Olo | Q3-24 Earning & Call

Better than I first thought.

If you do not know about Olo, everything you need is here.

Olo | Investment Case

Overview.

A very stable quarter which I wouldn’t call good, nor bad… Just, stable.

EPS. $0.05 | $0.06 | +20.00% beat
Revenue. $70.94M | $71.85M | +1.29% beat

Lots of green, but no acceleration…

Business.

Let's start with what was a disappointment at first but ended up being justified by management: The ARPUs sequential decline.

Olo can be a very powerful tool if its clients combine different modules to optimize their business. The entire investment case relies on this should be show in the data with constantly growing ARPUs & accelerating growth as active locations use more & more modules. At the moment, each location uses 3 to 3.5 modules on average - out of 16 in total.

This accelerationg isn't happening this quarter for two reasons according to management, the most valid one being Wingstop reducing its usage of Olo.

“The ARPU dynamic this quarter was driven by 2 factors. This was the first quarter where you felt the full impact of Wingstop transitioning from 3 product modules down to 1. And you had a subset of locations that did come on this quarter were single module locations. I think Noah called one out in the prepared remarks in Long John Silver's, which when only utilizing one product module, you inherently have a lower ARPU.”

The franchise decided to transition from Olo's solution to an in-house product they have been developing for three years. It seems like a story we already heard, here's how it went for &pizza who tried the same thing earlier.

With around 2,000 restaurants, it's entirely normal that Olo's ARPUs feel the impact. The second argument is less valid in my opinion as adding new locations with only one module should still be compensated by other locations growing their partnership. Plus, this quarter saw 800 locations of the 3,000 new ones coming from Dutch Bros with more than one module, while other new partners also started with more than one module directly.

“Multi-module new deployments included Dutch Bros on Olo Ordering and Olo Pay for card-not-present transactions and Paris Baguette for Olo Order suite modules and Olo Pay for card-not-present transactions.”

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“In emerging enterprise, we had a strong quarter of multi suite deployments, including Papa Gino's and Pizza Inn, who both deployed Ordering, Dispatch, Rails and Olopay Card Not Presence.”

New multi modules deployement while other locations expanded their usage, also shown by a retention above 120%.

Wingstop had a bigger negative impact on this quarter's ARPUs growth than the new acquisitions. As to if their in-house tool will work, I guess time will tell.

In term of active locations, the company reached this quarter its target of 5,000 additions for the year, pretty good new as they now expect to add another thousand in the fourth quarter.

The big subject remains Olo Pay which should help & push active locations to use it & deepen their partnership with more modules to benefit from the entire potential of Olo.

“As we shared in our fall release, brands on Q POS can now use Olopay to process card present transactions and aggregate the associated basket level data into the Olo Engage GDP.”

Things are going very well although a bit slow, but the deployment of Olo Pay with card present will take time.

“we're excited to share that we expect to launch 5 Olopay card present pilots in Q4 with brands on Q and NCR Voyix.”

The potential is here though, nothing changed, as Olo Pay processes less than 2% of the total value which transacts by Olo’s platform as of today. If everything scales properly this value should increase rapidly with the card present platform.

“That takes us because of the fact that card present and card not present together are about 6 times the size of card not present alone up to about $160,000,000,000 of GMV addressable as gross payments volume ultimately for OloPay. So from that standpoint, the $2,500,000,000 of gross payment volume on Olopay is quite substantial, but very early in the overall opportunity, under 2%.”

OloPay transacted $1B last year and should transact around $2.5B this year while generating $30M of revenues and in the high $60M respectively, which seems to point to a slightly lower take rate YoY though. I’ll let you do any math you want as to what it would generate if olo Pay grew in proportion of total GMV, as it should, and you’ll see that the potential remains… Big.

Revenues.

Lots to say here. I will focus on the nine months ending to have a better idea of the global improvement of the company.

In terms of revenues, we are around 26% of YoY growth which shows a YoY growth acceleration for now which we do not see in the quarterly results as there clearly is a growth slowdown for the third quarter in a row.

Bigger problem is that costs are growing much faster than revenues, up 48% YoY, probably due to the integration of Olo Pay. The short term question is to know if the costs are worth the expansion. I wouldn’t be invested if I didn’t believe so.

There’s a strong optimization in expenses, down 16.7% YoY, compensating for the costs growth as the sum of both remains flatish YoY, hence better operational results although still slightly unprofitable, helped by interests.

Gross margins decreased and will continue to decrease as Olo Pay ramps up, management expects them around 60%.

Balance sheet remains healthy with $350M of net debt and FCF is positive thanks to SBCs, although no dilution YoY.

Guidance.

Here’s a short-term issue to my opinion.

Olo is not expecting any QoQ growth in revenues which means no ARPUs growth QoQ as they also intend to add 1,000 active locations. No acceleration whatsoever, no confirmation on the investment thesis. This is very short term but it has to be mentioned.

FY-24 growth would be around 23% YoY and close to profitable, correct but nothing more.

My Take.

I might be a bit biased by a wish to have faster results, faster execution, faster implementation of Olo Pay card-present... Faster scaling in short with maybe unrealizable timeframe from a business perspective.

For now, this data & guidance do not show concrete proof of my investment thesis, of the acceleration of modules usage by locations and of the value & need franchises have for Olo's products. It surely needs more time. Noah himself concluded the call with the exact words I looked for.

“While we're pleased with our Q3 year to date performance in 2024, we're by no means satisfied.”

Quarter’s far from bad though and I'm very okay holding & giving time, especially at such a weak valuation but I already have a proper position & might not put much more liquidities on Olo this quarter. I'd rather wait to see more confirmations & a growth accelerations before. Will just be sitting on my hands.