Growth But at What Price?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
OpenTable (NASDAQ: OPEN) is a company that I used to own, and have been a proponent of in the past. I originally bought into the story when the stock was around $90. Admittedly I fell for the idea that this company would grow at 30% to 40% for the next few years. When the company reported disappointing earnings, I actually bought more. When they disappointed again, I fell for the idea that the stock was cheap. I finally came to my senses in June of this year and sold my shares. I realized at the time, and it has been proven again, that a company can be dominant in an industry and still have pricing pressures. This is one of the main issues with OpenTable today, the company is growing, but at what cost?
On the surface, most of the numbers in the company's most recent earnings report look pretty good. OpenTable grew revenue by 15%, and non-GAAP EPS of $0.42 beat estimates of $0.37. The company also grew seated diners by 27% as well. Where we start to see the cracks in the story is behind the headline numbers. OpenTable reports in two different segments, domestic and international. Let's take a look at each, and I'll also point out some opportunities and challenges the company is facing.
OpenTable's business is not just assisting diners in making reservations. The company also helps restaurants with their reservation management. In North America, most of the company's results were impressive. Revenues were up 18%, seated diners up 26%, and the installed restaurant base grew 18%. In this division non-GAAP EBITDA grew 22%, showing the company's ability to turn these sales into profits. For all the positives in the North American region, the international division had some challenges. Internationally, the company has been converting restaurants from the TopTable platform to OpenTable. The problem is, apparently the company hasn't been able to convince all of the restaurant owners to convert. Though it's a one time issue, the company essentially cut off those restaurants that have not converted. This caused the installed restaurant base to shrink by 5.7%. This directly affected revenues, which were only up 1%, and non-GAAP EBITDA showed a loss of $0.8 million. The only positive was the company seated more diners, with this measure coming in up 39% on a year-over-year basis. Some people might look at these results and assume that the international conversion issue is a one time deal. Unfortunately there are a few issues I've noticed that seem to point to challenges in the future.
One of the issues that OpenTable is dealing with is the slowdown in their subscription revenues. The company offers subscription services to restaurants using their Electronic Reservation Book solution. In theory, this software solution is more efficient than a whiteboard or traditional paper seating chart. However, with this line item only showing 11% revenue growth, the company apparently is having trouble convincing restaurants to sign up. While the company's reservation revenues were up 22% due to an increase in seated diners, there is also a hidden issue here as well. Last year, OpenTable made almost $612 in income per North American restaurant. This year, the company made about $483 per restaurant. Since there were 18% more restaurants participating, this increase in the restaurant count masked the fact that the company is obviously having to cut prices to continue signing new relationships. Another issue I noticed was operating expenses grew by 24%, which outpaced the company's 15% revenue growth. More troubling was the fact that general and administrative expenses increased 60% on a year-over-year basis. With the company cutting prices to continue its growth, seeing less income per restaurant, and running into huge expense growth, the only question is where does OpenTable go from here?
There are at least two opportunities that I could envision for OpenTable going forward. The first is, the company would do well to consider either a partnership, or a merger of equals with a company like Yelp (NYSE: YELP). Both companies have been announced as new additions to Siri's capabilities in the upcoming iOS from Apple. Yelp will be used as the preferred information source for localized information in the company's new maps application. OpenTable will offer reservation services to users within the same maps app. Both companies could use greater size and resources to grow their businesses. In addition, each company has a distinct niche market. Yelp targets local advertising and OpenTable targets restaurants. What better way for both companies to benefit than to combine forces?
The second possibility I could see happening would be OpenTable being acquired by Google (NASDAQ: GOOG). Big G is always looking for sensible acquisitions, and this would be easy for the company to accomplish based on their over $200 billion market cap. and over $43 billion in cash and investments. While this might make the inclusion in iOS 6 a tense relationship, it would give Google another arrow in their quiver to add to the Android OS, and to integrate into their other properties. Long story short, I don't see OpenTable as a great investment on its own.
With the stock selling for a forward P/E of about 28, and now expected to grow at about 22.4%, OpenTable isn't quite the growth story I first envisioned. The company's issues with margin contraction and international issues have put somewhat of a roadblock to better growth rates. Though shareholders have endured a tremendous fall from grace already, I fear the stock has further to move down. Unless the company makes a move to become bigger by acquisition, or is acquired by another company, I would have serious reservations about acquiring shares at this time.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and has the following options: short OCT 2012 $40.00 calls on OpenTable and long OCT 2012 $40.00 puts on OpenTable. Motley Fool newsletter services recommend Google and OpenTable. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.