Toast Earnings: Net Restaurant Adds and Profitability Impress, but Software Sales Growth Slows

As we balance Toast’s TOST better-than-expected net new location additions (5,500, or 37% annual growth, ahead of our 4,700 estimate) with guidance for slowing growth in average revenue per unit in the software business, we expect to increase our $21.50 fair value estimate by a low-single-digit percentage. While this move is shy of the market’s mid-single-digit rally in afterhours trading, it reflects our already optimistic view of the firm’s near-term growth road map and potential to increase per-unit software revenue above $10,000, a benchmark that Toast says 10% of its restaurants have eclipsed today.

Narrow-moat Toast served up solid first-quarter results, with $819 million in sales and a $17 million adjusted EBITDA loss surpassing the top end of its expectations and our estimates of $760 million and a $23 million loss, respectively. We attribute a large portion of the outperformance to outsize growth in financial products revenue (54% versus our 39% estimate), which benefited from an easier comparable period and strong net unit growth. On the software side of the business, ARPU growth clocked in at 23%, a touch softer than our 24% estimate. Moderation is expected, at least partially offsetting unit growth momentum; we pencil in 14% growth for the full year (down from 20%), suggesting deceleration over the balance of the year. Our long-term forecasts for ARPU penetration are intact, suggesting that Toast captures 90 basis points of restaurant sales as software revenue in a decade, up from 40 basis points today.

Strong first-quarter results led management to raise its guidance for sales (up 4% at the midpoint) and adjusted EBITDA (breakeven at the midpoint, from a $20 million loss), ahead of our $3.6 billion and $18 million loss forecasts, respectively. We expect to raise our own figures into the guided range after digesting results.