OLO - a stellar little company

Many thanks to JabbokRiver42 for bringing this company to my attention as a side note while discussing TOST and LSPD. He did a lot of hard digging.

OLO checks just about every box of a company we look for here…
• stellar sequential & yoy growth (see numbers below)
• Non-gaap profitable
• High recurring revenue business model. Dollar-based net revenue
retention over 120%.
• Efficient sales cycle.
• Founder in the management team.
• Good Glassdoor ratings.
• Massive TAM, small size
• No customer concentration risk.
• Excellent balance sheet and no debt. After its March IPO, the company
sits on $586,566 cash
The numbers:

                          	    	     
          TTM     Q1'21	  Q4	   Q3	   Q2      Q1'20   Q4	  Q3	 Q2    Q1'19
                                                                                                                   		
Revenue	107,042	36123	30,547  27,505   24,304   16,068  14,038 14,162	12,139	10,352

Sequen.           18.3%	 11.1%	  13.2%	   51.3%   14.5%   -0.9%  16.7%	17.3%
	
yoy chg          150%	  159%	   36%	  139%	   60%
Gr Prof         29,273	 25,261	22,726	 20,043	11,726	 9,760	 9,619	 8,398	  7,328	
Gr Mar             81%	   83%	    94%	   125%	    84%	   69%	   79%	   81%	

Company background:
I strongly recommend to those interested to read/listen to a MF glowing and thorough discussion just before the IPO at https://www.fool.com/investing/2021/03/09/what-investors-nee… Much of the narrative here is taken from that MF session.

OLO is a SaaS provider that helps big brand restaurants stand up their digital storefronts and make delivery happen. The company has 400 big name restaurant brands to their name and many of these listeners have ordered from and know. They process almost two million orders per day, and in 2020, $14.6 billion in gross merchandising volume. Not only can they enable order taking, they can also enable data and analytics.

The company generates revenue in two main main ways. The platform revenue is split between subscription based products, so they charge a per restaurant, per month fee, just to be on the old platform and that was about 57% of platform revenue last year, down from 93% in the prior year. However, they also have a transaction fee, and that is based on their dispatch model, as well as their analytics model. That is based on each transaction they take a fee for and that was 43% of revenue last year, up from 7% in 2018.

Even though it’s a small company with outstanding growth, it’s profitable because of their selling model. Per the S-1: "We don’t go door to door, or restaurants to restaurants looking for sales. We knock on corporate headquarters, When we go after the customers at that level, and if we win, we sign on thousands of customers all with one transaction”. This strategy makes selling costs very low.

How big is this market opportunity? It’s surprisingly large. Last year, which was a big time down year for the restaurant industry, total sales were still $660 billion. That number is expected to grow to $1 trillion by 2024. That gives them a total addressable market opportunity of about $7 billion They do have plans over time as they scale to shifts down-market and start focusing on medium-size restaurants and then smaller restaurants. If they make that move, you can expect their sales and marketing spending to go up significantly. But if they can do that, they believe that that will expand their TAM by another $8 billion, so doubled and again, just the United States.

However, a lot of their customers already have restaurants in international markets, so they do plan on expanding into international markets down the road and they believe that would give them a further $40 billion addressable market opportunity. Basically everyone on the inside side of the restaurant industry has deemed Olo the leader in the space.

They have consistently grown the way that we expect SaaS companies to grow. They get more and more revenue per location per customer. In 2019, they got about $1,100 per revenue per location. Last year, that was up $1,760.They structure their contracts when a customer signs on board – typically a three year deal. Once a company makes a switch and chooses to adopt Olo’s platform, I can see it being very hard for them to give it up.

Their top 10 biggest restaurant partners, accounted for only 21% of revenue.

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Thanks MagellansQuest for the discussion. I noticed your table of revenues does not include Q2 '21, reported on Aug 10. They showed revenue of 35.9M, a sequential decline of 0.7% from 36.1M in Q1. They did have one quarter of sequential decline previously, in Q4 '19, so it’s not unprecedented for them. In your research, was there an explanation for that?

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Thanks for highlighting Olo, MagellansQuest!

Since your numbers stop at Q1, I thought I’d drop info on Q2 here.

Total revenue increased 48% year-over-year to $35.9 million.
Platform revenue increased 53% year-over-year to $34.5 million.
Gross profit increased 42% year-over-year to $28.5 million, or 80% of total revenue.
Non-GAAP gross profit increased 46% year-over-year to $29.5 million, or 82% of total revenue.
Operating income decreased $8.2 million year-over-year to an operating loss of $(2.4) million, or (7)% of total revenue.
Non-GAAP operating income decreased $1.1 million year-over-year to $5.9 million, or 16% of total revenue.
Net loss was $(2.4) million or $(0.02) per share, compared to net income of $3.9 million or $0.00 per share a year ago.
Non-GAAP net income was $5.8 million or $0.03 per share, compared to a non-GAAP net income of $6.8 million or $0.05 per share a year ago.
Cash and cash equivalents were $575.2 million.
Ending active locations increased 30% year-over-year to approximately 74,000.
Average revenue per unit (ARPU) increased 13% year-over-year to approximately $486.
Dollar-based net revenue retention (NRR) remained over 120%.

And their guidance:
For the third quarter of 2021, Olo expects to report:

Revenue in the range of $36.0 million to $36.5 million; and
Non-GAAP operating income in the range of $3.4 million to $3.8 million.
For the fiscal year 2021, Olo expects to report:

Revenue in the range of $144.7 million to $145.7 million; and
Non-GAAP operating income in the range of $18.8 million to $19.6 million.

Here’s the full Q2 report: https://investors.olo.com/news/news-details/2021/Olo-Announc…

And here’s the MF transcript of the call: https://www.fool.com/premium/coverage/earnings/call-transcri…

Glassdoor: https://www.glassdoor.com/Overview/Working-at-Olo-EI_IE10005…. 97% approval for Founder/CEO Noah Glass (although based on only 33 reviews).

I have a 2% position.

JR

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I thought this ticker sounded familiar so I did a quick search, been discussed a couple times this past year on this board. Here is another decent write up:

https://discussion.fool.com/restaurant-saas-platform-olo-files-f…

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I always like to hear from the CEO/CFO. Here is a link to a webcast replay from the Piper Sandler Global Technology Conference from earlier this month: https://pipersandler.zoom.us/rec/play/KIk2TeuZCmn4Lw8kvNTvD3…

It’s only 20 minutes long and well worth a listen. Olo was founded in 2005 and started their business pre-smart phone which meant ordering via text. They have come a long way since then. Next on their development agenda is the “Fly Through Lane.” Think drive through but with pre-order so you speed through to pick-up. The CFO says they are at 1% penetration with the processing of 500M transactions annually in TAM that has 500B transactions per year.

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When I was going over LSPD and TOST, OLO came up as well. The reason I left it behind is this:

From their prospectus:

“We believe our total addressable market opportunity is $7 billion based on our current product offerings and focus on enterprise restaurants primarily in the United States.”

As of today, their current market cap is about 5 billion on a 145 million estimate for fiscal 2021. In addition, their QoQ as well as their YoY drop dramatically. They go from 125% YoY in Q1 to 47% YoY in Q2. The QoQ not only drops but it goes negative. As this wasn’t enough, they also guide for 36-36.5 million for Q3 which is basically flat with no growth. So, was the growth accelerated because of covid alone? Is it all over now? It seems that the market doesn’t like something about OLO since the stock price has been trending downwards for the past month or so.

At the same time, Toast (TOST) and Doordash (DASH) have been accelerating even after covid and they come off a much larger base. Over 1 billion in sales this Q for DASH and almost 3/4 of a billion for TOST for the first half. OLO makes TOST (estimated EV/S of 10) and DASH (EV/S of 15) look cheap.

With an EV/S of around 35, it makes it hard for me to believe that there is a tremendous opportunity out there for OLO. Or at least for now. Maybe I’m missing something. Please enlighten me.

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Pavlos21,

I’m under the gun for work today, but this MF article from June may be of help: https://www.fool.com/investing/2021/06/08/why-online-orderin….

See especially the final section, which covers the TAM question. I’ve pulled it out here:

In the company’s S-1, Olo estimates its total addressable market (TAM) in the U.S. is $20 billion. And the company says there are roughly 700,000 restaurants in the U.S. (Olo has captured about 10% of this market already.) If we divide $20 billion by the number of U.S. restaurants, we see Olo’s math as it estimates its TAM – each restaurant will pay an annual fee to Olo of around $28,000 a year. (Some of this is transaction revenue, and Olo does not disclose its pricing structure.)

Maybe I’m wrong, but I think Olo is low-balling its worldwide market opportunity. In their S-1, the company says the rest of the world is “at least as big” as the U.S. market. So the company doubles their U.S. market estimate and gives us a $40 billion opportunity overall. Right now, Olo is focused on the big restaurant chains in the U.S. – the enterprise customers. So they’re not really thinking about the foreign opportunity.

However, the number of restaurants in the rest of the world appears to be much larger than the number of U.S. restaurants. Olo estimates the number of restaurants in the rest of the world to be 700,000. That number may actually be 20 times larger. According to the WebMiner blog, there are an estimated 15 million restaurants in the entire world. That number includes pubs and coffee houses.

If we are cautious and say maybe there are 10 million restaurants, bars and coffee houses in the world that might adopt Olo’s solution, at $28,000 per year (cheap for what this company is providing), the ultimate TAM number I get is $280 billion in annual revenues.

Olo is a tiny company right now, with just $100 million in revenue and triple-digit revenue growth. But if Olo becomes the Shopify equivalent to the restaurant industry, its stock is going to generate fantastic returns for early investors.

There are a lot of assumptions and “ifs” in that write-up, and the numbers will tell over time whether they can execute. Covid impacted the restaurant industry in ways that many of the other companies many of us hold avoided, so the financials and comps have jumped around. But the industry is in dire need of digital solutions. Labor issues were bad before Covid and they are infinitely worse now.

As I said in the other thread that MagellansQuest mentioned (and which I can’t find now for the life of me–it was really OT in another thread), TOST and OLO are currently working in different areas of the restaurant industry–TOST with POS payments and OLO with online ordering. Each is the leader in their respective restaurant niches currently. But I would guess that both of them have their eye on the whole pie.

It seems possible to me that TOST and OLO might join forces down the road to keep the competitors on both sides at bay (Square and Stripe on the payments side and the Door Dash and delivery services on the ordering side) and have the restaurant industry to themselves.

I just have a 2% position here and I’m not convinced I’ll hold forever. I’ve sold out once for another opportunity a couple months ago and got back in at the beginning of this month. It was Brian Feroldi’s enthusiasm that got me in soon after their March IPO and he has a position personally. But this board provides these kinds of financial deep dives that I’m not able to do, so I’m grateful.

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