OLO INC. (SERVICING THE RESTAURANT INDUSTRY) GOES PUBLIC – RAISES OVER $500M – TRADES WITH A MARKET CAP OF $4.6 BILLION – WHAT’S THE OUTLOOK?

IN PREVIEW IS A BRIEF (38 SECOND) YOUTUBE VIDEO, JUST BELOW:

https://www.youtube.com/watch?v=qrvP02Oit04

As you know, we are often cynical about hot new issues trading at nosebleed valuations relative to current earnings and cash flow. In this regard, Olo, like Tiger’s putt shown above, is “Better Than Most”.

Olo Inc., founded in 2005 by 39 year old Noah Glass, represents a unique software platform serving the restaurant industry. Over 400 restaurant brands, representing 64,000 locations and $14.6 billion in on-demand (digital) commerce in 2020 are currently using the Olo service. The description below is not all encompassing but provides an introduction to investors and potential users. In full disclosure, we have no affiliation or relationship with the Company but have today taken a long position in the shares (which could change at any time, with no notice).

Olo came public on Wednesday, selling 20.7M shares at $25.00/share, which traded up to a high of $35.00, currently around $32, providing a market value of $4.6 billion. This is obviously a very high valuation relative to revenue of $98.4M in 2020, having grown rapidly from $50.7M in 2019 and $31.8M in 2018. Gross Profit also grew, nominally and as a percentage of revenues, from 66.0% in 2018 to 69.3% to 81.0% in ’18, ’19, and ’20. While GAAP earnings turned profitable, at $3.1M in 2020, Operating Income was a more material $16.1M in 2020, sharply improved from Operating Losses of $5.1M in ’19 and 8.8M in’18. In short, a critical mass has been reached and the Company has turned profitable.  As you might suspect, the expectations are for continued growth in revenues which should be levered into dramatic earnings progress. While there is no question that Covid-19 accelerated the progress of Olo, most likely bringing forward results by a year or two, they were growing rapidly before the pandemic. At this point, the growth in on-demand commerce within the food service industry is expected to continue, as well as the need for efficient response to customer preferences between dine-in and off-premise consumption.

We are normally suspicious when Companies (e.g. Fitbit and GoPro) describe their business as an “ecosystem”, but the term seems applicable in this case.

The business model is both subscription and transactional based. The average initial contract length is three years with one year renewal options. Their Ordering module generates the fixed monthly subscription fee/restaurant and transactions are generated from the Rails and Dispatch modules. It is noteworthy that, as locations have spent time within the system, the transactional portion of revenues have increased from 6.8% in ’18 to 19.2% in ’19 to 43.3% in ’20, demonstrating the utility of the approach. Confirming this, the number of customers using all three modules increased from 44% in ’29 to 71% in ’20, so the revenue base, currently handling nearly 2M orders per day, peaking at close to 5,000 orders/minute, is obviously “sticky”. Their open SaaS platform integrates with over 100 restaurant technology solutions including POS systems, aggregators, loyalty programs and others.

The addressable market for Olo’s services seems to be very large, but approachable due to the demonstrated benefits to both operators and customers. As presented in the prospectus, even prior to Covid-19, off-premise dining was 63% of U.S. restaurant transactions in 2019. This is due to the prevalence of drive-thru locations within the QSR segment, and this had been expected to grow to 70-80% within five years. In 2018, only 3% of total restaurant orders were by way of delivery, 39% by take-out and 21% by drive-thru. While Covid-19 accelerated the move to off-premise consumption, and the need to efficiently combine off-premise and dine-in, about 70% of restaurant operators say they plan to keep the changes that have been incorporated within the last twelve months. Combined with this trend, digital restaurant ordering has been accelerated by Covid-19 and every indication is for continued rapid growth. Part and parcel of these trends is the often stated preference of restaurant operators (70% of those surveyed) to maintain a direct relationship with their customers, and 64% of customers agree. This brief summary provides a basis for Olo’s continued penetration of the $700 billion U.S. restaurant market, with only 10% of the industry currently using on-demand (digital) services.

There is a great deal more we could add to this introductory piece, but several more of the most attractive elements of the Olo story are:

• Olo has a “first mover” advantage in serving a very large market
• A “bullet proof” balance sheet, over $500M in cash, no debt, with Operating Income
• Both restaurants and customers benefit in a tangible way from Olo’s service
• More services (and fees) possible, substantially enlarging the addressable market
• International markets are untouched and can be just as large
• The current ecosystem of integrated apps can be enlarged, increasing revenues/unit
• Markets other than restaurants , already working with grocery and C-stores
• Founder and CEO, Noah Glass, & Board of Directors, are qualified and credible

That’s a start. We will follow Olo with great interest, and keep our readers posted.

Roger Lipton