Strong Q3 Results, Ongoing Upgrades Help OpenTable Shares Jump 12%

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OpenTable (NASDAQ:OPEN) released its performance figures for the third quarter of the year late Tuesday, November 5, comfortably beating rather low expectations, which were largely set by its own announcement last quarter. [1] While the third quarter has historically been a slow one for OpenTable, investor sentiment was further impacted by the fact that the company revised its revenue and income estimates for the second half of the year downwards in August, to factor in growing expenses (see OpenTable Posts Strong Q2; Warns Of Lower Earnings For Rest Of 2013).

With an all-around strong performance from OpenTable, what really caught investors’ eyes was the marked increase in the company’s restaurant base in North America for the period – which swelled 13.1% in Q3 compared to an average growth figure of roughly 3% for the last six quarters – thanks to the acquisition of Rezbook from Urbanspoon. Another notable piece of information tucked away in the press release was that this is the first time ever that OpenTable provided a positive guidance figure for income from its international operations. Moreover, the company’s decision to boost its technology-related spending to revamp its software offering also indicates faster growth in the near future.

The string of good news sent the share price soaring 12.4% over trading on Wednesday, November 6, to settle just shy of $80 – a level the company’s shares have not seen since the first half of 2011. While we agree with the strong value addition suggested by these developments, we maintain our price estimate for OpenTable’s shares of around $70.

See our complete analysis for OpenTable

Diner Growth In Line With Slow Q3 Expectations…

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) Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13
Diners Seated 15.9 19.36 22.42 23.81 23.59 26.85 29.97 30.28 29.74 32.83 37.36 38.23 38.51
Q-on-Q Growth 2.0% 21.8% 15.8% 6.2% -1.0% 13.8% 11.6% 1.0% -1.8% 10.4% 13.8% 2.3% 0.8%

The number of diners seated for the quarter followed the historical trend, with the figure rising less than 1% compared to the figure for the previous quarter with 91% of the 38.5 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).

… But Fortification In North America Continues

OpenTable is the undisputed leader in the North American online restaurant reservation industry – with almost half of all full-service reservation-taking restaurants in the U.S., Canada and Mexico subscribing to its service. And while it has been a formidable achievement for OpenTable to maintain the 3% quarterly growth rate in this customer base for several quarters now, the figure also received a one-time boost this quarter when the company’s deal with Urbanspoon to acquire Rezbook went through.

OpenTable now has 23,287 restaurant customers across North America, and a little less than 31,000 restaurant customers worldwide.

International Business Is Finally Set To Break Even

We have pointed out on numerous occasions in the past that 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. The acquisition of toptable.com in late 2010 did not help profitability as OpenTable tries to replicate the success it received 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 17,977
Operating Income -5,830 -8,462 -5,907 -8,121 -11,384 -9,125 -6,637
Costs:Revenue 477% 404% 254% 191% 155% 141% 137%

OpenTable has been bleeding cash in its international operations, with the company recording 1.4 times more expenses than revenues from these operations in 2012. 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 has been at an all-time low of 130% for the last two quarters. And with international reservation revenues continuing to grow even as OpenTable finds ways to work around growing costs overseas, the company may very well post its very first profit from international operations later this year – something that is also seen in the guidance provided by OpenTable for Q4.

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Notes:
  1. OpenTable, Inc. Announces Third Quarter Financial Results, OpenTable Press Releases, Nov 5 2013 []
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