Toast - Profits finally on the menu, Recipe for Vertical Integration Success
Inside transformation that turned Toast into a profitable powerhouse and what it teaches us about vertical SaaS business models
In February 2020, before the pandemic upended the restaurant industry, Toast was riding high. The Boston-based restaurant technology platform had just raised $400 million at a $4.9 billion valuation and was adding locations at a blistering pace.
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The formula seemed straightforward: build an end-to-end operating system for restaurants, focus on growth above all else, and eventually translate market leadership into profitability.
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Then COVID hit. Within weeks, the company laid off half its staff as restaurants across the country shuttered. Toast's future โ like that of the industry it served โ suddenly looked precarious.
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Fast forward to February 2025, and Toast's Q4 2024 earnings tell the remarkable story of not just recovery, but transformation. The company reported its first full year of GAAP profitability while adding a record 28,000 locations. Revenue reached $1.34 billion, up 29% year-over-year. Adjusted EBITDA totaled $111 million, with margins expanding to 28% โ an 18 percentage point improvement from the previous year.
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This wasn't just a good quarter; it represented the culmination of a fundamental evolution in Toast's business model and strategic approach. The journey from growth-obsessed startup to balanced, profitable platform offers important lessons about vertical integration, product development, and the maturing of technology business models.
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The Vertical SaaS + Payments Flywheel
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The vertical software component โ point-of-sale, inventory management, payroll, marketing tools โ addresses restaurant-specific workflows with specialized functionality. A restaurant kitchen operates differently than a retail store or doctor's office, requiring purpose-built tools rather than generic solutions.
The payments component provides a consistent, high-margin revenue stream that scales with transaction volume. When a diner pays their check, Toast processes that payment and takes a small cut โ generating revenue that grows alongside the restaurant's business.
What makes this model particularly powerful is data integration. When payments flow through the same system that manages orders, inventory, and labor, Toast gains visibility across the entire restaurant operation. This enables unique insights: correlating menu items with profit margins, optimizing staffing based on busy periods, identifying high-value customers through spending patterns.
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CEO Aman Narang highlighted this advantage on the earnings call:
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This integrated approach explains why Toast has succeeded where horizontal solutions have struggled to gain traction in restaurants. The company's benchmarking tool exemplifies this advantage โ allowing restaurateurs to compare their performance against similar establishments and make data-driven decisions about pricing, menu offerings, and staffing.
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From Growth Maximization to Balanced Expansion
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Toast's earliest strategic priority was clear: maximize location growth. In a fragmented market with numerous legacy providers, scale was essential to establish credibility and create network effects. This focus drove impressive expansion, with the company reaching 134,000 locations by the end of 2024.
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But the narrative evolved significantly over time. By Q4 2024, management articulated a more nuanced set of priorities:
Scaling locations and market share in the core U.S. restaurant business
Demonstrating that new markets (enterprise, international, retail) can be material growth drivers
Increasing customer adoption of the broader platform and driving differentiation through data and AI
Maintaining investment discipline while gradually expanding margins
This balanced approach has produced impressive results. While Toast maintained strong top-line growth (recurring gross profit streams up 39% year-over-year), the company significantly improved financial performance. The dollar-based payback period remained in the mid-teen months, indicating sustainable unit economics even as Toast invested in new opportunities.
Elena Gomez, Toast's CFO, framed this evolution clearly:
The Multi-Pronged Expansion Strategy
What makes Toast particularly interesting is its multi-dimensional growth strategy. Rather than pursuing a single vector, the company is simultaneously:
Deepening penetration in core markets: Despite significant growth, Toast has just 15% market share in U.S. restaurants, providing substantial runway in its original target market.
Moving upmarket to enterprise: Partnerships with brands like Hilton Hotels, Potbelly, and Perkins demonstrate Toast's ability to serve complex, multi-location operations โ a segment traditionally dominated by legacy providers.
Expanding internationally: International locations are showing 50% year-over-year increases in SaaS ARPU as Toast deploys more of its product suite globally.
Entering adjacent verticals: Toast is building dedicated capabilities for food and beverage retail โ convenience stores, bakeries, coffee shops, and small grocery operations that share operational similarities with restaurants.
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Each expansion direction leverages Toast's core technology while opening new addressable markets. The retail expansion is particularly noteworthy, as Narang explained:
"Food and beverage retail market, especially in grocery and convenience, has historically been served by legacy solutions with relatively low market share across horizontal cloud-based entrants. Our vertical approach has resonated with customers because we're going deep on the challenges these customers face."
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This multi-pronged approach provides multiple growth levers while mitigating risk โ if one market segment slows, others can compensate.
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The AI Opportunity in Restaurant Tech
Perhaps the most intriguing aspect of Toast's strategy is its approach to artificial intelligence. While many tech companies make vague pronouncements about AI potential, Toast is deploying practical applications that address specific restaurant pain points:
These capabilities aren't flashy, but they deliver tangible value โ like helping Ada restaurant in Louisville boost Tuesday night revenues by 40% through data-informed menu adjustments.
Looking forward, Toast is focusing on enhancing the point-of-sale experience through data-driven recommendations and personalization.
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As Narang noted:
"If those of you that remember the show Cheers like the personalized experience, that's something we think we can create with our data."
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The restaurant industry generates massive amounts of data, much of which has historically gone unused. Toast's position at the intersection of operations and payments creates unique opportunities to surface insights that improve both guest experience and business performance.
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The 2025 Outlook and Beyond
Toast's guidance for 2025 reflects confidence in continued balanced growth: 23-25% increase in recurring gross profit streams and adjusted EBITDA of $510-530 million (30% margin). This represents substantial improvement over 2024 while maintaining strong growth โ no small feat for a company of Toast's scale.
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Macroeconomic conditions: Restaurant spending correlates with broader economic health. While Toast has proven resilient during challenging periods, a significant downturn could impact payment volume and new customer acquisition.
Competition: The restaurant technology landscape remains competitive, with Square, Clover, Oracle, and NCR all vying for market share. Toast's vertical focus provides differentiation, but competitors continue enhancing their restaurant-specific capabilities.
SaaS ARPU growth: While location growth remains strong, SaaS ARPU has grown more modestly (5% year-over-year). Accelerating this metric through increased product adoption and strategic pricing will be crucial for long-term value creation.
New market execution: Success in enterprise, international, and retail segments requires tailored capabilities and go-to-market strategies. Toast must balance investment across these opportunities while maintaining focus on its core business.
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The most significant long-term question is whether Toast can maintain its vertically-optimized advantage as horizontal platforms enhance their restaurant-specific capabilities. So far, the evidence suggests that Toast's deep industry expertise and purpose-built platform continue resonating with customers across segments.
The Vertical Integration Lesson
Toast's evolution offers broader lessons about technology business models. The company demonstrates that vertical integration โ deeply understanding a specific industry's workflows and building purpose-built solutions โ can create sustainable competitive advantages that horizontal platforms struggle to match.
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Product development: Features are designed specifically for restaurant workflows rather than generic business processes
Sales approach: Teams speak the language of restaurateurs and understand industry-specific challenges
Support services: Help centers and customer success teams are staffed with industry veterans who understand restaurant operations
Pricing models: Structures align with restaurant economics and seasonal patterns
Data insights: Analytics are contextualized to restaurant benchmarks and industry norms
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This approach contrasts with horizontal platforms that serve multiple industries with generic capabilities. While horizontal solutions offer breadth, they often lack the depth that specialized businesses require.
What makes Toast particularly powerful is combining this vertical focus with the network effects and economies of scale typically associated with horizontal platforms. By focusing exclusively on food service (now expanding to adjacent food retail), Toast achieves sufficient scale to invest in R&D, data capabilities, and infrastructure improvements that benefit its entire customer base.
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The result is a company that has achieved what once seemed contradictory: maintaining robust growth while dramatically improving profitability. Toast's Q4 2024 results don't represent a departure from its original mission; rather, they demonstrate the maturation of a business model that has proven its fundamental soundness.
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The restaurant operating system Toast envisioned in its early days is now a reality โ and a profitable one at that.
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Disclaimer: The views in the post are for for informational purposes only and should not be considered as investment advice. Please contact your RM or Kristal.AI for investment advise.
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By
Kristal Investment Desk
March 23, 2025
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