Food Poisoning at OpenTable

If an OpenTable (Nasdaq: OPEN  ) quarterly earnings report isn't right, can the waiter send it back to the kitchen until it comes out tasty?

The restaurant reservations leader served up inedible numbers last night. Revenue climbed 40% to $34.4 million, but analysts were targeting a 46% top-line spurt. Adjusted earnings of $0.30 a share matched expectations, but this is the first time since going public more than two years ago that OpenTable didn't beat Wall Street's profit forecast.

If you want a sour dessert after those stomach-turning courses, the number of seated diners slipped sequentially for the first time in three years. There is seasonality in this business, but the summertime lull comes at an inopportune time.

The silver lining here is that OpenTable continues to work for both diners and restaurants. In North America, where OpenTable generates the bulk of its revenue and all of its profitability, the number of restaurants on the platform increased 25% to 16,237. There were 21.8 million patrons seated through OpenTable.com's website and mobile app, 42% ahead of where it was last year. It's good to see reservations growing faster than installed eateries, indicating that the average restaurant is generating more reservations through OpenTable than it was a year ago.

The overseas market is still a bit of a mess. There may be 7,629 restaurants on its rolls -- largely through last year's toptable acquisition -- but just 1.8 million diners were seated. Losses are narrowing overseas, but it will take awhile before Europe and Asia begin moving the needle here.

OpenTable remains the top dog in this space. Urbanspoon's Rezbook -- now owned by IAC (Nasdaq: IACI  ) -- recently eclipsed the 1,000-eatery mark. Rezbook is a cheaper solution, as reservations are managed on Apple (Nasdaq: AAPL  ) iPads through an app instead of OpenTable's hardware and software solution. Google's (Nasdaq: GOOG  ) recent $151 million acquisition of Zagat is unlikely to introduce a well-financed rival, but you never can tell with Big G. For now, both Google and Zagat are OpenTable partners, running their online ressies through OpenTable.com.

OpenTable is still taking a proactive approach. It now offers a different product -- OpenTable Connect -- for restaurants that don't need its enterprise solution. Eateries on Connect pay more per seated diner ($2.50 per person through OpenTable.com vs. $1.00 per person), but they don't have to pay monthly subscription fees for the hardware and enterprise software.

It's been a humbling year for OpenTable. A year ago, it joined Travelzoo (Nasdaq: TZOO  ) and The Knot parent XO Group (NYSE: XOXO  ) as niche-specific sites rolling out Groupon-like initiatives. Unfortunately, OpenTable Spotlight for restaurants hasn't panned out as well as it has for Travelzoo for touristy deals. OpenTable is rededicating its sales force to push the 1,000-point product, where restaurants pay the company $7.50 per diner to be featured in the plan that issues 10 times the number of points during non-peak dining periods. It's also sticking with its 30% discounts offered through partner Savored.

The pressure is on OpenTable now that its analyst-thumping streak has ended and the competition is closing in. If there's an after-dinner mint to be made, OpenTable better deliver before its battered share price smokes out potential buyers.

If you want to follow the ever-changing menu, track the latest news by adding OpenTable to My Watchlist.

The Motley Fool owns shares of Google and OpenTable. Motley Fool newsletter services have recommended buying shares of OpenTable, Travelzoo, and Google. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Travelzoo. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (7) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2011, at 11:18 AM, chadscards1274 wrote:

    It's amazing to me that a company can increase Revs by 40% and match earnings expectations and because Revs were expected to increase 46% the company gets taken down currently 11+%. Given the seasonality of the business and the phenomenal growth overseas (200%+ growth in all categories) I think longer term this is an over-reaction by the market. OPEN even if it just meets earnings expectations in the next 12 months will drop to about 22 times earnings. This for a company growing Revs at 40% and expected to grow earnings at north of 30% makes the stock cheap on a PEG basis.

  • Report this Comment On November 02, 2011, at 11:29 AM, TMFBent wrote:

    This company is pretty amazing. If restaurants charged a buck or two for a reservation, people would bolt and revolt, but Open Table gets away with it only because those using the app don't know they're getting charged a buck or two for the convenience of typing away at their phone or tablet keyboard rather than making a 30 second phone call.

    Unless you believe that restaurants aren't jacking up their prices to make up for the gouging they get from open table.

    I never use Open Table to make a reservation, and when I see it at a restaurant, I always mention that I called rather than use open table, so the restaurant wouldn't have to pay the scalping fee. The staff always says thank you, and often launches into a don't-get-me-started kind of thing on OT.

    When your customers dislike you that much, but feel compelled to use you, you've either got an amazing business, or one that's ripe for lower-cost disruption.

  • Report this Comment On November 02, 2011, at 1:55 PM, tgauchat wrote:

    Amen, TMFBent! I as I commented on [ http://www.fool.com/investing/general/2011/11/02/opentable-s... ] ...

    Exactly WHY is this a "long-term opportunity"? Their service has low barriers to entry and, thus, their recent growth rate is not sustainable -- in the "long-term". Providing on-line table reservations is no longer rocket-science (OpenTable used to (still does?) actually provide data lines and terminals to restaurants, for a monthly lease fee; but ubiquitous 3G internet and tablets eliminates that need). Is there a moat? Can't a well financed competitor swoop in with better pricing and drain that moat?

  • Report this Comment On November 03, 2011, at 4:09 PM, TMFBreakerRick wrote:

    Gouging? Really? Come on now, Seth. It's $0.25 per diner through a restaurant's website or $1 per diner through OpenTable's website or mobile app.

    And if it takes you just 30 seconds to make a dining reservation consider yourself lucky.

    There's also no need to tell the restaurant that you called directly. OpenTable is a technology company. It knows. I'm sure that restaurants have a love-hate relationship with OpenTable, but why are there 25% more restaurants on it now than there were a year ago? As for the moat, Barry Diller's Rezbook is cheaper but it has landed 1,000 new restaurants over the past two years, while OPEN has tacked on 6,000 new restaurants in that time.

  • Report this Comment On November 04, 2011, at 11:21 AM, TMFBent wrote:

    Absolutely it's gouging, Rick. No one uses the restaurant web sites, or they wouldn't need the aggregation of Open table. The $1 or $2.50 per head per table can eat a major portion of a restaurant's per-table margin.

    I also think that OpenTable only prospers because of the mistaken notion that users have that it is somehow free to them. Of course it isn't free. Restaurants are going to jack up their prices to cover the lost margin (restaurants being a very thin margin biz for the most part).

    If restaurants itemized an OpenTable reservation charge on the bills, I guarantee there would be some pretty interesting flare-ups from the oblivious masses as they realize that they're not actually getting something for nothing.

    Read what a few restauranteur bloggers have said about how much OpenTable can cost them.

    As for expansion, I think they are only landing new restaurants because many feel compelled to be on it, sort of like we're all on Facebook not because it's good, but because we have to be.

    I don't tell restaurants that I reserved without OpenTable out of any courtesy to OpenTable, but to let them know I'm looking out for them, and I know they're getting hosed by OT. I know they appreciate being able to pocket the extra couple bucks or more for the table, rather than hand it over to OT.

    There are other problems at OT as well. I think the reviews are gamed for clients. I have given restaurants negative reviews that somehow never show up. (My fave, for a restaurant that soon after closed because it sucked so bad it could no longer attract clients, but that OT review base was glowing...)

    OpenTable is either going to have it all, or it's going to bring in a lower-cost disruption soon, and stockholders will get pummeled.

    My guess is it's the latter, but the smart bet might be on the former, depending on how you play it.

    I think it's a lame business that doesn't add much value since with my phone I can get reviews and call much more quickly. Maybe that's tougher if you're on an iPhone and have to resort to 5 different apps to do something similar, or use open table.

    OT was one of the first apps I put on my phone, but the OS itself is much better at finding me nearby restaurants, complete with reviews, directions, etc., just a swipe away, and a single button push to call beats typing away any day of the week.

  • Report this Comment On November 04, 2011, at 1:18 PM, dfb33b wrote:

    Bent have you ever worked in the restaurant business? From the way you talk it comes across fairly apparent to me that you have not. Nor do you understand anything about how OT works.

    If OT was as bad as a deal as you try to make it out to be do you really think it would have grown to over 16,000 restaurants? Don't you think the first 3,000 restaurants would have started screaming about how bad the service was if it is as raw of a deal as you claim it to be?

    I can and will run circles around any argument you want to bring about OT. Why because I have worked with multiple restaurants that use OT. I have personally seen OT save restaurants. On top of that in comparison to any other form of marketing it is the easiest to track and see a viable ROI and in comparison OT has a much lower cost per diner than any other form of marketing.

    I am not sure of your motives or the reasons for your angst against OT, but they boast a 98% retention rate. You have to be doing something right as a business if your retention rate is that high.

  • Report this Comment On November 07, 2011, at 10:19 AM, TMFBreakerRick wrote:

    Seth, we'll have to agree to disagree on this one.

    I did hear in your podcast that you are neutral to slightly positive to Groupon. I don't get how you can be cool with restaurants selling food and drinks at 75% off (50% off vouchers, split evenly between Groupon and the merchant) but object to $1 per diner through OpenTable?

    And if the argument is that the Groupon traffic is incremental, then so are the $1 reservations through OpenTable (because the organic ones originating from the restaurant's website redirecting into OT are just $0.25 per head). If OpenTable didn't result in incremental traffic, restaurants would drop them obviously. Why is it growing?

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