Restaurant software company (NYSE:OLO) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 24.6% year on year to $49.8 million. The company expects that next quarter's revenue would be around $50.8 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Olo made a GAAP loss of $8.23 million, down on its loss of $2.07 million, in the same quarter last year.
Olo (OLO) Q4 FY2022 Highlights:
- Revenue: $49.8 million vs analyst estimates of $48.6 million (2.39% beat)
- EPS (non-GAAP): $0.03 vs analyst estimates of $0.02 ($0.01 beat)
- Revenue guidance for Q1 2023 is $50.8 million at the midpoint, below analyst estimates of $50.9 million
- Management's revenue guidance for upcoming financial year 2023 is $214 million at the midpoint, in line with analyst expectations and predicting 15.4% growth (vs 24.1% in FY2022)
- Free cash flow was negative $1.6 million, down from positive free cash flow of $1.35 million in previous quarter
- Net Revenue Retention Rate: 108%, in line with previous quarter
- Gross Margin (GAAP): 69.3%, down from 79% 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.
Sales Growth
As you can see below, Olo's revenue growth has been very strong over the last two years, growing from quarterly revenue of $30.5 million in Q4 FY2020, to $49.8 million.
This quarter, Olo's quarterly revenue was once again up a very solid 24.6% year on year. On top of that, revenue increased $2.52 million quarter on quarter, a very strong improvement on the $1.67 million increase in Q3 2022, which shows acceleration of growth, and is great to see.
Guidance for the next quarter indicates Olo is expecting revenue to grow 18.7% year on year to $50.8 million, in line with the 18.4% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $214 million at the midpoint, growing 15.4% compared to 24.1% increase in FY2022.
Product Success
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 108% in Q4. That means even if they didn't win any new customers, Olo would have grown its revenue 8% year on year. That is 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.
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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 69.3% in Q4.
That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Cash Is King
If you have followed 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 $1.6 million in Q4,
Olo has burned through $6.65 million in cash over the last twelve months, resulting in a negative 3.59% free cash flow margin. This below average FCF margin is a result of Olo's need to invest in the business to continue penetrating its market.
Key Takeaways from Olo's Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Olo’s balance sheet, but we note that with a market capitalization of $1.29 billion and more than $448.8 million in cash, the company has the capacity to continue to prioritise growth over profitability.
It was good to see Olo improve their gross margin this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, the revenue guidance for next year indicates a significant slowdown and the revenue guidance for the next quarter slightly missed analysts' expectations. Overall, this quarter's results could have been better. The company is up 1.11% on the results and currently trades at $8.2 per share.
Is Now The Time?
When considering Olo, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Olo is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong, 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, the downside is that its gross margins aren't as good as other tech businesses we look at and its cash burn raises the question if it can sustainably maintain its growth.
The market is certainly expecting long term growth from Olo given its price to sales ratio based on the next twelve months is 6.2x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Olo doesn't trade at a completely unreasonable price point.
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