Toast Inc. (TOST, Financial) is an American company that offers cloud-based digital technology platform solutions for the restaurant industry.
At the core of the company's success is its all-in-one point-of-sale system, which is designed to harness the power of Android devices. This integration goes beyond mere transactions by seamlessly connecting every facet of restaurant management, from streamlining online orders and managing deliveries to overseeing payroll and running targeted marketing campaigns. The company’s software solutions are now used by a clientele spanning the United States and Ireland, with over 85,000 restaurants embracing its digital platform.
Growth
Toast recorded positive second-quarter financials that indicate it is inching toward profitability.
During the three months ended June 30, Toast’s annual recurring revenue surged to $1.1 billion, reflecting year-over-year growth of 45%. This marks the first time ARR eclipsed the $1 billion mark. Gross payment volume grew 38%, reaching $32.1 billion. This growth underscores the trust that restaurateurs place in Toast's integrated platform to manage transactions efficiently and securely.
Toast reported adjusted Ebitda of $15 million, a significant improvement from a loss of $33 million reported in the second quarter of 2022. The company also registered positive outcomes in terms of net cash from operating activities of $50 million and free cash flow of $39 million.
The company's expansive reach is also underscored by its growth in total locations, which increased 35% from a year ago to approximately 93,000. Notably, the second quarter has seen the addition of over 7,500 net new locations. This continued expansion in its network of clients reflects the widespread adoption and reliance on the company's comprehensive suite of tools even at a time when the restaurant industry is fighting inflationary pressures.
Strategic partnerships and new products
Beyond these financial milestones, Toast has continued to expand through strategic partnerships. The latest collaboration was with hospitality giant Marriott International Inc. (MAR, Financial), which led to the introduction of the groundbreaking Toast for Hotel Restaurants technology, designed to cater specifically to the unique requirements of hotel restaurant operators.
Its introduction into Marriott's select service hotels in the U.S. and Canada represents a significant step toward enhancing customer experiences and streamlining operational processes within the hospitality industry. One key aspect of Toast's appeal is its platform's adaptability to suit a wide range of restaurant sizes and styles. This adaptability played a pivotal role in securing the partnership, demonstrating its capacity to meet the hotel chain's differentiated service requirements.
These new product launches highlight how the company is building upon its scale to diversify into new market segments and product verticals after the successful introduction of its invoicing product last October.
Restaurant industry outlook and trends
According to Grand View Research, the global restaurant management software market was valued at $4.6 billion in 2022 and is expected to grow at a compounded annual rate of 16.3% through 2030. As the industry embraces technological advancements, Toast is well-positioned to grab market share with its product portfolio that spans various facets of the restaurant business.
One of the most striking trends in the restaurant industry is the increasing demand for smart food ordering. By leveraging technology for inventory management and vendor selection, restaurants could substantially reduce food waste by up to 80%. The appeal of automation becomes even more apparent as a significant portion (62%) of restaurants recognize its potential to address critical gaps in managing orders.
However, the true power of automation emerges when applied to inventory management. According to Square, 91% of restaurant operators acknowledge that automation surrounding inventory and item availability could streamline processes and bridge business gaps. This innovation not only simplifies operations, but can also yield promising results in boosting restaurant profits by up to 24% annually through accurate and timely inventory control.
Further, data-driven approaches are rapidly gaining traction, offering substantial advantages. Operators who embrace data-driven strategies witness 26 times more customers, are 6 times more likely to retain them and are 19 times more likely to achieve profitability. The importance of accurate inventory management is highlighted by the fact that 43% of operators consider it their most significant day-to-day challenge.
For restaurants with substantial annual sales that exceed $50 million, automation in the supply chain proves especially advantageous. By adopting the right software solutions, these companies can unlock potential savings ranging from $500,000 to $2 million annually, further demonstrating the transformative potential of technology in streamlining operations and driving financial efficiency.
Toast's role in the transformation of the restaurant industry
As automation takes center stage in the restaurant industry, Toast is emerging as a key player in helping restaurants transition to a more digitalized, connected future. During a recent earnings call, the company's management team provided a few examples of how it is doing so.
First, Tempo Urban Bistro has become a prime example of how Toast's comprehensive approach is revolutionizing restaurant operations. With nine modules spanning diverse product pillars, from the versatile Toast Go handhelds to streamlined Kitchen Display Systems and customer-engaging loyalty programs, the restaurant is using the power of automation to streamline every facet of its management.
Next, in the mid-market restaurant category, Ninety Nine Restaurant & Pub is leveraging Toast's technology across more than 90 locations. The strategic implementation of tools such as Toast Go handhelds and Kitchen Display Systems has elevated the experience for both guests and staff. Moreover, the strategic adoption of API integrations and multi-location management modules underscores the pivotal role the software plays in centralizing operations.
Another example is Slab BBQ & Beer, a multi-location barbecue joint that has been transformed with Toast’s systems. This partnership resulted in a 10-fold increase in Slab BBQ's annual recurring revenue.
From simplifying operations and enhancing guest experiences to facilitating substantial growth and efficiency gains, Toast appears to be at the forefront of transforming the restaurant industry landscape.
Future prospects
Toast's recent accomplishments are just the beginning of its promising journey ahead. With a total addressable market exceeding $110 billion on a global scale and a substantial $55 billion within the U.S. alone, the company still has a long runway to grow.
Conclusion
As the restaurant industry increasingly embraces automation, Toast is poised to harness these prevailing market trends to its advantage. The possibilities include smart food ordering, streamlined order and inventory management through automation and the transformative potential of data-driven strategies.
Although the company has yet to turn profitable, it is progressing nicely with cash flow metrics trending in the right direction. At a forward price-sales ratio of just over 3, Toast is not cheaply valued, but the company deserves to trade at premium multiples given double or triple-digit revenue growth recorded in each of the last 10 quarters.
