Toast (TOST -2.26%) is a leading provider of financial technology services for businesses in the restaurant industry. The business is growing rapidly and still seems to have a long runway for expansion, but some of its business segments are carrying a lot more weight on the profitability front than others.
In the second quarter, Toast’s revenue grew 23% to reach roughly $1.91 billion. Meanwhile, the business posted net income of $154 million in the period — good for a margin of roughly 80.7%. The company’s payments business once again did the heavy lifting in driving profits, but the picture is also more nuanced.
Image source: Getty Images.
Payments is Toast’s biggest draw, but it has other strengths
In the second quarter, the financial technology solutions segment that includes Toast’s payments business accounted for $1.57 billion of its overall sales in the period — roughly 82.2% of the total pie. While the segment’s total cost of revenue accounted for roughly $1.21 billion of the total $1.39 billion cost of sales in the quarter, it was still central to the business’s gross profit of roughly $516 million in the quarter.
Notably, the company’s hardware and professional services segment had a substantially negative gross margin in Q2. While the unit posted revenue of roughly $48 million in the period, it had a cost of revenue of $116 million — and that doesn’t factor in operating expenses for the segment.
Meanwhile, the company’s subscription services segment posted revenue of roughly $290 million and had a cost of revenue of just $64 million. In other words, the subscriptions business was a net positive contributor of $226 million in gross profit for the quarter. On a gross margin basis, the subscription services business is by far Toast’s most profitable.
Today’s Change
(-2.26%) $-0.72
Current Price
$31.12
Key Data Points
Market Cap
Day’s Range
$30.89 – $31.98
52wk Range
$22.26 – $42.15
Volume
8M
Avg Vol
11M
Gross Margin
26.68%
On the other hand, the payments-focused financial technology solutions unit is the linchpin of the company’s business model and accounts for the large majority of sales. The segment delivered a gross profit of roughly $360 million in the quarter.
The payments business holds Toast’s business together. While the hardware business is posting negative gross margins, that shouldn’t be surprising or concerning. By selling its payments and restaurant management hardware at a loss, the company is able to get the devices into the hands of customers who then use services with much higher margins.
Subscription services are notably much higher-margin than the payments-focused financial technology solutions segment. As Toast brings more customers on board through the core offering of its payment solutions, it has opportunities to acquire more clients for its subscription services and boost its overall margins substantially.
