What happens if you have a line of people outside your business, but each one pays less at the cash register than the one before?
There comes a day when you can't make it up in volume.
That's the problem at restaurant reservations system OpenTable
So each customer brings less to the checkout counter. And that's unsustainable without a massive change in the business. The trouble with growth is that in all but a minority of cases, it ends. As OpenTable investors and those at other growth-momentum companies have found, it's all fun and games until somebody gets hurt -- namely, the investor who overpaid along the way for slowing growth.
Less dough per diner
This table shows OpenTable's seated diners, installed base, total revenue, and revenue per seated diner, along with each metric's year-over-year percentage growth.
Seated Diners (millions)
Total Revenue (millions)
Revenue per Seated Diner
Sources: Company press releases; SEC filings. Numbers include both North America and international.
More diners are making reservations at restaurants that then pay a toll to OpenTable, but revenue per seated diner has consistently declined. This is why seated diners and installed base -- still growing at rates any company would be proud of -- surpass revenue growth in seven of the last nine quarters and the last five consecutive quarters, respectively. Installation revenue -- not a large revenue component, but still an indicator of what might be ahead -- is off 14% year over year through March 31 from a high of 288% a mere five quarters ago. An accounting change boosted installation revenue recognition for a year, but it's all over now. Comparisons became odious in the fourth quarter of 2011 -- and, in the last quarter, downright odorous.
And the much-vaunted international growth? Revenue per seated diner is higher, but it has declined for six of the past nine quarters, tumbling to $2.50 today, versus $4.33 in the March 2009 quarter.
Earnings quality goes stale
Equally worrisome is the rise in days sales outstanding -- the time it takes a company to get paid. For the last six quarters, DSO has increased year over year from 9% to 17%. It now takes OpenTable 44 days -- half a quarter -- to get paid, up from 35 days in the quarter ending March 2010. We followed this prior to the November and March earnings reports when they proved disappointing at earnings time.
Theoretically, OpenTable can improve collections. But with restaurant turnover (openings and closings) and, apparently, more distressed clients and company-extended payment terms, the skies are clouding over.
Management massages the stock price
The stock is heavily shorted -- 38% of shares outstanding at latest report -- and management has so far wasted $50 million in shareholder money to force a short squeeze that had no lasting effect. The boost to $50 has receded. Its checking account contains another $58 million today, and I wouldn't doubt management will waste another part or all of that shareholder money on a buyback for a short-lived boost. But earnings power drives a business, not management's efforts to jigger the stock price. Absent that, further buybacks will be short-lived. As with taking out debt to fuel a declining business, sooner or later you can't make the payments.
No one can predict the future. Competition is heating up, not least of all from Scripps Network Interactive station
But even without that, OpenTable is no longer a growth stock, its DSO is rising steadily, and it will hit the wall. In a year or three, it will continue running in place to maintain flat metrics. If each dollar you spend brings in a customer paying less -- and you aren't growing like a pre-2000 Internet company -- eventually, you can't make it up in volume.
Sell, avoid, or short the stock.
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