Restaurant software company (NYSE:OLO) announced better-than-expected results in Q2 FY2023, with revenue up 21.2% year on year to $55.3 million. On top of that, next quarter's revenue guidance ($56.3 million at the midpoint) was surprisingly good and 3.2% above what analysts were expecting. Olo made a GAAP loss of $17.1 million, down from its loss of $11.7 million in the same quarter last year.
Olo (OLO) Q2 FY2023 Highlights:
- Revenue: $55.3 million vs analyst estimates of $53.2 million (3.93% beat)
- EPS (non-GAAP): $0.04 vs analyst estimates of $0.03 ($0.01 beat)
- Revenue Guidance for Q3 2023 is $56.3 million at the midpoint, above analyst estimates of $54.5 million
- The company lifted revenue guidance for the full year from $216.6 million to $220.5 million at the midpoint, a 1.82% increase
- Free Cash Flow was -$1.88 million, down from $3.87 million in the previous quarter
- Net Revenue Retention Rate: 115%, in line with the previous quarter
- Gross Margin (GAAP): 62.4%, down from 68.9% in the 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. Hotels and other hospitality providers are another example.
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.
Sales Growth
As you can see below, Olo's revenue growth has been over the last two years, growing from $35.9 million in Q2 FY2021 to $55.3 million this quarter.
This quarter, Olo's quarterly revenue was once again up a very solid 21.2% year on year. On top of that, its revenue increased $3.01 million quarter on quarter, a very strong improvement from the $2.46 million increase in Q1 2023. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that Olo is expecting revenue to grow 19% year on year to $56.3 million, slowing down from the 26.4% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 13.4% over the next 12 months.
Product Success
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
Olo's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 115% in Q2. This means that even if Olo didn't win any new customers over the last 12 months, it would've grown its revenue by 15%.
Trending up over the last year, Olo has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.
Profitability
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 62.4% in Q2.
That means that for every $1 in revenue the company had $0.62 left to spend on developing new products, sales and marketing, and general administrative overhead. Olo's gross margin is poor for a SaaS business and it's deteriorated even further over the last year. This is probably the opposite direction that shareholders would like to see it go.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Olo burned through $1.88 million of cash in Q2 , reducing its cash burn by 36.9% year on year.
Olo has generated $1.74 million in free cash flow over the last 12 months, or 0.91% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.
Key Takeaways from Olo's Q2 Results
Sporting a market capitalization of $1.27 billion, Olo is among smaller companies, but its more than $401.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was great to see Olo's optimistic revenue guidance and outlook for next quarter, which exceeded analysts' expectations. We were also glad to see stable retention rates. On the other hand, its deteriorating gross margin was the only negative. Overall, we think this was still a really good quarter that should please shareholders. The stock is up 1.75% after reporting and currently trades at $8.14 per share.
Is Now The Time?
When considering an investment in Olo, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Olo, we'll be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
Given its price to sales ratio based on the next 12 months is 5.6x, Olo is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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