Weak 2014 Guidance Outweighs OpenTable’s Strong Q4 Figures

Investors were quick to overlook OpenTable’s (NASDAQ:OPEN) better-than-expected results for the last quarter of 2013, choosing to focus instead on the restaurant reservation giant’s lower guidance for the current quarter. ^[1] This is made clear from the movement in the company’s stock on Thursday, which gained 3% over the day in anticipation of a strong performance for the period only to lose 9% of its value in after-hours trading once the results were announced.

There was some good news from OpenTable’s earnings, especially the marked growth in the number of diners in North America as well as internationally. This boosted total revenues for the company by 12% quarter-on-quarter – the highest sequential growth since Q4 2010. This helped the company record a 30% increase in operating income despite its expenses swelling 7% sequentially. Additionally, OpenTable announced its decision to acquire Ness Computing at a net cost of $11.3 million. ((OpenTable Acquires Ness, OpenTable Press Releases, Feb 6 2013)) Ness is a provider of mobile personalized restaurant recommendations – making this the fourth mobile-focused acquisition by OpenTable since early last year; after Quickcue, Foodspotting and JustChalo.

But investors weren’t happy about OpenTable’s announcement that it will shell out more cash this quarter as it grows its headcount and increases marketing activities. This is expected to have a direct impact on profitability for Q1 2014 as well as for the full year 2014, and resulted in a downward revision in guidance figures provided by the company.

On several occasions in the past, we have expressed our view that OpenTable’s expenses will continue to grow at a brisk pace as it expands its footprints geographically, as the incremental cost to add each new restaurant will rise steadily. As we had already priced this fact in our analysis of the company, we maintain our $70 price estimate for OpenTable’s shares.

See our complete analysis for OpenTable

Spike In Diner Growth Gave Revenues A Boost In Q4

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 above, which pegs almost 70% 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.

While the number of diners seated for the quarter followed the historical trend, the improvement in Q4 figures was the best since Q1 2011. A good 90% of the 44 million diners were 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).

Consequently, reservation revenues jumped from around $27.7 billion for each of the last two quarters to $32.5 billion for Q4 2013 – a 17% improvement. Notably, growth in revenues from international reservations for the period of 33% outpaced the increase in number of diners seated at international restaurants (26%) – indicating that more diners at international restaurants made their reservations through the opentable.com or toptable.co.uk websites. This is a great trend in terms of future revenue growth.

But The Increasing Efforts Come At A Cost

Over the last couple of years, OpenTable has had to spend considerably more than it did earlier to ward off competition in North America and to expand its reach in international markets. The source of higher expenses in North America is the saturating markets as OpenTable already has a market share of around 50% in the region. The company has also explored inorganic growth options in terms of acquisitions to add to its product offerings.

OpenTable’s quarterly expenses rose 7% in Q4, and roughly 15% for full year 2013. While this was largely expected, the item that stands out is the sales & marketing expense, which grew from just above $10 million in Q3 2013 to $12.4 million in Q4 2013 – a 23% increase. We believe that this trend will continue for the years to come. Note that the chart below represents these expenses as a percentage of revenues. While the marketing expenses will increase in the future, we do not expect it to outpace revenue growth, which is why the overall trend shows a decline in the chart.

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1. OpenTable, Inc. Announces Fourth Quarter and Full Year 2013 Financial Results, OpenTable Press Releases, Feb 6 2013 [↩]