Olo (OLO)

Restaurant software company (NYSE:OLO) announced better-than-expected revenue in Q1 CY2025, with sales up 21.3% year on year to $80.68 million. Guidance for next quarter’s revenue was better than expected at $82.25 million at the midpoint, 0.5% above analysts’ estimates. Its non-GAAP profit of $0.07 per share was in line with analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Olo’s sales grew at a solid 24.2% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers.

This quarter, Olo reported robust year-on-year revenue growth of 21.3%, and its $80.68 million of revenue topped Wall Street estimates by 4.1%. Company management is currently guiding for a 16.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 17.2% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and suggests the market sees success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Olo’s billings punched in at $82.76 million in Q1, and over the last four quarters, its growth was impressive as it averaged 24.9% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Olo is very efficient at acquiring new customers, and its CAC payback period checked in at 26.5 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Olo more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Olo’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 117% in Q1. This means Olo would’ve grown its revenue by 16.5% even if it didn’t win any new customers over the last 12 months.

Despite falling over the last year, Olo still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

For software companies like Olo, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Olo’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 54.7% gross margin over the last year. That means Olo paid its providers a lot of money ($45.33 for every $100 in revenue) to run its business.

Olo produced a 54.9% gross profit margin in Q1, marking a 1 percentage point decrease from 55.9% in the same quarter last year. Olo’s full-year margin has also been trending down over the past 12 months, decreasing by 4.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Olo’s expensive cost structure has contributed to an average operating margin of negative 4.8% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Olo reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, Olo’s expanding sales gave it operating leverage as its margin rose by 22.1 percentage points. Still, it will take much more for the company to reach long-term profitability.

Olo’s operating margin was negative 3% this quarter. The company's consistent lack of profits raise a flag.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Olo has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.4%, subpar for a software business.

Olo burned through $1.90 million of cash in Q1, equivalent to a negative 2.4% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Olo’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 7.4% for the last 12 months will increase to 12.5%, giving it more flexibility for investments, share buybacks, and dividends.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Olo is a well-capitalized company with $358.5 million of cash and $13.26 million of debt on its balance sheet. This $345.2 million net cash position is 23.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Olo blew past analysts’ revenue, billings, and adjusted operating income expectations this quarter. We were also happy it lifted its full-year revenue guidance. On the other hand, its net revenue retention fell, but we still think this was a solid quarter with some key areas of upside. The stock traded up 4.1% to $8.37 immediately after reporting.

Updated: May 19, 2025 at 10:10 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Olo.

Olo has a few positive attributes, but it doesn’t top our wishlist. To kick things off, its revenue growth was solid over the last three years. And while Olo’s gross margins show its business model is much less lucrative than other companies, its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Olo’s price-to-sales ratio based on the next 12 months is 4.5x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $9.50 on the company (compared to the current share price of $8.97).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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