Olo Inc. (NYSE:OLO) Q3 2023 Earnings Call Transcript

Olo Inc. (NYSE:OLO) Q3 2023 Earnings Call Transcript November 6, 2023

Olo Inc. reports earnings inline with expectations. Reported EPS is $0.04 EPS, expectations were $0.04.

Operator: Good afternoon. My name is Irene and I will be your conference operator today. At this time, I would like to welcome everyone to the Olo Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Gary Fuges, SVP, Investor Relations. Please go ahead.

Gary Fuges: Thank you. Good afternoon, everyone and welcome to Olo’s third quarter 2023 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 our 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 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 are 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. Hello, everyone. Thank you for spending time with us today. In Q3, we continued to deliver on our 2023 financial and strategic goals. We generated strong quarterly results. We landed and expanded with both enterprise and emerging enterprise brands and drove innovation that helps our customers drive increased sales, operational efficiency and superior guest experiences. Third quarter financial performance exceeded the high end of our revenue and bottom line guidance ranges, with total revenue increasing 22% year-over-year and non-GAAP operating margin expanding to 10%. Platform revenue grew 24% year-over-year, driven primarily by the consistent solid performance in our ordering module, the foundational components of the order suite and by rapid growth in Olo Pay.

As our guidance for the fourth quarter reflects, we expect to build on our strong Q3 results. More importantly, the team’s hard work this year sets us up to execute on our long-term goal to be the platform that enables restaurant brands to harness the power of their guest data. With the scaled network that includes more than 600 brands, Olo is well positioned to help brands power their digital orders and payments, capture the associated guest data and convert these data into insights that can help brands drive more traffic. We ended the quarter with approximately 78,000 active locations, adding approximately 1,000 net new locations sequentially. Average revenue per unit or ARPU increased 33% year-over-year and net revenue retention expanded for the fifth consecutive quarter to approximately 119%.

The major customer trends in the quarter were consistent with what we’ve seen throughout this year. Pay is leading the expansion motion with enterprise brands and we’re winning more new business within the emerging enterprise segments. In Enterprise, we became a strategic partner of FAT Brands, a large portfolio of casual, fast casual and quick service concepts. We began our journey with FAT Brands with a few brand level relationships for order. Today, we have a parent level partnership with FAT Brands that includes our order and pay suites as well as Borderless, our password-less checkout feature coupled with Pay. As part of this expanded relationship, Fatburger, a net new brand for Olo deployed order and pay in the quarter. Additionally, Great American Cookies became the first FAT Brand concept to roll out Borderless.

It’s an exciting evolution of our FAT Brands relationship that offers us expansion opportunities into their entire U.S. portfolio. Dave’s Hot Chicken and Potbelly both launched Olo Pay, making Q3 the fifth consecutive quarter where an existing enterprise customer has expanded into our rapid growth payment solution. We’re excited to share that Pay recently eclipsed $1 billion in cumulative gross payment volume or GPV. Based on its year-to-date performance, Pay is on track to process more than $1 billion in GPV in calendar year 2023 which would be a 4x increase from calendar year 2022. Why is Olo Pay scaling so rapidly? Pay’s performance metrics exceed key industry benchmarks, including authorization, fraud and chargeback rates which helps decrease friction in the guest experience and increase efficiency and profitability in brand operations.

When brands utilize Borderless which is coupled with Pay today, our research indicates they see higher order frequency from guests with Borderless accounts. Since its launch about 5 quarters ago, Borderless has scaled to more than 1 million total guest accounts created. It’s an early milestone in our journey here and we see an opportunity to make Borderless available to all of our customers. We believe this would be a win for guests and it would help make Olo an even stronger partner to drive traffic for brands which is more important than ever in our industry. I want to provide an update regarding our ongoing relationship with Wingstop, who’s indicated an intent to transition from the platform when their contract expires at the end of Q1 2024.

This customer represents less than 3% of total revenue in approximately 1,800 locations. We do not believe any change in this relationship would be material to our business. Still, we feel it’s important to address this today given their announcement last week. As our contracts are typically 3 years in duration, we have a regular cadence of renewal discussions. Most brands continue on with us as reflected in our high gross retention rate that’s exceeded 95% since our IPO and many expand with us as illustrated by our 119% net revenue retention rate this quarter. While we’ve seen a few instances of brands opting to build their own technology, we view these as outliers. Far more frequently, we see brands migrate from homegrown tech to Olo. We believe our SaaS platform offers economies of scale, lower total cost of ownership and greater innovation than homegrown tech.

We invest over $90 million annually to deliver enterprise-grade reliability and platform-level innovation where every customer benefits from new features and product enhancements. The industry is beginning to validate our strategy of leveraging transaction data to improve operations and personalize the guest experience to drive increased conversion and frequency. We’ve built a differentiated platform at scale which we believe puts us in a unique position as data becomes increasingly vital to success in the restaurant industry. Turning to the emerging enterprise segment which we define as brands with 5 to 99 locations. We continue to see strong multi-module adoption, including Pay. In Q3, several new emerging enterprise brands deployed 4 or more modules, including Eataly, Gold Star Chili, La Madeleine, Lou Malnatia’s and Margaritaville Restaurants.

Eataly deployed several Olo modules across its North American brick-and-mortar locations in Q3, with each location operating a virtual Eataly Paninoteca as well. Olo is helping Eataly meet its customers where they are, making it more convenient for customers to order from their favorite Eataly spots. In the coming months, each location plans to add another virtual concept, Eataly Cafe. And Engage is also demonstrating product market fit with emerging enterprise. In Q3, California Fish Grill deployed engages marketing, sentiment and GDP modules. Our emerging enterprise segment represents brands with the ambition to scale, making Olo the ideal choice to serve their ordering, payments and engagement needs. Dave’s Hot Chicken is not only a new pay customer.

They’re the epitome of why we’re focused on emerging enterprises. Dave started with Olo in 2020 as an order customer and they were just shy of 80 locations. Since then, they’ve more than doubled their locations and expanded into additional modules. Today there are a multimodule enterprise brand customer that relies on Olo to fuel their growth. This is our playbook for emerging enterprise, serve their needs today and scale with them as they grow. As emerging enterprise brands tend to be more greenfield opportunities, our success in this part of the market can help drive both overall location counts and ARPU. An important part of serving our brands is providing continual innovation. And in Q3, we released several updates and new features across our 3 product suites.

I’ll review the highlights and I encourage you to watch the latest release video on our website to learn more about how new features are helping brands increase their revenue streams and do more with less. In our order suite, we launched Catering+, a robust ordering engine that integrates seamlessly with a customer’s existing meal time ordering platforms and enables high-value guests to place orders using a line of credit extended by the brand. Catering is a high-value channel, generating about $350 in average order value and its roaring back post pandemic. In Olo Pay, we added automated dispute response, a feature that automatically responds to certain disputes that have not been addressed by our customers. Leveraging Olo’s internal ordering data, this feature aims to boost chargeback responses and win rates while eliminating the need for manual intervention.

It’s just another way Olo helps our brands lower their cost of doing business. We also made progress toward our goal of expanding pay into card-present processing. In Q3, we began processing card-present transactions through a second kiosk partner. And in Q4, we expect to have card-present live in all locations of an emerging enterprise fast casual brand. We have plenty of runway in card-not-present to support Pay’s continued growth. As non-digital transactions account for more than 80% of restaurant transactions today, we expect card-present to be an additional growth driver for Pay as brands cycle through their existing multiyear legacy payment processing relationships. And in our Engage suite, we enhanced the sentiment module to help resource constrain marketing teams monitor and engage with guest feedback across rating and review platforms.

With an intuitive user interface, more powerful reporting capabilities and new AI tools that help marketing teams personalize and streamline their replies. Sentiment is stronger than ever in helping brands foster loyalty, win back on happy guests and turn review sites into reliable acquisition channels. Q3 was another solid quarter of financial performance as we executed further on our 2023 priorities. We delivered top line growth and operating leverage while investing in our go-to-market motion and product suites to position us for the long term. Pay is leading the charge on enterprise brand expansion and we’re establishing Olo as a winner for emerging enterprise restaurants with the ambition to scale. As the industry continues to move toward a data-centric approach to driving guest engagement and operational efficiencies, we believe our long-term competitive advantage increases with each quarter.

I’ll now turn the call over to Peter, who will review our third quarter financial performance and outlook. Peter?

Peter Benevides: Thanks, Noah. Today, I’ll review our third quarter results as well as provide guidance for the fourth quarter and the full year 2023. In the third quarter, total revenue was $57.8 million, an increase of 22% year-over-year. Platform revenue in the third quarter was $57.3 million, an increase of 24% year-over-year. We saw growth across all 3 of our product suites, most notably Olo Pay which is tracking ahead of our expectations. I’ll provide more color on this momentarily. In terms of key metrics, ARPU for the third quarter was approximately $742, representing a 33% increase year-over-year and a 4% increase sequentially. Further growth in ARPU was driven by continued progress in driving the average number of modules adopted by our customer base, including higher ARPU solutions like Olo Pay as well as the year-over-year impact of Subway departure.

The sequential improvement in ARPU was ahead of our expectations and reflects stronger-than-expected uptake of Olo Pay. Net revenue retention was approximately 119%, an increase of approximately 400 basis points sequentially. The ongoing strength in net revenue retention is being driven by ARPU growth as we successfully execute our cross-sell strategy as well as consistent strength in gross retention. And lastly, in terms of active locations, we added approximately 1,000 net new active locations to the platform sequentially, ending the quarter with approximately 78,000 active locations. This is modestly below our target for the quarter and was related to timing of go-lives. As we have discussed in the past, we can experience longer-than-expected implementation cycles due to customer resource constraints which can impact the pacing of our new location deployments.

We experienced this in Q3 and into Q4 with a large enterprise customer. As a result, excluding the impact of Subway, we now expect to add approximately 4,000 to 5,000 net new locations to our platform in 2023. For the remainder of the financial metrics disclosed, unless otherwise noted, I will be referencing non-GAAP financial measures. Gross profit for the third quarter was $38.8 million. This compares to $34.5 million a year ago. The year-over-year increase in gross profit was driven by continued growth in revenue, partially offset by processing costs associated with Olo Pay. We are making good progress scaling Olo Pay which we expect will continue to become a larger part of our overall mix. Sales and marketing expense for the third quarter was $9.4 million or 16% of total revenue.

This compares to $6.2 million and 13% a year ago. We made significant investments in our go-to-market team over the past year to align to our product suites in cross-sell strategy. We expect sales and marketing expense to decline as a percentage of revenue over time. Research and development expense for the third quarter was $14.3 million or 25% of total revenue compared to $15.7 million or 33% of total revenue a year ago. We continue to make meaningful R&D investments to support our growth initiatives but at a more normalized level relative to a year ago when we were releasing Olo Pay, our Borderless capabilities and the Engage suite. General and administrative expense for the third quarter was $9.4 million or 16% of total revenue. This compares to $9.7 million and 20% a year ago.

We expect to continue leveraging G&A expense as we scale the business and identify additional efficiencies in this area. Operating income for the third quarter was $5.7 million compared to $3 million a year ago. Operating margin was approximately 10% in Q3 as we generated operating leverage both sequentially and on a year-over-year basis. Net income in the third quarter was $7.6 million or $0.04 per share based on approximately 176.7 million fully diluted weighted average shares outstanding. Turning our attention to the balance sheet and cash flow statement. Our cash, cash equivalents in short and long-term investments totaled $397.6 million as of September 30, 2023. Pursuant to the share repurchase program which we announced in September 2022, in the third quarter, we repurchased 2 million shares for a total of approximately $13 million net of commissions.

Since the introduction of our share repurchase program, we have repurchased 8.8 million shares for $63 million. We have approximately $37 million remaining on our authorization. Regarding cash flows, net cash used in operating activities was $21.6 million in the quarter as compared to net cash provided by operating activities of $3.3 million in the quarter a year ago. Free cash flow was negative $24.4 million compared to positive $1.4 million a year ago. The cash outflow impact for the quarter was primarily due to higher day’s sales outstanding for the period due in part to a change in billing timing. We expect the day’s sales outstanding dynamic to reverse in the coming quarter, while the billing timing impacts to be one time in nature. I’ll wrap up by providing our guidance for the fourth quarter and full year 2023.

For the fourth quarter of 2023, we expect revenue in the range of $58.5 million and $59 million; and non-GAAP operating income in the range of $6.2 million and $6.6 million. For the fiscal year 2023, we expect revenue in the range of $223.8 million and $224.3 million and non-GAAP operating income in the range of $17.6 million and $18 million. A few things to note as you consider our guidance. Olo Pay continues to be an impressive source of strength with customer adoption exceeding our expectations. As Noah mentioned, we are on track to exceed $1 billion in GPV in 2023. As a result, we are now increasing our Olo Pay revenue outlook for the full year to be in the mid-$20 million range. This compares to our most recent outlook in the low $20 million and our expectation at the beginning of the year from mid to high-teen million.

The Order and Engage suites are tracking to our expectations and their revenue outlooks are unchanged. To wrap up, we delivered strong third quarter results on both the top and bottom line. Our strategic focus to expand our value proposition beyond digital ordering is working, increasing the value we deliver to customers in providing Olo a robust expansion opportunity. We are early in this process and believe we are well positioned to continue delivering an attractive combination of top and bottom line growth going forward. 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: [Operator Instructions] The first question we have is from Stephen Sheldon of William Blair.

Stephen Sheldon: First on the Wingstop loss, it sounds like they’re moving to an in-house solution that they’re rolling out in early 2024. Do you have visibility into other customers that are making tech investments like that? And what gives you the confidence that the general enterprise trends will be more towards outsourcing their tech stacks versus insourcing?

Noah Glass: Stephen, hello, this is Noah. Thank you for the question. To answer the first part, we don’t have visibility into any other customers that are contemplating a similar plan. With regard to Wingstop’s intended plan, look, we think this is the right strategy but the wrong tactics. The right strategy in that every brand should be focused on getting to 100% digital, collecting and using data to increase conversion and frequency to drive traffic. But we think it’s the wrong tactics in building a homegrown software. That’s very expensive. Wingstop has communicated that they had spent $50 million already and that’s just a down payment on a homegrown software platform. Olo spends $90 million annually to maintain our platform and to innovate to meet the needs of our customers and their guests.

Holding aside that ongoing expense, if you think about 600 brands each paying $50 million to kind of brands that are on our platform today, that would be $30 billion. If you think about Olo revenue, that’s under $300 million. So it’s a 100:1 ratio. That is a case study in the economies of scale of a SaaS platform. That’s not a belief, that’s not even a judgment, that’s just math. No matter what the scale is, SaaS is a more efficient way of going about this than homegrown. And that’s why we don’t take any enterprise brand out of our addressable market and we won’t be satisfied until 100% of them are Olo customers. If you look at the trend since our IPO, the trend has been brands migrating from homegrown solutions over to Olo and there have been 10 of those, more than 10 since the IPO.

We mentioned in the prepared remarks, 95% gross retention rate since our IPO and a 119% net revenue retention this quarter and that’s really representative of restaurant brands validating that Olo is mission-critical and leaning into doing more with Olo as they become digital-first businesses.

Stephen Sheldon: Maybe switching gears, you guys typically have good visibility into consumer behavior, especially on the digital ordering side. So curious what you’ve been seeing in recent months related to consumer spending at restaurants. Anything notable to call out on propensity to spend, willingness to pay for the convenience of delivery, basket size, et cetera. We’ve been hearing a lot of conflicting data points on how trends are holding up. So just curious what you’re seeing with any visibility you have?

Noah Glass: Yes. I think that is in line with what we’ve heard that restaurant guests are spending less, that the average order size is shrinking, that they’re seeking value. And part of that is in response to menu price inflation and part of that is in response to inflation and elevated costs in the form of elevated commodity costs, wage rates, et cetera. I think the key thing is that as restaurants raise prices, there’s a trade-off in traffic. It’s just normal price and supply and demand dynamics at play there. And so our responsibility as the old platform is how do we help restaurant brands to drive traffic. And driving traffic, it’s really all about meeting the needs of a restaurant’s guests, improving conversion and then improving frequency.

And that’s where the Engage suite and a guest data platform that can really help a restaurant brand, focus on its most valuable guests and get them to order more frequently has an outsized impact on traffic and enables the restaurants to do more with less in terms of labor and the cost of labor. So helping the restaurant become more efficient while improving the guest experience and making the guest journey more personalized is really the common thread across all of our solutions and that’s more important than ever in an industry that needs to drive traffic.