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Toast – serving a side order of profitability

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Innovation cash kings of the next decade - In this series we look at the standout companies that are ‘pivoting to profit’ and are at an inflection point of converting customer-driven innovation into shareholder value. In the next of this series, we take a closer look at Toast.

This is the sixth article in the series, you can read the other articles here:

Twilio  delivering the message on profitability

Airbnb: booking beds and profits

Shopify – the engine of ecommerce refocusing on its core

Uber's road to profitability

Atlassian – fostering collaboration and cashflow

Running a restaurant is no cakewalk, fraught with hefty fixed costs, wafer-thin margins, fickle customers, and high staff turnover. Efficiency challenges add spice to the mix: inventories are perishable, patrons are hungry, and food quality is often temperature dependent. Top it off with complex omnichannel management – servicing dine-in, takeout, and delivery customers simultaneously – and restaurateurs are faced with an operational ‘dogs breakfast’. It is little wonder that the shelf-life of a restaurant is typically short (nearly a third of restaurants shut shop each year), nor that software developers have had little taste for the space: volatile demand, low margins, and high churn are not ideal ingredients for developers seeking dependable, repeat customer contracts. As a result, the restaurant industry has long remained underserved from a digital penetration perspective.


Enter Toast –a cloud-based vertical market software platform with the restaurant business as its bread and butter. Toast provides a single end-to-end platform of hardware, SaaS products and financial technology solutions that give restaurants all the tools they need for running their business in one place. Its cloud-based platform spans point-of-sale, operations, finance, supply chain management, and much more, and is importantly easy to use, reliable, and flexible, integrating well with third-party APIs (think Uber Eats or Deliveroo). Toast’s operating system acts as the “brain” of the restaurant across all service channels, generating significant value for restaurateurs by streamlining operations, unlocking efficiency bottlenecks, enhancing guest experiences, and ultimately improving volumes.


Toast is able to dine out on this value creation too. A majority of Toast’s revenues stem from repeat transactions such as payments (taking a clip of each payment through one of their terminals) and SaaS (paid on a monthly basis); more efficient, profitable, and financially robust restaurateurs means increased lifetime contract values for Toast. Additionally, by offering a range of bolt-on solutions across its all-in-one platform Toast is able to capture a growing share of restaurant spend via targeted sales efforts. This expansion helps further entrench Toast across restaurant operations, creating switching costs which help Toast mitigate the long-standing issue of industry churn. Further, Toast’s narrow industry focus and deep customer relationships generate significant internal IP, increasing with scale and enabling continued targeted innovation. All of these factors mean that Toast is able to grow hand-in-hand with customers, supporting powerful network effects in an industry where word-of-mouth is a key driver of digital adoption and platform choice.


The market opportunity for Toast is appetising. To date Toast has primarily targeted the SMB end of the spectrum in the US where it is the dominant player used in over 90,000 restaurants nationwide. The real opportunity, however, remains in increasing market penetration, with restaurants still drastically under-spending on software compared to other industry verticals (only around 3% of sales as of 2019). Management sees a potential addressable market of $55 billion in the US alone, and over $110 billion globally, of which it has tapped a mere $1.1 billion in annualised recurring revenues as of its latest update. It is understandable, then, that to date Toast has primarily been focused on investing for growth, including a notable recent expansion into the enterprise market thanks to a sizeable contract win with Mariott Hotels. However, as with other names that we have covered in this series, this is not a “growth at all costs” story, and Toast is currently transitioning towards a more profitable business model.


Toast has already served up a profitability entree, positing positive adjusted EBITDA and free cash flow in its latest quarterly update. This is not a simple flash in the pan, with the company expecting 2023 to be its first full year in the black. However, this transition hasn't so much been a radical pivot but more a slight tweak to its operating recipe, with the company placing renewed emphasis on cost discipline and operational efficiency, allowing gross margins to expand alongside revenues. Indeed, its recent profitable shift is largely due to continued growth in recurring revenues from its maturing installed base. Gross payment volumes via its terminals continue to climb, and the company is increasingly capturing more share of customer wallets with 43% of customer locations now using six or more elective Toast products.


Importantly, however, Toast is keeping the burners on, and its shift to profitability has not come at the expense of future growth. R&D continues to scale with revenues, and management has maintained targeted sales and marketing efforts. As a result, the top of its customer funnel remains healthy, with the company adding a record net 7,500 locations in the most recent quarter. As the company scales, its growth flywheel is starting to whip into gear, and network effects are increasingly evident – three quarters of its latest new adds came from inbound customer queries, and one fifth from direct customer peer recommendations. This improving growth algorithm means the company is better positioned than ever to focus on product-led growth and efficient sales and marketing efforts – all in all making a much more profitable recipe for future success.

Understand common financial words and terms See our glossary

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

The Funds managed by the Global Innovation Team:

May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on a Fund's value than if it held a larger number of investments. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. The risks detailed above are reflective of the full range of Funds managed by the Global Innovation Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.


This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

James O'Connor
James O'Connor
James is a fund manager of the Liontrust Global Innovation, Liontrust Global Dividend and Liontrust Global Technology funds. He joined the team in 2023 and is a fund manager with 9 years of industry experience, having previously worked in global equities at Neptune Investment Management and Liontrust. James holds an MSc in education research from Oxford University and the equivalent of a first class A.B. degree in psychology and economics from Harvard University and is a CFA Charterholder. He also currently plays for the England men’s national team in netball.

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