Restaurant software company (NYSE:OLO) reported results ahead of analyst expectations in the Q1 FY2022 quarter, with revenue up 18.3% year on year to $42.7 million. The company expects that next quarter's revenue would be around $45.7 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Olo made a GAAP loss of $11.5 million, improving on its loss of $26.4 million, in the same quarter last year.
Olo (OLO) Q1 FY2022 Highlights:
- Revenue: $42.7 million vs analyst estimates of $41.6 million (2.63% beat)
- EPS (non-GAAP): $0.01 vs analyst estimates of $0 ($0.01 beat)
- Revenue guidance for Q2 2022 is $45.7 million at the midpoint, above analyst estimates of $45.4 million
- The company reconfirmed revenue guidance for the full year, at $196 million at the midpoint
- Free cash flow was negative $3.42 million, compared to negative free cash flow of $10.6 million in previous quarter
- Net Revenue Retention Rate: 107%, down from 120% previous quarter
- Gross Margin (GAAP): 70%, down from 81% same quarter last year
Founded by Noah Glass, who wanted to get a cup of coffee faster on his way to work, Olo (NYSE:OLO) provides restaurants and food retailers with software to manage food orders and delivery.
The Covid pandemic has made online ordering a necessity for restaurants and food retailers. But fully outsourcing online ordering to the popular food delivery apps drastically reduces a restaurant's margins, and building and maintaining your own online ordering system that can reliably handle peak loads is complicated and expensive.
Olo provides restaurant chains with software that can power their apps and websites, and makes it easy for them to offer online ordering directly to their customers. The platform provides the backend infrastructure and restaurants can still design their apps to look the way they want. Through the online dashboard managers can update menus, availability and pricing, and Olo integrates with delivery services, whether in-house or outsourced, so it can automate the whole food ordering process, from the purchase to delivery.
Enterprise resource planning (ERP) and customer relationship management (CRM) are two of the largest software categories dominated by the likes of Microsoft, Oracle, and Salesforce.com. Today, the secular trend of mass customization is driving vertical software that customizes ERP and CRM functions for specific industry requirements. Restaurants are a prime example where a set of customized software providers have sprung up in recent years to create unique operating systems that blend tax and accounting software, order management and delivery, along with supply chain management.
Olo competes with digital ordering platforms like Tillster, Onosys, and NovaDine; restaurant-focused POS platforms including NCR Corporation and Xenial; food-delivery companies such as Grubhub (NASDAQ:GRUB), DoorDash (NYSE:DASH), and UberEats.
As you can see below, Olo's revenue growth has been very strong over the last year, growing from quarterly revenue of $36.1 million, to $42.7 million.
This quarter, Olo's quarterly revenue was once again up 18.3% year on year. We can see that revenue increased by $2.79 million in Q1, up on $2.56 million in Q4 2021. While we've no doubt some investors are looking for higher growth, it's good to see that quarterly revenue growth is re-accelerating.
Guidance for the next quarter indicates Olo is expecting revenue to grow 27.4% year on year to $45.7 million, slowing down from the 47.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 33.5% over the next twelve months.
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Olo's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 107% in Q1. That means even if they didn't win any new customers, Olo would have grown its revenue 7% year on year. Despite it going down over the last year this is still a decent retention rate and it shows us that not only Olo's customers stick around but at least some of them get increasing value from its software over time.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Olo's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 70% in Q1.
That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Olo burned through $3.42 million in Q1, with cash flow turning negative year on year.
Olo has generated $6.95 million in free cash flow over the last twelve months, a decent 4.45% of revenues. This FCF margin is a result of Olo asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
Key Takeaways from Olo's Q1 Results
With a market capitalization of $1.51 billion Olo is among smaller companies, but its more than $463.7 million in cash and positive free cash flow over the last twelve months give us confidence that Olo has the resources it needs to pursue a high growth business strategy.
It was good to see Olo outperform Wall St’s revenue expectations this quarter. And we were also glad that the revenue guidance for the rest of the year was in line with expectations. On the other hand, it was less good to see the deterioration in revenue retention rate and gross margin deteriorated. Overall, this quarter's results could have been better. The company currently trades at $10 per share.
Is Now The Time?
Olo may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Olo is a great business. For a start, its revenue growth has been strong, and analysts believe that sort of growth is sustainable for now. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its customers are increasing their spending quite quickly, suggesting that they love the product.
Olo's price to sales ratio based on the next twelve months is 6.8x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Olo's qualities as a business really stand out and we do like the look of the company at current prices.The Wall St analysts covering the company had a one year price target of $42 per share right before these results, implying that they saw upside in buying Olo even in the short term.
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