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IPOs 2021: Analysis of Toast’s xtraCHEF Acquisition

Posted on Monday, Nov 15th 2021
restaurant management toast

There are 22 million restaurant locations globally generating more than $2.6 trillion in annual sales in 2021. Within the US, there are approximately 860,000 restaurant locations. US restaurants generated nearly $700 billion in sales last year and are expected to grow to $1.1 trillion by 2024. Recently listed Toast (NYSE: TOST) is helping adapt the restaurant industry to the digital world.

Toast’s Offerings

Founded in 2011 by Aman Narang, Jonathan Grimm, and Steve Fredette, Boston-based Toast was set up to make restaurant work simpler. They wanted to build a technology platform focused on the restaurant industry because they felt that the industry wasn’t benefiting from digital innovation. Initially, Toast was set up to build a mobile app that could streamline the payment experience at restaurants. Their initial attempts at solving the problem failed because they found it difficult to integrate with legacy systems, and they did not realize the challenges of running a restaurant – such as perpetually low-profit margins, higher failure rates, and high employee turnover.

The founders then engaged with restaurant operators directly to understand how the existing on-premise point of sale systems and the ecosystem of disconnected point solutions were making it difficult for restaurant technology to innovate. They then launched Toast, an all-in-one point-of-sale and restaurant management platform. As a cloud-based system built solely for restaurants, it provides advanced functionality such as tableside ordering, quick menu modifications, real-time enterprise reporting, online ordering, and labor management, all through an easy-to-use interface. 

Even today, many restaurants run on a combination of legacy on-premise technology, commodity payment processors, phoned-in takeout orders, and paper invoices. Today, Toast has 48,000 restaurant locations across approximately 29,000 customers on its platform. By listening to the restaurateurs, and by hiring from the restaurant industry itself, Toast believes that it has built a solution that truly understands how to help the industry.

Toast’s Financials

Toast has seen strong growth since its founding. As of June this year, they had 47,942 locations on its platform, growing from 33,129 as of June last year. Its gross payment volume (GPV) grew 17% over the year from $21.8 billion in the year ended December 2019 to $25.4 billion in the year ended December 2020. For the six months ended June 2021, GPV grew 125% over the year to $23.4 billion.

Toast generates revenues through four main revenue streams: subscription services, financial technology solutions, hardware, and professional services. For fiscal 2020, its revenues grew 24% to $823 million, ARR grew 77% to $326 million, and losses were $248 million, up from $209 million reported a year ago.

Toast recently reported its third-quarter earnings. Revenues grew 105% to $486.4 million. ARR grew 77% to $543.8 million, and GPV increased 123% to $16.5 billion.

By segment, subscription service revenues grew 67% to $45.8 million, financial technology solution revenues grew 138% to $404.22 million, and hardware revenues grew 71% to $31.05 million. Professional service revenues grew 76% to $5.3 million. Net loss was $252 million compared with $62 million a year ago. Loss per share increased from $0.31 to $1.05.

For the fourth quarter, Toast forecasts revenues between $465-$495 million. It also expects revenues between $1.655-$1.685 billion for the current fiscal year.

Toast’s Acquisition

Toast recently announced the acquisition of New York-based xtraCHEF. Founded in 2015 by Andy Schwartz, Bhavik Patel, and Chaz Brown, the company is a cloud-based restaurant management platform that provides finance and operations teams with the tools and insights to improve productivity and profits.

Prior to the acquisition, xtraCHEF raised $10.5 million in two rounds of funding led by MVP Capital, Laconia, ValueStream Ventures, RTP Seed, Connectivity Ventures Fund, Ben Franklin Technology Partners, and The Howard Sukonick Investment Group. Terms of the acquisition were not disclosed.

The acquisition will allow xtraCHEF to combine its line item level cost data with Toast’s sales data to get insights into profitability by menu item. It will provide restaurateurs with access to automation and intelligence tools that streamline repeatable tasks such as bookkeeping, managing inventory, and tracking margins. Toast will be able to extend its end-to-end product ecosystem to allow the industry to create better restaurants and connections with customers and suppliers.

Toast does have a significant competition to deal with. Companies like Square offer a widely acceptable PoS for the restaurant industry. Then there are players like POSist that, unlike Toast, has an international presence for its restaurant automation industry.

Toast went public in September this year. It raised $870 million through its IPO by selling stock at a list price of $40 and was valued at $20 billion. It is currently trading at $48.36 with a market capitalization of $24.29 billion.

Prior to going public, it had raised $902 million in seven rounds of funding. The most recent round was held in February 2020 when it raised $400 million.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.

Photo Credit: StockSnap from Pixabay

This segment is a part in the series : IPOs 2021

. DigitalOcean Goes Public with a Strong ISV PaaS Strategy
. Upstart Expands into Auto Loans Through Prodigy Acquisition
. AppLovin Fails to Woo the Market
. Can Newly Public Squarespace Compete with Wix?
. Analysis of UiPath's Cloud Elements Acquisition
. Duolingo's Monetization Rates Remain Unimpressive
. Udemy Targets $223 Billion Market Opportunity
. Robinhood Makes it Easier for All to Invest
. Confluent Addresses $91B Market Opportunity
. SentinelOne Targets $40 Billion Market Opportunity
. Analysis of Toast's xtraCHEF Acquisition
. Expensify's Interesting Journey to an IPO
. Marqeta Needs to Diversify its Customer Base
. CLEAR Looks Beyond the Aviation Sector
.'s Workflow Platform Targets $87.6 Market Opportunity
. Couchbase Goes Public in Crowded Database Market
. Amplitude Focuses on Digital Optimization
. Freshworks Focuses on PaaS Capabilities
. Braze Expands Partnerships for its App Ecosystem
. Recently Listed ForgeRock Banks on its SaaS Architecture
. Analysis of ThoughtWorks' Acquisitions
. ZipRecruiter Leverages AI to Deliver Ideal Employee Match
. Backblaze Helps Simplify Cloud Data Backup
. Analysis of GitLab's Opstrace Acquisition
. Wise Aspires to Minimize Cross Currency Transaction Fees
. Sprinklr Leverages AI to Grow its Enterprise Customer Base
. Analysis of Darktrace's Cybersprint Acquisition
. Analysis of SUSE's NeuVector Acquisition
. Samsara Leverages PaaS Strategy for Growth
. Informatica Targets Retail Sector for Growth
. Analysis of Zeta Global's Acquisitions

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