Greenberg: Watching for Signs of Indigestion at Open Table

OpenTable, the online restaurant reservations company, announces quarterly earnings after the close today. Forget about whether the company meets or beats (even though I know Wall Street won’t!): The only thing that really matters is the quality of new deals it strikes with restaurants added to its roster of customers.


Why care? Because a key metric for OpenTable is monthly revenue per restaurant, and it’s likely to start falling from its recent average of $600.

The company said so itself on its last quarter’s earnings call.

Yet investors have turned a blind eye. Over the past three months OpenTable's stock is up around 36 percent even though sequential revenue growth is falling.

That’s quite an unappetizing combo for a supposed growth company that pretty much created the business of online restaurant reservations—and by all accounts has done an excellent job.

Which gets us back to quality of new restaurant deals: OpenTable makes money by charging restaurants for using its system. Historically, it charges a one-time installation fee of around $600 to $700. Then it charges a monthly subscription fee that averages $270. This accounts for 45 percent of its revenue.

Another 49 percent of its revenue comes from fees the restaurant pays for each reservation made by customers: $1 if the reservation was made on OpenTable’s website; 25 cents if it was on the restaurant’s website.

Enter OpenTable Connect, which has no subscription fee and a sharply discounted monthly charge of $49. (That fee currently being waived for international customers.) The per-reservation fee is $2.50 if made on OpenTable’s website, but only 25 cents if it’s on the restaurant’s website.

Last quarter, OpenTable Connect accounted for 20 percent of all new open table customers, up from 11 percent the quarter before.

And there’s competition from IAC/InterActive Corp.’s Urbanspoon, which last year rolled out its Rezreservation app for the iPhone.

My take: Whenever a company valued by Wall Street for its growth starts reaching for revenue by discounting—watch out!—especially if it trades at more than 80 time earnings. At those levels, investors tend to expect perfection.

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