OpenTable (NASDAQ:OPEN) is slated to release its performance figures for the first quarter on May 1, and investors will be interested in several key factors that drive income at the largest online restaurant-reservation company. OpenTable’s stock has been seen as very volatile around its earnings release, which should figure high on investors’ mind. While the company’s shares have swung considerably in the $70-$85 price range since the beginning of the year, and have lost a over 10% of their value so far, the fluctuations have been particularly strong since the beginning of this earnings season.
Investors will also be curious to see how well the company actually fared given its admission in February that growing headcount and increased marketing activities will swell operating expense figures for Q1. ((OpenTable, Inc. Announces Fourth Quarter and Full Year 2013 Financial Results, OpenTable Press Releases, Feb 6 2013)) But the first quarter has historically been a strong period for the company, with positive earnings surprises helping share prices rocket immediately after the results announcement on several occasions in the past. That said, we believe investor reaction to OpenTable’s results this time around will be governed primarily by two metrics: the number of diners it seated in Q1 and its SG&A expenses.
We maintain a $70 price estimate for OpenTable’s stock, which is close to the current market price.
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OpenTable Likely Seated Well Above 45 Million Diners In Q1
It is hardly a surprise that the biggest source of value for the online restaurant reservation company is the revenue it generates by seating diners at restaurants. While OpenTable’s services are free for diners, restaurants shell out a dollar for every diner who is seated through the opentable.com website or mobile application. As seen in the chart above, our analysis of OpenTable attributes more than two-thirds of the company’s value to its reservation revenues. The share of reservation revenues have grown from 41% of total revenues in 2007 to 61% in 2013. Our forecast pegs this figure at 75% by the end of our forecast period in 2020.
Diners Seated By OpenTable Per Quarter (Source: 10-Q Filings)
Looking at the chart above, which shows the number of diners OpenTable seated in each quarter since 2009, there are some obvious trends that seek attention. The company normally sees a spurt in the number of diners in the first and fourth quarters of the year, with the second quarter showing moderate growth and the third quarter being the slowest – often ending up with a decline in the number of diners. Going by this trend, we expect the total number of seated diners for OpenTable in Q1 to be between 45 to 48 million for the period, with diners in North America constituting around 90% of this figure (~40 to 43 million) and international diners making up the rest. This points to reservation revenues of almost $35 million this quarter.
Rapidly Increasing SG&A Expenses Unavoidable For The Company
OpenTable’s marketing model relies on a direct sales force of regional account executives and sales representatives as well as a team of inside sales representatives. With increasing competition on OpenTable’s home turf from newer players, marketing spend has shot up as part of an effort to retain existing customers. Also, as the company saturates key markets in North America, it is bound to spread into less profitable areas and these moves into newer markets require expenditures to establish a sizable workforce in each location.
Accordingly, growth in OpenTable’s expenses have outpaced revenues in several quarters in the past. This will remain an issue for the company, which continues to leverage its position as the largest restaurant-reservation manager to increase its share of the expanding market. However, we believe that SG&A expenses are unlikely to grow faster than revenues this time, resulting in a healthy improvement in net income figures compared to the previous quarter as well as the same period last year.