GrubHub Inc (GRUB) Q4 2018 Earnings Conference Call Transcript

GRUB earnings call for the period ending December 31, 2018.

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GrubHub Inc  (NYSE:GRUB)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grubhub Q4 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

And now, I would like to turn the call over to Adam Patnaude, Head of Investor Relations. Please go ahead.

Adam J. Patnaude -- Vice President, Corporate Development.

Good morning, everyone. Welcome to Grubhub's fourth quarter 2018 earnings call. I'm Adam Patnaude, Head of Investor Relations. Joining me today to discuss Grubhub's results are our Founder and CEO, Matt Maloney and our President and CFO, Adam DeWitt. This conference call is available via webcast on the Investor Relations section of our website at investors.grubhub.com. In addition, we'll be referencing our press release, which has been attached as an exhibit to our current report on Form 8-K, filed with the SEC today.

I'd like to take this opportunity to remind you that during this call, we will make forward-looking statements, including guidance as to our future performance. These forward-looking statements are made in reliance on the Safe Harbor provisions of the Securities and Exchange Act of 1934 as amended, and are subject to substantial risks and uncertainties that may cause actual results to differ materially from those in these forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC, including the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on February 28,2018, and our quarterly reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31,2018 that will be filed with the SEC.

Our SEC filings are available electronically on our Investor's website at investors.grubhub.com or the Edgar portion of the SEC's website at www.sec.gov. Also, I'd like to remind you that during the course of this call, we will discuss non-GAAP financial measures in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. All references to active diners, daily average grubs and gross food sales, only include transactions placed on the Grubhub marketplace or related platform where Grubhub provides marketing services to generate orders.

Specifically, these metrics exclude transactions like LevelUp and Tapingo where Grubhub only provides technology or fulfillment services. Adam will discuss this disclosure change in more detail later on the call, but we think this clarification is the best way for investors to understand how our business is performing.

And now, I'll turn the call over to Matt Maloney, Grubhub's Founder and CEO.

Matt Maloney -- Chief Executive Officer

Thanks, Adam. Good morning everyone, and thanks for joining the call. This morning we are celebrating Seamless' 20-year anniversary. So for breakfast, we're enjoying corn beef and eggs from the famous Cassies Deli on the lower east side, delivered all the way from New York City. We had to temporarily increase their delivery boundary to include Chicago, which will definitely skew our average click-to-delivery time where we've left a great tip for the driver.

Now before I get nostalgic, we had an outstanding fourth quarter to finish the transformational 2018. We had over $5 billion in sales for our local restaurant partners. Our organic order growth, excluding all acquisition noise, accelerated in every quarter in 2018. This past quarter was actually the fifth in a row and we ended the year with almost 18 million active diners on our platform. We added 1.3 million diners in the fourth quarter alone. Now to put this in perspective, last quarter we set a record for net new diners and the number of diners we added this quarter is more than 60% higher than that past record. We now have over 105,000 restaurant partners in more than 2,000 cities in all of the 50 states. With our aggressive expansion in the fourth quarter, we tripled the number of markets with Grubhub Delivery in 2018 to over 300.

Now for the nostalgia. Seamless is an iconic New York City brand that defines how New Yorkers eat. It was founded to help Manhattan workers eat seamlessly at the office, and has evolved over time to be the most ubiquitous and most beloved way to order delivery in one of the greatest cities in the world. We are proud to steward this brand for the next 20 years and continue to evolve the platform to make ordering at home and at work even more seamless.

Reflecting on the successful history of our Company, much has changed over the past two decades. Recall, smartphones and apps did not exist when Seamless launched in 1999 and Grubhub initially solved the last mile problem by sending faxed orders to restaurants. What has not changed is our singular focus on connecting hungry diners with all of their favorite local restaurants. I remember the first restaurant pitch I went on 15 years ago. It was a Thai sushi fusion mom and pop restaurant in Chicago's Loop. I walked in with my laminated flip book ready to explain online demand and how it could grow their business. Little did I know that many independent restaurants, including this one, had been burned in the initial Internet bubble by paying thousands of dollars to contractors to build a website. Explaining how our platform will aggregate demand better than individual websites was an uphill battle. But I sat there for over an hour and half, explaining the concept to the son of the owner. I'm not sure if I was persuasive or if he felt bad for me, but eventually he signed up and that was the first dollar we earned.

We have a lot of fun events planned this year to celebrate Seamless' anniversary, starting with the new television spot highlighting our epic takeout history in New York City over the past two decades and celebrating Building the City on Delivery. This is going live today on our social media channels. When you look back over the brands' combined histories, the numbers are amazing. We've sent more than $10 billion in food orders to New York restaurants alone. 400 million door bells have been rung from orders on the Seamless and Grubhub platforms and the delivery people have earned more than $1 billion in tips. We are so ingrained in the fabric of New York life that the amount of time it has taken me to talk about New York, we brought food to at least another 75 New York diners.

Even after all these years, we still have thousands of people trying Seamless and Grubhub in New York every day. But this isn't just a New York story or just a Chicago or Boston or Philadelphia or Los Angeles or San Francisco or even a DC story. When we went public less than five years ago, we had seven markets, each of which drove more than 1,000 orders a day. We now have roughly 50 markets that each drive that amount and over 20 markets that are driving more than 3,000 orders a day. Markets outside of those original seven are driving a larger portion of our overall growth than ever before.

The underlying story is that we keep getting better and better at connecting hungry diners with the restaurants they want. We are proud of how we've transformed the way people order takeout over the past 20 years, but given our current growth trajectory and leadership in a giant industry that continues to migrate offline to online, we are far more excited about what is in front of us than what we've already accomplished.

The fourth quarter capped off the year of key business milestones and a reacceleration for Grubhub, as more and more diners look to order online. During the fourth quarter, we generated 467,000 DAGs, up 19% year-over-year. But when we exclude the Eat24 orders from both periods, they are up 22%. This translated to net revenue of $288 million for the quarter, up 40% year-over-year, while net revenue for the full year came in at just over $1 billion, up 47% from 2017. Adjusted EBITDA for the quarter was $42 million and adjusted EBITDA per order was $0.98. These figures, along with the material accelerations in new diners and orders, reflect the strategic marketing and delivery investments we discussed last quarter. Adam, will give you more detail on the impact of these initiatives later, but we are very excited about the new diner and order growth and how it sets us up for 2019 and beyond.

We entered 2018 with 17.7 million active diners, more than 5 times the number we had when we went public in April 2014. This is a sequential increase of approximately 1.3 million net new diners, which as I noted earlier, is easily a record for us. Grubhub generated gross food sales of approximately $1.4 billion in the quarter, an increase of 21% year-over-year. In total, we grew gross food sales by 34% in 2018, ending the year with over $5 billion sent to our local restaurant partners. This dramatic diner, DAG and GFS growth is a direct result of our fourth quarter investments in marketing and new delivery markets.

We spent significantly more on advertising in the fourth quarter of 2018 than we ever have before. This incremental spend scaled without losing efficiency because of our increased delivery and restaurant coverage and our improvements in targeting. TV has been one of those channels we have been able to grow, while maintaining and even improving our returns. Building on the success, we recently launched a new national marketing campaign entitled I Want It All. The campaign focuses on the variety of cuisines offered by our more than 105,000 restaurant partners and reflects our strategy of wanting to satisfy every diner craving. If you want it all, you can have it all, delivered by Grubhub.

Launching new delivery markets was also a meaningful investment in growth last quarter. New markets have been ramping more quickly because of our national marketing, enterprise restaurant partnerships and targeted local independent restaurants sales. As a result of the success in new markets and our ability to see a clear path to sustainability, we decided to launch a total of 125 new markets versus the originally expected 100 new markets in the fourth quarter. Grubhub Delivery now operates in over 300 CBSAs and thousands of cities, giving us an extremely broad footprint to sustain long-term growth. 'There are likely some additional CBSAs we will bring delivery to over time, but at this point, it's about filling in around the edges and going deeper in these markets opposed to broad expansions of coverage.

Grubhub Delivery now accounts for approximately 30% of our DAGs. Needless to say, we continue to be very excited about the benefits of managed delivery and extending our marketplaces. We are excited about the Yum! partnership as a source of growth, but also as a model of how we partner with enterprise restaurants across the country. Yum! has been an exemplary partner and we appreciate the high quality of their teams, as well as their franchise networks. To date, we have launched approximately 6,500 Taco Bell and KFC locations on our marketplace with pickup, delivery and full point of sale integration. Without national marketing support or launching their branded applications, we are still driving volume to their stores and generating thousands of new diners for Grubhub every day. We continue to work closely with the brands and their franchisees to roll out additional stores and build our marketplace in these communities.

Additionally, we have been working with the Pizza Hut team and recently began piloting some Pizza Hut locations on our marketplace and are planning on expanding to several hundred stores in the coming months. Taco Bell's first delivery through Grubhub integrated national marketing campaign is launching as we speak.

I've seen the television spots that are launching today and they are fantastic. We are partnering closely with the Taco Bell team to maximize the impact of this campaign and help their franchisees grow their business. Both teams are excited about the upcoming campaign and work closely to maximize the impact.

Taco Bell has invested heavily in a delivery-focused, comprehensive breakthrough campaign across television, PR, digital, social, email, audio in restaurant and more that integrates a Grubhub driver and branding into the story. In exchange for the support, Grubhub is funding free delivery for an extended period of time. We think this is a true win-win not only for both companies, but for all of our customers and all the new customers we will introduce to our brands through this campaign and through our partnership.

Over the last several quarters, we've highlighted how our acquisition of LevelUp helps us work more closely with national brands. These benefits are becoming more and more clear as we roll out our ability to provide, plug and play, yet highly customizable, integrated technologies that support digital orders from restaurant branded apps or the Grubhub marketplace, all with POS integration and bespoke CRM programs, including loyalty. Grubhub is the only platform bridging branded and marketplace transactions supporting all of the restaurants' digital business whether it's pickup or delivery.

We work like an outsourced technology group bringing whatever solutions a brand needs, as well as providing the integrations to tie it all together. Our strategy of deeply partnering with restaurants to grow their business profitably is yielding a better experience and more selection for our diners on our marketplace, creating significant and long-term competitive differentiation. We now have more than 25,000 enterprise brand locations on the platform and continue to build deeper relationships with leading regional and national brands. For example, we recently launched a pilot with Dunkin' brands where we completed a full point-of-sale integration with our marketplace in approximately six weeks. More to come on this exciting partnership as we expand the roll-out over the coming months. We expect a steady drumbeat of well-known regional and national chains choosing to work with Grubhub to continue because of our comprehensive restaurant-centric product offering, our delivery capabilities, our national coverage and base of 18 million and growing active diners.

We closed our previously announced acquisition of Tapingo on November 7th, welcoming their employees to Grubhub and substantially bolstering our college and restaurant technology engineering efforts. We've added Grubhub restaurants to the Tapingo application in most markets and have already started to see the benefits of that aggregated diner base.

Our 2019 plan continues our aggressive growth posture investing in opportunities that we have proven to be both scalable and effective. We will continue to invest behind our industry-leading brand partnerships and restaurant network. We will further differentiate ourselves by being ideal partners for restaurants and generating exciting and unique value for diners whether that is exclusive items, faster delivery or restaurant loyalty rewards. These efforts will yield profitable and sustainable growth for us for years to come.

I look forward to give you an update on our progress next quarter. And with that, I'll turn the call over to Adam.

Adam DeWitt -- President and Chief Financial Officer

Thanks Matt, and good morning everyone. As Matt alluded to in his remarks, we are very pleased with the impact of our higher levels of investment in marketing and delivery market launches during the fourth quarter. Our business had already been gaining strong momentum throughout 2018 and those investments have accelerated our momentum.

We achieved our fifth consecutive quarter of accelerated organic DAG growth. We added more net diners than ever before by a large margin and we brought Grubhub Delivery to 125 new CBSAs. With the integration of LevelUp technology and product expertise, we are signing new high-quality restaurants and partnerships at a higher rate than ever before, more high-quality diners, more great restaurants and more delivery areas setting us up perfectly for long-term growth, As Adam touched on in introductory remarks, we've clarified that our key operating metrics will largely exclude the impact of the pure technology relationships of LevelUp and Tapingo. Including each transactions would inflate our active diners, our orders and our gross food sales, but these orders had very different long-term financial profiles as compared to our marketplace orders, and would obfuscate our shareholders' ability to understand the health and trajectory of the core marketplace business.

Based on years of experience, we continue to believe the greatest value in this business is on the marketplace side, because creating demand for our restaurant partners is a unique value proposition that is very difficult to replicate. This clarification will have no impact on our historical metrics because we had excluded all these transactions from our third quarter earnings and we had no transactions like this prior to LevelUp and Tapingo. The revenue from these transactions will have a small impact on our reported order capture rate, which we will highlight for you each quarter.

We believe this is the best and most transparent way for shareholders to evaluate the progress of our business, particularly since our focus going forward will be on how to leverage these two businesses, technology, people and relationships to grow our marketplace business. We finished the fourth quarter was 17.7 million active diners, an increase of 1.3 million active diners from just a quarter ago.

On the third quarter call, we shared our plans to invest $10 million to $20 million of incremental marketing spend during the fourth quarter to take advantage of opportunities we saw the scale spend efficiently. We ended up being able to spend efficiently near the high end of this range, acquiring a record number of high-quality diners at a cost per diner similar to when we spend significantly lower dollar amounts. Last quarter, we talked about using seven-day behavior, then 14-day behavior and ultimately a full month of behavior to understand the quality of the new diners. We've now had a four-month to observe repeat behavior of all the new fourth quarter diners and the percentage of diners returning to order a second time was just as high as in our earlier cohorts, even though we dramatically increased our spend. Based on these reorder rates, we expect these new diners to have lifetime value significantly in excess of the cost to acquire them.

Our diner growth is also geographically diverse. We continue to add thousands of new diners per day in our more penetrated markets like New York and Chicago, underscoring how early it is in the offline to online transition in this industry. But the momentum in our newer markets is even stronger with new diners leading to DAG growth in excess of 200% annually in over 200 of our CBSAs. We can also see the impact of the marketing investment on our organic order growth, which accelerated again in the fourth quarter. We processed 467,000 orders per day on the platform in the fourth quarter, up 19% year-over-year, and as Matt noted, 22% when excluding the impact from Eat24.

It's a little hard to see from the headline figures given the impact of completely lapping acquisitions of OrderUp and Foodler, which closed in the third quarter of 2017. But the underlying organic DAG growth rate accelerated another 200 basis points to 300 basis points from the third quarter growth rate. This is on top of the roughly 300 basis points of acceleration in the third quarter from the second quarter. While we have generally moved away from highlighting the exact impact weather has had on our results, we had a little bit of a headwind in the quarter, especially in December, when there was unseasonably warm weather in many of our markets.

That said, we are very happy with the accelerated new diner and order growth this quarter. As both Matt and I noted this growth is increasingly coming from our newer markets, setting us up well for sustained growth. Fourth quarter net revenues were $288 million, up 40% year-over-year. Our capture rate of 20.9% includes roughly 80 basis points from the inclusion of LevelUp and Tapingo's technology-oriented revenues. Normalizing for LevelUp and Tapingo revenue, capture rate was up roughly 200 basis points year-over-year, reflecting a mix shift toward more GHD (ph) orders and a small upward impact for restaurants choosing to pay more for more impressions on our marketplace.

Operations and support expenses grew 76% year-over-year from $81.7 million to $144.1 million in the quarter. During the year, we launched 225 delivery CBSAs, including 125 throughout the fourth quarter alone, bringing our total delivery market count to more than 300 as of year-end. Most of the $10 million delivery investment we talked about last quarter is included in this line item. We've highlighted revenue per order less ops and support cost as a reasonable proxy for overall delivery efficiency. As expected, this metric fell sequentially from the third quarter to the fourth quarter. If you back out the $10 million investment in new markets from the ops and support line, this metric is roughly in line with the third quarter with respect to that $10 million investment.

As a reminder, when we launch delivery in a new market, we are less efficient, because we need to staff delivery drivers ahead of demand. As we grow in these markets, increasingly robust restaurant and diner networks will drive more orders and increase our delivery efficiency. It's the same strategy we've successfully employed since we initially launched delivery in 2015.

In terms of the cadence of reducing that $10 million in quarterly excess burn in all of these newer markets, we will likely see significant room for improvement as the year progresses. We have already seen a meaningful improvement for launch. But given that the markets were launched throughout the fourth quarter, the full quarter impact of the burn will offset the improvement in the first quarter.

Sales and marketing expenses were $69.9 million in the fourth quarter, a 54% increase compared to the same quarter last year and a sequential increase of 41%. Both Matt and I have talked at length about the success of the incremental fourth quarter advertising investment. We spend at the high end of the $10 million to $20 million range with most of it falling in this line item. A few million was in the form of discount promotions, which is recognized as contra revenue. The return and effectiveness of this spend is clear in the dramatic acceleration of active diner growth and sustained acceleration in order volume. Technology expenses, excluding amortization of web development, were $25.0 million for the quarter increasing 70% from the fourth quarter of 2017 and 17% sequentially. A majority of this growth is related to the tech and product spend we acquired with LevelUp and Tapingo. As we said, we are extremely excited about how the work product of those teams is going to help us drive future growth on the market place.

Depreciation and amortization was $24.2 million for the quarter, up 29% year-over-year and 15% sequentially. This expense includes a full quarter of intangibles amortization related to the level of acquisition, which closed in the third quarter, as well as amortization from the Tapingo acquisition, which closed in the fourth quarter.

G&A costs were $27.4 million in the quarter, up from $22.2 million in the third quarter. Excluding one-time impacts and deal costs from both quarters, G&A ticked up slightly with the inclusion of LevelUp and Tapingo G&A costs.

GAAP net loss was $5.2 million in the fourth quarter compared to net income in the prior year of $53.5 million. Last year's results included a one-time $34 million tax benefit related to the new tax laws. We still expect our go-forward tax rate to be approximately 29% before any additional impact from stock-based comp, which is very difficult to forecast. Non-GAAP net income was $17.6 million or $0.19 per fully diluted common share compared to the prior year of $33.3 million or $0.37 per fully diluted common share.

Adjusted EBITDA for the fourth quarter was $42.1 million, a decrease of $14.8 million from the same quarter of the prior year and $18.0 million lower sequentially. Both variance is due to our previously discussed investments in the fourth quarter. Adjusted EBITDA per order was $0.98 in the fourth quarter, down from $1.57 in the third quarter, but very much in line with our expectations.

We ended the year with approximately $225 million in cash and $340 million in debt. On February 6th, we refinanced and upsized our existing credit facility. The new five-year facility has an additional $200 million in committed capacity, $550 million in total, and provides us with additional strategic flexibility.

At this point, I'd like to share our thoughts on Q1 and full-year 2019 guidance. To recap our investments, during our third quarter earnings call, we highlighted a $10 million incremental investment delivery launch markets and a $10 million to $20 million incremental investment in advertising. Since we spent at the high end of the range, think about this as a $10 million investment in delivery and a $20 million investment in advertising, so in aggregate, a total investment during the quarter of approximately $30 million or roughly $0.70 per order. With respect to the $10 million delivery investment, we will continue to launch new delivery markets in 2019, albeit at a significantly slower rate in 2018.

As I highlighted earlier, the operating drag from the fourth quarter launches has started coming down already. But most of the benefit in the first quarter will be offset by the full quarter impact of those new markets since they occurred throughout the fourth quarter as opposed to the very beginning of the fourth quarter. This is baked into our first quarter guidance along with a steady decline in this $10 million per quarter drag throughout 2019. We're are currently anticipating very little, if any, of this drag to be remaining by the fourth quarter of 2019.

While we were explicit last quarter that the $10 million delivery investment would decline throughout the year, we talked about taking a wait-and-see approach on how we think about our marketing spend going forward, based on what we saw in the fourth quarter. Because we've been able to acquire a lot more new diners at a very reasonable per diner cost and these incremental diners are just as good as our historical new diners, we think it makes sense to maintain a higher level of marketing spend. We have been spending in similar rate so far in 2019 and the results have continued to be great. We are really excited that we've accelerated our acquisition of high-quality new diners through increased advertising. It's a testament to the quality and breadth of our restaurant partners, efficiency of our driver network, enhanced product experience and improved new diner targeting.

Our partnership with Yum! will deepen in 2019. We mentioned a national co-marketing campaign that started today for Taco Bell. As Matt noted, the teams are so excited about the campaign that we have all increased our investment in the launch. Given the magnitude of what Taco Bell has pulled together a comprehensive media support, Grubhub is going to enhance the impact by supporting free delivery. We think this shows the power of aligning incentives with our restaurant partners. Embedded in our guidance is approximately $5 million and free delivery that we will be providing to support the Taco Bell campaign during 2019.

With these considerations in mind, I'll go through the first quarter and full-year guidance. We expect $310 million to $330 million of revenue for the first quarter and $1.315 billion to $1.415 billion for the full year. Our revenue should follow seasonal pattern observed in prior years. We currently expect the first quarter adjusted EBITDA to be in the range of $40 million to $50 million and the full year to be in the range of $235 million to $265 million. We expect adjusted EBITDA and EBITDA per order to increase throughout the year as we gain efficiencies in the new delivery markets, start to get increasing leverage from the recent marketing and technology investments, and achieve general operating leverage as we continue to grow. As a result, we expect to exit the year generating EBITDA per order much closer to our third quarter 2018 rate of $1.57 than our fourth quarter ' 18 rate $0.98. If you take our 2019 order volume and apply the third quarter of 2018 level of EBITDA per order, it implies that the business would generate $40 million to $50 million in EBITDA above our full-year guidance for 2019.

So when considering 2020 and beyond, we believe the base EBITDA from where we will continue to grow, should be closer to that figure than our full-year 2019 guidance. As you can tell, we are excited about the progress we've made in 2018 and our momentum beginning in 2019.

With that, Matt and I will take your questions. Operator, please open the lines.


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Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Ron Josey with JMP Securities, please go ahead. Your line is open.

Ronald V. Josey -- JMP Securities -- Analyst

Great. Thanks for taking the question, Matt and Adam. I just wanted to talk a little more about the investments and Adam, I appreciate the commentary at the end, but 4Q was the first quarterly reported loss we've seen in a long time and understood the investments in market delivery. Can you just talk about how you balance investments with overall profitability and growth? And when you think about 2019, we're focused on our ROI here, but any way to sort of break out the investments around, maybe talk about free delivery, marketing new markets around those lines. And then, what gives you confidence potentially that 2020 gets back to more of a normalized sort of investment cadence. Thank you.

Adam DeWitt -- President and Chief Financial Officer

Yeah. Hey, Ron. Thanks for the question. In terms of kind of historical context, this cycle is not that dissimilar from 2015 when we first launched delivery and saw our EBITDA per order go down to like a $1.10 per order and then bounce up and exceed our historical highs on an EBITDA per order basis over the next several quarters. So I -- in terms of the net loss versus that, we really look at that EBITDA per order. We talked about how over time, as you increase the delivery, you are grossing up the P&L. So we really focus on that EBITDA per order and the $0.98, $1.10 in terms of how we feel confident that we're going to get back to that third quarter of '18 level of $1.57. I think there's two or three important points. One is, I talked about the marketing investment in our script. We are not talking about increasing our marketing. again or accelerating our marketing investment again, at this point. So, you're really talking about growing into a higher level of marketing spend throughout the year and I think you'll see some operating leverage there.

I think the second point is on the delivery investments. So that $10 million of investment in new markets in the fourth quarter, I think the key is, we launched those markets throughout the quarter, right, so we didn't have a full quarter impact from the drag from all of those markets until the first quarter. What's interesting is, we don't think we're investing more in the first quarter because we've already seen some improvement in all those markets. And having been through this cycle before, where we've invested in delivery capacity and then grown into it and generated operational leverage and efficiencies over time, we feel very good about the cadence throughout the year.

I think the third thing is just the core business, right. So one of the things we talked about a little bit less in the last couple of quarters is the LevelUp and Tapingo acquisitions. There is an implied investment in tech and product there. We acquired really strong tech and product teams that we think are going to accelerate our -- or have accelerated really the momentum that we have on the enterprise side in terms of the LevelUp acquisition and Tapingo in terms of helping us think through how to work with more captive demand like colleges. But that was really a step up in our product and tech expense that were also going to grow into throughout the year.

So as I look through the map, we feel pretty good about the path that gets us back to that level in the fourth quarter. And I think -- I think a key point here is, these are -- these are choices that we're making based on what we're seeing right. Matt talked about and I talked about the new diner growth, the 1.3 million net diner adds in the fourth quarter, that we're adding at a significantly lower cost and the value that they're going to generate for Grubhub over time. Right? If we wanted to grow at a slower pace, if we wanted to grow similar to what we were doing in the first quarter or the second quarter of last year, we could add $20 million to -- $20 million to $30 million of EBITDA right now. But this is the right choice for the business long term, right.

We have -- as I mentioned in the call, we've accelerated our DAG growth every quarter for the last five quarters with a couple of 100 hundred basis points consecutively for the -- for the third quarter and fourth quarter. And we think that, that puts us in a much better long-term trajectory. If you think about where we are versus a year ago, we're a much larger and diverse business on a much deeper trajectory. So we feel good about those investments and we feel good about our path to recoup them.

Ronald V. Josey -- JMP Securities -- Analyst

Great, thank you.

Operator

Matthew DiFrisco with Guggenheim Securities. Please go ahead, your line is open.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Thank you. I have a question with respect to sort of the -- the restaurant growth and relative to the market growth. I think it looks like you added -- the last time you spoke, you had about 95,000 restaurants off of 180 markets. Now you've expanded that by over 30% new market growth, yet your restaurant growth looks like it only sort of grew about 10% or so. Is that an indication that these are just significantly smaller markets or should we be concerned a little bit about, are you losing some of your restaurant partners in the more mature markets?

Matt Maloney -- Chief Executive Officer

No, I don't -- I mean, from a -- I'm not sure what points -- data points you're looking out there. I think -- I think we are mixing a little bit kind of how many markets we're in versus how many GHD delivery markets we're in versus restaurant ads. I think over the year last year, we increased our restaurant network by more than 30%. Our restaurant growth continues to be super strong with LevelUp -- LevelUp's product. We're having better conversations, more accelerated conversations with more enterprise and our product on the independent side. and our targeting on the independent side continues to get better. If you look at our attrition rate in terms of orders that we're losing off the platform from restaurants that leave, it hasn't changed in several years. It's very, very low.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

So you're in a 105 -- you have 105,000 restaurants in the 300 markets?

Matt Maloney -- Chief Executive Officer

In 300 delivery markets. I think we're actually in something like 600 and we have orders in something like well over 600 CBSAs.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Right, OK. Thank you.

Matt Maloney -- Chief Executive Officer

In -- in thousands and thousands of cities. So CBSAs is a construct that people used to think about marketing demographics, but we're in thousands of cities.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Thank you.

Operator

Jason Helfstein with Oppenheimer. Please go ahead, your line is open.

Jason Helfstein -- Oppenheimer & Co. Inc. -- Analyst

Hey, thanks. I'll ask two questions. One, is incremental demand from Yum! co-marketing baked into the guidance? I know historically it hasn't been, we're just asking that. And then, can you help us a bit thinking about kind of exit run rate for diner and GFS growth toward the end of the year? Obviously, a lot of things are happening that will accelerate that number, and just kind of any kind of clarity, because clearly (ph) the investments are in the guidance, but any kind of color would be super helpful. Thank you.

Adam DeWitt -- President and Chief Financial Officer

Yeah, so in terms of the -- in terms of the first question on the Yum! marketing, obviously we did our -- we took our best guess at the impact. This is the first time that we've gone through a national co-marketing campaign with a brand that's well established, right. So there's a little bit of an art. We do have some baked in. We think it's going to be a super -- a really powerful campaign. We know that to-date, we have thousands of Taco Bells and KFC, in this case it's Taco Bell, but if thousands of Taco Bell's on the network and we've watched the diners that come in and the quality there, and the incrementality in terms of new diners, is really strong. And so we feel good. There's definitely some impact from the Yum! or from the Taco Bell marketing campaign baked in.

In terms of exit rate, you know, we don't give guidance on a per quarter basis and we don't give guidance on the metrics. But I think my comments on the first question were probably helpful in terms of thinking about the new diner growth cadence. We're certainly at a much higher level than we were in the first quarter and second quarter of last year in terms of net diner active adds. And I think it's fair to assume that if we -- if we maintain a higher level of marketing, that will continue to grow at a higher level than we saw earlier in '18.

Jason Helfstein -- Oppenheimer & Co. Inc. -- Analyst

Just maybe a quick follow-up for Matt. When do you think the LevelUp or -- LevelUp will scale off to be able to offer that in more markets or a bigger chain?

Matt Maloney -- Chief Executive Officer

I -- LevelUp is ready to scale right now. We're actively having conversations with, I would say, all of the national leading QSRs. I mean, in my comments around Dunkin', for example, when we think about -- think about what I said, we're able to execute a fully integrated POS relationship, including marketplace and pilot in about six weeks. And if you think about the level of effort that requires, and that's it, there is a tremendous amount of technology and products. And we -- the Dunkin' is a -- I mean, it's a great example of what we want to do with national partnerships broadly. So let me kind of take your question, parlay that a bit into our enterprise restaurant strategy, whether it's Dunkin' or Taco Bell or KFC, every restaurant -- every brand, every team kind of has different requirements. They need a different solution and platform that's going to partner with them, needs to have a variety of products that they can leverage in this situation. And our goal overall, is obviously to accelerate this shift that we're seeing from offline to online ordering and capture as much of that volume as possible.

So we bring the largest marketplace as well as industry-leading products for chains and that's exactly what we were building out and accelerated with the LevelUp acquisition. So, this includes supporting branded platforms. We're, for example, building the KFC app at this point. We are fundamentally executing core technology for brands. We're helping them with transaction management, we are doing delivery from their applications, we're doing four POS integration, and as I mentioned, CRM tools including royalty. That's a suite of products that we bring to enterprise partners that no one else is able to bring to the table. And that's why we are the ideal partner for restaurants, both enterprise and independent. You're seeing that with the Dunkin' decision, you're going to see that with a lot more announcements that we'll have in the coming year. But being the ideal partner and having these deep, deep relationships with restaurants will fundamentally come back and build our marketplace and build a competitive differentiation that we're looking to build over a longer term. So, I appreciate -- I appreciate you opening the door for that answer, because I've been wanting to communicate more clearly what -- what our goal and our strategy is for enterprise restaurants.

Jason Helfstein -- Oppenheimer & Co. Inc. -- Analyst

Thanks.Heath Terry with Goldman Sachs. Please go ahead, your line is open.

Heath Terry -- Goldman Sachs & Company LLC -- Analyst

Great, thanks. Last quarter you talked about seeing acceleration in not just -- from not just the new markets, but also your mature markets. Curious how that trended over the course of the quarter and sort of what your expectations are for that going forward. And then as we -- as we look at sort of the impact that these markets are having in the fourth quarter, 100 basis points of daily average grubs growth acceleration in Q4. I know you mentioned, weather was an issue in December, but just curious with over 200, 225 new markets launched over the last six months, how much are we seeing sort of these markets punching at their weight? What kind of acceleration should we be expecting in 2019, as those markets become sort of more -- more mature? It doesn't seem to be something that's started showing up in the initial guidance, but wanted to dig into that a bit deeper?

Matt Maloney -- Chief Executive Officer

I'll take the first one. In terms of the old and versus -- the more mature versus the new market expansion, we're still seeing incredible growth across both segments. I'd say for the new ones, specifically, we have seen very strong demand. It absolutely helps having anchor tenants in our -- in our Yum! relationship in these locations. But we've very aggressively been filling out the supply side with independent restaurants to build out more full marketplaces. And with the comprehensive options we're seeing for diners, we're seeing strong growth and many of these were raising market efficiency. So the new markets are growing very well, and similarly, with the enterprise relationships, as well as the augmentation of delivery around the fringes of the more mature markets, we're seeing a ton of growth there. I mean if you think about it, the more delivery you add, the more restaurants you can bring into the platform and the more restaurants, you have, the more you're going to take it, the higher conversion rate is going to be for the national advertising that you're doing.

So as we're increasing our national advertising and we are dramatically increasing the restaurants we have available, our conversion rate is going up for the same dollar, so the dollars are being used more efficiently. The conversion rate goes up as new diners and that's growth. So, it all builds on itself. We have been talking about it for months and months at this point and we're seeing it and it's not just while -- while the new markets are growing fashion, they have and they're providing a much stronger base of growth for the fund -- for the Company, we're seeing much more growth on new ones. It's also coming out of the mature markets. It's really coming from everywhere, and that's why you're seeing as Adam said, the consecutive quarterly DAG acceleration, you're seeing a record new diners, it's all just working.

Adam DeWitt -- President and Chief Financial Officer

Thanks, Matt. Just -- go ahead Heath.

Heath Terry -- Goldman Sachs & Company LLC -- Analyst

Yeah, I was just going to say, while we have you, could we get sort of an update on your latest thoughts about the competitive landscape and to the extent that that's having impact -- any impact positive or negative on your growth -- your outlook? Would love to get your current thoughts.

Matt Maloney -- Chief Executive Officer

Sure. That's -- that's a quicker lag right? Just a one-off. I think fundamentally that our cohorts are absolutely rock solid as they always have been. The old cohorts are stable, the new cohorts are looking fantastic. I would say generally in competition and all, I'll slightly modify my answer this time. I think we definitely see more opportunity now than we ever have before. And that's playing out in the -- rolling the investment from the fourth quarter into this year. We're not -- we're not accelerating that investment, and that's obviously discretionary. But we see the ability to spend extremely effectively at these higher rates, which we haven't seen years past. So with competition It really hasn't slowed our growth. We think it's probably bringing awareness because it's allowing us to take advantage of more of the offline to online conversion like you're talking about.

We still have a significant structural advantage because we're only focused on this. We see everyone else with multiple priorities and we're able to engineer our products around this. But I'd say that we have strategically over the past six to nine months really built out and acquired the capabilities to be the only platform that bridges branded transactions, as well as our marketplace transactions and be a technology partner at the restaurants like I talked about in my prepared remarks.

We bring the restaurants new customers, we offer the capabilities, we've helped their branded apps, we really are partnering for growth and we are bringing the industry-leading products, partnerships and value. And I do fundamentally believe that the deeper the partnership, the deeper the relationship with the restaurants. This is going to play out in unique and differentiated value for diners whether that's in unique products, unique supply, faster speed delivery because of tighter integration or better pricing and loyalty rewards. I think the diners will ultimately be -- be the beneficiary of our efforts around restaurants whether they are enterprise or independent. And I think that's what will differentiate our business over time.

Adam DeWitt -- President and Chief Financial Officer

And Heath, I'm just going to follow up on the -- on the acceleration point because I wanted to clarify a couple of things. So to your point, in our prepared remarks, we said this quarter excluding Eat24, it was 22% and last quarter it was 21%. I think there is additional -- it's worth noting, there is additional acquisition noise in those numbers because we acquired OrderUp and Foodler in the third quarter of '17 and we acquired another small piece of OrderUp in the fourth quarter of '18. So when you adjust for all of those acquisitions, that 100 basis points really turns into 250 basis points to 300 basis points, which is on top of the 200 basis points we talked about last quarter. And so your question about '19, it may be a little difficult to unpack given all that noise, but that higher level of DAG growth is certainly the jumping-off point that we're at that's embedded in the guidance.

Heath Terry -- Goldman Sachs & Company LLC -- Analyst

Great. Thank you both.

Operator

Nat Schindler with Bank of America Merrill Lynch, please go ahead. Your line is open.

Nat Schindler -- Bank of America Merrill Lynch. -- Analyst

Yes. Hi, Adam, you basically hit on my main question, literally I meant last sentence. But if you could help me out a little bit about how the DAG acceleration corresponds to the organic changes in GFS, and how that is playing out as you've added in these acquisitions?

Adam DeWitt -- President and Chief Financial Officer

So if you're able to unpack the DAG growth and get to the math, I think the GFS connection is very close in terms of the average order size being very, very similar plus or minus. I don't think we're anticipating a big delta in GFS. Historically, the average order size has gone up kind of 2% to 3% every year, but we've always said that we want the average order size to be the order size that maximizes diner lifetime value. So if order size is down $0.50, but orders are up 30%, we'd much rather have that trade-off. So what's interesting is, now that we have delivery on the platform, we're managing delivery, we have a lot more opportunity to manage pricing and figure out not only the optimal pricing strategy for diners, but also get us to the optimal average order size. And so net-net, I don't think we're anticipating significant changes in the average order size, so the GFS story should be very similar to the DAG story.

Nat Schindler -- Bank of America Merrill Lynch. -- Analyst

Okay. And then following up on the competition discussion we've had earlier. A lot of us have seen data out. Recode seems to publish a lot and on how the market itself is growing and market share is changing, do you believe that your spend is appropriate in marketing now, is it letting you capture that opportunity at the same level? And do you think that the market share declines that are discussed in some of these press releases, press pieces are at all accurate?

Matt Maloney -- Chief Executive Officer

Hey. So, the investments that we're making are the right business decisions, so CPA is very stable. The cost per acquisition is very stable, the lifetime value is very stable. What's changed and we saw this change in the third quarter of last year and this is why we accelerated the investment in the fourth quarter is that, we are able to spend at a much larger magnitude extremely effectively. So we've done a lot of work and measurements around are these weaker diners and they are not and they're broad base. There's not just new markets. It's our classic mature markets. The industry is definitely growing. I think that consumer behavior is changing, they're much more likely to order online. You're seeing restaurants recognize that and accelerate their conversations and their pilots and their partnerships, and I think the whole thing is, it's just broadly accelerating. So the ability to spend more, is not a competitive response because we're worried about the market share. It's an opportunity that we are investing into. As Adam said earlier, it's all discretionary. If we want to maximize EBITDA, we can do that.

I think that you will see the industry accelerate and if we are not maintaining our leadership by choice because we want to maximize profitability, I think that's the wrong business decision and that's why we're -- we are continuing our investment from the fourth quarter throughout. I don't really worry about market share per se. We have not seen anyone else -- we are not seeing our churn rates accelerate because of competition. We have not seen the ability to grow to be hindered because of competition. I think you're seeing different players execute in different pockets of the population. I have said many times that while unsustainable business models may be working in the short term, I don't think that they will work in the long term.

However, if the cost of capital remains zero for some of them in perpetuity, then that may have to be rethought. But I'm more of a rational economist than that. So we are just going to continue to invest where we see positive ROI. We're going to continue to strategically build out our features in our products. I fundamentally believe that partnership with restaurants is the right way to build up quality experience for diners and we're going to keep -- we're going to keep building and we're going to keep pushing as hard as we can, because we see so much opportunity in front of us and we're not going to slow down at this point in favor of short-term profitability.

Nat Schindler -- Bank of America Merrill Lynch. -- Analyst

Matt, really quick follow-up on that. Are you still focused on getting the app on people's phones as a cost of customer acquisition and then relying upon them to continue to use it from there and build a history, or is there more with people using multiple services? Is this become a little bit of marketing for share of wallet?

Adam DeWitt -- President and Chief Financial Officer

Nat, we don't see -- I think to Matt's comments, sorry -- sorry to jump in. But I think to Matt's comments, I think the -- from our perspective, when we look at, we would see change in behavior in our cohorts right, and when we look at our older cohorts they're stable. And so we're not -- we're not losing any orders from our old customers and the new diners that we're picking up are just as -- just as high quality as our prior new diners. So we're not seeing that impact. We are --when we think -- when we talk about new diners, we are not giving you app downloads. Those are diners that have actually placed an order.

I would say, I'm not -- I know this isn't exactly what you asked, but over the -- over the years, that number has become more and more skewed toward app new diners as opposed to web new diners. But we view that as a positive. But it's not a case where we are fighting for share of stomach or we haven't seen that in our customer behavior where we are fighting for share of stomach, so to speak with other apps.

Matt Maloney -- Chief Executive Officer

Nat, the other thing I'd point out is, we are not an apples-to-apples comparison with everyone else in the industry. We partner with restaurants for growth. We're not just a logistics company that delivers from one place to another and one of the reasons that Yum! partnered with us is because we are able to support them on a pickup basis. We're able to support delivery, not only for our marketplace but from the app. We're able to do catering orders through our corporate business, we are able to do phone orders for independent restaurants.

There's a lot of ways that we drive growth. We're not just focused on delivering or requiring that we deliver the meal and that's part of the reason we can partner so deeply with some of these chains like Dunkin's or we can support their native branded experience even with a loyalty program. It's kind of a -- it's a different way to think about a restaurant partnership than you see in the rest of the competitive set. And so I wouldn't -- I wouldn't take everything you see these in these (inaudible) or in these earnings press releases at face value. You need to think about the nature of the relationship, you need to think about the partnership and the opportunity that, that partnership drives for the diners in the longer term.

Operator

Brian Nowak with Morgan Stanley, please go ahead. Your line is open.

Brian Nowak -- Morgan Stanley -- Analyst

Thanks for taking my questions. I have two. Just the first one, you mentioned the free delivery with Yum!. I don't recall that being part of the relationship before. Can you just talk to what brought that into the equation? Why do that and sort of how big of an investment is that -- is that going to be as we go throughout 2019? And then just sort of a bigger picture question, I know you talked about how the -- your comments on EBITDA per order don't assume step-ups and further steps-ups in marketing in the back half of the year. If you go back to sort of the start of 2017 and 2018 and your initial expectations as opposed to what happened internally, how has your marketing typically trended when you do the actual results compared to your initial budget and if the opportunity is so big, why not spend more on marketing this year?

Matt Maloney -- Chief Executive Officer

Hey, Brian, I can talk about the Yum! free delivery, and let Adam kind of talk about the marketing of that. So we sat down with the media team at Taco Bell and talked about what their plans were. I think you've seen other advertisements of other relationships of different players in our industry and what you typically see is a restaurant ad, sometimes a great restaurant ad and they flash brand at the end of the 30 seconds and say partnered with blank. And what -- because of the tight alignment and partnership we have with the Taco Bell team and Yum! broadly, Taco Bell's team was very different. It's a fundamental delivery message around Taco Bell. You can see them, I mean it's literally going live today nationally. It's about getting your Taco Bell delivered by Grubhub. There is a Grubhub Delivery driver in the advertisement, fully branded, well representing us and it is at the core, a much better advertisement. It's going to be much more effective than your -- you've ever seen in the past. And so we wanted to accelerate, push as hard as we could and free delivery is really the right way to do that. And so as we saw Taco Bell increasing their investment in the relationship and the co-marketing, we want to do something to make it even stronger. And so we wanted to do free delivery and we are very excited to support that. This is going to be really (inaudible).

Adam DeWitt -- President and Chief Financial Officer

So Matt, that -- that amount, it's roughly $5 million throughout 2019, is baked into the guidance. I think the key is there. That is, you asked the question about acquiring diners in the ROI. That is a great ROI investment for us over the long term. We just highlighted it because it's going to take down EBITDA this year. I'm sorry, by -- by $5 million. But we will see the impact, the CPA on the incremental new diners that we get. We'll be well below our LTV and over time, we'll add a lot of value. Addressing your broader question about 2017, 2018, as we think about it, I think it's easier for me to talk about 2018 since it just happened. Throughout last year, we updated you guys and starting with the second quarter, we started spending more for exactly the point that you made which is, we are seeing our reach, our ability to spend as Matt, also noted earlier to grow and spend effectively.

And so in the second quarter, we probably ended up spending a few million dollars -- a couple of million dollars more than we had planned. In the third quarter, it was a little bit more aggressive and that led to the fourth quarter. And the way that we think about setting the plan, excuse me, I have a little bit of cold, and the way that we think about the fourth quarter and 2019 is, we're spending at the right level in terms of efficiency and we are constantly pushing and testing to see where the optimal spend number is. And we're looking at things like the seven-day repeat rate, the 14-day repeat rate, and the 30-day repeat rate, and we think we're at a good level right now. And we think we can continue to generate the growth that we have and I think in large part, it's due to the market expansion, the restaurant growth et cetera. And so we feel pretty good about the level that we're at right now.

Operator

Mark May with Citi, please go ahead. Your line is open. Mark May, your line is open, you may be on mute. Andy Hargreaves with KBCM, please go ahead. Your line is open.

Andy Hargreaves -- KeyBanc Capital Markets Inc. -- Analyst

Thanks. Just a little bit of a follow-up to the last question. The cost per customer acquisition, diner acquisition and you looked pretty good in the quarter. The cost per sort of order has continued to rise at a pretty healthy clip. So I wonder if you can just kind of talk about the disparity there and maybe how we should think about that going forward. And then the other question I have, is just clearly sort of a focus on chains, but I had wanted to get your thoughts on how you think about the long-term economics of order volume through big chains versus independents just given the potential for chains to have more negotiating leverage.

Adam DeWitt -- President and Chief Financial Officer

Yeah, so I'll take both of those pretty quickly. The marketing cost per order, I think in some -- at some point when you're looking at EBITDA per order, it's obviously an input. But I think you have to keep it in context. I mean the reality is, we're when we're marketing 95% of it's to acquire new diners. And we're buying a lifetime of orders not one order. And so it's not like we're trying new pace, when we're marketing, we're not putting up a TV ad to have someone come into our store one time and buy a big item. We're buying a lifetime of orders, and so when you see us accelerate our marketing spend, it did make sense that you would see that marketing cost per order go down.

I think given the -- given what we talked about today in terms of our current guidance on the marketing spend, you will probably see that number go down, but it's not -- it's not something that we're managing to per se. And the second one, the economics on the chains, like Matt said earlier, we're continually working with chains together to figure out how to make these win-win partnerships. I think going back to the Yum! partnership, that was the first thing that the team has discussed in the room together. It's the reason that they invested in us. And we also have Artie from Pizza Hut on our Board, is that we wanted to make it a win-win partnership. And as we've -- as we've gone further into these relationships, we feel very comfortable that over time, we can maintain or improve our EBITDA per order, you know regardless of mix change versus independents, et cetera. We think that there is upside to that over the long term and every -- the economics of every relationship are different, but net-net, we always keep an eye on the long-term potential for profitability.

Andy Hargreaves -- KeyBanc Capital Markets Inc. -- Analyst

Thanks.

Operator

We have reached the end of our question-and-answer session. I want to thank everyone for participating in today's call. You may now disconnect .

Duration: 65 minutes

Call participants:

Adam J. Patnaude -- Vice President, Corporate Development.

Matt Maloney -- Chief Executive Officer

Adam DeWitt -- President and Chief Financial Officer

Ronald V. Josey -- JMP Securities -- Analyst

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Jason Helfstein -- Oppenheimer & Co. Inc. -- Analyst

Heath Terry -- Goldman Sachs & Company LLC -- Analyst

Nat Schindler -- Bank of America Merrill Lynch. -- Analyst

Brian Nowak -- Morgan Stanley -- Analyst

Andy Hargreaves -- KeyBanc Capital Markets Inc. -- Analyst

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