TOAST’s S-1
It’s been a while since I wrote about the S-1 forms of any startups. Not that I didn’t continue to read them during my breakfasts. It ‘s just that I haven’t seen anything to write home about.
TOAST’s, however, is kind of interesting, as it brings up my age-old question: if you have SaaS revenue and payment flows at the same time, what’s a better format for your financial reporting?
As seen above, TOAST’s income statements are hugely skewed (distorted?) by “Financial technology solutions”, which according to its S-1 form includes integrated payment processing and other financial products they provide to clients such as working capital financing.
In both 2019 and 2020, this “financial technology solutions” accounted for roughly 80% of the overall revenues. In terms of gross margins, however, it was “only” 15% and 21% respectively, compared to the 60%~61% GM of the SaaS revenues.
This low GM percentage is actually quite common in payment businesses as it’s a flow business and payment platforms usually have to pay other players in the payment chain (such as Visa & Mastercard) the fees the later are charging. The more internalized the payment processing is for such platforms, the higher the margins they could make. But one could seldom escape the elephants in the room such as Visa & Mastercard. As a result, when taking all payment fees collected by the platform as revenues, these revenues also usually have a high-percentage cost as they have to turn around and pay part of those fees out to the others.
My favorite visualization of this nature of payment businesses is always the one found in Adyen’s first annual report post-IPO (2018). As seen above, a big chunk of the total revenue was simply re-directed (to the right-hand direction) to other financial institutions, leaving Adyen a visually small, but extremely lucrative “Net revenue”
Above are the Adyen’s income statements of the two most recent complete fiscal years. You see Net revenue reported as Revenue minus Costs incurred from financial institutions and Costs of good sold, with the former being the dominant item. In the case of Adyen, Net revenue is roughly 19~20%, similar to the GM margin percentages I calculated above for TOAST’s “Financial technology solutions”.
There’s a certain way a payment company can improve this net revenue percentage by integrating more of the payment in-house, just like TOAST seemingly improved from 15% to 21%. But as long as the biggest duopoly on the consumers’ end, Visa & Mastercard, stand still, it’s hard to see any payment company improve dramatically beyond this.
On the other hand, the success of payment companies like Adyen in terms of market caps shows that the seemingly low-percentage of net revenues is a none issue. It’s just different way of cutting the cake. If the effort of cutting your part of the cake is way smaller than the piece of cake you’re gonna enjoy, who cares if a large part (80%) of the cake goes directly to someone else?
Why doesn’t TOAST simply report net revenues?
This brings us back to the reason I’m writing this article:
Why didn’t TOAST simply report net revenues? Why did they choose to include the revenue of payment processing (etc) in the total revenue, thus dwarfing the revenues of the SaaS revenues which has a 60% GM?
In fact, in the entire S-1 form only mentioned the word “net revenue” 3 times, without explaining what it means in this S-1 form — one can imagine that the investment banker in charge of these paragraphs simply copied/pasted from another S-1 form of a payment startup and forgot to check with his colleagues in charge of the main narrative.
So why?
Simple. IPO is mostly about perception. It’s about how you want the public market to perceive you as a up-and-coming hot shot. I wrote about this multiple times in the past, especially those non-SaaS startups pretending to be SaaS companies.
In the case of TOAST, to their advantage they have the shining keywords of SaaS and payment processing roped into one deal. It’s surely much nicer to see a news headline of “SaaS & payment startup going IPO with more than $800M of revenue in 2020”, rather than “SaaS & payment startup going IPO with a SaaS revenue of $100M and net payment revenu of $136M”.
$800M is surely much more powerful perceptually than either $100M or $136M — or even the two combined ($236M).
But surely investors are not idiots and will do the calculations themselves, no?
Yeh, I’m pretty sure all those WallStreetBets retail investors do very sound fundamental researches and sophisticated discounted-cash-flow valuations.
You would agree, right?
