Olo Inc. (OLO): A differentiated and unique software product in a fragmented industry

The company is a major player in the restaurant software market

Olo Inc. (OLO) is a recent cloud software IPO, that provides an e-commerce platform for multi-location restaurants, allowing them to quickly and cheaply setup take-out and delivery options. The company works with brands like Shake Shack, Five Guys, Wingstop, Dairy Queen, Cheesecake Factory and many others.

Olo developed a white-label solution for restaurants, that allows them to offer take-out, delivery, drive-through options coupled with payments with small upfront costs and also enables them to maintain their brand, customer data and engagement. Olo facilitated $14.6 billion in GMV during 2020 and processes around 2 million orders per day. The company had 400 customers (brands) with 64,000 locations at the end of 2020.

According to their S-1 filing, off-premise meal consumption represented 60% of restaurant revenue in US even before COVID-19, and it’s expected to contribute up to 80% of revenue growth once things return back to normal.¹

The company solves several problems:

1. Offers an easy solution with plenty of APIs that can be integrated into restaurant management systems, POS systems, payment processors, delivery service providers platforms (DSPs such as Grubhub or Doordash) or reward programs. Many restaurants are run on legacy systems that were developed decades ago, and are not prepared for the new digital age. According to Olo’s internal surveys, 70% of restaurants use 2-4 tech providers to collect orders across various channels.

2. Olo’s customers can use their solution for multiple channels (take-away, delivery, mobile).

3. Restaurants maintain control over their branding and customer data, also allows them to keep a larger part of their margins than selling through DSPs. It also helps them learn from consumer interactions, evolve their offerings, and drive increased consumer loyalty.

Olo has 3 main products:

Ordering: A fully-integrated, white-label, on-demand commerce solution, enabling consumers to order directly from and pay restaurants via mobile, web, kiosk, voice, and other digital channels.

Dispatch: A fulfillment solution, enabling restaurants to offer, manage and expand direct delivery while optimizing price, timing, and service quality.

Rails: An aggregator and channel management solution, allowing restaurants to control and syndicate menu, pricing, location data, and availability, while directly integrating and optimizing orders from third-parties into the restaurants’ point-of-sale, or POS, systems.

During 2020, 71% of their customers used all 3 products, up from 44% in 2019. Olo generates revenue from subscriptions (Ordering) and transactions (Dispatch, Rails). In the past year, 56% came from subscriptions and 44% from transactions, versus 81% and 19% in 2019. Around 50% of orders received by Olo customers come from third-parties.

Their business is different from DSPs such as DoorDash, HelloFresh, Just Eat Takeaway or Delivery Hero, as Olo owns no trucks or delivery infrastructure, instead it connects to DSPs through APIs and helps restaurants find the best and cheapest courier for a particular order.

In fact, the majority of revenue from Rails is tied to DoorDash. Olo was recently sued by DoorDash for breach of contract², claiming that Olo overcharged them for certain services and they are seeking millions in damages. It’s not yet clear who will prevail, but their relationship is likely to continue unabated as both need each other.

Sales strategy

Olo targets only larger and more established brands with higher visibility and growth. The company’s sales strategy is to go directly to corporate HQ with the aim of deploying their software exclusively to all locations and franchisees. This means that their sales cycles might be longer, but once they get a customer to sign up, it’s usually a larger deal. Interestingly, the company spent only $8.5 million on sales during 2020, less than 10% of revenue and invested $33 million in R&D. Their churn rate is only 1% per year according to S-1 filing.

Founder

The company was founded by Noah Glass in 2005, who developed a prototype and received venture funding to expand the idea further. He decided to drop out of Harvard Business School and pursue the opportunity full time³. While the company benefited from COVID-19, the founder expects a continuation of the trend of take-out or delivery over time:

Industry

According to the National Restaurant Association (NRA), restaurant spend surpassed groceries for the first time in 2019. In addition, restaurant spend is expected to grow from c. $800 billion in 2019 to $1.1 trillion in 2024, a CAGR of 6.5%. Even during the current pandemic, digital orders represented only 10% of the market.

Sales dropped almost 20% last year according (NRA)⁴ to $659 billion. According to surveys by the association, 68% of consumers are now more likely to purchase delivery meals than before the pandemic, and two thirds prefer to order directly from a restaurant than from aggregators (DSPs). This bodes well for Olo and even if online delivery takes a back seat this year, restaurants and consumers will probably continue using e-commerce solutions that were established during the pandemic.

However, 64% of consumers also said they prefer table service compared to digital on-premise orders, as socialization still remains a very important aspect of the dining experience. This might hinder their growth plans for digital on-premise ordering.

Olo works only in a subset of the overall market, which is the restaurant software market estimated globally at $3.1 billion by Data Bridge Market research⁵. This is expected to grow at a CAGR of 7% to $5 billion by 2028. The market is very fragmented and consists of POS (point of sale) providers, restaurant management software, online ordering solutions etc.

Competition

Olo is in a space of its own, as it uses aggregators to route orders for restaurants and doesn’t own any physical infrastructure, this it’s not competing with DoorDash or Uber Eats. In my view, this gives them a very favorable position as restaurants will seek to maintain their brands and relationships with customers. They have a unique offering and don’t compete directly with asset-heavy delivery companies such as DASH and Just Eat Takeaway, which have gross margins of 53% and 65% compared to Olo’s 81%.

The company lists Tillster, Inc., Onosys, Inc., and NovaDine, Inc as competitors, none of which are publicly traded. As a result, it’s very hard to get comparable valuations or metrics for Olo. One comparable company is PAR Technology, which owns the Brink software solution for restaurants. Their revenue grew c. 50% in 2020, half of Olo’s rate.

Other major players are Toast Inc., Square (SQ), Lightspeed (LSPD) and NCR Corporation (NCR). None of these offers a solution that competes directly with Olo, however their products overlap in some aspects. There is significant room to consolidate the market, replace legacy solutions and simplify restaurant operations. Olo could potentially capture a significant chunk of this market thanks to their current products and investments in new solutions.

Toast Inc. is the juggernaut in the industry, with revenues of several hundred million dollars and estimated valuation of $20 billion.⁶ The company grew 109% in 2019, but was later hit by an 80% drop in revenue in March 2020, forcing it to cut 50% of staff in April. As the year progressed and restaurant sales rebounded, so did Toast’s revenue and valuation.

In the US, DoorDash (DASH) remains the dominant aggregator with 50% market share⁷ , followed by Uber Eats and Gruhub. DASH revenues were up almost 230% in 2020, compared to only 40% growth at Grubhub. According to Sensor Tower, DoorDash commanded 33% of all food delivery app downloads compared to 21% for Uber Eats.⁸

Financials

Olo’s revenue was up 94% in 2020, however such growth is very unlikely to recur this year as restaurants reopen and customers dine on-premise again. The company is already profitable, with $16 million in operating income, $21 million in operating cash flow and $19.5 million in free cash flow. As I mentioned before, they invest very little in sales and instead put 33% in R&D, which is in contrast with many SaaS companies that spend most of their money on marketing.

The company had $75 million in cash at the end of December with no significant debts, and raised $450 million in their IPO.⁹ They have 142.5 million shares outstanding, which gives them a market cap of $4.05 billion at the current price of 28.4. Enterprise value is somewhere around $3.5 billion given the cash they raised in the IPO, which means an LTM EV/Sales multiple of 35, and EV/FCF of 180.

Growth opportunity

Olo plans to grow mainly by adding new restaurant brands and encouraging their current customers to increase their engagement and spend on their platform. The company is only active in the US, but plans to expand abroad in the future as the opportunity remains very large globally.

The company estimates their current US total addressable market (TAM) to be $7 billion, based on 300,000 restaurant locations owned by larger brands. In addition, thanks to introducing on-premise QR codes and other digital ordering options, they expect to reach a market of $15 billion. This still doesn’t include smaller restaurants, which could potentially increase their TAM to $20 billion.

As always, these forecasts have to be taken with a grain of salt. The company currently services 64,000 locations and generated $98 million in revenue during a pandemic, so their TAM estimates sound very optimistic, if we also look at the current size of the restaurant software market. I wasn’t able to find forward revenue estimates, as the company went public just recently, but they are unlikely to maintain the pace of growth from last year, and will likely grow in the low double digits.

Major shareholders

Olo was initially financed by Core Capital, Raine Group, RRE Capital and Tiger Global¹⁰, the current shareholder structure from their S-1 filing is below:

Raine Group remains the largest shareholder with a 27% stake. Founder Noah Glass retains 10% ownership as well as voting power. Some insiders purchased stock after the IPO, including Danny Meyer, the founder of Shake Shack who sits on the board of Olo.

Reviews

Olo has a 4.2 star rating on Glassdoor¹¹ and a similar rating on Comparably¹² . CEO approval rating of 94% CEO is pretty good, the employees seem to be happy at the firm.

Risks

Decline in off-premise dining: Once things normalize, people will happily dine in restaurants as most of them are tired of eating at home and would welcome the socialization and outdoor dining. There will likely be a sharp decline in Olo’s growth rate this year, however this should even out in later years as restaurants modernize their technology and add take-out options as a must-have.

Switching costs: According to their S-1 filing, the company states that “the difficulty and cost to switch to a competitor may not be significant for many of our customers”. While Olo’s software remains embedded deeply in restaurant’s operations, it’s responsible mainly for digital ordering, which are only a part of their customer’s business. I expect this risk to diminish over time, as they expand their product offering in future years.

DoorDash lawsuit: The ultimate impact of this lawsuit on their business is unclear. In the worst case scenario they would have to pay out tens of millions in damages and would lose DoorDash as an aggregator, which represents 20% of their revenue.

Summary

The company has been around for a long time, but really gained traction in the past two years partly thanks to COVID. They can potentially earn very high margins in the future, if they are able to capture a large part of the restaurant software market.

Their current valuation is quite high, given that a drop in growth rate is largely expected and a lawsuit has just been started. I remain very optimistic regarding their future, but the multiples have to come down to more reasonable levels. I would view anything near 20x EV/Sales as an attractive buying opportunity and I will continue monitoring the stock.

1. https://d18rn0p25nwr6d.cloudfront.net/CIK-0001431695/eee8b010-6d53-4ca1-9d75-cbfe579a948f.pdf

2. https://www.cnbc.com/2021/03/31/doordash-sues-olo-for-fraud-says-software-company-charged-it-too-much.html

3. https://www.qsrmagazine.com/business-advice/how-olo-climbed-top-digital-ordering-world

4. https://www.nrn.com/data-research/restaurant-sales-projected-climb-102-2021-not-enough-recover-devastation-covid-19

5. https://www.databridgemarketresearch.com/reports/global-restaurant-pos-software-market

6. https://www.forbes.com/sites/petercohan/2021/02/22/after-50-april-staff-cut-toast-aiming-for-20b-ipo/?sh=1be72c54b318

7. https://www.ft.com/content/1e3ed01e-c31f-46b9-9726-d83a0c41f5be

8. https://sensortower.com/blog/food-delivery-apps-report-2021

9. https://www.cnbc.com/2021/03/17/restaurant-tech-firm-olo-shares-soar-more-than-20percent-in-ipo-as-online-ordering-surges.html

10. https://techcrunch.com/2019/01/09/tiger-global-just-invested-18-million-in-olo-a-low-flying-ordering-platform-for-more-than-50000-fast-casual-restaurants/

11. https://www.glassdoor.com/Reviews/Olo-Reviews-E1000570.htm

12. https://www.comparably.com/companies/olo