OLO - Olo Continues Strong Sales And Marketing Investment In 2023

2023-03-29 12:22:50 ET

Summary

• Olo reported its Q4 2022 financial results on February 22, 2023.
• The firm provides software and related services for restaurant locations primarily in the U.S.
• Olo has produced growing revenue but operating losses remain material, and the company has lost its large Subway account.
• While management forecasts robust sales and marketing spending to sell its broader offering set, I'm more cautious about its net growth and operating results in 2023.
• For the near term, I'm on Hold for Olo.

A Quick Take On Olo

Olo ( OLO ) reported its Q4 2022 financial results on February 22, 2023, beating revenue and EPS consensus estimates.

The firm provides software for restaurants seeking integrated digital ordering and delivery processing capabilities.

I'm on Hold for Olo in the near term and await further information to see if it can continue to grow sales while making progress toward operating breakeven.

Company

New York-based Olo was founded to develop an integrated SaaS software solution for restaurant operations use cases.

Management is headed by founder and Chief Executive Officer Noah Glass, who was previously International Expansion Manager for Endeavor Global.

The company's primary offerings include:

• Digital ordering
• Dispatch & delivery
• Channel management
• Integrations Network
• Olo Pay
• Engage

The firm pursues relationships with major restaurant brands to provide its SaaS solutions as the exclusive direct digital ordering provider.

The company's platform serves more than 87,000 restaurants, handles several million orders per day and integrates more than 300 restaurant technologies into its systems, such as 'POS systems, aggregators, DSPs, payment processors, user experience or UX, and user interface, or UI, providers, and loyalty programs.'

Olo's Market & Competition

According to a 2018 market research report by Grand View Research, the global restaurant management software market is expected to reach nearly $7 billion by 2025.

This represents a forecasted strong CAGR of 14.6% from 2019 to 2025.

The main drivers for this expected growth are continued technology development and disruption and the sharply increased need by restaurants for technology solutions to enhance their efficiency and improve their daily operations.

Also, front-end software held the largest share of the market in 2016 and is expected to continue to account for a majority of the market share in 2025.

Major competitive or other industry participants include:

• Tillster
• Onosys
• NovaDine
• NCR Corporation (NCR)
• Xenial
• Grubhub (JTKWY)
• DoorDash (DASH)
• UberEats (UBER)
• Others

Olo's Recent Financial Results

• Total revenue by quarter has risen per the following chart:

• Gross profit margin by quarter has trended lower, as shown below:

• SG&A expenses as a percentage of total revenue by quarter have also moved lower recently, a positive trend:

• Operating income by quarter has remained substantially negative:

• Earnings per share (diluted) have also remained negative with no meaningful move toward breakeven:

(All data in the above charts is GAAP).

In the past 12 months, OLO's stock price has dropped 41.5% vs. that of DoorDash's fall of 48.5%, as the chart indicates below:

As to its Q4 financial results, total revenue rose 24.5% year-over-year, continuing a trend higher but gross profit margin dropped 9.5 percentage points as it has trended material lower recently.

However, SG&A as a percentage of total revenue has dropped, a good development.

Operating losses remain substantial, as do negative earnings per share.

The company's net retention rate was 108%, an increase of 1 percentage point over the previous quarter, indicating reasonably good product/market fit and sales & marketing efficiency.

For the balance sheet, the firm finished the quarter with $448.8 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash flow was only $1.8 million, of which capital expenditures accounted for $500,000. The company paid a hefty $46.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Olo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be DoorDash; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

Future Prospects For Olo

In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted the growth in ARPU (Average Revenue Per User) of 8% to slightly less than $2,200 while growing annual revenue by 24% over 2021.

Leadership also noted processing more than $250 million in gross payment volume for Olo Pay's first full year on its platform.

The firm is focused on enhancing its offerings through a guest-centric approach, as it believes this ultimately makes its restaurant clients more effective at growing their business efficiently.

While historically Olo has been focused on pickup and delivery motions, it is now moving more forcefully into drive-thru and on-premise, which represent 38% and 24% of restaurant transactions in its target markets.

Looking ahead, management expects to add 6,000 locations in 2023 excluding its loss of remaining Subway locations, which could be as many as several thousand locations.

The company's financial position is strong, with ample liquidity and no debt.

Regarding valuation, the market is still valuing Olo at a higher revenue multiple than DoorDash despite its lower growth rate.

The primary risk to the company's outlook is the effect of a general macroeconomic slowdown, which may reduce consumer use of discretionary dining to save on extraneous expenses.

Notably, management intends to continue investing in its sales and marketing efforts 'to align with the rapid expansion of [its] product portfolio. 18 months ago, [Olo] had roughly a third of the product modules [it] has today,' so the firm is bullying up its sales and marketing to take advantage of its growing offerings.

Whether it can do so efficiently in the teeth of slowing macroeconomic activity is an open question.

I'm on Hold for Olo in the near term and await further information to see if it can continue to grow sales while making progress toward operating breakeven.

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