Restaurant software company (NYSE:OLO) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 26.4% year on year to $47.2 million. The company expects that next quarter's revenue would be around $48.4 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Olo made a GAAP loss of $14.5 million, down on its loss of $11.3 million, in the same quarter last year.
Olo (OLO) Q3 FY2022 Highlights:
- Revenue: $47.2 million vs analyst estimates of $46.6 million (1.32% beat)
- EPS (non-GAAP): $0.02 vs analyst estimates of $0.01 (46.3% beat)
- Revenue guidance for Q4 2022 is $48.4 million at the midpoint, above analyst estimates of $48.1 million
- Free cash flow of $1.35 million, up from negative free cash flow of $2.97 million in previous quarter
- Net Revenue Retention Rate: 107%, in line with previous quarter
- Gross Margin (GAAP): 67.7%, down from 78.1% 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 impressive over the last two years, growing from quarterly revenue of $27.5 million in Q3 FY2020, to $47.2 million.
This quarter, Olo's quarterly revenue was once again up a very solid 26.4% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $1.66 million in Q3, compared to $2.84 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Olo is expecting revenue to grow 21.2% year on year to $48.4 million, slowing down from the 30.8% 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 15.6% 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 Q3. 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 67.7% in Q3.
That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
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's free cash flow came in at $1.35 million in Q3, down 86.7% year on year.
Olo has burned through $15.6 million in cash over the last twelve months, a negative 8.91% free cash flow margin. This low FCF margin is a result of Olo's need to still heavily invest in the business.
Key Takeaways from Olo's Q3 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 $1.31 billion and more than $468.3 million in cash, the company has the capacity to continue to prioritise growth over profitability.
Olo delivered solid revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, there was a deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $7.46 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 we have other favorites, we understand the arguments that Olo is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its cash burn raises the question if it can sustainably maintain its growth, the good news is its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from Olo given its price to sales ratio based on the next twelve months is 6.0x. 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.
To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.