Ocado moves out of R&D phase, hoping for positive cash flow next year

Ocado announced this morning that it had narrowed its losses across FY2024, helped by the growing demand for grocery delivery and its lucrative technology business. Revenue was up by 18% for its technology solutions, 14% for retail and 8% for logistics. This evened out to 14% revenue growth across the entire business, leading to a loss before tax of £374.5m, versus £393m last year. 

This failed to impress the market, with shares dropping by double digits on Thursday. A slowdown in the rollout of its robotic sites, no new CFC deals being announced, and a slightly worse-than-expected pre-tax loss are potential drivers of the dip. 

The business is set for a year of transformation,with the deconsolidation of its Ocado Retail unit. It will relinquish its rights as a controlling stakeholder in the 50/50 partnership with Marks & Spencer (though its share in the partnership will not change) in April. The status of a final payment for the deal from M&S remains unclear after Stuart Machin publicly said it did not believe anything was owed. In a call with journalists, Steiner simply said “constructive conversations” are ongoing. 

What it hopes will be an even bigger transformation will be the move to finally becoming cash-flow positive, which it predicts will happen next year.

A big driver here will likely be the technology solutions segment of its business. It has nearly twice the adjusted EBITDA of Ocado’s retail segment (£80.9m versus £44.6m), despite being much smaller in overall revenue terms.

That equates to an EBITDA margin of 16.3% in its technology segment, with Ocado’s outlook saying that will grow to between 20 and 25% for 2025. Driving this change is the end of what Steiner calls a “significant R&D cycle” where the company spent over £800m over the last four years, with Ocado now looking to get some bang for its buck. 

Some of this tech includes the 600 Series Bot, a superlight 3D-printed fulfilment robot, as well as advanced robotic picking arms and tote-loading automation. All this has an attractive look in a year where much of the retail mood music is around increased labour costs. 

Spending on technology will drop by £39m as it looks to roll out the technology. R&D capital expenditure is set to drop to around 20% of recurring revenues by full-year 2027. This will include cutting headcount on its R&D teams, Steiner said, but job cuts would be significantly less than the 1,000 reported for 2023-24.

EBITDA is also expected to improve in its retail segment. The adjusted EBITDA of £44.6m in FY2024 represented a margin of 1.7% versus 0.4% in FY23. Ocado points to online as the fastest-growing channel in almost all major grocery markets worldwide as a reason for continued growth. 

Efficiencies are also being sought in its logistics business, where revenue growth was in the single digits and where EBITDA remained more or less static compared to the year before. The company flagged a small number of fulfilment centres that are not delivering the returns that are expected, with strategies here likely to include taking orders from ecommerce marketplaces or business-to-business fulifilment. 

In the US market, where Ocado has a partnership with Kroger, the rollout of its fulfillment centres has been slower than originally envisaged. Steiner was still bullish on the market, saying: “I still believe that the US is an enormous opportunity for the group. And at some point in the future, we’ll look back at these challenging years and go, oh, wasn’t it challenging for a few years? And we’ll see enormous growth.”

Cash positive is one milestone, but the more elusive one it has been changing is profitability. The forecast improvements likely still leave it some way from achieving the latter aim, but it has made another step in the right direction. Whether shareholders will be happy to keep waiting is another question.