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Tech Topic: Vertical SaaS (part 4)- Restaurant Week
This week we continued our discussion on industry vertical specific SaaS companies. Check out parts 1, 2, and 3 of this series in previous episodes…
This week, we focus on SaaS solutions for the restaurant industry. The restaurant industry was probably the historically least tech enabled business sector that was forced to digitize through the pandemic. The two companies we discuss today, Olo (OLO) and Toast (TOST) enable restaurants to digitize their operations.
Not long ago, a restaurant could operate as a no-tech business by relying on walk-in customers and only accepting cash. Those days are gone, in a large part due to COVID-19, but also do to changes in consumer preferences and the emergence of aggregators like Google, DoorDash, Postmates, and Uber Eats to name a few.
It should come as no surprise that the restaurant industry has one of the lowest levels of digitization of all industries1. Reinforced by the fact that technology spending in the restaurant industry in 2019 was less than 3% of total sales2.
As aggregators quickly deployed solutions to enable any restaurant to drive an ecommerce strategy, restauranteurs were quickly overwhelmed. Here is one perspective3..
We’re in Tablet Hell for a couple of reasons. One, the tablets themselves are a burden because you’ve got to make sure they’re all turned on. You also must make sure that the app is activated. You know, sometimes overnight the iPad or the tablet will reboot or refresh itself, and then it won’t restart itself automatically. Sometimes team members unplug it and steal the power cord to charge their phone or take it home, and so now you’ve got an uncharged tablet, which honestly happens more and more and more.
The companies we will discuss today, Toast and Olo, aim to solve some of this complexity. Toast offers an entire software solution for managing a restaurant. Olo, on the other hand, offers a specific solution that is gaining traction with large restaurant brands. Keep reading to learn more about these companies…
Toast (TOST)
From the Toast S-1:
Toast is a cloud-based, end-to-end technology platform purpose-built for the entire restaurant community. Our platform provides a comprehensive suite of software as a service, or SaaS, products, financial technology solutions including integrated payment processing, restaurant-grade hardware, and a broad ecosystem of third-party partners. We serve as the restaurant operating system, connecting front of house and back of house operations across dine-in, takeout, and delivery channels.
Toast has certainly benefited from the proliferation of APIs for everything4. As you can see from the image below, Toast offers restuarnturs a plethora of services as well as the ability to integrate with other services (including Olo!).
Toast generates revenue from four streams: subscription services, financial technology solutions, hardware, and professional services.
Subscription services revenue is generated from fees charged to customers for access to SaaS products, including: POS, kitchen display system, invoice management, digital ordering and delivery, marketing and loyalty, and team management. Subscription services pricing is primarily based on a rate per location, which varies depending on the number of SaaS products purchased, hardware configuration, and employee count.
Financial technology solutions revenue consists primarily of fees paid customers to facilitate payment transactions. The transaction fee is generally calculated as a percentage of the total transaction amount processed, plus a fixed per-transaction fee. The transaction fees collected are recognized as revenue on a gross basis inclusive of all fees and costs paid to issuers and card networks as well as other related fees associated with third-party payment processors and fraud management. Financial technology solutions revenue also includes fees earned from marketing and servicing working capital loans to our customers through Toast Capital that are originated by a third-party bank and that range from $5,000 to $100,000.
Hardware revenue is primarily derived from the sale of terminals, tablets, handhelds, and related devices and accessories.
Professional services revenue consists of fees charged for installation and configuration services for new locations joining the Toast platform and new products added by existing locations.
If you dig into the Toast S-1 you’ll see that the vast majority of their revenue comes from payment processing. Additionally, you will find that as of December 31, 2020, Toast had 29,000 customers and 48,000 restaurant locations, which translates to revenues of ~$28k per customer and ~$17k per restaurant location.
Olo (OLO)
From the Olo S-1:
Olo provides a leading cloud-based, on-demand commerce platform for multi-location restaurant brands. Our platform powers restaurant brands’ on-demand commerce operations, enabling digital ordering and delivery, while further strengthening and enhancing the restaurants’ direct consumer relationships.
Olo not only has benefited from the proliferation of APIs for everything, but really only exists because there are APIs for everything. Olo’s services connect existing restaurant infrastructure to enable digital ordering and delivery with aggregators (Uber Eats, DoorDash, PostMates, etc) and 3rd party delivery services.
There are 3 components to Olo’s product offering:
Ordering - white label on-demand e-commerce solution. Enables customers to order via mobile, web, kiosk, and other digital channels. This is billed via monthly subscription
Dispatch - fulfillment solution - enables restaurants to offer and manage direct delivery via own operations or 3rd party delivery service providers.
Rails - aggregator and channel management solution
If you dig into the Olo S-1, you’ll see that the company has not generated much revenue, but is growing quickly. Additionally, the most recent 10-Q shows 36,084 in subscription revenue on 500 customers and 76,000 restaurant locations, which translates to revenues of ~$288k per customer and ~$1.9k per restaurant location.
Notable customers include: PF Changs, Applebee’s (DIN), Cheesecake Factory (CAKE), Chili’s (EAT), Denny’s (DENN), Five Guys Burgers & Fries, Jamba Juice (JMBA), Noodles World Kitchen (NDLS), Shake Shack (SHAK), sweetgreen, Wingstop (WING), and more.
Supplemental Data
Supercompounders
Energy Data
Macro
Tech
Semiconductors
Semiconductor Industry Association Global Billings Report
Bureau of Economic Analysis Semiconductor Import / Export
Cryptocurrency
Cloud Multiples
Check out the most recent edition of Clouded Judgement for the latest SaaS multiples. Also, this week Ball covers the topic of growth durability - long story short - best in class SaaS companies are seeing long term durable growth at higher rates than ever before.
McKinsey Global Institue, Digital America: A Tale of the Haves and the Have-Mores, December 2015
Hospitality Technology, 2020 Restaurant Technology Study, March 2020