Olo Inc. (NYSE:OLO) Q1 2024 Earnings Call Transcript

Olo Inc. (NYSE:OLO) Q1 2024 Earnings Call Transcript May 7, 2024

Olo Inc. misses on earnings expectations. Reported EPS is $-0.01451 EPS, expectations were $0.05. OLO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the welcome to Olo Inc.’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Gary Fuges, Senior Vice President of Investor Relations. Please go ahead sir.

Gary Fuges: Thank you. Good afternoon and welcome to Olo’s first quarter of 2024 financial results conference call. Joining me today are Noah Glass Olo’s Founder and CEO; and Peter Benevides, Olo’s CFO. During this call, we will make forward-looking statements including but not limited to statements regarding our expectations of our business, our industry, and future financial results. These statements reflect our beliefs and assumptions only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of these material risks and uncertainties, please refer to our Form 10-Q that was filed today and our other SEC filings. Also during this call, we’ll present both GAAP and non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures are available in our earnings releases, which is available on the Investor Relations’ page of our website. Finally, in terms of our prepared remarks or in response to your questions, we may offer incremental metrics. Please be advised that this additional detail may be one-time in nature, and we may or may not provide an update in the future on these metrics. With that, I’ll turn the call over to Noah.

Noah Glass: Thank you, Gary. Hi everyone. Thank you for spending time with us today. Olo got off to a great start in Q1. We increased revenue 27% year over year and expanded non-GAAP operating margin to 8%, and we’re raising our 2024 revenue and profitability guidance. We announced new integrations with NCR Voyix and Q that move us closer to launching full stack pay functionality later this year. And we’ll provide access to ingredient level and guest-linked data from non-digital transactions where more than 80% of restaurant business is conducted today. with omnichannel guest data at scale and the AI and machine learning solutions to leverage it, we believe Olo is uniquely positioned to help brands deliver more personalized guest experiences that increase sales and grow guest lifetime value.

I’ll review our customer and innovation highlights and share more about our new POS integrations and then Peter will discuss our Q1 performance and updated guidance. We ended the quarter with approximately 81,000 active locations, adding approximately 1,000 net new locations sequentially. First quarter ARPU of $816, increased 29% year-over-year and net revenue retention was in excess of 120%. We continue to land and expand with enterprise and emerging enterprise brands. And we further strengthened our open platform through new features and ecosystem partners. In enterprise, Quiznos deployed ordering, rails, dispatch, pay, and engages sentiments and SIC [ph], a three suite implementation. And we’re super excited to announce today that Dutch Bros will deploy our ordering and pay modules to enable guests to order ahead through their app.

It’s a great example of digital moving into the drive-thru channel and we’re thrilled to help this fast-growing brand deliver on their core values of speed, quality, and service. Dutch Bros has completed a successful pilot and we expect them to deploy Olo across their 850-plus locations across 17 states throughout 2024. In emerging enterprise, we continue to land and expand more than a dozen brands like moonbowls and RocnRamen had multi-module implementations. While brands like Bluestone Lane and Mendocino Farms expanded into pet. And Panini Kabob Grill and Uncle Julio’s expanded into Engage. We spent time with more than 100 of our brands in March at our Beyond 4 Customer Conference. This was a fantastic event with record attendance overall and among senior level decision makers.

Customers love our roadmap presentation, the hands-on demos of our three suites, and our announcement to integrate Olo Pay and Engage’s guest data platform with Q. It was great validation that our products and strategy are resonating with brands. In Q1, we announced 13 major product enhancements in our spring release and further expanded our ecosystem partnerships. I’ll share a few highlights. Catering is an increasingly important channel for brands. It’s rebounding significantly post-COVID and it generates high average order values and it’s a large TAM. Third-party research estimates that U.S. workplace and event catering is a $60 billion market. However managing catering orders can be inefficient, often requiring manual order entry and customer cross-referencing with POS data.

To address this opportunity, Olo launched its Catering Plus module in the fall. And this spring, we released a new production sheet feature that streamlines the prep for large volume orders, improving staff efficiency and enabling brands to capture more high-value catering sales. We are very excited about our early success here with brands expanding into Catering Plus in Q1. Since implementing Catering Plus, [indiscernible] Fresh Mexican Grill has increased catering same-store sales by 22% and has improved order accuracy and staff efficiency. With catering plus we believe we can do for catering what we’ve done for mealtime ordering and delivery, integrate the channel into the brand’s operations and drive sales and efficiencies. Like rails and dispatch, Catering Plus is a standalone module and it’s generating interest from large brands not currently working with Olo as well as restaurants within our base.

We look forward to sharing more this year as we focus on making Catering Plus a larger part of our business. We also announced smart cross-sells and AI powered feature that surfaces personalized dynamic items suggestions during the ordering and checkout process. By recommending items based on contextual data such as order history, location menu and card contents. This new feature is improving guest engagement and average order value. In a recent Olo test, smart cross-sells accounted for 10% more basket value on average than static cross-sells. Smart cross-sells is live today and we see an opportunity to combine it with borderless which has doubled since year end. And now exceeds four million guests to flex the Olo network effect and power cross-sells across the Olo network to drive even more guest engagement and sales list.

In Pay, we announced the general availability of card present functionality in self-service kiosk which is another step toward bringing card present to market this year. Honeygrow a high growth stir fry and salad concept, is a digital first brand that runs nearly all of its orders through Olo’s platforms. They’re also the first to adopt Olo pay for both on and off-premise transactions which reduced chargeback costs by 83% and increased authorization rates for card-not-present transactions by over 7%. By running all their payments through Olo pay, ee enabled Honeygrow to improve their financial performance and their guest experience and they are generating significantly higher RPU than our platform average. RPU expansion is a key growth lever and we believe we can replicate our success with Honeygrow throughout our base.

And in ENGAGE we released new features to help brands assess ROI, manage contact lists and analyze campaign effectiveness. We also enhanced the guest data platform’s user interface to make it easier for brands to develop a comprehensive view of their guest across all channels and platforms in real time. These engaged enhancements give brands more power to convert their data into the insights and actions that increase sales and guest lifetime value. In our ecosystem which now exceeds 400 partners, we announced a number of new integrations including Karbit for kitchen capacity, order and delivery management; kia for voice ordering and Sparkfly for guest engagement. We remain committed to providing an open platform that helps restaurants benefit from innovation provided by Olo and other best-of-breed technologies.

Before I turn the call over to Peter, I want to discuss our new POS integration announcements with NCR Voyix and Kiu [ph] and why we believe these are so important to our strategy. By integrating Olo Pay into POS providers like NCR Voyix and Kiu, we will expand our payment processing and data footprint into non-digital transactions. We are 84% of US restaurant business occurs coupled with ENGAGE integration capabilities although Olo will be positioned to touch 100% of restaurant transactions and offer brands a differentiated omnichannel guest data platform at scale. We believe that’s an unlock for scaling pay and engage revenue and a game changer for Olo’s ability to help brands drive sales grow guest lifetime value and make every guest feel like a regular.

Today our open platform enables brands to aggregate guest data from Olo solutions and our ecosystem partners to better understand their guest lifetime value; personalize the guest experience and drive sales and operating efficiencies. For example, SONNY’s barbecue ingest data from multiple sources across its tech stack including ordering, rails and dispatch into the Engage GDP to better understand guest lifetime value order frequency and average set. SONNY’s leverage this data to drive 50% growth in marketing subscribers and learned that the top 15% of their guests account for half of their sales. First Watch used with Olo to unify their data and increased frequency with repeat customers, engage enabled First Watch first watch to deliver personalized automated e-mail campaigns that resulted in a 20% lift in spend by recipients over 30 days and $2.7 million in total spend in the campaigns first 90 days.

And as brands face the challenges of continued food cost inflation minimum wage legislation and a tight labor market the benefits of data-driven personalization are becoming increasingly important to a brand’s success. With greater data breadth, depth and scale than alternatives, Olo we’ll be in an even stronger position to help brands win. Our network of 700 brands, 85 million guests and 400 ecosystem partners drives data breadth. Our API.’s pulled deeper levels of transaction data than alternative providers and our expanding POS integrations will provide a meaningful increase in data scale. This is why we believe Olo has a durable competitive advantage versus the traditional walled garden approach of POS providers. Data-driven personalization yields success for restaurants and we believe although it’s set to become the clear leader in restaurant data and therefore best positioned to leverage AI and machine learning to drive insights and action that results in greater sales guest lifetime value and hospitality.

I’ll now turn the call over to Peter to review our Q1 results and guidance. Peter?

Peter Benevides: Thanks, Noah. Today, I’ll review our first quarter results, as well as provide guidance for the second quarter and the full year 2024. In the first quarter, total revenue was $66.5 million, an increase of 27% year over year. Platform revenue in the first quarter was $65.8 million, an increase of 28% year over year. Revenue from all three suites quarter paying and engage outperformed our expectations. Active locations were 81,000 up approximately 1000 sequentially. Note that the vast majority of Dutch proved locations are yet to be deployed, so they are not included in the Q1 active location count. We expect location count to ramp throughout the year and we continue to expect to add approximately 5000 net new locations this year.

ARPU for the first quarter was approximately $816, up 29% year over year and 4% sequentially. Year over year increases in RPU were driven by increased order volumes and modules per location in particular Olo Pay. In net revenue retention was above 120%, the second consecutive quarter where NRR was at or above 120%. For the remainder of the Q1 financial metrics disclosed, unless otherwise noted, I will be referencing non-GAAP financial measures. Gross profit for the first quarter was $41.5 million. This compares to $37.2 million a year ago. The year-over-year growth in gross profit was driven by continued revenue growth, partially offset by the increasing revenue mix of Olo Pay. Sales and marketing expense for the first quarter was $12.7 million or 19% of total revenue.

This compares to $9.9 million and 19% a year ago. Research and development expense for the first quarter was $13.9 million or 21% of total revenue. This compares to 15.7 million or 30% of total revenue a year ago. General and administrative expense for the first quarter was $9.3 million or 14% of total revenue. This compares to $10.4 million in 20% a year ago. Operating income for the first quarter was $5.6 million. This compares to $1.2 million a year ago. Operating margin was approximately 8% in Q1 and the year-over-year improvement reflects the combination of our focus on managing costs, as well as growth in revenue. Sequentially, the decline in profitability from Q4 2023 reflects seasonality around factors such as tax resets and benefit expense increases associated with the new calendar year, as well as costs associated with hosting our annual customer conference beyond four in March.

Net income in the first quarter was $7.8 million or $0.05 per share based on approximately $172.7 million fully diluted weighted average shares outstanding. Turning our attention to the balance sheet and cash flow statements. Our cash, cash equivalents and short and long-term investments totaled approximately $377 million as of March 31 2024. Pursuant to our current share repurchase program in the first quarter we repurchased 2.8 million shares for a total of approximately 15 million. Since the introduction of our share repurchase program, we have repurchased 14.3 million shares for approximately 93.1 million. We had approximately $6.9 million remaining on the authorization as of the end of the quarter and have since completed the program. And today, we announced that our Board has authorized a new 100 million share repurchase program.

Net cash provided by operating activities was $6 million in the quarter compared to $7.2 million in the quarter a year ago. Free cash flow was $2.8 million compared to $3.9 million a year ago. I’ll wrap up by providing our guidance for the second quarter and full year 2024. For the second quarter of 2024, we expect revenue in the range of $67.5 million and $68 million and non-GAAP operating income in the range of $5.5 million and $5.9 million. For the fiscal year 2024, we are raising revenue and non-GAAP operating income guidance. We now expect revenue in the range of $274.5 million and $276.5 million and non-GAAP operating income in the range of $23 million and $24.5 million. A few things to keep in mind as you consider our outlook for the year.

We got off to a solid start to the year as reflected in our raised full year guidance. That said, we continue to take a prudent approach to our full year outlook. We expect trends in the restaurant industry will remain similar to what we saw in 2023, consistent growth in digital ordering, a continued need to improve efficiency to offset rising costs, and macro uncertainty. Revenue guidance continues to assume a two-third, one-third split between incremental revenue from existing projects currently in deployment and new projects signed and deployed in year, which will be driven primarily by ARPU expansion as Olo Pay scales, and we have further success in selling multiple modules in our Order and Engage suites. In terms of gross margin, we now expect the sequential decline will be less pronounced.

Specifically, we expect Q2 gross margin to decrease approximately 100 basis points to 150 basis points from Q1’s gross margin, and for this range of decline to occur from Q2 to Q3 and from Q3 to Q4. The change from our initial expectation of 150 basis points to 200 basis points is due to a shift of certain costs from cost of revenue to operating expenses as well as from better cost optimization within the platform. In terms of non-GAAP operating income, we expect to generate operating leverage in the second half of the year compared to the first half, directionally consistent with prior-year trends. Finally, as a reminder, the quarterly pacing of operating expenses will be slightly different in the first half of 2024 versus prior years. As we stated on our last call, this year’s annual compensation increases begin hitting in Q2.

Historically, annual comp increases began in Q1. To wrap up, we got off to a strong start this year. We are making good progress across our key strategic priorities and believe we are well-positioned to deliver on our updated financial targets for the year. We remain at the early stages of the digitization of the restaurant industry and believe Olo’s portfolio of solutions helps brands solve many of their most pressing operational challenges. Further, our open platform approach is allowing us to significantly increase the scale of our data asset and do more to help brands increase their sales and improve their operations. With that, I’d now like to turn it over to the operator to begin the Q&A session. Operator?

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Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] The first question we have comes from Terry Tillman of Truist Securities. Please go ahead.

Terrell Tillman: Yeah. Hi. Good afternoon, gentlemen. Can you hear me okay?

Noah Glass: Loud and clear, Terry. Thanks.

Terrell Tillman: Wonderful. So congrats on some of these wins like Dutch Bros and some of the other transactions first of all. I’ve got two questions. The first one is a multi-parter. The second one, it might also be a multi-parter. So bear with me. But in terms of you’ve got a couple of POS relationships now integrating into Olo Pay. I would love just some qualitative perspective on what are you hearing from your large customer base as now that’s starting to unlock? And then secondly, I think, Peter, you had talked about, if I’m not mistaken, about a doubling of Olo Pay for the year to $60 million. Does that still hold true, or does that change? Thank you. And then I have a follow-up.

Noah Glass: Terry, I’ll get started on the qualitative part. This is Noah. So it’s been fun to work on these POS partnerships that go beyond the traditional way that we integrate to the three dozen point-of-sale providers that we integrate to with just order injection, but to now include both Olo Pay and also Olo Engage. So we’re able to process those on-premise transactions happening inside of the restaurants or through the drive-thru and have all of the data from those transactions, the 84% of transactions that take place in non-digital channels, but in on-premise channels flowing into the guest data platform. It’s been even more fun to see the reaction from customers who — many of whom described this kind of capability of being able to see 100% of transactions and tie every transaction back to a guest as something of a Holy Grail that they’ve been waiting for this industry to get to.

So being able to unlock that Holy Grail because it tries really think about marketing and guest engagement differently and enables them to really understand guest lifetime value, not just for the 16% of digital transactions, but for all 100% has been really, really encouraging. So we’ve seen that reaction as you posted about these relationships with Qu initially, which we announced at our Beyond4 customer conference about six weeks back and then more recently with NCR Voyix, we’ve seen these reactions in social media. And then we’ve also had direct conversations with the executives at the restaurant brands that are today common customers of Olo and these point-of-sale platforms. They are really excited about the future for both pay and for engage and the unlock that this represents.

And beyond that, it’s been really fun to see what prospects are saying and thinking about these capabilities as they’re evaluating POS partners and seeing this as a real competitive advantage for the POS partners that are working with Olo beyond just order injection, but across all three of our product suites. So we have these two announced. And we obviously are seeking to do this across our point-of-sale partner relationship. [Audio Gap]

Gary Fuges: Apologies, Gary here, I think we may have lost Noah, just give us a second.

Peter Benevides: Well, while Noah connects. So I can jump in there Terry in your question around the estimates for pay this year. So you’re right. We are still estimating a doubling of the business to over $60 million of revenue for the year. And again that will just include the card-not-present portion of the business with card-present being a revenue contributor in 2025.

Terry Tillman: That’s great. Thanks for that. And then Noah, Gary, I don’t know, if we’ve had — thank you for that Peter. Gary did Noah, rejoined.

Gary Fuges: I believe Terry he’s dialing back in, so apologies for that.

Terry Tillman: Okay. Well, maybe what I’ll do is just for the spirit of letting other folks get in here. Maybe I could just ask you Peter. And then I’ll just jump back in the queue, as it relates to free cash flow for the year. Just any updated thoughts there on how you’re thinking about free cash flow for the year? Thank you.

Gary Fuges: Yeah. I’m sure you noticed this quarter we generated a free cash flow which is about half of what we brought in from an operating income perspective with the difference there being really on cap software driven. I would expect holding aside from any one-time items that we’re not foreseeing currently for that dynamic to continue through the balance of the year and being free cash flow positive for the year.

Terry Tillman: All right. Thank you.

Gary Fuges: Operator, next question please. Apologies, we seem to be having a continued difficulties here. I’ll just hang loose here one second. Hi folks we’re working through this. We’re still here and we’ll work on getting in QA — see folks in the Q&A and we’ll work on getting it through. So please be patient. Thank you. Max at Lake Street, can you hear me?

Unidentified Analyst: Yeah. I can. Sorry just said you are not talking or if they were talking to me?

Gary Fuges: Yeah. That’s right Omar. I’m taking over here Max. Trying to do it’s remotely. So we’ve got your line live so. I’ve got Peter and Noah is so far away.

Unidentified Analyst: Okay. All right. Sounds good and so if we just go to the NCR Voyix partnership, I guess what I’m wondering here, is this arrangement dependent on the launch of card-present or we see card-not-present revenue from them today.

Noah Glass: So we currently have the integrations. Max this is Noah. For order injection and Olo can the digital ordering provider with and card-not-present processing. The idea of this relationship is really tied to the launch of card present processing, where the transaction is happening. Orders’ being taken on the POS the payments is being done, POS adjacent taking to the point-of-sale and then be receiving the data from that order, not just the transaction data of the total amount that you typically get from a payment transaction, but we’re actually getting ticket data. So we’re able to see item-level data, ingredient-level data, what was modified, adjusted, substituted, added to an item. And that’s getting pulled back into the Olo Engage guest data platform.

And all of that is tied back to a guest profile. So that’s what I mean when I say being able to see 100% of transactions for 100% of guests. And we’re really seeing a level of depth of those transactions, a granularity that is typically associated with digital transactions, we were able to see all of that customization detail down to the ingredient level, but we’re not able to do that — we’re now able to do that, rather, for on-premise transactions through these two different point-of-sale platforms, Qu and NCR Voyix. And our ambition is to replicate that kind of arrangement across all of the point-of-sale partners that we work with in serving enterprise restaurant brand guest data needs.