Olo Inc

Good afternoon. My name is Shomali, and I will be your conference operator today. At this time, I would like to welcome everyone to the OLO fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to OLO's Vice President of Investor Relations, Ms. Stephanie Daucus, Please go ahead.

Thank you. Good afternoon, everyone, and welcome to OLO's fourth quarter 2022 earnings conference call. Joining me today are Noah Glass, OLO's founder and CEO, and Peter Benavides, OLO's CFO. During our call today, some of our discussions and responses to your questions may contain forward-looking statements which represent our beliefs and assumptions only as of the date such statements are made. These forward-looking statements include, but are not limited to, statements regarding our expectations of our business, future financial results, including gross margin, operating margin, operating income, and operating expense leverage, total addressable market and growth opportunity, including with respect to revenue growth and the allocation of such incremental revenue growth, OLO pay growth, and growth in location, guidance and strategy, restaurant order processing trends, ability to increase usage of our platform, including by adding new locations, and upsell, including with respect to our opportunity to expand and our growth in average revenue per unit, and the durability of customer adoption of multiple modules. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements, and such risks are described in our earnings press release and our risk factors included in our SEC filings, including our annual report on Form 10-K that will be filed following this call and our other SEC filings. You should not rely on our forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today. 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 release, which we issued a short while ago. This earnings release is available on the Investor Relations page of our website and is included as an exhibit in the Form 8K furnished to the SEC. 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. We may or may not provide an update in the future on these metrics. I encourage you to visit our investor relations website at investors.olo.com to access our earnings release, investor presentation, periodic SEC reports, a webcast replay of today's call, or to learn more about OLO. With that, let me turn the call over to Noah.

Thank you, Stephanie. Hi, everyone. Thank you for spending time with us today. In 2022, Olo increasingly became the platform that restaurant brands rely on to make their digital priorities a reality. With the Olo platform supporting approximately 87,000 restaurants and more than 600 brands, connecting them to more than 300 technology partners and more than 85 million guests who transacted over the Olo platform and processing on average more than 2 million orders per day. In 2022, we grew annual revenues by 24%, expanded ARPU by 8% to just under $2,200 per year, surpassed $23 billion in gross merchandise volume for the year, and processed more than $250 million in gross payment volume in Olopay's first year of general availability on the platform. OLO continued our post-IPO transformation in 2022, OloPay had a marquee inaugural year. We broadened our platform's capabilities through the Omnivore acquisition. We brought on Chief Revenue Officer Diego Panama to elevate our world-class go-to-market team. And we introduced our refreshed mission to serve as the engine of hospitality. Consistent with this mission, Olo is committed to helping restaurants use technology to provide personalized guest experiences across all touchpoints, while improving operational efficiency. This will enable brands to elevate the guest experience, drive incremental and repeatable sales, and improve profitability. We believe the future of the restaurant industry is guest-centric, empowered by digital solutions, and that Olo is best positioned to realize this vision on behalf of our customers and their guests. Now, more than ever, restaurants recognize the need to invest in technology as a means to better serve their guests and operate their businesses more effectively. Our hard work in 2022, our network of brands, partners, and guests, and our comprehensive product suite all enable Olo to meet the needs of our customers. And we believe we've set the table for great things to come in 2023 and beyond. In the fourth quarter, Olo continued to see success with both new and existing customers across all three product suites that enable restaurants to increase the number of digital orders, better engage their guests by providing best-in-class experiences, and tap into digital native pay solutions tailored towards the needs of restaurant operators. This quarter, we continued to expand our relationship with existing customers, Bravo Brio Restaurant Group, Bucca di Beppo, Eggs Up Grill, Lucille's Smokehouse Barbecue, TGI Fridays, and Virtual Dining Concepts deployed Olope, and 2J's Gourmet Deli deployed Olope as well as our Engage solution. Virtual Dining Concepts, the parent of Mr. Beast Burger and other virtual brands, adopted Olope at all of its brands, which include more than 3,000 virtual restaurants operating in more than 2,000 restaurant kitchens. This also included Lanky Box Kitchen, a family-focused virtual brand launched by Virtual Dining Concepts, which adopted our ordering, dispatch, rails, and OloPay modules. As part of the deployment, Olo also completed a POS integration project with Chuck E. Cheese. This integration allows Chuck E. Cheese to make Lanky Box available at more than 450 locations, more efficiently leverage its operations, as well as increase revenue per square foot. And for those of us with young children, yes, the virtual concept is a tie-in with LankyBox, a YouTube channel with millions of subscribers focused on entertaining children. TGI Fridays, a casual dining restaurant with more than 300 locations in the U.S., continues to invest in its digital presence. Since launching Olapay, TGI Fridays has seen positive growth in authorization rates by more than 5%, and our data suggests an overall drop in fraud rates of more than 1%. In 2023, TGI Fridays is focused on bolstering its tech stack, improving its custom app, and launching a new loyalty structure to enhance its current guest experience, with Olo driving ordering and payments across these properties. All of these customers have added OloPay to their existing solutions. And this quarter, we also welcomed Captain V's, a fast casual seafood restaurant with more than 550 locations. Captain Deez deployed our ordering, dispatch, rails, network, and Olopay modules. This deployment represents our largest Olopay customer to date by location and continued success in multi-module deployment to new customers. It also reflects our ability to deploy within highly franchised enterprise environments. Olopay continues to perform across all key metrics. Fraud prevention and authorization rates are higher than we initially expected. and higher than traditional methods. From an adoption perspective, OloPay has been broadly deployed across both enterprise and emerging enterprise, across new and existing customers, and across service models, from names in casual dining to quick service to virtual brands. And as our fastest of 14 modules to get to $1 million of monthly recurring revenue, OloPay is becoming ubiquitous, and we're very excited about the product's future. This quarter, we also welcome new customers such as Kroger and Tender Shack. More on Kroger in a moment. Tender Shack, a Bloomin' Brands virtual brand with more than 800 locations, launched our rail solution this quarter. Previously, Tender Shack integrated directly with only one of the top three marketplaces. By adopting our rail solution, the virtual brand can now integrate with all major marketplaces and easily synchronize menus, pricing, location data, and item availability in order to streamline operations through a single integration. As I typically provide an update on product enhancements on this call, I'm excited to announce that we've expanded borderless identity availability to all OLO Pay customers, including those with custom ordering websites and apps, enabling more brands access to increase revenue potential and actionable guest data. Borderless capabilities simplify the checkout process for guests by eliminating the need to create or remember a password, or manually enter credit card information at every purchase. In addition to helping restaurants meaningfully increase basket conversion, guest retention, and visit frequency, Borderless enhances the guest experience and de-anonymizes transactions by linking them to guest profiles, enhanced QR code ordering, furthering our on-premise dining offerings, and integrated geolocation partner notifications. which automate arrival notification for brands utilizing our Expo interface, eliminating the need for multiple tablets and ensuring food is prepared and handed off efficiently and on time, resulting in fresh food for guests. While we typically broadcast our product release events, this quarter we've decided to present these enhancements live at Beyond4, our annual customer conference, which will be held in Napa, California next week. For those not in attendance, you can view demos, and further details of our winter product release event at olo.com slash quarterly dash release. Olo is constantly innovating and enhancing our platform, ensuring all restaurant locations are always able to use the latest technology to their advantage. We continually release updates to products and enable new use cases that didn't exist before. And our customers look forward to our quarterly product updates, where we demonstrate these improvements as well as the extensibility of the Olo platform. In prior quarters, I've discussed how we leveraged our ordering module to enable virtual brands for restaurants. And more recently, our products have moved into new verticals, such as convenience stores. In the fourth quarter, we were able to develop a new product use case with Expo, our tablet-based software solution that's part of the ordering module, focused on enhancing the preparation and handoff workflow, this time for the grocery industry. Kroger deployed approximately 1,600 locations, bringing sushi and floral delivery to guests nationwide. This is just one example of how the company is deploying its accelerating with digital strategy to position Kroger for long-term sustainable growth. For Olo, enabling guests to purchase prepared foods and flours from multi-unit grocery stores represents an emerging vertical, expanding Olo's total addressable location count by almost 30,000 locations. representing more than $37 billion in annual food service sales. Before I speak about our corporate strategy and our outlook for 2023, I'd like to recognize Team Ollo. Ollo earned Best Customer Data Platform from Digiday in recognition of our platform's ability to deliver personalized marketing messages, better guest experiences across channels in restaurants and digital, and better understand guest preferences. I believe this demonstrates that our strategic investments in guest data are already paying off. As we look ahead to the new year, I'm energized to build on our strong foundation. We have a robust product portfolio. We're further empowering our go-to-market organization. We remain profitable on a non-gap basis and are growing revenue at a strong rate. As I mentioned earlier, we believe that the future of the restaurant industry is guest-centric. It's important for restaurants to build better relationships with their guests in order to increase guest lifetime value, retain existing guests, attract new guests more easily, and drive revenue and profit. And part of the reason OLO is well-positioned is that everything we do is tied back to a knowledge of the guest. A co-product of the secular shift from analog to digital is the de-anonymization of transactional data. enabling the Olo platform to tie every transaction back to a guest profile. This enables more personalized experiences going forward and gives the brand a fresh understanding of guest lifetime value, the new North star metric for running a restaurant. This guest centricity is what Olo is uniquely positioned to do and what traditional players are unable to do and have not done as a result. Olo is more than a commerce platform. Olo is a data platform, a two-sided network and conduit between 87,000 restaurants and 85 million guests. And this year will continue to be laser focused on our mission and key investments in order to drive long-term growth and value to restaurant brands and shareholders alike. These investments will be directed toward payments, on-premise experiences, guest engagement, and continuing to empower our go-to-market organizations. Historically, the OLO platform has predominantly focused on pickup and delivery. Categories that represent roughly 29% and 8% of overall restaurant transactions, respectively. Over the past year, we've moved into drive-through and on-premise. Categories that represent roughly 38% and 24% of overall restaurant transactions, respectively. More than doubling our serviceable footprint. Currently, nearly 100% of drive-through and on-premise transactions are analog. And as Olo moves into both on and off-premise as a focus, we have a great opportunity for Olo to unlock a path to digitize 100% of transactions as restaurants look to better serve guests and do more with less. In order to capitalize on this opportunity, we expect to make additional investments in payments and on-premise experiences, which will enable us to drive operational efficiencies for our customers, increase guest satisfaction, as well as enable OLO to capture more transactions and drive revenue growth. And as an extension of this, we expect to invest in our engagement solutions to enable hospitality that makes every guest feel like a regular. We'll also invest in capacity and yield management to create a more integrated technology experience for our customers. I spoke about this briefly on the prior call to remind you, expanding these offerings vertically throughout the restaurant value chain will capture and leverage crucial data from both on and off-premise transactions, increasing the efficiency of the kitchen and improving the guest experience. This allows Olo to be the brains of the restaurant operation, the orchestration layer of production, which further solidifies the mission criticality of the Olo platform. In short, our platform will provide a fully integrated technology experience with capacity and yield management capabilities, that will enable restaurants to use one vendor for all of their needs, focused on enabling the restaurant kitchen to become as productive as possible and as profitable as possible. And as we build out these capabilities, we expect to further invest in and empower our sales and marketing organization while maintaining sales efficiency. All of these investments will propel Olo into the great opportunity ahead, one in which we're uniquely positioned to increase restaurants' digital penetration from 15% to 100%. Leading restaurant brands know that digital capabilities will give them the ability to do more with less, intimately know and better serve their guests, and operate as one unified business. I'm more confident than ever that we're on the right path, and I'll be delighted to share our successes along the way. And with that, I'll hand it over to Peter to discuss more detailed results. Peter? Thanks, Noah. Today I'll review our fourth quarter results as well as provide guidance for the first quarter in the full year 2023. In the fourth quarter, total revenue was $49.8 million, an increase of 25% year over year. Platform revenue in the fourth quarter was $48.9 million, an increase of 26% year over year. And OLO Pay continues to exceed our expectations contributing just over $3 million in revenue for the quarter and surpassing $6 million in total revenue for the year. In terms of key metrics, ARPU for the fourth quarter was approximately $571, representing a 13% increase year-over-year and a 2% increase sequentially. Continued growth in ARPU is driven by further expansion within our existing customer base, including continued adoption of our Engage and Pay suites. In terms of active locations, we ended the quarter with approximately 87,000 active locations on the platform, a 10% increase year-over-year and a 4% increase sequentially. And lastly, net revenue retention was approximately 108%, up 100 basis points sequentially. For the remainder of the financial metrics to disclose, unless otherwise noted, I will be referencing non-GAAP financial measures. Gross profit in the fourth quarter was $37.3 million. This compares to $32.6 million a year ago. The year-over-year increase in gross profit was driven by continued growth in revenue, partially offset by increased compensation costs to support new locations coming onto the platform, and to a lesser extent, processing costs associated with OLO Pay. Sales and marketing expense for the fourth quarter was $6.9 million. or 14% of total revenue. This compares to $4.6 million and 11% a year ago. Over the past year, we have invested additional resources in our go-to-market team to fully capitalize on the growth opportunity from our significantly expanded product portfolio. Research and development expense for the fourth quarter was $15.8 million, or 32% of total revenue, compared to $12.8 million, or 32% of total revenue a year ago. On a dollar basis, we increased investments in R&D in order to unlock future growth opportunities related to OLO Pay, borderless capabilities, and on-premise ordering. General and administrative expense for the fourth quarter was $11.5 million, or 23% of total revenue. This compares to $10 million and 25% a year ago. The year-over-year percentage decrease represents continued optimization of expenses as our organization continues to scale. Operating income in the fourth quarter was $3.1 million compared to $5.2 million a year ago. Net income in the fourth quarter was $5.6 million, or 3 cents per share, based on approximately 180 million fully diluted weighted average shares outstanding. Turning our attention to the balance sheet and cash flow statement, our cash, cash equivalent in short and long-term investments totaled $451.2 million as of December 31st, 2022. Pursuant to the share repurchase program, which we announced in September 2022, in the fourth quarter we repurchased 2.7 million shares for a total of approximately $20.1 million. Regarding cash flows, net cash used in operating activities was roughly zero in the quarter as compared to $10 million used a year ago. Pre-cash flow was negative $1.6 million compared to negative $10.6 million a year ago. I'll wrap up by providing our guidance for the first quarter and full year 2023. For the first quarter of 2023, we expect revenue in the range of $50.5 million and $51 million and non-GAAP operating income in the range of $600,000 and $1 million. For the fiscal year 2023, we expect revenue in the range of $213 million and $215 million and non-GAAP operating income in the range of $11.4 million and $13 million. When preparing our financial projections for 2023, we took a prudent approach. While the restaurant industry has seen some recent improvements in cost, pressure, and labor, and digital ordering has remained durable, our approach was to balance these favorable trends and desired long-term investments against a backdrop of ongoing macroeconomic uncertainty. From a revenue perspective, a few things to call out. First, our guidance assumes approximately two-thirds of incremental revenue growth will be driven by existing projects currently in deployment, with one-third of incremental revenue growth driven by in-year bookings in deployment. This mix has historically had a larger weighting to in-year booking, and by emphasizing a larger share of revenue contribution from existing projects and deployment, we believe this to be a more cautious approach to planning for the year ahead. Secondly, given our visibility into projects currently in deployment and a healthy sales pipeline, we expect revenue growth to reaccelerate in the second half of 2023, driven primarily by ARPU expansions. We ended 2023 with customers on average utilizing three modules per location and therefore have a great runway for growth to expand across our existing 14 product modules. And lastly, given OLO Pay's continued momentum, we are estimating revenue contribution in the mid to high T millions for the year. As it relates to location, as a reminder and in line with what we've discussed in prior quarters, Approximately 12,500 Subway locations transitioned from the platform in late Q4 2022 and will no longer be included in active location totals in the first quarter of this year. For the full year 2023, excluding the impact from Subway, we are modeling 6,000 location ads for the year. In terms of gross margins, we expect a couple hundred basis points decline year over year due to OloPay's growing mix of overall revenue. This is an expected part of our long-term plan and reflects the strong early adoption of OloPay and its strategic role within Olo's mission critical commerce platform. We believe OloPay will be a fast-growing part of our business for years to come and will be accretive to our revenue growth and profitability. Moving on to operating expenses, this year we intend to continue our investments in sales and marketing to align with the rapid expansion of our product portfolio. 18 months ago, we had roughly a third of the product modules we have today, and we are rebalancing the size and skill set of our sales and marketing organization in order to effectively seize the opportunity ahead. While further investment in sales and marketing is needed, we plan to retain our strong sales efficiency. Additionally, as a reminder, our annual user conference, Beyond4, will occur in Q1 this year. which will result in higher marketing expenses of approximately $1.5 million in the first quarter. In terms of research and development, we anticipate increased leverage as the year progresses and on a full year basis. In terms of general and administrative expense, we anticipate increased leverage on a full year basis as we continue to scale the business. All said, we expect our combined revenue and expense target to yield a modest improvement in operating margin for the year. Philosophically, we have always been focused on balanced growth and efficient investment in the business. We believe that has served the business well over time, and it is how we are approaching 2023. Our investment plan this year takes into account the rising cost of capital in the macro environment, which is reflected in the OpEx leverage we expect to gain in 2023. With that, I'd now like to turn it over to the operator to begin the Q&A session. Operator?