Greenberg: More Reservations about OpenTable

Follow-up: In Tuesday’s pre-earnings piece on OpenTable I said that it doesn’t really matter whether the company met or beat earnings expectations.


What really mattered, I said, was the quality of restaurants it added. (It did and does; more about that in a moment.)

As it turns out: The issue of meeting or beating was actually important—and not for the obvious reason.

By headline accounts, the company beat by 8 cents per share; estimates were for 15 cents. That tremendous beat, in turn, helped drive up its shares by around 11 percent to a new nosebleed level of the high 60s.

Reality: It could be argued that OpenTable, best known for its online restaurant reservation system, merely met estimates of 15 cents when factoring in a 5-cent gain from a lower-than-expected tax rate and 3 cents from merger-related expenses. (It’s up to investors whether they believe they should include the merger-related expenses, which are subjectively counted by management as a non-GAAP. Acquisitions appear to be part of the company’s strategy. I digress…)

Even with the meeting or beating of estimates, there’s the issue of reaching for growth by adding a discounted (and now, perhaps free) product to its offerings.

OpenTable, which went public a little over a year ago, started with a simple model: It made money by charging restaurants a one-time fee averaging $600, an average monthly subscription fee of $270 and a per-user fee of $1 for reservations made on OpenTable’s site; 25 cents on the restaurant’s site.

Then, three quarters ago, after quarters of uneven new restaurant growth, it added OpenTable Connect, which is geared for smaller restaurants.

Unlike its traditional offering, OpenTable Connect has no one-time fee but started off charging a sharply discounted monthly subscription fee of around $49 and a per-user fee of $2.50 for reservations made on OpenTable’s site; 25 cents on the restaurant’s site.

Here’s where it gets interesting: On its earnings call Tuesday, the company suggested it may now drop the monthly fee for OpenTable Connect and shift exclusively to what the company refers to as “pay for performance.”

Which gets us back to the concept of reaching for growth via discounts:

In the most recent quarter, OpenTable Connect represented 40 percent of new restaurant adds—double the second quarter.

That’s right: 40 percent of the new restaurant growth is coming from what, without a monthly subscription cost, could effectively be considered free. Oh, sure, there is a per-user fee. But without a monthly fee there’s no downside for a restaurant to sign up, even if it doesn’t take reservations.

That means new restaurant additions may actually be a misleading metric.

Instead, keep an eye on revenues per restaurant, which the company said a quarter ago “will trend down” as OpenTable Connect kicks in.

Also worth noting: While sequential revenue rose by 9 percent, the operating margin remained flat at 18.6 percent, suggesting the company is having trouble squeezing more profits out of each sale.

And something that has fallen through the cracks: While most analysts were cheerleading the results—even raising forecasts—Stifel Nicolaus analyst George Askew sliced his 2011 earnings estimate to 76 cents per share from 95 cents. (Not that anybody noticed.)

My take: As I said on The Strategy Session, I make a living sometimes stepping in front of speeding trains. Someone’s got to do it! I’ve been run over more than once. But to out-of-hand ignore incremental changes at growth companies valued for perfection is foolhardy. Sometimes the models are so strong they power through these transitions. Other times (all too often in retrospect, of course) they actually were the first signs of cracks in the story.

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