Toast, Inc. Q3 FY2022 earnings

Toast closed the September 2022 quarter with revenue of $752 million, up 55% year over year, and nine-month revenue of $1,963 million, up 65%. Growth came from more live locations and deeper product adoption at existing customers. Subscription services and financial technology solutions carried the top line, while hardware revenue declined as Toast kept pricing competitive to win new locations. Gross payment volume reached $25.2 billion in the quarter, up 53%, and $66.3 billion for the nine months, up 66%. Annualized recurring run-rate was $868 million at September 30, up 60%, and total locations grew more than 40% to roughly 74,000.

Gross profit of $151 million rose 82%, and quarterly gross margin improved 3.0 percentage points to 20.1%. The longer view is less flattering. Nine-month gross margin was 18.0%, down 2.2 percentage points, weighed down by hardware and professional services costs that management describes as customer acquisition tools rather than profit centers. Toast still has work to do before the margin profile resembles a mature software business.

Operating loss of $85 million widened from a loss of $55 million in the prior-year quarter, and operating margin was flat at -11.3%. Spending explains the gap. Sales and marketing expenses rose 50%, research and development rose 85%, and general and administrative rose 86%, each driven by headcount. The nine-month operating loss widened to $285 million. The tension in the story is clear: the business is buying growth, and the cost base is expanding faster than gross profit.

Net loss of $98 million narrowed from a loss of $254 million a year earlier, and diluted loss per share narrowed to $0.19 from $1.06. The nine-month net loss of $175 million was narrower than the $488 million loss in the prior-year period. Most of that improvement came from a much smaller non-cash charge on warrant liabilities, not from operations. The operating loss line tells the more useful story.

Cash is the soft spot. Net cash used in operating activities was $69 million in the quarter, against $18 million a year earlier. Free cash flow, which also subtracts purchases of property and equipment and capitalized software, was -$80 million versus -$22 million. Capital expenditures for the quarter were $6 million. Net cash used in operating activities for the nine months was $137 million, a reversal from cash generation a year earlier. The balance sheet still has room to maneuver; nothing was drawn on the $330 million revolving facility, which carries a minimum liquidity covenant of $250 million.

Forward commitments deserve attention as well. Operating lease commitments totaled $116 million and purchase commitments $243 million, with most of the latter due in 2022 and 2023. Deferred revenue of $48 million was down 20% year over year, while remaining performance obligations of $455 million were up 29.2%, a reminder that billing timing and contract duration can pull those two measures apart.

Guidance looks steady. For the fourth quarter, management guided to Adjusted EBITDA of -$30 million to -$20 million. For the full fiscal year, it raised its revenue outlook and improved Adjusted EBITDA guidance to -$127 million to -$117 million from -$160 million to -$140 million. Adjusted EBITDA was -$19 million in the quarter.

Management flagged the same macro risks that dominate restaurant operator sentiment: inflation, rising interest rates, supply chain disruption and COVID-19. The company's own survey found one in three restaurants struggled to hire in 2022 and nearly 40% had started tracking key ingredient prices. Those pressures land on Toast's customers first, and they show up in hardware softness, credit costs, and the pace of new location additions.