Toast (NYSE:TOST) Misses Q3 Sales Targets, Stock Drops 13%

Restaurant software platform Toast (NYSE:TOST) reported revenue in line with analyst expectations in Q3 FY2023, with revenue up 37.2% year on year to $1,032 billion. Next quarter’s revenue guidance of $1 billion fell short, coming in 1.6% below analysts’ estimates. Turning to EPS, Toast made a GAAP loss of $0.09 per share, improving from its loss of $0.19 per share in the same quarter last year.

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Toast (TOST) Q3 FY2023 Highlights:

• Revenue: $1,032 billion vs analyst estimates of $1,032 billion (in line)
• EPS: -$0.09 vs analyst estimates of -$0.10 (10.1% beat)
• Revenue Guidance for Q4 2023 is $1 billion at the midpoint, below analyst estimates of $1 billion
• Free Cash Flow of $37 million, similar to the previous quarter
• Gross Margin (GAAP): 21.9%, up from 20.2% in the same quarter last year

Founded by three MIT engineers at a local Cambridge bar, Toast (NYSE:TOST) provides integrated point-of-sale (POS) hardware, software, and payments solutions for restaurants.

Hospitality & Restaurant SoftwareEnterprise resource planning (ERP) and customer relationship management (CRM) are two of the largest software categories dominated by the likes of Microsoft (NASDAQ:), Oracle (NYSE:), and Salesforce.com (NYSE:). Today, the secular trend of mass customization is driving vertical software that customizes ERP and CRM functions for specific industry requirements. Restaurants are a prime example where a set of customized software providers have sprung up in recent years to create unique operating systems that blend tax and accounting software, order management and delivery, along with supply chain management. Hotels and other hospitality providers are another example.

Sales Growth
As you can see below, Toast’s revenue growth has been exceptional over the last two years, growing from $486 million in Q3 FY2021 to $1,032 billion this quarter.

This was another quarter of strong growth for Toast with revenue up 37.2% year on year. However, its growth did slow down compared to last quarter as the company’s revenue increased by just $54 million in Q3 compared to $159 million in Q2 2023. While we’d like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter’s guidance suggests that Toast is expecting revenue to grow 32.2% year on year to $1 billion, slowing down from the 50% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 29.3% over the next 12 months before the earnings results announcement.

ProfitabilityWhat makes the software as a service business so attractive is that once the software is developed, it typically shouldn’t cost much to provide it as an ongoing service to customers.
Toast’s gross profit margin, an important metric measuring how much money there’s left after paying for servers, licenses, technical support, and other necessary running expenses, was 21.9% in Q3.

That means that for every $1 in revenue the company had $0.22 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Toast’s gross margin is still poor for a SaaS business. It’s vital that the company continues to improve this key metric.

Key Takeaways from Toast’s Q3 Results
With a market capitalization of $9.1 billion, Toast is among smaller companies, but its more than $514 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

It was great to see Toast improve its gross margin this quarter. That really stood out as a positive in these results, alongside with cash flow turning positive year on year. On the other hand, its revenue guidance underwhelmed. Overall, the results could have been better. The company is down 13% on the results and currently trades at $15.01 per share.

The author has no position in any of the stocks mentioned in this report.