OLO Earningcall Transcript Of Q2 of 2024
Noah Glass -- Founder and Chief Executive Officer Thank you, Gary. Hi, everyone. Thank you for spending time with us today. Team Olo delivered another strong quarter in Q2. Once again, revenue and non-GAAP operating income exceeded the high end of their respective guidance ranges, and we're raising full year 2024 revenue and profitability guidance in excess of our Q2 outperformance. We added new enterprise and emerging enterprise brands and expanded with existing customers. We also announced our third POS integration partnership for Olo Pay and engage with TRAY, which brings us closer to supporting full stack payment processing and enabling brands to use omnichannel guest data to drive profitable traffic, a critical restaurant metric. I'll review our customer and innovation-related highlights from the quarter, and Peter will discuss our Q2 financial performance and updated guidance. We continue to win new brands and retain and expand with existing customers. We ended the quarter with approximately 82,000 active locations, adding approximately 1,000 net new locations sequentially. Second quarter ARPU of $852 increased 19% year over year and net revenue retention was again in excess of 120%. In enterprise, we deployed our core order suite with Bonchon, a fast casual Korean chicken concept, and we launched ordering with Mission Barbecue. I'm excited to share a number of large brands expanded into pay, including El Pollo Loco, Miller's Ale House and the Pollo Tropical. And we're very pleased to announce that Culver's expanded into both pay and rails in the quarter. In emerging enterprise, more than a dozen brands deployed Olo products across our order and pay suites, including &pizza and DIG. We are especially excited to welcome back &pizza who returned to Olo after leaving to build their own ordering solution. &pizza reignited their growth strategy with new operating and franchising models and believe that in order to keep up with expansion without cumbersome processes and draining resources, they needed to upgrade their tech stack. With our gross revenue retention exceeding 95%, most brands remain on our platform and the trend we've seen since our IPO is that more brands migrate from in-house tech and to the Olo platform. We're proud &pizza chose to come back to Olo and are excited to help them do more with less while improving their guest experience. We also continue to drive product innovation and partner expansion in our ecosystem, which is foundational to our long-term success. In Q2, we announced 19 major product enhancements in our summer release, including loyalty for Olo Borderless Accounts. This new feature allows guests to earn and redeem rewards from a brand's existing loyalty program through Borderless, our passwordless guest checkout solution. We see great potential in Borderless, which has grown to now more than 7 million accounts, and we believe it can evolve beyond a seamless high conversion checkout experience into yet another OLO offering that enriches guest data to help restaurants drive profitable traffic. We also added enhanced order management capabilities for our new Catering+ solution that helps brands reward their high-value customers and enable their guests to pay for delivery orders through their personal devices. We're very excited about the success of Catering+, which has been a strong performer out of the gate since we launched it less than a year ago. In Q2, we deployed Catering+ across 14 existing Olo brands, including Doghouse, The Flame Broiler, and Freddie's Frozen Custard and Steakburgers. Catering+ is winning with enterprise and emerging enterprise brands and across both full service and limited service concepts. We'll continue to add features and expect to make Catering+ an expansion driver, as well as a vector for landing new business, including within the Top 25. In our ecosystem, Loop AI's integration into the Olo platform is enabling brands to run more efficiently by automating accounting reconciliation with third-party marketplaces. And GRUBBRR recently announced it will integrate Olo's digital ordering and full stack Olo Pay into its self-ordering kiosks. This is our third Olo Pay kiosk partnership, and we're bullish on the value kiosks bring to enterprise restaurants from streamlining operations to providing exceptional guest experiences. And we continue to expand our POS integrations beyond digital ordering and delivery to include Olo Pay and the Engage Guest Data Platform, or GDP. In May, we announced an Olo Pay and engage integration agreement with TRAY, a cloud-first POS focused primarily on full-service concepts. TRAY joins NCR Voyix and Queue, and we have expanded relationships in the works with additional POS providers. These expanded POS partnerships move us closer to processing card-present transactions, which can help us drive meaningful scale in our Olo Pay business and help reaccelerate our gross profit growth. For example, we mentioned on our last call that Honeygrow, a core order customer, was our first brand to expand into full stack payment processing with Olo Pay, running nearly all on-premise transactions through Olo Pay-enabled kiosks. By powering both digital ordering and all payment transactions, we estimate that Olo's gross profit per Honeygrow location was more than six times higher than Olo's gross profit per average location over the last three quarters. This is an encouraging early data point about where we can take our Olo Pay business. We believe we can drive similar results within our base over time as Olo Pay's card-present functionality becomes broadly available through kiosks and POS partners and as brands revisit their payment vendor relationships. The strategic rationale for a brand to replace their incumbent payment processor with Olo Pay is Olo Pay's differentiated ability to leverage transaction data to drive profitable traffic. We believe brands can significantly benefit from consolidating their on and off-premise transactions into one guest data platform that ties digital ordering and full stack payment transaction data into one guest profile and provides a comprehensive view of each guest. Given the industry's historical reliance on discounting to improve traffic, we believe our approach offers a compelling and differentiated value proposition. This is what Olo is best positioned to do as our guest-centric solution and data platform capabilities, combined with the scale of our 700-brand, 82,000-location strong network give us the ability to empower brands to convert transactions into profitable traffic and increase sales. And with the platform level data capabilities of Borderless, we see a future where a brand can deliver even more personalized experiences for every guest, regardless of whether they have visited that brand before with an enriched Olo-level data. We are already helping brands succeed with data. Consider Five Guys, one of our first order enterprise brands who recently began deploying the engage GDP and marketing modules. In just over six months, Olo's GDP ingested millions of orders, created 4.5 million guest profiles, and automatically identified cohorts of Five Guys' most loyal and highest lifetime value guests. From there, our marketing module helps Five Guys create hyper-targeted marketing communications and measure their impact on sales. The results, $2 million of incremental revenue attributable to the email campaigns, a 1% increase in shake sales, and a large base of new guest profiles that Five Guys can use for future campaigns. With the addition of card-present transactions to our guest data, we believe we can turbocharge a brand's ability to better know its guests and engage with them in ways that have guests come back to the brand again and again without an overreliance on discounts and value menus. We are just getting started, and we believe no one else in the industry has the network scale, guest-centric offerings and data capabilities to help brands succeed like Olo. We're excited about the progress to date in 2024, and Team Olo is focused on building on this momentum. We're landing and expanding with brands, delivering more value through product innovation and valuable partnerships, and moving closer to unlocking even more value from greater guest data. I'll now turn the call over to Peter to review our Q2 results and updated guidance. Peter? Peter Benevides -- Chief Financial Officer Thanks, Noah. Today, I'll review our second quarter results, as well as provide guidance for the third quarter and the full year 2024. In the second quarter, total revenue was $70.5 million, an increase of 28% year over year. Platform revenue in the second quarter was $69.6 million, an increase of 27% year over year. Revenue from all three suites: order, pay, and engage, performed better than our expectations. Revenue also benefited from some nonrecurring revenue associated with a new customer contract and stronger-than-expected wing stock performance in their last quarter on our core order suite. Excluding these factors, revenue would have been above the high end of our Q2 revenue guidance range. Active locations were 82,000, up approximately 1,000 sequentially. We continue to expect location count to ramp throughout the year and to add approximately 5,000 net new locations this year. We have line of sight to this target based on business already booked and in process of being deployed such as Dutch Bros, which is scheduled to launch the majority of its locations in the second half of the year. ARPU for the second quarter was approximately $852, up 19% year over year and 4% sequentially. The year-over-year increase in ARPU was driven by increased order volumes and modules per location, in particular Olo Pay. Please note that in the second quarter we have now lapped the ARPU benefit from the roll-off of Subway's location count. Net of Subway, year-over-year ARPU growth has been in the high teens over the last three quarters. And net revenue retention was above 120%, the third consecutive quarter where NRR was at or above 120%. For the remainder of the Q2 financial metrics disclosed, unless otherwise noted, I will be referencing non-GAAP financial measures. Gross profit for the second quarter was $44.3 million, up 16% year over year. Gross margin for the second quarter was approximately 62.8%, up 40 basis points sequentially. Gross profit and gross margin performance reflect the impact of this quarter's revenue outperformance, in part driven by the aforementioned one-time items. Excluding these one-time items, Q2 gross margin would have declined approximately 50 basis points sequentially. Furthermore, we continue to be disciplined with operating expenses. In Q2, all three operating expense line items improved year over year on a percentage of revenue basis. Sales and marketing expense for the second quarter was $11.4 million or 16% of total revenue. This compares to $9.7 million and 18% a year ago. Research and development expense for the second quarter was $13.7 million or 19% of total revenue. This compares to $14.5 million or 26% of total revenue a year ago. General and administrative expense for the second quarter was $11.6 million or 16% of total revenue. This compares to $9.5 million and 17% a year ago. As a reminder, the quarterly pacing of operating expenses was slightly different in the first half of 2024 versus prior years. As we stated in our last call, this year's annual compensation increases began hitting in Q2. Historically, annual comp increases began in Q1. Operating income for the second quarter was $7.6 million, up from $4.5 million a year ago. Operating margin was approximately 11% in Q2, an increase of approximately 260 basis points year over year. This strong performance reflects a combination of continued expense discipline and revenue outperformance, as well as the benefit of the nonrecurring revenue items I referenced earlier. Net income in the second quarter was $9.2 million or $0.05 per share based on approximately 170.5 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 totaled approximately $387 million as of June 30th, 2024. In the second quarter, we repurchased 1.4 million shares for a total of approximately $6.9 million. Q2 share repurchases completed the $100 million share repurchase program we announced in September 2022. Net cash provided by operating activities was $18.1 million in the quarter, compared to $2 million in the quarter a year ago. Free cash flow was $14.2 million, compared to a negative $1.9 million a year ago. Q2 cash flow metrics primarily reflect operating income performance and working capital timing. I'll wrap up by providing our guidance for the third quarter and full year 2024. For the third quarter of 2024, we expect revenue in the range of $70.8 million and $71.3 million and non-GAAP operating income in the range of $6 million and $6.4 million. For the fiscal year 2024, we are again raising revenue and non-GAAP operating income guidance. We now expect revenue in the range of $279.5 million and $280.5 million and non-GAAP operating income in the range of $25.6 million and $26.4 million. A few things to keep in mind as you consider our updated outlook for the year. We continue to expect trends in the restaurant industry to be similar to what we saw in 2023. Consistent growth in digital ordering, a continued need to improve efficiency to offset rising costs, and macro uncertainty. Revenue guidance continues to assume a two-thirds, one-third split between incremental revenue from existing projects currently in deployment and new projects signed and deployed in year, which will be driven primarily by ARPU expansion as Olo Pay scales and we have further success selling multiple modules in our order and engage suites. Revenue guidance also reflects the change in the Wingstop relationship. Starting in Q3, Wingstop shifts from using our ordering, dispatch, and rails modules to using our voice AI capabilities. Further, given Olo Pay's outperformance in the first half and our outlook for the second half of 2024, we now expect full year 2024 Olo Pay revenue in the mid-$60 million range. We continue to expect the vast majority of 2024 Olo Pay revenue to be from card-not-present transactions. Lastly, we expect full year 2024 gross margin to be in the low 60% range. We anticipate second half gross margin will be approximately 200 basis points lower than the first half 2024 gross margin performance, with the majority of this decline occurring from Q2 to Q3. This reflects the timing of the revenue mix shift in the second half of the year due to Olo Pay's continued momentum as I discussed. We continue to expect full year 2024 will be the trough in gross profit growth. To wrap up, in the second quarter we delivered another solid quarter of financial performance, positioned ourselves to raise guidance, and continued to execute on our strategic priorities. We are uniquely positioned with guest-centric solutions that help brands drive profitable traffic through guest data. With that, I'd now like to turn it over to the operator to begin the Q&A session. Operator? Operator Questions & Answers: |
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