Olo Inc. (NYSE:OLO) Q4 2023 Earnings Call Transcript
Olo Inc. (NYSE:OLO) Q4 2023 Earnings Call Transcript February 22, 2024
Olo Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Olo Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Gary Fuges, Senior Vice President of Investor Relations. Please go ahead, sir.
Gary Fuges: Thank you. Good afternoon, everyone, and welcome to Olo's fourth quarter and full year 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 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 a discussion of these material risks and uncertainties, please refer to our Form 10-K 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 is 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. Hi everyone. Thank you for spending time with us today. In 2023, Olo was again instrumental in helping enterprise restaurants succeed at scale. Our platform facilitated more than $26 billion in gross merchandise volume across approximately 80,000 locations and approximately 700 brands. We processed more than $1 billion in gross payment volume through Olo Pay, a nearly 4x increase from 2022. Since our last earnings call, we've continued to scale. We had another record number of orders on Super Bowl Sunday, including record sales days across more than 40 brands. And since our last call, we've doubled the number of accounts on Borderless, Olo's passwordless checkout feature, to more than 2 million opt-in guests.
As a result of Team Olo's great work, we also delivered continued growth and profitability in 2023, increasing revenue by 23% year-over-year and expanding non-GAAP operating margins by close to 300 basis points. And we ended the year strong. Fourth quarter revenue and non-GAAP operating income, again exceeding the high end of their respective guidance ranges. In Q4, we increased revenue 27% year-over-year, expanded non-GAAP operating margin to 11%, and deployed with marquee enterprise brands. In 2024, we expect to balance growth with increased profitability while investing in products, go-to-market and data-related initiatives that we believe will help even more brands accelerate their future. We believe no one is better positioned to help the restaurant brands leverage the power of digital commerce and data to drive guest lifetime value and operational efficiencies.
We ended the quarter with approximately 80,000 active locations, adding approximately 2,300 net new locations sequentially. Fourth quarter ARPU increased 38% year-over-year and net revenue retention expanded for the sixth consecutive quarter to 120%. In December, we announced that Waffle House deployed order for pickup, pay for card-not-present transactions, and Borderless to power all guest logins and checkouts. This is Waffle House's first brand-wide digital investment, and they chose Olo for our "exceptional online ordering experience" and the "strategic and financial value of Olo's reliable platform". We're excited to be part of the Waffle House success story, and we believe we can expand further with this iconic brand as we deliver value.
Q4 was the sixth consecutive quarter, where an existing enterprise customer expanded into our payment suite, as a large casual dining company launched Olo Pay across all of their concepts. This brand was looking to support digital wallets like Apple Pay and Google Pay, reduce fraud and increase authorization rates, and streamline their chargeback management. We believe Olo Pay addresses all of those needs. We're also excited to share that Five Guys has expanded its Olo relationship into the Engage suite's Guest Data Platform and Marketing modules. The GDP aggregates data from guest digital touch points to help Five Guys analyze purchase behavior, generate lifetime value predictions, and optimize guest acquisition. Marketing activates this rich data through email and text message journeys to reengage lapsed guests, surveys new customers to create a powerful feedback loop, and powers targeted email campaigns to drive sales.
Five Guys joined us in 2009 as our first enterprise brand and we're now helping them leverage their data to inform business decisions and drive guest lifetime value. Two of our key differentiators for large enterprises are our modularity and open architecture. Brands can buy our full suites or utilize specific modules to supplement existing technology, and they can work with our 300-plus partner integrations. A great example of this is Wingstop, who we're pleased to say will be continuing its strategic partnership with Olo by leveraging our AI-powered voice ordering integrations to digitize their phone orders. It's a great validation of our flexibility in working with the largest brands, especially those who share our vision of digitizing every transaction and using guest data to drive a more personalized guest experience.
Peter will share more about how our evolving Wingstop relationship impacts our financials. It was also another successful quarter with emerging enterprise brands, which we define as brands with five to 99 locations today and aspirations to scale. We deployed multiple modules with brands like Barberitos, Carrot Express, Smalls Sliders, and Texas de Brazil. Merging enterprise has become a meaningful contributor to location count since we doubled down on our go-to-market strategy for this brand category about 18 months ago. Today, approximately 14,000 of our total active locations are from emerging enterprise brands, and we have room to grow. Wins here drive ARPU through multimodule adoption at the start of the relationship, and they can help drive incremental growth by adding modules and locations over time.
To scale successfully, emerging enterprise brands need a secure, reliable, and scalable platform with flexibility to integrate across multiple vendors. And that's exactly why Olo is winning here. An essential part of our ability to win with brands is our relentless focus on innovation. And in January, we announced nine new features as part of our Winter 2023 release announcement. Olo COO, Jo Lambert, highlighted three of these in the video announcement available at olo.com. After launching Catering Plus in Q3, we followed up in Q4 with new functionality that allows brands to recognize and authenticate the tax-exempt status of a guest. This makes it easier than ever for restaurants to serve the 1.7 million tax-exempt organizations in the US.
We also launched split check capabilities as part of our Pay at Table solution, so that guests simply scan a QR code on the receipt, select how to divide the check and pay through each guest's personal device. Brands with Engage integrated into Pay at Table can also trigger post-transaction surveys to collect in the moment, guest experience, feedback. And still, the biggest story in our Winter release was expanding Borderless availability. Previously available only to Olo Pay customers, Borderless is now accessible to all Olo customers who use our Olo's white-labeled ordering interface as part of the order suite. More Olo restaurant brands will be able to provide a passwordless and convenient sign-in and seamless checkout experience, which is shown to help brands increase guest account sign-ins, grow expected order frequency and improved checkout conversion rates by up to 7.5%.
This is a great first step in giving brands the ability to simplify the guest checkout process and capture more data to help them run their operations more efficiently and increase guest lifetime value. As we look forward, we believe we're still early on in the industry's journey in fully leveraging the promise of digital. NPD data shows that digital accounted for 16% of US restaurant orders, up 1 point from 2022. There's still a ton of opportunity in front of us to help the restaurant industry transact more through digital channels, to make themselves more productive and to capture more data that they can utilize to help every guest feel like a regular. In 2024, we'll continue to invest to help accelerate brands along their digital journey.
In Order, we'll invest in tooling to make Olo and our customers more efficient in how they use the platform and we'll add functionality to our catering module to help brands manage order approvals, notifications, and accounts receivable. In Pay, we'll continue our work to launch full card-present functionality in the second half of this year. We see great potential in selling card-present into our existing base, starting with the brands that have already adopted our card-not-present offering. And in Engage, we'll continue to add enterprise-grade functionality our customers are asking for, like more powerful analytics and GDP integrations, so they can leverage their data to drive more traffic and frequency. Within our platform, we'll work to extend Borderless access into our entire installed base and further leverage our scale to power data-driven solutions for guests and brands.
We can drive new customers into our marketing funnel through industry reports, power new features like smart upsells and dynamic pricing, and provide actionable insights like order-ready AI for guests and benchmarking solutions for brands. In go-to-market, 2024 is about driving sales across all three suites and our brand categories. We'll continue to educate the top 25 on how our modular platform can enhance what they have already built or drive cost savings and platform-level innovation by cutting over to Olo. In enterprise, we'll lead with expansion within our impressive installed base. And in emerging enterprise, we'll stay focused on fast-growing concepts that drive location counts and ARPU. We had a great year and the Olo team never lost focus on delivering for our brands.
I'm proud of what we accomplished in 2023 and we're more excited than ever about the opportunities for 2024 and beyond. I'll now turn the call over to Peter. Peter?
Peter Benevides: Thanks, Noah. Today, I'll review our fourth quarter results, as well as provide guidance for the first quarter and the full year 2024. In the fourth quarter, total revenue was $63 million, an increase of 27% year-over-year. Platform revenue in the fourth quarter was $61.9 million, an increase of 27% year-over-year. We saw growth across all three 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 fourth quarter was approximately $787, representing a 38% increase year-over-year and a 6% 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.
Net revenue retention was approximately 120%, an increase of approximately 100 basis points sequentially. And lastly, we added approximately 2,300 net new active locations to the platform sequentially, ending the quarter with approximately 80,000 active locations. This reflects approximately 5,500 location additions for the year net of Subway, which was above the revised range we provided last quarter. This strong result was driven primarily by Waffle House deploying at the majority of their locations in the quarter. For the remainder of the Q4 financial metrics disclosed, unless otherwise noted, I will be referencing non-GAAP financial measures. Gross profit for the fourth quarter was $40.8 million, this compares to $37.1 million a year ago.
The year-over-year growth in gross profit was driven by continued revenue growth, partially offset by the increasing revenue mix of Olo Pay. Sales and marketing expense for the fourth quarter was $9.7 million, or 15% of total revenue. This compares to $7 million, or 14% a year ago. Research and development expense for the fourth quarter was $13.7 million, or 22% of total revenue, compared to $16.1 million, or 32% of total revenue a year ago. General and administrative expense for the fourth quarter was $10.5 million, or 17% of total revenue. This compares to $10.9 million and 22% a year ago. Operating income for the fourth quarter was $6.8 million, compared to $3.1 million a year ago. Operating margin was approximately 11% in Q4, as we generated operating leverage both sequentially and on a year-over-year basis.
Net income in the fourth quarter was $8.5 million or $0.05 per share based on approximately 174.4 million fully diluted weighted average shares outstanding. For the full year of 2023, revenue of $228.3 million increased 23% and ARPU of just over $2,700 rose 23%. Olo Pay revenue was approximately $30 million in the year. Brands utilized 3.5 modules per location on average as of December 31, 2023, versus three average modules per location as of year-end 2022. Non-GAAP operating margin in 2023 was 8%, up approximately 270 basis points from 5.3% in 2022. Turning our attention to the balance sheet and cash flow statement. Our cash, cash equivalents and short- and long-term investments totaled approximately $388 million as of December 31, 2023. Pursuant to the share repurchase program, which we announced in September 2022, in the fourth quarter, we repurchased 2.8 million shares for a total of approximately $15 million.
Since the introduction of our share repurchase program, we have repurchased 11.5 million shares for $78 million. We have approximately $22 million remaining on our authorization. Net cash provided by operating activities was $5.8 million in the quarter, as compared to roughly breakeven in the quarter a year ago. Free cash flow was $2.7 million compared to negative $1.6 million a year ago. I'll wrap up by providing our guidance for the first quarter and full year 2024. For the first quarter of 2024, we expect revenue in the range of $64 million and $64.5 million and non-GAAP operating income in the range of $5.1 million and $5.5 million. For the fiscal year 2024, we expect revenue in the range of $269 million and $272 million, and non-GAAP operating income in the range of $22 million and $24 million.
A few things to keep in mind as you consider our outlook for the year. We continue to take a prudent approach to our outlook for the year. We expect trends in the restaurant industry will remain similar to what we saw throughout 2023, with consistent growth in online ordering, a continued need to improve efficiency and offset rising costs, and an uncertain macro environment. Our guidance once again assumes a two-third, one-third split between incremental revenue from existing projects currently in deployment and new projects signed and deployed in year. Revenue growth will continue to be driven primarily by ARPU expansion as Olo Pay scales, and we have further success selling multiple modules in our Order and Engage suites. We expect Olo Pay revenue to approximately double in 2024 as we add more brands to the offering.
Please note, we are not anticipating any material revenue from card-present transactions, which we expect will begin to be a growth driver in 2025. In terms of locations, we expect to add approximately 5,000 net new locations this year. Our 2024 guidance reflects the impact of our updated Wingstop relationship. We now expect the revenue contribution of the existing relationship to extend through the end of Q2 2024. Starting in Q3, Wingstop will begin using our voice ordering module, as Noah mentioned. As a result of this updated relationship, the approximately 1,800 Wingstop locations will remain in our location count metric with ARPU lowered as a single module customer. In terms of gross margin, we would expect 150 basis points to 200 basis points in sequential margin decline throughout the year as Olo Pay continues to become a larger portion of our revenue mix.
Based on our current expectations, we would expect 2024 to be the trough in terms of gross profit growth. For operating expenses, we will continue to prudently manage our cost structure, while funding our various growth initiatives. We have made significant progress in building out and rebalancing our go-to-market teams and would expect sales and marketing growth to moderate from recent levels. Note that our annual user conference, Beyond4, will take place in March, which will result in higher marketing expenses of approximately $1 million in Q1. Similarly, we'll begin to generate operating leverage in R&D now that much of the investment in the Engage and Pay suites is behind us. In G&A, we also expect to generate operating leverage. But note that the timing of compensation increases will be a Q2 event in 2024, instead of a Q1 event as they were in 2023.
To wrap up, Q4 was a strong finish to a solid year. We expect to balance growth with continued operating leverage in 2024. The strategy is working and we believe we can continue to drive future growth by landing and expanding within our enterprise and emerging enterprise brands. With that, I'd now like to turn it over to the operator to begin the Q&A session. Operator?
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