Toast, Inc. Q3 FY2024 earnings

Toast reported $1.30 billion of revenue for the quarter ended September 30, 2024, up 26.5% from the prior-year quarter, while gross payment volume rose 24% to $41.7 billion. The company added roughly 7,000 net new locations and ended the period with nearly 127,000 locations, up 28% year over year. Annualized recurring run-rate reached $1.6 billion as of September 30, 2024, up 28%, split between $774 million of payments ARR and $780 million of subscription ARR. Those locations processed about $151 billion of gross payment volume over the trailing 12 months. Growth came from across the platform rather than one product line.

Profitability improved faster than the top line. Gross profit was $322 million, up 42.5%, and gross margin was 24.7%, up 2.8 percentage points. Non-GAAP subscription services and financial technology solutions gross profit, which Toast treats as its recurring gross profit streams, rose 35% to $378 million. Operating income was $34 million, a swing to a profit from the prior-year quarter, and operating margin was 2.6%, up 8.3 percentage points. Net income was $56 million, also a swing to a profit, and diluted EPS was $0.07. Adjusted EBITDA was $113 million.

Year to date, revenue was $3.62 billion, up 28.0%. The operating loss narrowed to $16 million, the net loss narrowed to $13 million, and diluted EPS was -$0.02.

Cash generation accelerated. Net cash provided by operating activities was $109 million for the quarter, up 127.1%, and capital expenditures were $12 million, up 20.0%. Free cash flow, a non-GAAP measure, was $97 million. Year to date, operating cash flow was $213 million, up 395.3%, and capital expenditures were $41 million, up 32.3%. The balance sheet held $761 million of cash and cash equivalents and $511 million of marketable securities at September 30, 2024, or $1,272 million combined, alongside a $330 million credit facility with nothing drawn. Deferred revenue was $64 million, up 23.1%, and remaining performance obligations were $783 million, up 26.9%. Toast spent $61 million to repurchase warrants and $56 million to buy back about 2 million Class A shares during the first nine months of the year.

Guidance points to a lower profit level in the near term. For the fourth quarter, Toast expects non-GAAP subscription services and financial technology solutions gross profit of $370 million to $380 million, or 32% to 35% growth against the fourth quarter of 2023, and Adjusted EBITDA of $90 million to $100 million. For the full year 2024, the company guides to non-GAAP subscription services and financial technology solutions gross profit of $1,395 million to $1,405 million, 32% to 33% growth versus 2023 and up from a prior 27% to 29% range, with Adjusted EBITDA of $352 million to $362 million, up from $285 million to $305 million. Toast does not reconcile these forward-looking non-GAAP measures to GAAP, citing items such as stock-based compensation and changes in the fair value of its warrant liability that are difficult to forecast.

Several items deserve attention. Stock-based compensation expense and related payroll tax was $61 million in the quarter, a recurring cost excluded from Adjusted EBITDA. Restructuring and restructuring-related expenses totaled $46 million in the first nine months under the February 2024 plan, including $32 million of severance and $12 million of accelerated stock-based compensation. The warrant liability moved the wrong way, with a $1 million charge in the quarter and a $37 million charge year to date. Hardware and professional services gross profit stayed negative even on a non-GAAP basis, at negative $36 million. Toast also notes that financial technology solutions revenue per processing location has historically been stronger in the second and third quarters, so the fourth-quarter outlook carries seasonal risk. Product momentum this fall included a Branded Mobile App and SMS Marketing. In the company's survey of restaurant decision makers, 28% said they hope to open a new location in the next 12 months, and about 40% said they are very likely to adopt AI for tasks such as pricing and menu optimization.