Restaurant software company (NYSE:OLO) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 22.2% year on year to $52.2 million. Guidance for next quarter's revenue was $53.3 million at the midpoint, 3.24% above the average of analyst estimates. Olo made a GAAP loss of $13.7 million, down on its loss of $11.5 million, in the same quarter last year.
Olo (OLO) Q1 FY2023 Highlights:
- Revenue: $52.2 million vs analyst estimates of $50.8 million (2.92% beat)
- EPS (non-GAAP): $0.03 vs analyst estimates of $0.01 ($0.02 beat)
- Revenue guidance for Q2 2023 is $53.3 million at the midpoint, above analyst estimates of $51.6 million
- The company lifted revenue guidance for the full year, from $214 million to $216.6 million at the midpoint, a 1.19% increase
- Free cash flow of $3.87 million, up from negative free cash flow of $1.6 million in previous quarter
- Net Revenue Retention Rate: 114%, up from 108% previous quarter
- Gross Margin (GAAP): 64.1%, down from 70.1% 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. 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.
As you can see below, Olo's revenue growth has been strong over the last two years, growing from quarterly revenue of $36.1 million in Q1 FY2021, to $52.2 million.
This quarter, Olo's quarterly revenue was once again up a very solid 22.2% year on year. Quarter on quarter the revenue increased by $2.46 million in Q1, which was in line with Q4 2022. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.
Guidance for the next quarter indicates Olo is expecting revenue to grow 16.8% year on year to $53.3 million, slowing down from the 27% 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 13.9% 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 114% in Q1. That means even if they didn't win any new customers, Olo would have grown its revenue 14% year on year. Significantly up from the last quarter, this 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 64.1% in Q1.
That means that for every $1 in revenue the company had $0.64 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 $3.87 million in Q1, turning positive year on year.
Olo has generated $639 thousand in free cash flow over the last twelve months, 0.33% of revenues. This FCF margin is a result of Olo asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.
Key Takeaways from Olo's Q1 Results
With a market capitalization of $1.1 billion Olo is among smaller companies, but its more than $422.2 million in cash and positive free cash flow over the last twelve months give us confidence that Olo has the resources it needs to pursue a high growth business strategy.
We were very impressed by the strong improvements in Olo’s revenue retention rate. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 8.81% on the results and currently trades at $7.41 per share.
Is Now The Time?
Olo may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Olo we will 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.
Olo's price to sales ratio based on the next twelve months is 5.0x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. 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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