Toast, Inc. Earnings Call Signals Profitable AI Growth

Toast, Inc. Class A ((TOST)) has held its Q1 earnings call. Read on for the main highlights of the call.

Toast, Inc. struck an upbeat tone on its latest earnings call, emphasizing powerful top-line growth, expanding margins and rapid traction for its AI-driven products. Management acknowledged some near-term headwinds from hardware margins, inventory investment and a notable credit charge, but framed these as manageable trade-offs against strong operational momentum and upgraded guidance.

Recurring gross profit and ARR growth

Recurring gross profit streams jumped 27% year over year in the first quarter of 2026, underscoring the health of Toast’s high-margin revenue base. Annualized recurring revenue climbed 26%, supported by steady additions of new locations and rising average revenue per unit across its customer base.

Location expansion and market penetration

The company added 7,000 net locations in the quarter, ending with 171,000 live locations, a 22% increase from a year ago. Management highlighted continued share gains across core restaurant customers and newer opportunities in enterprise accounts, international markets and adjacent retail segments.

SaaS strength and margin expansion

SaaS ARR grew 27% year over year while subscription gross profit expanded 32%, showing strong operating leverage in software. SaaS gross margin surpassed 80% for the first time, reaching 81% and improving by roughly 300 basis points year over year as scale and efficiency gains flowed through.

Payments, fintech and GPV momentum

Total payment volume processed through Toast hit $51 billion, up 22% from the prior year and reinforcing its role as a payments platform. Payments ARR and fintech gross profit increased 24%, with the payments take rate rising to 51 basis points and non-payment fintech, led by Toast Capital, adding $51 million of gross profit and about 10 basis points to the take rate.

Profitability and cash generation

Adjusted EBITDA rose 35% to $179 million, delivering a robust 34% margin despite ongoing investments in growth and product. GAAP operating income improved to $110 million with a 21% margin, GAAP EPS more than doubled to $0.20 and free cash flow reached $115 million in a seasonally strong first quarter.

Product and AI traction: Toast IQ and Toast IQ Grow

AI-powered Toast IQ now serves around 40,000 weekly active locations, signaling rapid adoption among customers. In pilots, the new Toast IQ Grow marketing agent produced an average 8% sales lift versus similar Toast restaurants, with one standout customer seeing more than a 30% increase and roughly a third of March sales tied to Toast marketing tools.

AI-driven productivity gains

Inside the company, AI has boosted engineering coding velocity by more than 60% year over year, enabling features like the marketing agent to ship about three months earlier than planned. AI tools also resolve roughly 40% of customer support interactions, improving efficiency and freeing resources for further investment in growth initiatives.

Product and TAM expansion wins

Toast continued to widen its addressable market with new offerings such as its Drive-Thru product, opening access to an estimated 140,000 locations. The company pointed to new enterprise wins like Hungry Howie’s and Papa Murphy’s, an implementation at Alinea Group, international momentum with its Toast Go 3 handheld and progress in grocery and retail, where it now serves over 100 locations and more than $5 million in sales.

Monetization progress and raised guidance

Total monetization crossed a key milestone as recurring gross profit as a percentage of GPV topped 1% for the first time, landing at 103 basis points, up 5 basis points year over year. On the back of this strength, Toast raised full-year outlook for recurring gross profit growth to 21%–23% and guided second-quarter subscription plus fintech gross profit growth to 22%–24%.

Capital allocation and share repurchase

Toast highlighted disciplined capital allocation, noting that it has repurchased about 14 million shares for nearly $400 million year to date. Roughly $200 million remains on its buyback authorization, and management underscored that reducing diluted share count is part of its strategy to drive EPS growth over time.

Hardware and professional services margin drag

Hardware and professional services remained a drag on profitability, with gross profit in these areas equal to negative 13% of recurring gross profit streams. The pressure reflects higher tariffs and input costs, along with the economics of hardware shipments that are used to support broader platform adoption.

Inventory build and near-term free cash flow pressure

The company is intentionally building inventory, including strategic purchases of memory chips to secure supply, which is concentrating cash outflows this year. Management cautioned that this will reduce the conversion of adjusted EBITDA to free cash flow, with most of the impact expected in the second quarter and a larger accounting effect projected in 2027 than 2026.

Bad debt and credit-related expense

Toast recorded $28 million in bad debt and credit-related expenses during the quarter, which management excluded from its core operating expense commentary. The company acknowledged that these credit-related costs were elevated, though they were framed as manageable within the context of overall profitability.

GPV per location and modest pricing tailwinds

Despite strong overall GPV growth, GPV per location declined 1% year over year, suggesting mix or volume shifts at the venue level. The payments take rate improved only modestly by 2 basis points, indicating that net pricing and optimization benefits from payments were incremental rather than a major profit driver this quarter.

Competitive environment and partner dynamics

Management flagged the evolving competitive landscape, particularly from large delivery and aggregator platforms that increasingly encroach on restaurant technology. Toast continues to emphasize partnerships, but acknowledged that changing partner and peer positions remain a source of uncertainty that investors should monitor.

Forward-looking guidance and outlook

For the second quarter, Toast expects subscription and fintech gross profit to grow 22%–24% year over year and adjusted EBITDA between $185 million and $195 million. For full-year 2026, the company now targets recurring gross profit growth of 21%–23% and adjusted EBITDA of $790 million to $810 million, reiterating a long-term goal of 40% plus adjusted EBITDA margins while noting that free cash flow conversion will be slightly lower than in 2025 due to inventory investments.

Toast’s earnings call painted a picture of a company balancing rapid growth with rising profitability, underpinned by strong software, payments and AI momentum. While hardware margins, inventory build and credit costs pose near-term drags, management’s upgraded guidance and clear path toward higher margins suggest that the long-term trajectory remains firmly positive for investors.