Last week, we summed up OpenTable’s (NASDAQ:OPEN) Q4 2011 results in our article OpenTable Shows Resilience Despite Tough Environment. Despite the good performance for the period, the online restaurant reservation company’s shares tanked 11% over trading after the results were announced. The market clearly responded to the bits and pieces of information provided by the company during the earnings call about ongoing changes to its business model. These changes, coupled with the outlook presented by management for the year, warranted a reduction in our price target for the company’s shares from $65 to $55.
Below, we highlight the main factors that led us to revise our price estimate downwards by 15%. Our new price estimate is still more than 20% above the current market price, as we continue to believe that there are several untapped potential revenue sources that OpenTable will realize in the years to come. You can read more about the main factors driving our views in our article Does OpenTable Really Have to Worry About Google?
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Effective Subscription Revenues Per Restaurant to Decline
At the end of Q4 2011, OpenTable reported in its corporate presentation that 44% of all reservation-taking full-service restaurants in North America subscribe to its flagship Electronic Reservation Book (ERB) offering. On the other hand, market penetration among primarily walk-in restaurants using OpenTable Connect is around 9%.
The company is looking to increase focus on the pay-as-you-use Connect service to improve the latter figure in coming periods. However, as OpenTable Connect does not bring in any subscription revenues, the effective subscription fee per registered restaurant would decline as the number of OpenTable Connect users increase faster than ERB.
Spotlight Goes Out of Focus
At the end of Q3 2011, OpenTable’s management decided to pull the plug on its Groupon-like restaurant group-buying coupon service, dubbed Spotlight. The service apparently did not strike the right chords with full-service restaurants who prefer not to give out coupons.
Spotlight held a lot of promise, with our earlier analysis predicting that the service could contribute to as much as 10% of OpenTable’s $65 value. Clearly that projection needed to be revised with OpenTable doing away with Spotlight deals completely since late January.
Expenses are Expected to Keep Rising
OpenTable’s expenses have risen rapidly in recent quarters as the company spends more in both the saturating North American market as well as the recently entered international market. As we pointed out earlier, the decrease in overall expenses for Q4 2011 seems to be a one-off incident, as management expects costs to increase by 15% sequentially in Q1 2012 and then increase modestly thereafter. Our forecasts for OpenTable now incorporate that guidance.