Olo Inc

Good afternoon. My name is Irene and I will be a conference operator today. At this time, I would like to welcome everyone to the OLO third quarter 2023 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 and then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Gary Fuchs, SVP, Investor Relations. Please go ahead.

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 Benavides, 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 can 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.

Thank you, Gary. Hi, 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 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 passwordless checkout feature coupled with pay. As part of this expanded relationship, Fat Burger, 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 OloPay, 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 OloPay 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 five 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 and 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 three 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 five to 99 locations, we continue to see strong multi-module adoption, including pay. In Q3, several new emerging enterprise brands deployed four or more modules, including Eataly, Gold Star Chili, Le Madelin, Lou Malnati'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 Engage's 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, payment, 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, they're a multi-module 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 count and our poop. An important part of serving our brands is providing continual innovation. And in Q3, we released several updates and new features across our three 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 Plus, a robust ordering engine that integrates seamlessly with a customer's existing mealtime 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 it's 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, although it 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 multi-year legacy payment processing relationships. And in our Engage Suite, we enhanced the sentiment module to help resource-constrained 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 unhappy 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? Thanks, Noah. Today, I'll review our third quarter results, as well as provide guidance for the fourth quarter in 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 three of our product suites, most notably Olopay, 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 Olapay, as well as the year-over-year impact of Subway's departure. The sequential improvement in ARPU was ahead of our expectations and reflects stronger-than-expected uptake of Olapay. 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, Including 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 and 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 4 cents 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, and short and long-term investments total $397.6 million as of September 30th, 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 sales outstanding for the period due in part to a change in billing timing. We expect the day 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 $20 million range. This compares to our most recent outlook in the low 20 million and our expectation at the beginning of the year for 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 and 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?