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Olo (NYSE:OLO) Reports Sales Below Analyst Estimates In Q2 Earnings, Stock Drops 10%


Full Report / August 11, 2022
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Restaurant software company (NYSE:OLO) fell short of analyst expectations in Q2 FY2022 quarter, with revenue up 27% year on year to $45.6 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $46.7 million at the midpoint, or 8.62% below analyst estimates. Olo made a GAAP loss of $11.6 million, down on its loss of $2.43 million, in the same quarter last year.

Olo (OLO) Q2 FY2022 Highlights:

  • Revenue: $45.6 million vs analyst estimates of $45.8 million (0.5% miss)
  • EPS (non-GAAP): $0.01 vs analyst estimates of $0 ($0.01 beat)
  • Revenue guidance for Q3 2022 is $46.7 million at the midpoint, below analyst estimates of $51.1 million
  • The company dropped revenue guidance for the full year, from $196 million to $183.5 million at the midpoint, a 6.37% decrease
  • Free cash flow was negative $2.97 million, compared to negative free cash flow of $3.42 million in previous quarter
  • Net Revenue Retention Rate: 106%, in line with previous quarter
  • Gross Margin (GAAP): 68.9%, down from 79.4% 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 strong over the last year, growing from quarterly revenue of $35.8 million, to $45.6 million.

Olo Total Revenue

Even though Olo fell short of revenue estimates, its quarterly revenue growth was still up a very solid 27% year on year. Quarter on quarter the revenue increased by $2.84 million in Q2, which was in line with Q1 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 25% year on year to $46.7 million, slowing down from the 35.9% 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 34.8% over the next twelve months.

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 Net Revenue Retention Rate

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 106% in Q2. That means even if they didn't win any new customers, Olo would have grown its revenue 6% 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.

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 68.9% in Q2.

Olo Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 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 follow 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 $2.97 million in Q2, with cash flow turning negative year on year.

Olo Free Cash Flow

Olo has burned through $6.8 million in cash over the last twelve months, resulting in a negative 4.1% 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 Q2 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 $2.11 billion and more than $460.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

Olo delivered solid revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Olo's revenue guidance for the full year missed analysts' expectations and that gross margin dropped. Overall, this quarter's results were not the best we've seen from Olo. The company is down 10% on the results and currently trades at $11.72 per share.

Is Now The Time?

Olo may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Olo is a great business. For a start, its revenue growth has been solid, and that growth rate is even expected to increase in the short term. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its customers spend noticeably more each year, which is great to see.

Olo's price to sales ratio based on the next twelve months is 9.4x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Olo's qualities as a business really stand out and we do like the look of the company at current prices.

The Wall St analysts covering the company had a one year price target of $17.6 per share right before these results, implying that they saw upside in buying Olo even in the short term.

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