Toast, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts are in millions unless noted. Toast provides cloud-based restaurant software, payment processing, hardware, and related services.
Business context and operating metrics
- At September 30, Toast served approximately 74,000 restaurant locations. Trailing-12-month gross payment volume (GPV) was approximately $83 billion.
- Q3 GPV was $25.2 billion, up 53% year over year; nine-month GPV was $66.3 billion, up 66%.
- Annualized recurring run-rate (ARR) was $868 million, up 60% year over year. Toast cautions that ARR is an operational measure, not GAAP revenue or a revenue forecast.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $752 | $486 | $1,963 | $1,193 |
| Gross profit | $151 | $83 | $353 | $241 |
| Gross margin | 20.1% | 17.1% | 18.0% | 20.2% |
| Operating loss | $(85) | $(55) | $(285) | $(112) |
| Net loss | $(98) | $(254) | $(175) | $(488) |
| Adjusted EBITDA (non-GAAP) | $(19) | $(12) | $(97) | $3 |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $(160) | $17 |
- Q3 revenue grew 55%; subscription services rose 96% to $90, financial technology solutions rose 55% to $628, hardware fell 13% to $27, and professional services rose 40% to $7.
- Nine-month revenue grew 65%. Growth in subscription services reflected more live locations and product adoption; financial technology solutions growth reflected more locations and higher GPV per location.
- Q3 gross margin improved year over year, while nine-month gross margin declined, reflecting costs across the business, including hardware and professional services. Toast reported a Q3 hardware gross loss of $25, compared with $12 a year earlier.
- Operating expenses rose to $236 in Q3 from $138, including $57 of stock-based compensation; nine-month stock-based compensation was $167. Q3 operating loss widened despite higher revenue.
- The lower reported net loss versus Q3 2021 primarily reflects the prior-year $198 warrant remeasurement expense; Q3 2022 included a $21 warrant remeasurement expense. For the nine-month period, warrant remeasurement was a $102 gain versus a $215 loss in 2021, making net income comparisons sensitive to fair-value changes.
Cash, liquidity, and commitments
- At September 30, cash and cash equivalents were $644 and marketable securities were $409. These totaled $1,053, excluding $61 held for customers and $19 of restricted cash.
- Nine-month operating cash use was $137, compared with $33 provided in 2021. Free cash flow was negative $160, versus positive $17. Management cited working-capital use, including higher inventory, deferred costs, and receivables.
- No borrowings were outstanding under the $330 revolving credit facility; $330 was reported available. The facility has a $250 minimum-liquidity covenant, and $11 of letters of credit were outstanding.
- Toast said existing cash, marketable securities, and available facility capacity should meet working-capital needs for at least the next 12 months. No numerical earnings or revenue guidance was provided.
- Purchase obligations were $243, most payable within 12 months; operating lease commitments were $116. The company also reported an $8 contingent expected-credit-loss liability related to loan guarantees.
Changes, outlook, risks, and unusual items
- Toast acquired Sling, an employee scheduling and communications company, on July 6, 2022, for a stated purchase price of $49. The preliminary allocation included $33 of goodwill and $19 of acquired intangible assets. Toast issued management restricted shares with a fair value of $19, subject to service-based vesting.
- Management cited inflation, higher interest rates, economic uncertainty, COVID-19 effects, and supply-chain constraints as factors that may affect restaurants and Toast. Semiconductor shortages and elevated freight and product costs may constrain hardware supply or profitability. Payment volume, transaction mix, and seasonal patterns also affect results.
- Toast depends on third-party payment processors, a bank partner for Toast Capital loans, and AWS for cloud infrastructure. The filing describes credit, fraud, cybersecurity, service interruption, regulatory, and partner-dependency risks.
- Toast reported that disclosure controls and procedures were not effective at quarter-end, citing material weaknesses in financial-statement close controls and controls over unusual and infrequent transactions. Remediation efforts were ongoing; management stated the financial statements fairly present the periods shown.
- The filing reported no litigation expected to have a material adverse effect and no material changes in market risk disclosures. It identifies a dual-class share structure; Class B shares carried approximately 85% of voting power at September 30.
Important facts for investors to verify
- Whether GPV, restaurant-location growth, and ARR growth continue, and how these translate into revenue and gross profit.
- Whether gross-margin trends improve, particularly for hardware and professional services, and whether operating-expense growth moderates.
- Cash burn and working-capital needs, including inventory, credit losses, purchase commitments, and compliance with the facility’s minimum-liquidity covenant.
- Progress in remediating the disclosed material weaknesses and the results of subsequent internal-control assessments.
- Performance and integration of the Sling acquisition, along with the impact of stock-based compensation and warrant fair-value changes on reported results and dilution.