Slow Customer Growth A Bigger Problem For OpenTable Than Q1 Loss

OpenTable (NASDAQ:OPEN) reported an unexpected loss for the first quarter of the year due to a one-time impairment charge of $12.6 million related to its toptable brand. ((OpenTable, Inc. Announces First Quarter Financial Results, OpenTable Investor News, May 1 2014)) OpenTable acquired toptable in late 2010, and after spending the last few quarters migrating former toptable restaurant customers to its existing platform, the restaurant reservation giant has decided to do away with the toptable name completely. ^[1] The resulting accounting charge wiped out the roughly $10 million in operating profits the company made in the quarter – forcing OpenTable to report its first ever quarterly loss since it went public in May 2009. In fact, this was the first quarterly loss for the company since a marginal $70,000 loss in Q3 2008.

While the loss was undoubtedly a one-time event and is in itself nothing to worry about in the long run, OpenTable’s performance figures for the quarter show a few disturbing trends. Notably, growth in the number of restaurant customers for the company was negligible for the period as OpenTable added just 38 customers in North America – making this the worst quarter by this measure, based on publicly available data, since Q2 2008. Considering the fact that the company has hiked its marketing expenses considerably to ensure growth in its customer base, this poor performance is very likely a result of increasing competition at the local level. Also, the international business fared quite poorly compared to the previous quarter, as operating loss for the international unit increased from $1.2 million in Q4 2013 to $1.7 million in Q1 2014 (adjusting for the one-time impairment charge).

That said, OpenTable’s reservation revenue continued its impressive growth trajectory, with a 6.8% quarter-on-quarter jump in the number of diners seated in North America helping reservation revenues from the region grow 6% sequentially. While we acknowledge the downside risk a stagnating customer base poses to OpenTable’s value, we maintain our $70 price estimate for OpenTable’s stock.

See our complete analysis for OpenTable

Reservation Revenues Continue To Drive Value

As seen in the chart above, our analysis of OpenTable attributes more than two-thirds of the company’s value to 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. In our article Here’s What To Expect From OpenTable’s Q1 Results, we detailed the seasonal trend demonstrated by OpenTable in terms of diners seated each quarter and estimated that the company should have seated between 45 to 48 million diners in Q1. We also pegged the number of North America diners seated in Q1 to be in the range of 40-43 million and expected OpenTable to report total reservation revenues of almost $35 million for the quarter.

The actual figures were in line with these numbers, as the company seated 46.7 million diners in Q1, with the figure for North America being 42.5 million. Notably, the number of international diners seated remained flat compared to the previous quarter, although we expected a 5% sequential jump in this figure. As a net impact, the company’s reservation revenues fell slightly below our expectations to settle at $34.3 million.

Weak Customer Growth Is A Cause For Concern

As we pointed out earlier, Q1 was the poorest quarter for OpenTable since 2008 in terms of number of restaurant customers added in North America. This is definitely not good news for the company which makes roughly one-third of its revenues through monthly subscription fees, and is also likely to drag down the reservation fees in the long run. This is because a growing chunk of OpenTable’s expenses is already allocated to its marketing team to retain existing customers as well as bring in new customers in less profitable areas across North America. But with a number of competitors in various regions trying to undercut OpenTable in terms of price, stagnating customer figures could mean that the competitors are actually successful in driving customers away from the industry leader. What remains to be seen is if the Q1 performance was just a one-off event, or whether it is the start of a trend that can seriously hurt OpenTable’s long-term profitability.

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1. toptable Website [↩]