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October 27, 2021
Toast Inc. (the “Company”) is a cloud-based, end-to-end technology platform purpose-built for the entire restaurant community. Its platform provides a suite of SaaS products, financial technology solutions including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. It serves as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels. Founded in 2010, the company raised c.$870m in its initial public offering on the New York Stock Exchange on September 22, 2021.
The Company is disrupting the legacy market of the restaurant industry with a solution addressing the needs of “mom-and-pop” restaurants as well as larger regional, national and global restaurant chains. As of June 30, 2021, approximately 48k restaurant locations across 29k customers, processing over $38 billion of gross payment volume (“GPV”) in the trailing 12 months, partnered with the Company to optimize operations, increase sales, engage guests, and maintain the happiness of employees. As a reminder, GPV represents the sum of total dollars processed through a payment platform across all restaurant locations in a given period.
The Company took a severe hit with COVID-19, but showed both support to the whole restaurant community, and resilience as sales reached $704m over S1 2021 (vs. $344m in S1 2020). ARR reached $494m on June 30, 2021.
Except for marginal hardware and professional services sales (<9% of total FY20 revenue in total), the Company derives its revenue from its software. Software revenue includes a subscription part (c.12% of FY20 revenue), but the majority stems from the revenue derived from the payments operated through the platform (c.79% of FY20 revenue), captured through GPV, and considered as “usage MRR”. The Company has defined its ARR in what we view as interesting as it is not simply MRR*12. No, it starts by splitting its MRR into two components, the subscription part (easy) and the usage-based part derived from payments. It then states that its ARR is its subscription part MRR*12 and 4 times its trailing last 3 months payment MRR. There could be a discussion on that 3-month reference period however, and it will be interesting to watch new definitions that will arise in the coming months for software companies building more financial capabilities into their original applications.
In line with its revenue sources, mostly made up of commissions on the payments processed through the platform, the Company does not have the margin levels of your “traditional” SaaS company, with a gross margin of 17% in FY20! The Company’s scalability will derive from how it finds improved margin levels on the payment activity (the subscription margin is roughly in line with software standards, at c.65% of net sales, though there is room for improvement).
From a legal standpoint, the Company has strong intangible assets deriving from its IP portfolio, and notably from its patents which protect its technology.
Lastly, in light of its international expansion, the Company could face a challenge related to its data collection: Guest data is collected in mass (5.5 million orders a day), and the Company will have to anticipate the business consequences that could result from compliance with EU data protection regulations.
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