Restaurant software company (NYSE:OLO) announced better-than-expected results in the Q2 FY2021 quarter, with revenue up 47.6% year on year to $35.8 million. Olo made a GAAP loss of $2.43 million, down on its profit of $3.93 million, in the same quarter last year.
Olo (OLO) Q2 FY2021 Highlights:
- Revenue: $35.8 million vs analyst estimates of $34.1 million (5.03% beat)
- EPS (non-GAAP): $0.03 vs analyst estimates of $0.01 ($0.02 beat)
- Revenue guidance for Q3 2021 is $36.2 million at the midpoint, above analyst estimates of $34.5 million
- The company lifted revenue guidance for the full year, from $141.1 million to $145.2 million at the midpoint, a 2.86% increase
- Free cash flow of $10.7 million, up 167% from previous quarter
- Net Revenue Retention Rate: 120%, in line with previous quarter
- Gross Margin (GAAP): 79.4%, down from 81% previous quarter
Founded in 2005, 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 $24.3 million, to $35.8 million.
And unsurprisingly, this was another great quarter for Olo with revenue up an absolutely stunning 47.6% year on year. But the revenue actually decreased by $227 thousand in Q2, compared to $5.57 million increase in Q1 2021. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.
Analysts covering the company are expecting the revenues to grow 19.8% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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 Q2. That means even if they didn't win any new customers, Olo would have grown its revenue 20% year on year. That is 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, licences, technical support and other necessary running expenses was at 79.4% in Q2.
That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, 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 Q2 Results
With market capitalisation of $5.6 billion Olo is among smaller companies, but its more than $575.2 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 a strong quarter, that should leave shareholders feeling very positive. The company is down -4.65% on the results and currently trades at $35.7 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 is 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 impressive gross margins are indicative of excellent business economics.
Olo's price to sales ratio based on the next twelve months of 35.5x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Olo's qualities stand out and we still like it at this price.