAP) | Not stated for quarter | Not stated for quarter | $43 million / $12 million | $(137) million / $(160) million |
Q3 revenue comprised $856 million of financial technology solutions, $131 million of subscription services, $34 million of hardware, and $11 million of professional services. Financial technology revenue grew 36% in Q3, primarily with growth in platform locations; subscription revenue rose 46%, reflecting location growth and broader product adoption. GPV was $33.7 billion in Q3, up 34% year over year; nine-month GPV was $92.5 billion, up 40%. ARR was $1.218 billion at September 30, up 40% year over year. ARR is a company-defined operational measure, not GAAP revenue or a forecast.
Balance sheet, liquidity, and cash flow
- Cash and cash equivalents were $514 million and marketable securities were $516 million at September 30, 2023, totaling $1.030 billion. This excludes $87 million of customer funds and $49 million of restricted cash.
- No borrowings were outstanding under the revolving facility; $330 million was available, subject to a $250 million minimum-liquidity covenant. The filing reports no drawn debt at period-end.
- Total current assets were $1.480 billion and current liabilities were $574 million. Total liabilities were $685 million; stockholders’ equity was $1.149 billion.
- Nine-month operating cash flow improved to positive $43 million from negative $137 million. Free cash flow was $12 million, after $4 million of property and equipment purchases and $27 million of capitalized software. Investing activities used $85 million; financing activities provided $58 million.
- Management stated existing cash, investments, and available facility capacity should meet working capital needs for at least the next 12 months, including planned capital spending, strategic transactions, and investment commitments.
Material changes, outlook, and risks
- Revenue growth and gross margin improved, while the company remained GAAP loss-making. Q3 operating expenses increased 21% year over year to $285 million; nine-month stock-based compensation was $206 million.
- Q3 results included an $18 million gain from remeasurement of warrant liabilities; the nine-month period included a $5 million loss. These non-cash fair-value changes can materially affect reported results. Nine-month Adjusted EBITDA excludes several items, including stock compensation, warrant remeasurement, lease termination costs, and charitable share expense.
- The nine-month period included a $12 million net charge related to terminating part of the Boston headquarters lease, including an impairment; the filing reports $14 million of lease-termination adjustments in its nine-month Adjusted EBITDA reconciliation. The company also recorded $10 million of stock-based charitable contribution expense.
- Toast Capital exposure increased: nine-month credit-loss expense for expected loan defaults was $38 million, and the related contingent liability was $29 million at quarter-end, in addition to an $11 million non-contingent stand-ready liability. Toast’s contractual loan repurchase exposure is capped at 15% of each quarterly loan cohort’s originated amount.
- No specific revenue, earnings, or margin guidance is provided in the supplied filing text. Management cited inflation, interest rates, supply-chain conditions, consumer spending, and restaurant-industry uncertainty. The business is seasonal, with financial technology revenue per location historically stronger in the second and third quarters.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of an ongoing material weakness in IT general controls, particularly user access controls affecting revenue-reporting systems. Management expected remediation by fiscal year-end 2023, subject to implementation and testing; the weakness was not yet considered remediated.
- Principal risks include competition and customer retention, exposure to restaurant SMB health and payment volumes, dependence on third-party payment processors and AWS, cybersecurity and service availability, supplier concentration, financial-product credit exposure, evolving financial-services and privacy regulation, and the dual-class voting structure. The filing says it was not party to litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether the IT-control material weakness was remediated and controls tested effective after quarter-end.
- Whether revenue and GPV growth translate into sustainable gross-margin improvement and GAAP profitability, considering processing costs and operating-expense growth.
- Trends in Toast Capital defaults, credit-loss expense, loan repurchases, and the bank-partner relationship.
- Cash conversion and free cash flow, including deferred customer-acquisition costs and other working-capital needs.
- Potential dilution from equity compensation: the filing reports 35.2 million unvested RSUs and 49.3 million outstanding options at September 30, 2023.
- Changes in liquidity or facility availability, and any developments in regulatory, cybersecurity, processor, or supplier risks.