Olo Inc. (OLO) Earnings Call Transcript & Summary

My name is Abhi Singhal. I'm a Managing Director in Citi's Investment Banking team. I focus my time on covering vertical software and payments companies. With me, I have Noah, who is the CEO of Olo; and Peter, who is the CFO of Olo. Thanks for joining us.

Thanks for having us.

Thank you, Abhi.

Just to kind of quickly start and kind of level set with people, especially with people who are less familiar with Olo. At a high level, can you talk about the business overview of the business today?

Sure. Well, Abhi, thank you so much for having us. Thank you all for coming. Thank you to Citi for hosting. I'm Noah Glass. I'm the Founder and CEO of Olo. So our mission at Olo is hospitality at scale. And what that means to us is helping enterprise restaurant brands who are our customers really make every guest feel like a regular. And the way that we do that is through our open and modular software platform providing ordering capabilities, payment capabilities and engagement capabilities, and that means that restaurants can take orders, can take payments for those orders and then use the data thrown off by orders and payments to better engage their guests. Of course, that's a nice flywheel, because that engagement then drives more orders, more payments. So if you haven't heard of Olo but you have used apps like the Shake Shack app or the sweetgreen app, then you've used Olo without knowing it. In terms of scale, we are now at the scale of 80,000 individual restaurant locations that use the Olo platform across 700 enterprise brands. And I think about Olo really as almost a 3-sided network. That's one part of the network, one side of the network. We also have 85 million restaurant guests that use Olo on an annual basis. And then the third and very important part of the network is our partner ecosystem. So part of being an open platform, we have 300 integrated technology partners that really augment the things that Olo is able to do organically ourselves and allow our restaurant brands to kind of design the perfect digital stack for their business and accelerate their future. In terms of the market opportunity -- or just, I guess, a little more about our scale. I founded the company in 2005. We have, since inception, processed over 2 billion orders, and we process about 2 million orders every day. Each one of those is really a packet of clues and very data-rich in terms of the items the guest has ordered, modifications, substitutions, additions, so very powerful to pull that data back into the guest data platform. In terms of scale of the business, we did $26 billion in gross merchandise value last year. I'm sure we'll get more into our payments component business given the audience and the event. We processed over $1 billion in gross payments volume last year. So we're early stages of growing that payments business into the total merchandise value of the business. It's a massive industry. It is a $1.2 trillion industry, restaurants, and it is still only 16% digital. So we look at that, we have an incredible positioning, and it's still very early innings for the restaurant industry is digital transformation. To put that another way, there's about 60 billion transactions in the restaurant industry every year, and only about $0 billion of those today are digital transactions.

That is very interesting. And the way you talk about it, it sounds like there is really like a very strong network effects in your business and the way restaurants operate today, restaurants and consumers and the partners that you have operating today. Can you talk to us a little bit about kind of what your ideal customer profile looks like and how that has changed over time between your founding the company and where the company stands today?

Yes. So I'd say that we think about enterprise restaurant brands as our ideal customer profile. And within that category of enterprise, we kind of divide it into 3 segments. We think about enterprise as we define it as 100 plus. That's really how Olo made its name. That's sort of our anchor territory, and those brands like sweetgreen brands, like Shake Shack are good examples of that. We think about top 25, and top 25 are probably in the 1,000-plus or 2,000-plus unit category. We have a number of examples of Olo customers in that category. Dairy Queen, Jack in the Box, Jimmy John's, Panda Express are all good examples. But I'd say that's sort of the less penetrated territory at the moment. And then we think now about a really exciting component of enterprise that we call emerging enterprise, and that takes the most definition. Emerging enterprise are those brands that have between 5 and 99 locations today and have a proven model and the ambition to scale. And we've seen so many brands. A great example of this is Dave's Hot Chicken start off with us as emerging enterprise, knowing that they're going to scale and become the big enterprises of tomorrow and wanting to have that digital stack in place and take advantage of both the modularity of our platform, the scalability of the platform and also that partner ecosystem that we have. So that's kind of how we think about it. We do not play, important to note, in the true SMB space. So when you say a restaurant to somebody, they got this idea of an independent restaurant, sit down dining experience. That's not really where Olo plays. It's really those enterprise brands and the emerging enterprise brands with that ambition to scale into multi-location restaurant concepts.

Got it. Got it. That's very interesting. And as you think about the enterprise and emerging enterprise customer, which is your kind of ideal target customer, how should we think about some of the modules that you talked about as you talked about the business in terms of engagement, payments and newer products as well like Borderless? Can you double-click on some of that? Like how do you yourself engage a customer? What do you lead with? And how do brands think about on-prem, off-prem ordering and management?

Yes, I'd say when we started out as a company, Order was the only software suite that Olo offered. We started out with digital ordering for takeout transactions, and delivery really wasn't a thing outside of the pizza realm. That changed really in 2015, 2016 with the rise of restaurant delivery marketplaces, and with them, guests who wanted food delivered, delivery driver capacity. So we expanded into delivery in 2 ways: one, enabling restaurant brands to take orders themselves through their own direct channels and match an order with a delivery courier to offer delivery through their native experience; and the other that's called Dispatch. And then the other was a product called Rails, which enabled our restaurant brands to list their menus and pricing on third-party restaurant delivery marketplaces, get rid of the tablets inside of their operation, have orders that came from those marketplaces still come into the point of sale. So that's really like where we made our name with the enterprise segment, that 100-plus unit segment. And we're well penetrated with the Order platform in that segment. So typically, what that means today is that we're going back to these existing customers where their digital business has grown on the back of Olo, and we're having conversations about the newer things that we do. Pay is something that we just started offering post our IPO in March of '21. First real year of being generally available was in 2022. And then Engage was an acquisition that we made at the end of '21, acquiring what we saw as the foremost marketing stack for restaurant brands. So the sequence of that Order and then Pay and then Engage is typically how we have conversations with brands. They know us as the Ordering platform, then we have the integrated payments offering within the Ordering platform. That's Olo Pay. And then Engage is, when you have all this data, when you have all this knowledge and it's tied back to a guest, every single order they place through the platform that makes up a great profile of that guest, how do you then score your guests based on lifetime value and really make sure that you're using the data and using the Engage platform to personalize their experience? How you communicate with them, what their experience using the platform looks like? So I'd say most of what we're doing in enterprise is going back to those customers and selling them Pay and selling them Engage. We had, last week, the pleasure of announcing that Five Guys Burgers and Fries, which is one of our very first enterprise customers 15 years ago, from 2009, had just signed on and implemented Olo Engage. And that was really exciting because they were a great calling card deal for us in the Order suite and now they get to play that same role in the Engage suite, and we get to help grow their digital business together. It's different in the 2 other segments. In top 25, a lot of the time we have restaurant brands who have built some homegrown tech. And the sales motion there is typically starting with, are there components of what Olo does as a platform company that has 14 different software modules that you could use to enhance the homegrown solution? Are there things that we could do that could enable you to do delivery, as an example, when, today, you're only using digital for takeout? And a great example of that is Jack in the Box. Jack in the Box started using Olo just for 1 module to enhance their homegrown solution, and then we built up enough credibility and a track record of success with the brand, and they said, this would be a great thing for us to migrate off of the homegrown stack and on to Olo. That's really been the trend in top 25, because brands don't need to build and maintain in-house. There are great reasons from an economies of scale perspective, there are great innovative things that we're doing as a platform that a brand couldn't do on its own, and that's leading to us landing with 1 module and expanding into the full stack. And then emerging enterprise, these are concepts that really tend to land with more of the capabilities initially at the onset of the relationship, where we might be selling Order and Pay and Engage to a brand because they know that this is the footprint that they're going to need to kind of play some catch up with those more digitally-mature enterprises that are a bit larger.

Yes. Yes. There is ample opportunity for kind of land and expand and kind of grow your footprint within every customer from the story that you just laid out. My next question is somewhat -- it's a 2-part question. One is like who do you see as the core competition today? And the second part of the question is like, when you think about competition, there is POS and payments companies trying to go towards the software angle and kind of add more engagement, guest engagement type of modules, and then there is companies like yourself, which are actually software-led companies trying to add more payments just because they can. Where do you see that advantages, disadvantages in the approach to that dynamic with competition?

Yes. I would say we're very well differentiated based on, number one, our scale. And the numbers I quoted of 700 enterprise brands, 80,000 locations, 85 million guests, and importantly, 300 integrated technology partners is, to my knowledge, unrivaled scale for enterprise restaurant software. And that's important because our brands are looking for not just the best solution but what they define as the best solution. And that could mean parts of Olo and parts of our partner network. It is dangerous to suggest to an enterprise restaurant CIO that you have all the things that they need and that they can't do other things that they think that they need. We've learned that the hard way. It is much better to be an open platform and say, hey, if we don't have somebody that you want to work with today in our partner network, we'll work with them. We'll integrate in and we have developer support to help them integrate to our open API. We want to help you design your future and do that heavy lifting. I would say that in those different segments, the thing that we compete against most is really in that top 25, and I alluded to it earlier, and that's those homegrown tech stacks. And it was a big reason for our desire to become a public story, to be a company that was seen as independent, around for the long term, well capitalized, strong financials profitable business. There have been a number of times in our space where restaurant brands have relied on third-party technology companies that were private. And those companies shut down, or they got acquired and shut down, and it led to just a chaotic moment for these restaurant brands because they had to scramble and find a way to provide those capabilities and not disrupt the guest experience. Those were all good things in isolation for Olo. They led to a lot of brands coming on to our platform and off of competitors. But as a narrative, it's a very scary thing for brands to feel like, "Oh, my gosh, if this became mission-critical and my mission-critical provider goes away overnight, what am I going to do? I need to build something in-house so I control it." And so we really want to differentiate Olo by saying, as a public company, you know that we're going to be around for the long term playing this role. And once you're kind of past that concern, there are just so many arguments from economies of scale perspective and from an innovation perspective, and I'd like to talk about platform-level innovation that we're able to do that make using a scaled SaaS provider like Olo far superior than trying to build in-house. And that's the case that we're making to those brands.

Yes. And that's an interesting comment because it was -- one of the things I was going to talk to you about was kind of some of the enterprise strong platform is kind of making acquisitions and working to build out their own kind of order routing platforms like Inspire brand acquired Vromo. Do you see that dynamic changing? Like as you talk to more and more CIOs, how do they think about kind of Olo versus doing something on their own? Is that a pure economic math? Or is it more of like an innovation math that they have to do?

I'd say it's a point of order that Vromo was an acquisition that Inspire Brands made, and Vromo is an Olo partner, and they are a delivery fleet routing software company. That's the role they play. There's about 4 of those that I can think of off the top of my head in our partner ecosystem, and they'll continue to be a partner. We do work with Inspire Brands today through Jimmy John's, which is a great customer of ours and has been for the long term. I really see the paradigm shifting from a pure black and white build versus buy decision to one that is much more gray of build and buy. And that's where that approach of landing with 1 module, so it could be -- Olo offers a great catering suite that we've spent a lot of time developing over the past year. That could be a way that we engage with a top brand. They're focused on a different part of the business, but it also does catering. It could be Dispatch and taking advantage of what we've built for connecting to the delivery service providers. You mentioned Borderless earlier. This might be a good time to hit on that. Borderless is the latest example of something that is really a platform-level innovation that we've done and that no individual brand could really do and have success with. What it is, is taking inspiration from what Shopify did with Shop Pay, where, instead of requiring a guest on every single app that they download or every single site they go to, to create a brand-new account with an e-mail address and a password, instead just letting the guests put in their mobile number or their email address and have a passwordless experience. And the thing that we're doing that is similar to Shop Pay, not just in that dynamic, but is enabling that guest to create that account at the Olo platform level. Doing away with passwords might sound like a small thing, but think about just the pain that you've experienced as an individual consumer and the joy of using something like Shop Pay, where it starts to become the expectation and having to create an account with a password becomes intolerable, that's been a big win and something that we've landed with brands with. It's also a great thing for that brand's ambition of having more of the orders happen in a logged-in state so that order can get resolved back to an existing guest in their guest database, and add more data to the record about that guest.

Yes. That was going to be -- your comment, last comment, kind of leads to my next question, like you and your leadership team have talked a lot about data. How do you use data today to drive business decisions for brands and shape the experiences of end consumers as well?

Yes, there are some kind of obvious and frequently talked about in restaurant trade media, kind of sexier applications of things like data and AI, like voice AI in the drive-thru. People love to talk about that. We play in that space really with partners. We have, I think, at least 5, maybe 6 voice AI partners that connect into our Order API and are able to engage with the guests, process an order, push it through our API into the restaurant point of sale. I think the less sexy but much more exciting stuff is what we're doing in the back of the house. And by that, for those not familiar, I mean, the kitchen. So one of the things that we've done recently is a product called Order Ready AI, and Order Ready AI connects to the kitchen display system. And instead of just a kind of a theoretical notion of how long an order will take, it's really using machine learning to get very, very close to exactly how long an order will take to process given the current conditions in that kitchen. That also impacts how much extra capacity does that kitchen have to take another order, or should that order get pushed out into a future time because we just don't have capacity. That stuff really, really matters to a restaurant's profitability, their efficiency, their ultimate bottom line. And it's really a game of inches, that sort of tweaking the model, using AI, using machine learning. And then we're also doing things on the Engage front of the business, helping restaurant marketers to write email copy and choose the right image, choose the right headline and that sort of thing. And then there's a ton of different uses of data and AI within the payment suite. Fraud scoring is an absolute win for our restaurant operators. They -- one of the big problem statements that encouraged us to launch Olo Pay was my operators are spending so much time fighting fraud with online transactions, and they're fighting so much -- they're spending so much time fighting chargebacks with online transactions, can you please, please help us with that? And the work that we've done ourselves and with partners like Stripe and Adyen as well has really proven to be a huge win at the very basics of payments around fraud, around chargebacks, around authorization rate, and it makes Olo Pay into the best converting checkout, we believe, in the restaurant experience.

That's very interesting. It's interesting to see that your customers are pulling into directions and kind of enabling you to add more products. One thing I would love to double-click on is payments. So where -- how should we think about kind of what's the monetization model there? What does -- what role does Olo Pay versus kind of your partners like a Stripe and Adyen? Can you touch upon that a little bit?

Yes. So in terms of monetization, we charge per transaction fees for the facilitation of that payment transaction. Today, that's solely for the card-not-present experience. The hope is, later on this year, we will be in market with card-present as well, which is important just given the quantum of GMV that's processed in the restaurant industry for that card-present transaction. I'll come back to that in a moment. In terms of the role that Stripe and Adyen play, it's really about the back-end connectivity to the acquirers, so really from the acquirers to Stripe and/or Adyen. From that point on, it is all Olo technology that's facilitating that transaction on the front end. And of course, all of the tooling that's required for administration of the payments product, that's all Olo technology. In terms of the opportunity, Noah touched on earlier the amount of GMV that's processed over the platform this past year, $26 billion. And if you think about that in the context of total industry transactions and what share is digital, card-not-present is sort of synonymous with digital. I think that's a fair way to think about it. And if 16% of transactions today are digital, that means that there is 6x more transactions that are non-digital today that would be addressable with a card-present offering. So when we think about the $26 billion that is processed on the platform, that's really more like $150 billion plus with a card-present offering as an immediate SAM. And that's what we're really excited about to, again, get to market later on this year. And while we -- having achieved $1 billion of GPV this past year is a great milestone, that's still sub 1% of the immediate SAM once card-present is ready.

That is very interesting and a massive opportunity in front of you. One question that comes out of like this conversation about kind of different modules that you've talked about is ARPU expansion. How should we think about kind of growth in the near term as well as longer term from adding locations, new locations, versus ARPU expansion, land and expand motion?

Yes. There is a slide in our presentation where we talk about the 100x opportunity. And just to maybe simplify that, 4x opportunity to expand location now from where we are today to the 300,000-plus enterprise restaurant locations in the U.S. and 25 times x opportunity to expand ARPU from where we are today to what we ultimately think we can get to with 100% of payment processing over the platform. Because of that, just the magnitude of that ARPU expansion opportunity, in the near term, growth will be driven primarily by ARPU expansion. And how we do that is through continued adoption of multi-modules. So this past year, we talked -- we disclosed on our last call that, on average, locations subscribe to 3.5 modules per location. We have a suite of over 14 product modules to sell, so a lot of room to grow there. And if you go back over time, the year prior in 2022, we had 3 modules per customer. The year prior to in '21, was 2.7. So we continue to make progress in multi-module adoption, which then results in higher ARPU and higher revenue.

That's very interesting, and that's a great track record on kind of landing and expanding and kind of consistently delivering on that part. One of the things that kind of stuck with me was your cohort data presentation as part of your earnings. That's a very strong cohort data where you see the cohorts even like the pre-2020 cohort kind of still growing at an expedited rate. How should we think about that cohort data even more in that? Like what's the churn? How should we think about churn? Obviously, you are landing and expanding customers and expanding ARPU. How should we think about kind of churn? And if there is churn in the customer base today, where do they -- where do the customers go? What do they do?

Yes. The cohort data is super impressive. I mean Noah touched on earlier Five Guys expanding into the Engage suite. They had initially began working with Olo back in 2009, so just to give you a sense of the kind of staying power of the platform. In terms of some data to think through from a cohort perspective, on last quarter's call, we talked about gross retention continuing to be north of 95%, right? So we're really sticky once a customer is engaged. And then from there, we expand the relationship. So this past quarter, we reached 120% from NRR. And I think that's maybe the fourth or sixth quarter -- fourth or fifth quarter in a row where that number has continued to increase and that, again, flips back to the multi-module adoption comment I made earlier. In terms of churn, I think, again, I would point to the gross revenue retention as sort of like the key metric to think about. I think it's natural as a company continues to scale that occasionally you have churn. But if you look at it in the context of the entire platform and the ability to maintain that high gross retention, I think gives you a better sense of maybe some of the singular data points that are out there.

Yes. Yes, makes a lot of sense. One of the things that has come up in our conversations are payments. As you expand more into payments, how do you see your gross margin profile kind of changing? It has changed. And how do you foresee that change going into 2024?

Yes, I'd say this is probably what we spend the most talking about. And certainly, with kind of pure software investors or even on the sell side, pure software-focused sell-side analysts, what -- as the business has evolved into both software and payments, the blended gross margin profile of the company has gone down. And when we look at that internally, we see that as a great sign. We want that to happen because that's showing us that Pay is continuing to scale. The one point that I've tried to make is that, as opposed -- if you think about pure software versus pure payments businesses, typically, software, you'll see 80% gross margins with 20% drop to op margins. It's kind of the inverse for payments where all of the leverage lives in R&D. So we think we can get to a blended gross margin profile of payments of about 20%, with a large portion of that falling to the bottom line over time because all of the leverage in payment sits in R&D. So we're obviously not there yet. Olo Pay has been in the market now for a little over 18 months. And like I mentioned earlier, $1 billion of GPV is a great milestone, but there's much, much more to go after.

Yes. Talking a little bit more about the operating leverage in the business model. Could you touch upon a little bit around expense side of the things in terms of S&M, G&A and R&D?

Yes. So we talked a little bit about this on our last call, just like -- as we talked through kind of the -- our guidance for the year. If you go back, say, 18 to 24 months, really sales and marketing and R&D, we went through an investment cycle where, within sales and marketing, there was investments that we needed to make to rightsize the organization to the multi-suite offering we now have, which meant building in a layer of specialization within the team in the form of sales engineers and solution consultants that could go really, really deep on those particular suites. So there was investment that we need to make to better enable the team. Much of that is now behind us, and now we're really focused on execution within that team. Similarly, for R&D, we went through an investment cycle in addition to bringing on 2 acquisitions, one in the form of Wisely, which gave us our marketing technology capabilities, and then with Omnivore, which was a tuck-in acquisition on the integration front. Those are now behind us, and we feel like we're at a level of R&D where we can start to drive leverage in the business while continuing to execute on the product road map. And that's what we're focused on this year. It's really driving incremental leverage within OpEx while continuing to have success within sales and marketing and execute against the product road map.

Got it. Very helpful. Over the last few years, you've kind of made a lot of investments and decisions, significant decisions, around your product expansion and the acquisitions that you've made. Do you -- how do you see that going forward? Like are there any key pivot points in the business? What's the next frontier for Olo short term, long term?

I think there's just still so much opportunity to help our restaurant brands accelerate the future of their digital transformation. And in many ways, that's just having them take up more of the modules that we offer because of that flywheel effect. I mean, it works for us from driving revenue, but it works for them in driving their digital mix. So much of it is centered around guest data. I think that's why we've centered as a company with this mission of hospitality at scale. We believe that, that guest data being captured and then having insights derived from that guest data is the key to personalizing that guest experience, which leads to greater visit frequency, greater spend from the best guests that the restaurant has. That's such a key area of focus within the industry right now. So I think that is really the third leg. We think about sort of stacking S curves. Order was the first S curve, Pay was the next S curve. Engage is the third S curve. That Engage S curve, I think, is really ready to rocket. It's so resonant for our industry. It's really going through this marketing stack kind of refresh cycle. It used to be that email marketing and social media was all that there was from a digital marketing perspective, then the loyalty came, and I would argue, has proven not to be super ROI positive, broadly speaking. And I think you have restaurant marketers who now have greater scrutiny, greater challenges with profitability given what's happened with commodity costs and labor inside the industry as input costs, and they need to figure out now how to make digital marketing work for them. I feel like Olo has the database, Olo has the tools, and Olo is now helping these restaurant brands make that migration to a more sophisticated marketing stack. And I think that's the big area of focus for the team.

Yes. Very interesting. You've covered a lot of ground between your network effects between your guests, customers and partners. Any closing remarks? Anything we should take away with?

I just continue to think -- I mean it's crazy when you've been nearly running a business for 19 years, but it's crazy to think just how much we've scaled and what a massive opportunity the restaurant industry represents. There are a lot of things that we say no to, right? We don't sell to 1- to 4-unit restaurant brands. We don't really sell outside of the U.S. and Canada. And we have a pretty focused product stack. And yet that opportunity in what we do sell just still has so much further to run, and we're excited. We think we're really well positioned and able to help our customers have a competitive advantage versus everybody else in terms of digital transformation and winning the heart of the guest.

Yes. Yes. In your world, software is truly eating the restaurant. But thanks for joining us. This was very insightful. Thank you.

Yes. Thanks for having us.