Toast Q1 2026: It's fine

Don't overthink a good quarter.

After hour trading can lead to wrong conclusions about the quarter. Don’t overthink it. Toast reported a good quarter.

What’s going on?

GPV was flat for the third consecutive quarter. FinTech revenue declined sequentially for the second straight period. Total revenue — $1.63 billion — grew 22% but rate of change is slowing. FCF grew less than anticipated. On the surface, this reads like a growth company losing momentum.

It isn’t.

Toast’s compounding mechanism is net new locations. Add locations, and you get subscription ARR. You get payment volume as those restaurants process transactions. You attach more software modules over time — Payroll, Capital, Marketing — and soon Toast IQ grow, expanding ARPU.

The entire model cascades from one variable. And Q1 delivered 7,000 net new locations, 1,000 more than the same quarter last year, off a materially larger base. That’s impressive growth. Especially when you consider that this outgrew every single competitor by a wind margin.

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What the Numbers Actually Show

Seven thousand net new locations in a quarter means 171,000 total, up 22% year-over-year. Looking back at older Wall street models, this is thousands above anticipated store locations. Toast is proving they can grow at a higher rate for longer than even the most bullish WS analysts modeled just 12 months ago.

Total ARR reached $2.15 billion — SaaS plus FinTech ARR up 32% — growing faster than location count because ARPL is moving up. SaaS ARPL was up 4.8% year-over-year. The FinTech take rate ticked up 2 basis points to 0.61% - also healthy expansion. Looking ahead, SaaS still has lots of value to add, as they add agentic workflows that create and capture value for busy restaurant owners.

The profitability story is clean. Total gross margin expanded 160 basis points sequentially and 155 basis points year-over-year to 27.4%. Subscription gross margin jumped from 73.8% to 77.6%. Operating leverage is real: OpEx as a percentage of revenue held flat at 20.7%. COGS is growing slower than revenue. The model is operating as it should. This led to Net income of $126 million, up roughly 100% year-over-year.

The one ugly line is Hardware and Professional Services GP: a loss of $72 million, the worst print on record, up 53% year-over-year. But hey, memory costs are up across the board so who would expect anything different? Toast uses HW to subsidize deals, this is a cost of sales, so worth watching but as they roll out new handheld models, this cost does increase.

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The Three Levers

Here is why Toast doesn’t require overthinking. There are three levers that grow ARR:

1. Net new location adds

2. SaaS ARPU expansion as restaurants attach more modules

3. FinTech take rate improvement

All three moved in the right direction in Q1. Toast has beaten consensus estimates on these KPIs for four consecutive years. Management has not surprised investors with guidance cuts or strategic pivots. They are executing a legible playbook against a fragmented competitive field — Fiserv, Shift4, Lightspeed, Global Payments — and clearly taking share from all of them. A revived Block is the most credible threat, but their restaurant positioning skews behind Toast’s product depth in food-service-specific workflows. Toast’s switching costs are high and rising as restaurants embed Payroll, Capital, and the new AI product layer into daily operations.

The guidance for the full year — $790 to $810 million in Adjusted EBITDA, $2.29 to $2.32 billion in sub-and-FinTech gross profit — is tracking well.

Additional positives

A few callouts I found compelling on the call:

1. Toast finally has drive through. This is key for enterprise growth.

2. Toast IQ: 40,000 weekly active users on a base of 171,000 restaurants is almost 25% WAU. For an AI product layered onto a vertical SaaS install base in its first innings, that is high. Data flywheel is an abused term. Here it is concrete: 25% WAU at this base size means Toast IQ is generating enough proprietary signal to make its next iteration noticeably better than its last
   — on an operating workflow set that nobody else has end-to-end access to. It is also the precondition for converting free usage into paid value-add modules later. The base is engaged. The monetization is the next step.

3. SBC is now ~11% of revenue, down by roughly half over two years. If revenue continues to compound at 20–25% and SBC stays roughly flat in absolute dollars, this line decays mechanically.

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Operating Expense growth?

Something that could be disturbing analysts and estimates is an increase in costs: R&D expense grew to 20% in the quarter, S&M is roughly flat at 20%. That’s higher than the past few quarters overall - and a hit to the operating leverage thesis.

AI is showing up for now as increased costs:

1. Customer support agents

2. Toast IQ

3. R&D efficiency

Time will tell if the AI investments translate into operating leverage via S&M efficiency on customer support and ARPU growth via Toast IQ grow. My guess is that they will. For now, operating leverage could be further out than expected. Josh Baer at Morgan Stanley framed the central debate as cleanly as anyone on the call: how much of the below-the-line reinvestment converts into higher growth, and what is the profile of that conversion?

To add insult to injury on the cost side, there isn’t only AI; there’s also memory. Since Toast utilizes their hardware as a loss leader, this is a hit to the bottom line. They don’t pass through the costs, which will hurt CAC payback periods and gross profit without any real ability to pass it through.

Long-term, this isn’t material to the company unless memory costs stay at a very elevated level for the next five years, which is a possibility. However, at some point, this will be a tailwind, and it’s not a structural driver for the business.

Being integrated between the point of sale, the hardware terminal, and the backend will increasingly enable more value-add offerings. Focusing on this is upside for Toast. AI can offer recommendations at the edge to servers, enable better table management, and essentially act as a coach for a waiter in real time. That’s a significant value add, and being vertically integrated gives Toast the ability to do that.

DoorDash

DoorDash is soon entering PoS competition. I’m not overly concerned.

DoorDash has a LOT on its plate: integrating deliveroo, wolt. Competing with Uber in its core market. International markets. Grocery, ads, autonomous vehicle delivery. Competing in a whole new category that’s marginal doesn’t seem high impact.

Doordash definitely has a strong touchpoint with restaurants, and perhaps this could give them a strong GTM. But how much of the market that overlaps with Toast is self serve vs requiring a sales person to help a restaurant convert? For Toast the majority is the latter (as apposed to say Clover or XYZ) and that sales motion isn’t so simple to scale.

At the margin, more competition is never good, and DoorDash is definitely a competitor. I’d be more worried about it limiting international growth tbh than competing in core US markets.

Valuation

Toast’s biggest problem has always been its valuation. But after a brutal year, down 17% over the past 12 months and after a 50% peak to troth drawdown, it’s finally at a good entry point.

$17 billion market cap. Roughly 25x 2026 net income. For a company adding locations at 20%, growing ARR slightly faster, and compounding net income faster still — that multiple is not crazy. Especially for the best-positioned operator in restaurant technology, outgrowing every named competitor, with a management team that has delivered without major surprises for four years.