$TOST: $685Milly IPO today
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IPO Update: Toast Proposes Terms For $685 Million IPO
Sep. 15, 2021 2:21 PM ETToast, Inc. (TOST)2 Likes
Summary
Toast has filed to raise $685 million in an IPO of its Class A common stock.
The firm provides an integrated software solution to restaurants.
TOST has grown sharply during the pandemic and the IPO appears reasonably valued, so is worth a close look.
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customer contactless payment for drink with mobile phon at cafe counter bar,seller coffee shop accept payment by mobile.new normal lifestyle concept
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Quick Take
Toast (TOST) has filed to raise $685 million from the sale of its Class A common stock in an IPO, according to an amended registration statement.
The company offers restaurant payment and management software in the United States and other countries.
TOST’s IPO valuation expectations appear reasonable given its strong top line revenue growth rate, so the IPO is worth consideration.
Company & Technology
Boston, Massachusetts-based Toast was founded to develop a SaaS platform to process payments for restaurants via a mobile app, hardware system, and third-party providers.
Management is headed by Chief Executive Officer Christopher P. Comparato, who has been with the firm since February 2015 and was previously head of Customer Success at Acquia and Endeca Technologies.
Below is a brief overview video of how the system works:
(Source)
The company’s primary offerings include:
Point of sale
Restaurant operations
Digital ordering & delivery
Marketing & loyalty
Team management
Toast has received at least $849 million in equity investment from investors including Bessemer Venture Partners, T. Rowe Price Funds, TCV (Technology Crossover Ventures), Technology Investment Dining Group, and Tiger Global.
Customer/User Acquisition
The firm pursues relationships with medium and large restaurant operators through its direct sales force.
The company has four primary revenue streams:
Subscription services
Financial technology solutions
Hardware
Professional services
Sales and Marketing expenses as a percentage of total revenue have dropped materially as revenues have increased, as the figures below indicate:
Sales and Marketing
Expenses vs. Revenue
Period
Percentage
Six Mos. Ended June 30, 2021
10.5%
2020
16.9%
2019
19.4%
(Source)
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose sharply in the most recent reporting period, as shown in the table below:
Sales and Marketing
Efficiency Rate
Period
Multiple
Six Mos. Ended June 30, 2021
4.9
2020
1.1
(Source)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
TOST’s most recent calculation was 97% for the six months ended June 30, 2021, so the firm has performed extremely well in this regard, per the table below:
Rule of 40
Calculation
Recent Rev. Growth %
105%
EBITDA %
-8%
Total
97%
(Source)
The firm’s dollar-based net revenue retention rate for the year ended June 30, 2021 was 110%, a solid result.
The dollar-based net revenue retention rate metric measures how much additional revenue is generated over time from each cohort of customers, so that a figure over 100% means that the company is generating more revenue from the same customer cohort over time, indicating good product/market fit and efficient sales and marketing efforts.
Market & Competition
According to a 2018 market research report by Grand View Research, the global restaurant management software market is forecast to reach nearly $7 billion by 2025.
This represents a forecast CAGR of 14.6% from 2019 to 2025.
The main drivers for this expected growth are a growing awareness by restaurant operators of the benefits of increased efficiencies from software systems.
Also, the COVID-19 pandemic will bring forward significant demand for integrated restaurant management systems in order to streamline processes while providing restaurant services in a more omnichannel approach to customers.
Major competitive or other industry participants include:
Square (NYSE:SQ)
TouchBistro
Clover Network
Lightspeed POS (NASDAQ:LSPD)
Oracle/MICROS (NYSE:ORCL)
NCR (NYSE:NCR)
PAR Technology (NYSE:PAR)
Heartland Payment Systems
Shift4 Payments (NYSE:FOUR)
Fiserv (NASDAQ:FISV)
FreedomPay
Olo (NYSE:OLO)
Others
Financial Performance
Toast’s recent financial results can be summarized as follows:
Sharply higher top line revenue growth
Increasing gross profit and gross margin
Fluctuating and high operating losses
Dropping negative operating margin
A swing to positive cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue
Period
Total Revenue
% Variance vs. Prior
Six Mos. Ended June 30, 2021
$ 703,748,000
104.7%
2020
$ 823,134,000
23.8%
2019
$ 665,029,000
Gross Profit (Loss)
Period
Gross Profit (Loss)
% Variance vs. Prior
Six Mos. Ended June 30, 2021
$ 154,774,000
244.0%
2020
$ 140,413,000
125.2%
2019
$ 62,349,000
Gross Margin
Period
Gross Margin
Six Mos. Ended June 30, 2021
21.99%
2020
17.06%
2019
9.38%
Operating Profit (Loss)
Period
Operating Profit (Loss)
Operating Margin
Six Mos. Ended June 30, 2021
$ (56,824,000)
-8.1%
2020
$ (220,147,000)
-26.7%
2019
$ (213,367,000)
-32.1%
Net Income (Loss)
Period
Net Income (Loss)
Six Mos. Ended June 30, 2021
$ (234,650,000)
2020
$ (249,015,000)
2019
$ (209,448,000)
Cash Flow From Operations
Period
Cash Flow From Operations
Six Mos. Ended June 30, 2021
$ 51,218,000
2020
$ (124,633,000)
2019
$ (126,483,000)
(Glossary Of Terms)
(Source)
As of June 30, 2021, Toast had $376.1 million in cash and $462.4 million in total liabilities.
Free cash flow during the twelve months ended June 30, 2021, was $7.0 million.
IPO Details
TOST intends to sell 21.7 million shares of Class A common stock at a proposed midpoint price of $31.50 per share for gross proceeds of approximately $685 million, not including the sale of customary underwriter options.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Class A common stockholders will receive one vote per share and Class B stockholders will receive ten votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (ex-underwriter options) would approximate $14.7 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 4.35%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.
Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.
(Source)
Management’s presentation of the company roadshow is available here.
Regarding outstanding legal proceedings, management said it is not a party to any legal proceeding that would have a material effect on its operations or financial condition.
Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, J.P. Morgan, and other investment banks.
Valuation Metrics
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
Measure [TTM]
Amount
Market Capitalization at IPO
$15,728,979,452
Enterprise Value
$14,708,887,452
Price / Sales
13.30
EV / Revenue
12.43
EV / EBITDA
-96.52
Earnings Per Share
-$0.71
Float To Outstanding Shares Ratio
4.35%
Proposed IPO Midpoint Price per Share
$31.50
Net Free Cash Flow
$7,001,000
Free Cash Flow Yield Per Share
0.04%
Revenue Growth Rate
104.67%
(Glossary Of Terms)
(Source)
As a reference, a potential public comparable would be Olo (OLO); shown below is a comparison of their primary valuation metrics:
Metric
Olo (OLO)
Toast (TOST)
Variance
Price / Sales
10.21
13.30
30.2%
EV / Revenue
34.06
12.43
-63.5%
EV / EBITDA
-197.26
-96.52
-51.1%
Earnings Per Share
-$0.73
-$0.71
-2.1%
Revenue Growth Rate
94.2%
104.67%
11.16%
(Glossary Of Terms)
(S-1/A and Seeking Alpha)
Commentary
TOST is going public to provide a public market for its stock and for its future unspecified corporate expansion initiatives.
TOST’s financials show significantly higher top line revenue growth, growing gross profit and gross margin, high and variable operating losses, lowered negative operating margin but a swing to positive cash flow from operations.
Free cash flow for the twelve months ended June 30, 2021 was only $7.0 million.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenue has increased and its Sales and Marketing efficiency rate rose sharply to 4.9x in the most recent six-month reporting period.
The firm’s Rule of 40 performance has been impressive, at 97%, and its current dollar-based net retention rate was 110%, a solid result.
The market opportunity for providing restaurant software is large and expected to grow substantially in the coming years as the restaurant industry modernizes in the wake of the COVID-19 pandemic’s negative effects on its in-store dining business.
Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 37.3% since their IPO. This is a mid-tier performance for all major underwriters during the period.
The primary risk to the company’s outlook is consumer behavior shifting back toward in-restaurant dining from online ordering and delivery, reducing activity for these behaviors as the effects of the pandemic wane.
As for valuation, compared to competitor Olo, TOST’s IPO valuation expectations appear reasonable given its higher top line revenue growth rate, so the IPO is worth consideration.
Expected IPO Pricing Date: September 21, 2021.
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This article was written by
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Donovan Jones
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investing in IPOs is an inherently volatile and opaque endeavor. My research is focused on identifying quality IPO companies at a reasonable price, but I’m wrong sometimes. I analyze fundamental company performance and my conclusions may not be relevant for first-day or early IPO trading activity, which can be highly volatile and unrelated to company fundamentals. This report is intended for educational purposes only and is not financial, legal or investment advice.
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