San Francisco-based OpenTable (OPEN, Financial) is a company which provides an integrated restaurant reservation management system. The company operates www.opentable.com, leading website for making restaurant reservations online, and thorough its hardware and software system allows restaurants to automate the process of taking reservations and managing tables, as well as generating a robust diner databases for both guest recognition and targeted e-mail marketing. Its network includes approximately 23,300 restaurants in the United States and more than 7,500 locations internationally. The popular website is considered a fast and efficient tool for customers and professionals to find available tables at desired restaurants, targeting price, location and cuisine. Revenue is generated through software subscription fees, hardware installation fees and a fee for each diner seated.
Results for the last quarter were optimistic, as U. S. revenue increased 22% to $44.7 million. The company started to make some investments as to enhance its network effect and provide its services to mobile and tablet devices. The recent innovation in cloud-based electronic reservation book, expected to launch this year, along with the development of new a marketing technology, although implied more expenses and decreased adjusted EBIDTA margins, these investments are expected to have significant effects on the company’s future performance and results.
The Company
Leading the online restaurant reservation market, and with more than 14 million diners per month via online bookings, OpenTable’s service allows customers to see available restaurants and select their perfect choice with verified diner reviews, menus and additional information. Through its Review program, the firm helps diners find the perfect restaurant. Moreover, the company recently launched the “2014 Diners’ Choice Award for the Top 100 Hot Spot Restaurants in America,” reflecting more than 5 million restaurant reviews collected form verified OpenTable users since March 2013. The firm additionally has a mobile app which provides online restaurant reservation services to customers all around the world.
OpenTable allows restaurants to automate their reservation process through an easy system: installing its hardware and software at restaurant locations, the system then interfaces with the OpenTable.com website and is ready for customers to make reservations free of charge. The company sees revenue for each seated customer booking at their website. OpenTable also offers a web-based product, Connect, which doesn’t require on-premise hardware installation and enables restaurants to receive reservations from OpenTable.com and apps. Although Connect has no monthly subscription fee or installation cares, the company charges a higher per-diner reservation fee of $2.50.
It is no wonder OpenTable’s broad restaurant base — more than 55,000 restaurants that accept reservations worldwide —Â along with its strong user base have come to develop a network effect. This network effect increases restaurant operators’ interest in being at the network, increasing as well the company’s base. And OpenTable’s network effect has also made the transition to bile devices, representing now more than 30% of total seated diners. This tendency is likely to raise operating margins through expense leverage, as each restaurant addition aggregates revenue streams.
Competition and Innovations
OpenTable is not only a company which provides restaurant online reservation solutions, but also a customer acquisition tool. OpenTable’s position is dominant in the online and mobile reservation market. Nevertheless, it has its rivals: Livebookings, Eveve and Groupon Inc. (GRPN, Financial) Reserves, pose a considerable threat to the company’s solid presence among the industry. Restaurant operators are not likely to install multiple reservation system, even though they might be willing to try out new less costly alternatives. The presence of lower-cost rivals might potentially hurt OpenTable’s bargaining and pricing power. Rumors of possible competition from Google Inc. (GOOG, Financial) and Apple Inc. (AAPL, Financial) were also circulating but are yet to be confirmed.
In order to keep its innovative spirit and its position among this market, OpenTable has been diversifying and making new alliances. The company teamed up with Urbanspoon and Facebook (FB, Financial) recently, seeking to reinforce its network effect while posing serious competition to new rival reservation sites on the long run. The acquisitions of Rezbook and Quickque have been as well strategic moves from the firm to enhance its business and strengthen its position. In addition, management expects to develop an app-based mobile payment system with JustChalo, to improve its mobile payment options. These investments are expected to strengthen OpenTable’s business; however, integration costs and risks should also be taken into account regarding future results.
The international segment represents yet a sizable growth opportunity. Nevertheless, OpenTable's is still struggling to expand its network effect and make the business as profitable as it is in the U.S. overseas as it competes with other established reservation book platforms.
Bottom Line
The restaurant reservation market is, as we know, subjected to macroeconomic cycles and volatile consumers’ preferences. This is always a threat to companies such as OpenTable, susceptible of seeing lower revenue streams as number of meals purchased decrease. Moreover, the increasing influx of food delivery services is challenging for restaurant reservation services. Nevertheless, restaurant operators are still receiving customers, and the business is likely to sustain its historical levels in the long term. OpenTable has a network which is increasing, and becoming larger each year. Receiving revenue for each diner seated on OpenTable.com or mobile apps, the company sees a steady stream of revenue. Throughout its applications and latest acquisitions, OpenTable is capitalizing the increased usage of mobile devices, and expanding through this market.
The company has been delivering good results for the past quarters, and with an above industry average return on equity, is likely to sustain its growth, taking advantage of future opportunities. Still, the cyclical nature of the consumers’ market and the increasing competition among the online and mobile reservation services might affect in the near term OpenTable’s pricing and bargaining power. Analysts are suggesting a hold on this stock, expecting to see future outcomes and expansion of new acquisitions.
Disclosure: Damian Illia holds no position in any stocks mentioned.
