OpenTable Posts Strong Q2; Warns Of Lower Earnings For Rest Of 2013

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The large swings in OpenTable’s (NASDAQ:OPEN) stock towards the end of last week indicate the mixed expectations among investors. Slated to release its performance figure for the second quarter of the year after market close last Thursday on August 1, OpenTable raised immense interest among investors by announcing its decision to partner with rival Urbanspoon and acquire the latter’s restaurant reservation platform Rezbook a day earlier. [1] Shares raced nearly 10% higher over trading on the day as news of the acquisition and the high expectations from Q2 figures encouraged investors. OpenTable also did not disappoint investors as it reported a better-than-expected income figure for the quarter on the back of strong diner growth. [2]

But it wasn’t all good news the company had to share. The rising competition in the online restaurant reservation industry makes it necessary for OpenTable to dole out larger sums of cash for marketing and advertising purposes – something we predicted in our recent articles Will Groupon Reserve Chomp On OpenTable’s Business? and Is Yelp’s Acquisition of SeatMe Really A Threat To OpenTable? This translates into lower total earnings over the coming quarters, which OpenTable admitted to by lowering its guidance for next quarter and full year 2013. Investors over-reacted to the news early Friday morning on August 2, with shares sinking almost 10% during the first trading session before recouping most of the losses in the afternoon to close 3% lower for the day.

As our analysis of OpenTable already factors in increasing SG&A costs over the coming quarters, we have raised our price estimate for the company’s stock from $56 to $60 to account for the improved value from the acquisition of Rezbook.

See our complete analysis for OpenTable

Diners Continue To Embrace OpenTable’s Restaurant Reservation Offerings

The revenue that OpenTable earns for each diner it seats at restaurants is the biggest source of value for the online restaurant reservation company. This is evident from the chart, which pegs more than two-thirds of the company’s total value to this revenue stream. The growth in the number of diners seated by OpenTable shows a discernible trend year after year with the number of diners seated showing a spurt in the first and fourth quarters, moderate growth in the second quarter and negligible to negative growth in the third quarter.

(in millions) Q1’10 Q2’10 Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13
Diners Seated 14.5 15.59 15.9 19.36 22.42 23.81 23.59 26.85 29.97 30.28 29.74 32.83 37.36 38.23
Q-on-Q Growth 19.5% 7.5% 2.0% 21.8% 15.8% 6.2% -1.0% 13.8% 11.6% 1.0% -1.8% 10.4% 13.8% 2.3%

The number of diners seated for the quarter followed the historical trend with the figure rising 2.3% compared to the figure for the previous quarter with 91% of the 38.2 million diners being seated in restaurants across North America (the U.S., Canada and Mexico) and the remaining at international restaurants (primarily the U.K., Germany and Japan).

And these figures will only be helped by the series of acquisitions OpenTable has announced in the recent past – including Foodspotting, Just Chalo and Rezbook.

Is The International Business Ready To Turn The Corner?

As we have pointed out on numerous occasions in the past, a major source of concern for OpenTable is its international operations, which have yet to break even despite the company’s efforts over the last five years. Even the acquisition of toptable.com in late 2010 did not really help profitability as OpenTable tries to replicate the success it found in the U.S., Canada and Mexico to the U.K., Germany and Japan.

International Business Results

($ thousands) 2007 2008 2009 2010 2011 2012 2013 YTD
Revenues 1,547 2,779 3,845 8,883 20,864 22,294 11,895
Operating Income -5,830 -8,462 -5,907 -8,121 -11,384 -9,125 -4,824
Costs:Revenue 477% 404% 254% 191% 155% 141% 140%

OpenTable has been bleeding cash in its international operations with the company currently recording 1.4 times more expenses from these operations than the revenues they generate. While this figure is better than the near -500% cost to revenue ratio seen in 2007, the slow rate of decline seen in expenses with respect to revenues is a serious cause for concern.

While the international business reported a net loss again this quarter, the cost to revenue ratio fell to 130% for the quarter – the lowest ever, with international reservation revenues seeing one of the highest quarter-on-quarter gains in recent years. This may very well result in the unit actually posting its very profit later this year, or early next year – something that would represent a notable upside for OpenTable’s total value.

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Notes:
  1. OpenTable Partners with Urbanspoon; Acquires Rezbook, OpenTable Press Releases, Jul 31 2013 []
  2. OpenTable, Inc. Announces Second Quarter Financial Results, OpenTable Press Releases, Aug 1 2013 []
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