Restaurant software company (NYSE:OLO) reported strong growth in the Q3 FY2021 earnings announcement, with revenue up 35.9% year on year to $37.3 million. Guidance for next quarter's revenue was $39 million at the midpoint, 5.45% above the average of analyst estimates. Olo made a GAAP loss of $11.3 million, down on its profit of $5.1 million, in the same quarter last year.
Olo (OLO) Q3 FY2021 Highlights:
- Revenue: $37.3 million vs analyst estimates of $36.3 million (2.91% beat)
- EPS (non-GAAP): $0.03 vs analyst estimates of $0.02 (50% beat)
- Revenue guidance for Q4 2021 is $39 million at the midpoint, above analyst estimates of $37 million
- Free cash flow of $10.2 million, roughly flat from previous quarter
- Net Revenue Retention Rate: 120%, in line with previous quarter
- Gross Margin (GAAP): 78.1%, down from 82.6% 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.
The online commerce and food ordering market has been growing fast even before the covid and the pandemic has only accelerated it. But restaurants are not in the software development business and building an online ordering system is difficult and expensive. And so similarly as we have seen in other sectors of the economy, there is a demand for modern, cloud-based software as a service platforms that can power restaurant’s online food ordering systems, without them having to maintain it on their own.
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 incredible over the last year, growing from quarterly revenue of $27.5 million, to $37.3 million.
And unsurprisingly, this was another great quarter for Olo with revenue up a stunning 35.9% year on year. On top of that, revenue increased $1.49 million quarter on quarter, a strong improvement on the $227 thousand decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.
Analysts covering the company are expecting the revenues to grow 22.9% over the next twelve months, although estimates are likely to change post earnings.
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 120% in Q3. That means even if they didn't win any new customers, Olo would have grown its revenue 20% year on year. Despite it going down over the last year this is still a good retention rate and a proof that Olo's customers are satisfied with their software and are getting more value from it over time. That is good to see.
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 78.1% in Q3.
That means that for every $1 in revenue the company had $0.78 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 a good gross margin that allows companies like Olo to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Key Takeaways from Olo's Q3 Results
With a market capitalization of $4.44 billion Olo is among smaller companies, but its more than $597.7 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
We were impressed by the very optimistic revenue guidance Olo provided for the next quarter. And we were also excited to see the really strong revenue growth. On the other hand, there was a deterioration in gross margin. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is up 7.62% on the results and currently trades at $32.2 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. There are a number of reasons why we think Olo is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. 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.
The market is certainly expecting long term growth from Olo given its price to sales ratio based on the next twelve months is 25.8x. But looking at the tech landscape today, Olo's qualities stand out and we still like it at this price.
The Wall St analysts covering the company had a one year price target of $41.8 per share right before these results, implying that they saw upside in buying Olo even in the short term.
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