Toast's hardware lost money so its payments could win

The record

Toast, Inc. filed its Form S-1 on August 27, 2021 ahead of its IPO. The S-1 discloses four revenue lines for fiscal 2020: subscription services of $101.4 million, financial technology solutions of $644.4 million, hardware of $64.0 million and professional services of $13.4 million, on total revenue of $823.1 million, meaning financial technology solutions, the fees tied to processing restaurant payments, made up 78.3% of the total. The same statements show hardware cost of revenue of $85.0 million against hardware revenue of $64.0 million for 2020, meaning hardware was sold at a loss on a standalone basis. As of June 30, 2021, the filing discloses approximately 48,000 restaurant locations across approximately 29,000 customers, processing more than $38 billion in gross payment volume.

What the documents establish

The S-1 is Toast's own segmented account showing that its revenue is overwhelmingly a payment-processing business by dollar volume, with subscription software and money-losing hardware sales functioning as the mechanism that brings a restaurant onto the platform where those payment fees are then earned. A final amendment, the S-1/A filed September 20, 2021, carries the same segment figures forward unchanged and sets an assumed IPO price of $35.00 per share, the midpoint of its range. The filing itself does not rank the three revenue lines by profitability beyond what the reported cost-of-revenue figures show; it discloses subscription services' cost of revenue at $39.7 million against $101.4 million of subscription revenue, a materially higher margin line than hardware.

The operating read

A point-of-sale company disclosing hardware revenue below hardware cost is describing a loss-leader strategy, not a hardware business; the actual product being sold, in unit-economic terms, is the payment-processing relationship the hardware unlocks. Editorially, a reader evaluating a similar blended hardware-software model should separate the segment that management is willing to lose money on for distribution from the segment carrying the company's actual margin, since Toast's own cost-of-revenue disclosure makes that distinction visible without the filing needing to state it directly.

What to check before you decide

Before assuming a blended-revenue company's segments are equally profitable, check the following.

• Does the filing disclose cost of revenue by segment, not only revenue by segment, as Toast's does?
• Which segment is growing fastest in dollar terms, and which is growing fastest as a share of total revenue?
• Does gross payment volume, a processing metric, track directly with the revenue the company actually recognizes from it?

Toast's own figures show hardware priced to lose money and payments priced to carry the business; a reader modeling a comparable company should ask which segment plays which role before comparing growth rates across them.