OpenTable Is a Tasty Treat

Eateries may be suffering through the recession, but the same can't be said for the high-tech company that is helping its biggest stars fill their tables.

OpenTable (Nasdaq: OPEN  ) posted its first quarterly report since going public less than three months ago. Like scoring a table at a popular bistro, it was worth the wait.

Revenue climbed 18% to $16.4 million. Earnings more than tripled to $0.7 million, or $0.03 a share, (or twice as much if you back out stock-based compensation expenses).

Don't lose your appetite over the uninspiring net margins of 4%. They're as real as plastic fruit. The company is growing nicely in North America, where most of its restaurateur clients are, but it's growing even faster in Europe. Losses are narrowing overseas, but they're still eating into OpenTable's bottom line. Compounding the red ink, losses in Europe can't be used to offset taxable gains closer to home.

In short, more than half of the $1.465 million in pre-tax profits went to Uncle Sam. That metric will change as European operations continue to improve. It's a trans-Atlantic hiccup that has also stung travel publisher Travelzoo (Nasdaq: TZOO  ) over the past two years.    

OpenTable's network now consists of 11,164 restaurants, 22% more than it had on its rolls a year ago. Nearly 10.3 million diners were seated through the company's proprietary online reservations system during the quarter.

It's the ultimate network effect, as the growing popularity of OpenTable.com as a reservations platform makes it a worthwhile investment for restaurants that want to stay afloat. OpenTable generates revenue by installing its digital reservation systems, followed by monthly subscription fees and small charges for every reservation.

Restaurants will go to great lengths to fill their tables. They offer marked-down meals through Rewards Network (Nasdaq: DINE  ) , although it's not as sticky or growing as quickly as OpenTable. Rewards Network now delivers leads to 10,197 merchants, just a 4% increase over the past year. Restaurant.com is also an option, as long as the eateries are willing to sell gift certificates for pennies on the dollar. 

Larger chains can turn to print advertising, offering coupons through Valassis (NYSE: VCI  ) or Harte-Hanks (NYSE: HHS  ) campaigns. They can also roll out their own loyalty programs. California Pizza Kitchen (Nasdaq: CPKI  ) , for instance, has The CPK Adventure Card, offering 20% markdowns on new menu items.   

The attraction to OpenTable is that it offers a self-contained platform that seamlessly blends online and phone-in reservations, making operations easier. It also delivers new business, with the average North American OpenTable client receiving more than 1,000 diners via the service during the period. OpenTable claims that all it takes is 12 incremental diners a month to cover the system's cost, so it's no surprise to find more and more restaurants on the OpenTable platform. It made it easy for me to recommend the stock to Motley Fool Rule Breakers subscribers shortly after the IPO.

The stock's valuation isn't cheap, even by foodie standards. However, you're not going to find a category killer with an impressive network effect -- like eBay (Nasdaq: EBAY  ) in the 1990s -- at a discount.

The best meals are worth paying up for.   

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OpenTable is a Motley Fool Rule Breakers recommendation. eBay is a Motley Fool Stock Advisor selection and a Motley Fool Inside Value pick. Try any of our Foolish newsletter services, free for 30 days. It's like an appetizer, on the house. 

Longtime Fool contributor Rick Munarriz is glad to see the IPO spigot flowing again. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On August 28, 2009, at 2:34 PM, tengrandchicago wrote:

    Rick,

    OPEN has a tight timeline to show results to keep their valuation where it is. If the company doesn't start producing strong profitable growth, their share price will take a hit.

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