Toast Inc., an end-to-end restaurant payments and software-as-a-service (Saas) platform serving the restaurant industry, is doubling down on its strategic investing to drive its market share, according to CFO Elena Gomez.
The company is staying its course amid a cloud-computing company sell-off since November, market volatility in the wake of Russia’s invasion of Ukraine and its own lower gross margins. The margins declined to 15.9% for the fourth quarter in earnings reported Feb. 15, from 18.2%, in the year-earlier period, according to a research report from the financial firm Piper Sandler.
Toast’s shares are trading in the $20 range, down from the $40s in September when it had one of the largest IPOs of the year in the restaurant technology space. Initially, it snared a market valuation of about $20 billion, but that has since dropped to about half that value.
Gomez, who believes weathering various market backdrops is an opportunity for a CFO to demonstrate leadership, said she will focus on what she can control, which is executing the growth plan.
“We had a moment where we could have made a different decision or even said, ‘Hey, look, given the market background maybe we should do something differently,’" Gomez told CFO Dive. Instead it has opted to “lean into this investment, because we’re in the early innings of this massive opportunity.”
The company, which has about 7% of the sector's U.S. market share, will invest in research and development, sales and international expansion, Toast executives said on the February earnings call. Gomez said that investments would be centered around hiring sales reps and engineers to continue adding to new services like its Toast Go devices that help restaurant employees turn tables faster.
Piper Sandler Analyst Brent Bracelin estimates that Toast will increase its capital expenditures, including purchases of property and equipment and capitalized software, to $47 million this year, up from $19 million last year and $36 million in 2020. The company did not provide guidance on 2022 capital expenditures.
The long game
The growth strategy involves calculated trade-offs of some short-term costs for the long-term gain of bringing more restaurants onto its end-to-end platform at a time when the pandemic has accelerated the industry’s move to digitalization. The platform includes front of the house payments systems that diners use as well as back of the house payment processing and payroll management.
“If we had decided now is not the time, obviously we would have had a different margin profile, but we want to go after this opportunity to sustain growth for the long-term,” Gomez said. On the fourth quarter earnings call, Gomez said the company expects an adjusted EBITDA loss of $200 million to $240 million in 2022 on a year-over-year revenue rise of about 48% to between $2.3 billion to $2.4 billion.
Bracelin said investments might not be popular with some sector investors who have grown more bearish in recent months. The cloud software sector has slumped since November, partly on concern about the outsized impact that rising interest rates could have on companies in the sector which aren’t yet making any money.
But Bracelin said the strategy makes sense given that the company has more than ample cash to invest in growing the business to become what he forecasts could be an $8 billion revenue operation over the next five years. “We need businesses to focus on the right things to grow,” he said. “Optimizing for the near term to me would be a red flag for a leadership team.”
Gomez, who was previously CFO at SaaS company Zendesk as well as a senior vice president of finance and strategy at Salesforce, took over as Toast’s finance chief just months before its planned IPO last year.
Her background is a good fit for the company given that software is one of the fastest growing areas of Toast’s business, according to Bracelin, who notes that she also has a good handle on how to put enterprise controls and business processes into fast-growing companies.
'Paint the picture with numbers'
For Gomez, joining a company midstream as it prepared to go public was not a decision she made lightly. But she was drawn to what she saw as a big market opportunity at what she called a mission-based company with strong management. Once on board, she quickly began taking steps inside and outside the company to smooth the way to the IPO, including by developing a strong narrative to share with investors, analysts and other stakeholders.
“As CFO, it’s my role to make sure I take the strategy and paint the picture with numbers,” she said, adding that she sought to differentiate Toast from competitors by emphasizing that it was purpose-built for restaurants and to make the value case that it brings efficiencies to restaurants in a rising cost environment. The company faces growing competition from rivals, ranging from San Francisco-based Square to Toronto-based TouchBistro.
Her job was made a little easier because some of the investors had already been involved in prior funding rounds and knew the company’s story. Still, the scale of the operations was a surprise for some, albeit a pleasant one, she said. Indeed, the pace of growth has been brisk: in the fourth quarter the number of restaurant locations it serves rose by 41% year-over-year to 57,000 and revenue more than doubled to $512 million.
At the same time, Gomez had a narrow window to expand the company's finance team to prepare for the IPO and beyond. To do that, she first took an inventory of the team and then parsed out what changes were critical over the short and long term, she said.
Ultimately, the unit of roughly 50 to 60 employees has grown to over 100 employees. She saw the need for a chief accounting officer and tapped Michael Matlock from Ernst & Young to take on the position while also building out the financial planning and analysis team, which was critical, she said.
The hybrid nature of Toast, which views itself as both a fintech and a SaaS business, made the hiring a little more complex. She was looking for people who had familiarity with business models and public companies to build a team that could deliver on the company's short-term and long-term goals.