Toast's free terminal now costs it $85 million a quarter, and the FTC wants the fee that pays for it
The restaurant platform's $0 terminal cost it $85 million in gross loss last quarter while the FTC argues the fees that fund it are hidden. A new CFO inherits both the memory bill and the lawsuit in January.
Richard Tang · 2 min read
Toast's+2.39% — Toast, up 2.39 percent as of its last quote free terminal is no longer free to Toast. In the third quarter of 2026 the company gave restaurants hardware and professional services that cost $130 million and billed only $45 million for them, an $85 million gross loss in a single quarter, the widest of the year 3. The terminal on the counter is funded by the take rate: Toast keeps 104 basis points of the $61.8 billion of card volume flowing through its platform, six basis points more than a year ago 2.
That fee line is exactly what the FTC's lawsuit, filed October 29 in the Northern District of California with seven states and two city attorneys, says is hidden: $0 hardware recovered through processing fees, a $150-a-month early termination charge and an $85 monthly fee for restaurants that close temporarily 4. Nothing has been proven; Toast argues that ROSCA, a consumer statute, has never applied to negotiated business contracts 2.
The take rate must climb or Toast eats the memory bill
So the question Toast's numbers force is narrow: does the take rate keep climbing to pay for hardware, or does Toast absorb the cost? Memory prices pushed it toward absorbing. Inventories ended September at $244 million against $114 million at year-end, a deliberate buy-ahead of chips, and free cash flow conversion fell to 75% of adjusted EBITDA, $181 million on $240 million, down from $153 million a year earlier 3. Management named its tools on the call: older-generation hardware, cheaper memory, spot-market purchases 5.
Free cash flow is falling behind operating cash flow as the hardware bill grows
- Operating cash flow
- Free cash flow
Data
| Operating cash flow | Free cash flow | |
|---|---|---|
| Q2 '24 | $124M | $108M |
| Q3 '24 | $109M | $97M |
| Q4 '24 | $147M | $134M |
| Q1 '25 | $79M | $69M |
| Q2 '25 | $223M | $208M |
| Q3 '25 | $165M | $153M |
| Q4 '25 | $194M | $178M |
| Q1 '26 | $132M | $115M |
| Q2 '26 | $144M | $130M |
Hardware cost ran at three times its revenue in Q3 2026
Costs of the free terminal grew while revenue from it stayed flat
- Hardware and professional services revenue
- Cost of revenue
Data
| Hardware and professional services revenue | Cost of revenue | |
|---|---|---|
| Q3 2025 | 44M | 101M |
| Q3 2026 | 45M | 130M |
February's margin guide, not the beat, prices the terminal
The arithmetic lands on 2027, and on the person who will sign the fee line last in December 2. Elena Gomez leaves at year-end; Michael Senno takes over January 1 and has promised only modest margin progression next year, with formal guidance in February 2. The suit constrains the first path, raising disclosed fees; the memory market constrains the second. Investors should treat the 2027 margin guide, not the quarter's beat, as the number that prices the free terminal 2.
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