Stock Story -
Restaurant software platform Toast (NYSE:TOST) beat analysts' expectations in Q2 CY2024, with revenue up 27% year on year to $1.24 billion. It made a GAAP profit of $0.02 per share, improving from its loss of $0.19 per share in the same quarter last year.
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Toast (TOST) Q2 CY2024 Highlights:
- Revenue: $1.24 billion vs analyst estimates of $1.22 billion (1.7% beat)
- EPS: $0.02 vs analyst estimates of -$0.02 ($0.04 beat)
- EBITDA guidance for the full year is $295 million at the midpoint, above analyst estimates of $267.1 million
- Gross Margin (GAAP): 23%, up from 21.4% in the same quarter last year
- Free Cash Flow of $108 million is up from -$33 million in the previous quarter
- Annual Recurring Revenue: $1.47 billion at quarter end, up 29.2% year on year
- Market Capitalization: $13.28 billion
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:MSFT), Oracle (NYSE:ORCL), and Salesforce.com (NYSE:CRM). 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 GrowthAs you can see below, Toast's revenue growth has been incredible over the last three years, growing from $424.7 million in Q2 2021 to $1.24 billion this quarter.
This quarter, Toast's quarterly revenue was once again up a very solid 27% year on year. On top of that, its revenue increased $167 million quarter on quarter, a very strong improvement from the $39 million increase in Q1 CY2024. This is a sign of re-acceleration of growth and great to see.
Looking ahead, analysts covering the company were expecting sales to grow 23.9% over the next 12 months before the earnings results announcement.
Cash Is KingAlthough earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Toast has shown weak cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.4%, subpar for a software business.
Toast's free cash flow clocked in at $108 million in Q2, equivalent to a 8.7% margin. This quarter's result was good as its margin was 4.7 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.
Over the next year, analysts predict Toast's cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 4.4% for the last 12 months will increase to 5.7%, giving it more optionality.
Key Takeaways from Toast's Q2 Results It was encouraging to see Toast top analysts' revenue and EPS expectations this quarter. We were also glad it raised its full-year EBITDA guidance. Zooming out, we think this was a solid quarter, showing the company is staying on target. The market was likely expecting more, and the stock traded down 3.8% to $23.25 immediately following the results.
