The growing hardware bill behind Toast's stronger profit

Toast nearly doubled quarterly operating profit as more restaurants and retailers joined its platform. The equipment side of the business is taking a larger share of the improvement.

Hardware and professional services produced an $85 million gross loss in the September quarter, up from $57 million a year earlier. Those costs sit alongside a much more profitable software and payments business.

Research by Ticker Byline shows that the extra $28 million loss absorbed one-fifth of the $140 million increase in gross profit from subscriptions and financial technology. Toast still grew operating income to $165 million from $84 million.

More locations, with a larger equipment bill

Toast added about 8,500 net locations, bringing the total to approximately 189,000. Payment volume rose 20% to $61.8 billion, while total company revenue increased 21% to $1.98 billion.

Subscriptions and financial technology generated $630 million of GAAP gross profit, against $490 million a year earlier. That is the money left from those services after their direct costs, before the company's selling, research and administrative expenses.

The hardware and professional-services category moved differently. Revenue barely changed, at $45 million against $44 million, while costs rose to $130 million from $101 million. That left a larger loss for the recurring businesses to cover.

The overall business remained more profitable: net income rose to $169 million from $105 million. Quarterly operating cash flow also increased 20% to $198 million.

Most of the forecast increase is already earned

Toast raised its annual adjusted EBITDA forecast to $840 million to $850 million from August's $805 million to $825 million. That profit measure removes interest, taxes, depreciation, amortization, stock compensation and selected other items.

Our comparison shows that the $25 million beat against its earlier Q3 midpoint accounts for most of the $30 million annual midpoint increase. The new fourth-quarter midpoint is $205 million, just $5 million above the amount implied by August's annual plan.

The updated forecast therefore builds mainly on a stronger quarter already delivered. It also calls for year-over-year growth in adjusted subscription and financial-technology gross profit during Q4.

Growth has cash demands too

The quarter's better cash generation follows a weaker first half. Over the first nine months, operating cash flow edged up to $474 million from $467 million, while net income rose to $449 million from $241 million.

Inventory used $131 million of cash, compared with a $14 million inflow last year. Deferred customer-acquisition costs used another $148 million, up from $109 million. These were two contributors to the gap between profit growth and cash growth.

Cash and investments nevertheless rose by $172 million from June to $1.89 billion. The next operating test is whether recurring profits can keep outpacing the hardware bill as Toast expands. The Toast company profile tracks those margins, the cash commitments and the updated forecast.