Just Eat Takeaway.com N.V.
Q2 2019 Earnings Call Transcript

Published: 30 Jul 2019

[Operator:]

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Grubhub Q2 2019 Earnings Conference Call. [Operator Instructions]. Thank you. Adam Patnaude, Head of Investor Relations and Corporate Development, you may begin your conference.

[Adam Patnaude:]

Good morning, everyone, welcome to Grubhub's Second Quarter of 2019 Earnings Call. I'm Adam Patnaude, Head of Investor Relations. Joining me today to discuss Grubhub's results are 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, 2018, filed with the SEC on February 28, 2019, and our quarterly report on quarterly report on Form 10-Q for the quarter ended June 30, 2019, that will be filed with the SEC.Our SEC filings are available electronically on our investor 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.Finally, as a reminder, all of our key business metrics exclude transactions like LevelUp and Tapingo where Grubhub only provides technology or fulfillment services. And now I'll turn the call over to Matt Maloney, Grubhub's Founder and CEO.

[Matthew Maloney:]

Thanks, Adam. Good morning, everyone, and thanks for joining the call. During the second quarter, we generated 489,000 DAGs, up 16% year-over-year. As expected, DAG growth slowed a bit from the first quarter because the first quarter included the large-scale Taco Bell comarketing TV campaign paired with free delivery. Active diners grew 30% year-over-year to 20.3 million. Sequentially, we added 1 million net active diners. Our strong order and diner growth translated to net revenue of $325 million for the quarter, up 36% year-over-year.Adjusted EBITDA for the second quarter was $55 million, this is $4 million higher than the $51 million in the first quarter despite the sequential seasonal slowdown in orders because of the operating leverage we said we would realize as newer markets scale.Adjusted EBITDA per order was $1.23, up from $1.09 in the first quarter. In these newer delivery markets, we had another quarter of strong momentum and DAG growth with the added restaurant inventory helping these markets scale. As Adam will touched on in his remarks, we expect the continued improvement in driver efficiency through the balance of the year.This trajectory underscores our confidence that we will return the economic parity between Grubhub Delivery and soft delivery orders. This time we're operating at a much larger scale and in a much broader and more diverse geographic footprint. We now have over 125,000 restaurants on the Grubhub marketplace, an increase of more than 10,000 partnered restaurants since April. We had another record quarter of independent restaurant additions across all of our market segments. In today's world, independent restaurants know they need to have an online presence and delivery capability in order to compete effectively and reach the maximum number of potential diners.Our value proposition of packaging an online presence, demand generation and outsourced delivery into a transparent pay-for-performance model clearly resonates and allows our independent restaurant partners to focus on what they do best, making delicious food for their customers. The original focus of Grubhub is connecting independent restaurants with hungry diners, essentially providing franchiser-type services like marketing and technology for small businesses that don't have the scale, resources or expertise to do it themselves. Years later, these small independent restaurants still account for the vast majority of our order volume.We had continued strong restaurant additions this quarter in the 225 delivery markets we launched during 2018, but we're also seeing record restaurant ads in our oldest markets. For example, during the second quarter, we added hundreds of net new independent restaurants in New York City alone. Independent restaurants sales is an area where we are leveraging our data and insights to identify local favorites and cuisine-type preferences to vastly improve our sales targeting. Restaurant churn has always been and remains extremely low in all of our markets, with restaurants predominantly leaving the platform only because they're going out of business. For good reasons, we have spent a lot of time on the last few calls celebrating our accelerated progress in bringing new well-recognized national and regional brands on the platform.It's a great growth catalyst for us, but it's also important to note that independent restaurants will always be a cornerstone of our business and we are extremely committed to making sure they succeed. We have consistently improved the value of the Grubhub partnership for our tens of thousands of independent restaurant partners. Over the last several years, we have tripled the number of active diners ordering from restaurant partners, designed more and more ways for restaurants to efficiently access new diners, including CRM, e-mails, carousels on our platform and better targeted search to name a few. Created analytical tools for restaurants to optimize traffic conversion on the Grubhub marketplace that can be accessed for free on their Grubhub-provided tablets, giving restaurants the ability to connect Grubhub directly to the most popular points-of-sale systems for free, build highly efficient, low-cost delivery capabilities and continually provided the lowest and most transparent pricing for diners driving the most demand.Our record new independent restaurants sign-ups and de minimis attrition are proof of this strong perceived value of being an independent restaurant on Grubhub. We also continue to make progress with enterprise brands. We now have more than 35,000 enterprise restaurant locations live on our marketplace and roughly 100 different national and regional brands that are each driving at least 100 orders per day. During the second quarter, we expanded coverage of brands like KFC, Duncan, Popeyes, Red Lobster, Bob Evans, Jack in the Box, Jersey Mike's, Doghouse, BJ's and The Halal Guys.And among the enterprise brands, we already have agreements with, there are thousands of locations that we still need to roll out to the marketplace. We'll be adding the stores as we integrate their POS systems and fine-tune operational details over the coming quarters. During the quarter, we deepened our relationship with another enterprise brand, Philadelphia-based honeygrow, who is now leveraging our full enterprise product offering, demand generation through our marketplace, running their white label app, fulfilling all delivery orders, data sharing and managing their omnichannel loyalty program, which includes the ability to earn and burn points on the Grubhub marketplace.We now have roughly 750 product and tech employees throughout the U.S. and around the globe, an increase from approximately 400 at the end of 2017. They have been very busy this year pushing out a number of new features, including enhanced driver tracking for Grubhub Delivery restaurants, further personalization of the restaurant sort algorithm, streamlined customer care interactions, improved logistics and batching capabilities and added functionality in our restaurant-facing products. The teams have also helped deepen relationships with restaurant partners by completing numerous direct point-of-sale integrations. We are now sending well over 30,000 DAGs directly to enterprise and independent POS systems, which is the best transmission vehicle for minimizing errors and simplifying operations for our partners.We are currently piloting an exciting new perks feature, which consolidates all of the diners' personalized discounts and incentives and loyalty rewards into a single place to find a nonstop stream of free food and other promotional offers, almost all of which are only available on Grubhub. When diners go to perks, they will find a treasure trove of restaurant-funded incentives frequently totaling hundreds of dollars in free food with the actual amount dependent on their location and ordering habits. Across our marketplace, restaurants have already committed to what we believe will amount to hundreds of millions of dollars in available incentives to attract and retain diners through Grubhub.Perks is an integral part of our efforts supporting restaurant loyalty programs, and we believe that it will be a strategic differentiator over the long term as diners start to focus on the significant consumer-pricing disparity that already exists across third-party delivery platforms. Through perks, diners can also participate and track their progress in restaurant loyalty programs. These programs, which are designed and maintained by brands, enable diners to earn points by ordering from the restaurants on Grubhub, on the restaurants' white label site or app and even with the purchase physically in store.Bending across all channels is tracked with perks so diners can easily how close they are to earning additional rewards. We believe that our loyalty tools will be more effective for our restaurant partners and our diners will realize significantly more benefits with perks serving as a centralized rewards hub for our diners. Perks is just another way Grubhub is bringing value to our restaurant partners. Be sure to check out the new functionality in our app and look for the national marketing support perks this fall.A quick update on our Tapingo acquisition. In the eight months we have owned the business, the teams have made fantastic progress integrating Tapingo's college campus digital ordering experience directly into the Grubhub app. Our deep college presence helps us connect with diners very early in their lives. This fall, college students at more than 200 campuses across the U.S. will be linking their University meal plan accounts to the Grubhub app. We are also enhancing the dining experience by leveraging our delivery capabilities to provide campus-operated stores with the ability to deliver to students on and off campus. Existing Tapingo diners will be migrated over to Grubhub throughout the year as we transition from the Tapingo brand.Finally, as I'm sure all of you have seen, there have been some negative articles in the New York media related to Grubhub's business practices. To be clear, Grubhub is a two-sided marketplace that relies on restaurants and diners to succeed. We wouldn't be in business for over 20 years if it weren't for our restaurant partners and any characterization that we are intentionally misleading or manipulating restaurants at their expense is patently false. And while I'm going to give you color on the issues in the spirit of transparency, I want to point out that none of these issues are having a measurable impact on our business. As I said earlier, restaurant attrition has not changed. We are having more success signing up restaurants than we ever have.With respect to phone orders. Grubhub is a DemandGen platform and has always charged for phone orders, even before we invented the idea of digital takeout. We generate a unique phone number for each restaurant that provides its own delivery and this number is listed only on the Grubhub platform. We do this to make it as easy as possible for Grubhub diners to place orders, which ultimately means more orders for our restaurant partners. For example, a new Grubhub diner may find the restaurant on our platform but prefer to call a restaurant rather than place their first order online. Or a diner with a severe food allergy may need to call the restaurant to ask if a certain ingredient is included in the dish and while they're speaking to the restaurant, they go ahead and placed an order. In both of these instances, Grubhub is driving the order to a local restaurant so it should result in a billable order.While we strive to be accurate, we designed our system to be conservative and believe that we are fairly charging restaurants for the value we bring. However, we still allow restaurants to review telephone orders via their manager portal so we are completely transparent. We believe this is fair. If Grubhub is sourcing and driving the order, we should collect a commission. This has been our policy for years and is explicitly laid out in our restaurant contracts. We've also been accused of creating copycat restaurant websites to send more orders to Grubhub at the expense of our restaurant partners. This is totally false. We historically created websites on behalf of restaurants to help them bolster their online presence and generate more branded orders without paying Grubhub's full commission rates.Years ago, when it was harder and more expensive for restaurants to maintain their own websites, this was a huge benefit of partnering with Grubhub and like phone orders, it was explicit in our restaurant agreements. Restaurants would pay us significantly less on orders generated through these websites, always $1.00 or less and in many instances, there was no commission at all. To be clear, while registered by us, we never acquired ownership of the domain and the restaurants could always request that we transfer their domain to their control at any time. We ceased the practice of registering new domain names because it had become easier and less expensive for restaurants to maintain their own websites at the greater availability of third-party website building tools.To reiterate, at no time did our behavior in this regard constitute cybersquatting and overall, while this program was a drag on profitability, it was absolutely the right thing to do to support our restaurant partners. As an aside, orders generated from phone calls and these white label websites account for a small fraction of our business, together representing a low single-digit percentage of our orders. We are engaging with government, media and other organizations to demonstrate the value we create for small and large restaurant brands alike and more importantly, to bring to light how Grubhub provides the most transparent and consistently lowest diner facing fees in the industry.While it is well-known that online delivery has grown dramatically over the past several years, it is less known the diners on other third-party platforms are often paying 30% to 40% of the total order value in fees and markups on every transaction. And looking at the total cost of ordering, diners need to look at delivery fees, service fees and menu markups. These fees and markups are well documented through third-party research and I encourage anyone to do price comparisons with our platform, looking at the bottom line, total all-in cost for a like-for-like orders.I can't tell you how many conversations I've had with diners who think they're getting free delivery from a competitor, but don't realize that they are paying 30% or more to that platform because of hidden service fees and many markups. This is often the case even when they are paying for a subscription program for free delivery. It's clear that consumers will put up with price gouging in the short-term because of the novelty of being able to receive their favorite food without leaving their couches. But throughout time, consumers have proven to be savvy and they will look at their credit card statements and realize that in total, they are paying way too much for that burrito when there are lower cost options for the same food from the same restaurants.This is why Grubhub is so focused on keeping diner fees as low as possible. It's the best answer for all diners, restaurants and even drivers and the only answer for a long-term sustainable growth in this industry. Thank you for giving me a minute to set the record straight. We've accomplished a lot so far in 2019 but there's still a lot more to do in the second half of the year, and we look forward to updating you on our progress this fall.And with that, I'll turn the call over to Adam.

[Adam DeWitt:]

Thanks, Matt. I'll start by walking through the details of our second quarter results and give some updated thoughts on guidance before opening the call up for Q&A. Grubhub processed 489,000 DAGs in the second quarter, up 16% from the second quarter of 2018. On a sequential basis, DAGs were 6% lower than the first quarter. Historically, we've seen a sequential decline of low to mid-single digits from the first to the second quarter due to seasonality. Decline was a bit exaggerated this year by the Taco Bell national television and free delivery campaign in the first quarter that Matt referenced as well as the timing of the Easter holiday, which we mentioned last quarter.Active diners grew 30% year-over-year to 20.3 million in the second quarter as we added 1 million net new active diners during the quarter compared to 500,000 net additions during the same period last year. Our strong active diner growth is a result of our ever-improving restaurant network, efficient advertising and broad delivery coverage. Calculated orders per active diner was lower than last year as it has been in past quarters. But as a reminder, this isn't really a fair way to measure the activity of our individual diners for two reasons

[Operator:]

[Operator Instructions]. Your first question comes from Jason Helfstein with Oppenheimer.

[Jason Helfstein:]

So like one question and then housekeeping. So you kind of ended making a point of talking about that you're seeing favorable CAC levels, and you could see that sales and marketing as a percentage of revenue and GFS improved sequentially, however, it does appear that the industry has decided that the higher diner LTV justifies higher total marketing, promotional take rates to retain restaurants and higher CAC. And so I guess the question, high level, if you don't make changes to your CAC to LTV model, does it cap your growth or market share at some point? And then just a model housekeeping question, it does look like the guidance implies, or can you confirm that the guidance implies, $1.50 of EBITDA per order in the fourth quarter? And is all the leverage in that number in the ops and support line?

[Matthew Maloney:]

Jason, in terms of the first question, what I would say is, look, I mean from a framework perspective, we're always going to think about how much do the diners that we acquire cost versus how much value do they deliver to us over time, right? And so we're constantly to your point, while not changing that basic framework, we're always changing how we view value and how -- what we're seeing in terms of cost. So I don't think that there's any cap on -- in terms of our growth -- an artificial cap because we're looking at the lifetime value of the diner and what we're going to get from it over time.I mean we're what we're not doing is looking at a CAC or CPA, let's say, look, it costs us $100 to acquire a new diner but there's no way we think that the diner's ever going to be worth a total of $50, we're not going to go out and make that trade off. We're still taking a view of hey, overall -- based on the behavior that we see, based on profitability of the orders that we have and based on our infrastructure and everything else, what the value is over time. And we're finding a lot of opportunities to deploy capital to do that. And frankly, we're doing it -- a better job of it now than we were a year ago or 18 months ago, as you can see in the diner growth. Actually, sales and marketing dip during the quarter sequentially, but we still had strong net new diner adds. So we feel good about that and the framework is made so that it evolves with what's going on in the marketplace.In terms of the second question, yes, absolutely. The implied guide in the fourth quarter still has $1.50 plus in terms of EBITDA, and the story hasn't changed there at all, right? It's a combination of leverage and ops and support but then also, as I mentioned in my comments, we're going to lap the big step up in marketing that we had in the fourth quarter of last year, and we don't see another similar $20 million step up in the fourth quarter this year. So you're going to see that. You also see just general leverage in the business. The fourth quarter is a big tick up in terms of orders and frequency and it will leverage the fixed costs in our business too. So all three of those components will get you above about $50 million in the implied guidance for the fourth quarter.

[Operator:]

Your next question comes from Mark May with Citi.

[Mark May:]

You referenced the planned marketing campaign later this year for perks, I believe. Does this represent a meaningful overall step-up in your marketing budget in the second half versus a year ago? And then total order growth in the quarter, I think it was up 16% year-on-year. Sales and marketing per order up nearly 40%. Just curious, are you seeing any change in the competitive intensity in a particular region going forward? Clearly looks like in Q2, there was a slowdown in orders and increase in acquisition cost. As you look forward kind of quarter-to-date or in recent months, are you seeing any changes there?

[Adam DeWitt:]

Yes, in terms of the marketing campaign in perks, just for a functional standpoint, it's not an incremental on top of our current plan. It's just part of our current plan, right? We have a -- we have this great new product where restaurants are funding free food for diners and we're packaging it in a unique way, and we will be pushing it out to diners in a way we think will not just drive conversion for new diners, but also drive frequency for return diners and potentially impact orders, the size and things like that. I mean all these things we do are incremental so I don't foresee like a big step up for many -- any individual thing. But the campaign aspect of it is just part of our current marketing program. It might just be adding it to messaging, the stuff that we already do, it may be profiling specific digital ads around it, et cetera, et cetera, but nothing out of the ordinary.In terms of the order growth, we're not -- the way to think about the sales and marketing expense. We've always talked about as being 95% plus related to new diner acquisition, and we have -- the number that we disclosed is net active diners, not gross new diners. And so last quarter, we had a supplemental disclosure where we showed you guys what that gross CPA looked like over time and what I'd say is that trend hasn't changed. We're still seeing plenty of opportunities to acquire new diners at a reasonable cost and that has not increased the cost there, whether it's competitive or running out of runway or not launching. Whatever it is, we haven't seen a headwind on our ability to acquire new diners at similar cost as we have over the past several quarters.

[Operator:]

Your next question comes from Robert Mollins of Gordon Haskett.

[Robert Mollins:]

Given the stronger-than-expected diner growth in the quarter and revenue coming in at the high end of the Q2 '19 guidance range, what are you seeing that made you take down the top end of that revenue guidance for 2019? Then just a quick second question, has there been any improvement in driver retention resulting from the driver pay changes? And any comment on hiring new drivers will be helpful as well.

[Adam DeWitt:]

Yes. In terms of the diner -- in terms of the first question, were you talking about the revenue guide or the EBITDA guide?

[Robert Mollins:]

The revenue guidance.

[Adam DeWitt:]

Yes. I mean look, in terms of the revenue guidance, there's a lot of variables that go in there, right, when we set the guidance for the full year. And there's a lot of things that go into that, not just orders but also pricing, promotions, et cetera. And we've kind of set guidance where we think we're going to be for the remainder of the year given that different things that we're thinking about doing and feel good in terms of the trajectory of order growth, and we technically didn't take it down. I think we just didn't bring it up based on the revenue beat. But still very much within the guide and like I talked about earlier, from an EBITDA per order perspective, we're still forecasting over $1.50 exit rate for the fourth quarter.On the driver side, look, I mean we're doing lots of things. If there's not a -- we're constantly tweaking models and in terms of how much we pay, how we are recruiting drivers, scheduling versus not scheduling and what I'd say overall is you can see in our revenue less op and support numbers that we're making a lot of progress overall in terms of revenue less what we are having to pay drivers, but I wouldn't necessarily -- it has nothing to do necessarily with the total -- not that we're paying drivers, it has to do with our schedule to better schedule and better match supply and demand. And so to the extent that we're tweaking pay models, we are having that -- we are having success there.

[Matthew Maloney:]

Robert, I just want to add one more thing because there has been a lot of attention on drivers in the media lately and what's going on. We recognize there's a lot of options. In the gig economy, we want to make sure we are as competitive as possible so the pay change specifically wasn't to pay our drivers less or to increase profitability. We want drivers to feel like they're paid as fairly as possible, and so this is really more accurately pay drivers for their time and distance. As we've been very vocal 100% of our tips go to the drivers, and we want to make sure we are extremely positive and partner with the drivers and giving them an option to make great money very flexibly.

[Operator:]

Your next question comes from Tom Champion with Cowen.

[Thomas Champion:]

Curious if you could update the marketplace versus delivery split within GFS. And is -- second question, just one quarter into the Taco Bell partnership, can you talk about how that's going and maybe any opportunity to expand with Pizza Hut?

[Adam DeWitt:]

Yes, I'll grab the first. So marketplace for delivery -- versus delivery, I think -- so just to clarify. We talk in terms of percentage of orders that we deliver versus percentage of orders that the restaurant delivers, and I think in my prepared remarks, I said about 35% of orders, Grubhub is delivering at this point. I don't think GFS might be slightly different than that but that's a delivery number. I'll let Matt take the Taco Bell/Pizza Hut question.

[Matthew Maloney:]

Yes, thanks. Taco Bell partnership is going great. Fantastic team over there. We really knocked it out of the park earlier this year. We're trying to figure out how do we continue the momentum. KFC is going to decide when to launch their own national advertising campaign, but there's -- I think we said before nothing from our end is preventing the campaign from starting. We have more than 3,000 KFCs in the platform. We know it's coming and we're looking forward to supporting that, along with their white label app, which we're building for them, working very closely, just really can't wait for that to kick off.And then with Pizza Hut, I think Yum! mentioned on its earnings, that Pizza Hut is really excited based on early results of the partnership there. And we're figuring out how to expand that pilot and will have more information on that when it's nailed down. But back in May, Yum! mentioned that there's over 200 Pizza Hut locations on Grub and they're very happy with the performance they've seen on incremental orders.

[Operator:]

Your next question comes from Brad Erickson with Needham & Company.

[Bradley Erickson:]

So just a couple. First, you talked about this $1.50 in orders in Q4 that seems to be tracking in line. Do you expect sustainability of that profit order level going forward? Or will you invest incrementally for faster growth? Just maybe help us expand our thinking around philosophy for growth in 2020 beyond this focus around Q4 of this year, and then I have a follow-up.

[Adam DeWitt:]

Yes. I think the $1.50 has been kind of where we forecasted the business to get to. I think to your question about where it goes next year, there's no set target, right? But it's more about what are the opportunities that we have to invest for growth. And so the -- just the way the business works, it's a hyper local business that generates a lot of scale because we can service it from a centralized location. So there's a natural tailwind on that $1.50 over time, right? But if we can find good opportunities to reinvest, we're always thinking about that.Even now on our way to -- even as we are progressing from $0.98 to the $1.09 to $1.23 this quarter, we are at the same time investing for growth, right? So if there's opportunities to invest for growth, like I mentioned earlier, it doesn't have to be explicitly through marketing spend but it can also be through promotions or unique offers or things like that. And so I think the way to think about the $1.50 is a good level but if there's opportunities to invest in the business long term, it may stay at $1.50. But as we've said in the past, if all we're trying to do is maximize her cash flow, that $1.50 could be a lot higher, right? It could easily be over $2. It could easily be closer to $2.50, but we are seeing a lot of opportunities for growth so that's why you're seeing the fourth quarter even at $1.50.

[Bradley Erickson:]

Got it. And then just a quick follow-up, do you get any benefit or acceleration to the growth rate as you see this mix shift at some point from -- you called out the mix of marketplace versus -- or Grubhub Delivery versus restaurant deliveries. It looks like now your revenue is probably cresting a little bit higher for Grubhub delivered orders. Do you have an improvement to the growth rate or help in that mix shift?

[Adam DeWitt:]

I think the way to think about it from a diner-behavior perspective is that from a diner perspective, the restaurants -- the behavior is the same, right? Whether it's a Grubhub-delivered restaurant or a restaurant that delivers for itself. And so I don't think you see any natural acceleration from a -- or deceleration, frankly, from a mix shift in one towards the other. We do have -- the revenue does go higher, the capture rate goes higher because in the case where we're doing the delivery, we're charging for the delivery. So there is a second component to the revenue in an order that we deliver for in addition to what the restaurant pays us for DemandGen.

[Operator:]

Your next question comes from Maria Ripps of Canaccord.

[Maria Ripps:]

First, there's been a lot of press report about various hypothetical mergers. Do you have any high level thoughts on how you're thinking about the M&A landscape? And secondly and maybe just to follow up on the earlier question, it appears that your smaller delivery markets are gaining efficiency from the unit economic standpoint. As I look at the next year, what are some points of operating leverage in the model that could help you grow profitability maybe in excess of revenue?

[Matthew Maloney:]

Marie, I'll take the first one. Adam can take the question on efficiency and leverage next year. I think that -- there are a lot of rumors, which is kind of interesting. I don't know where the industry is going to land. I think that I have -- I've seen it evolve over 15, 20 years. There are a lot of players right now, making a lot of poor business decisions. And I think that there's a lot of money and likely a lot of investors that are concerned about their own liquidity and how their investments are going to play out. So I think the conditions are favorable for consolidation. But how that actually plays out? It's hard to tell. There's been a few companies that have been rumored to be on the market for definitely months, if not years, and nobody seems to be interested in acquiring them. And I would only assume that it would be because of poor unit economics, poor competitive differentiation or poor management. And I think that when we look at our forward opportunity, we try to figure out our strategic differentiation, and we've been very consistent that our business is founded on partnership, working with the restaurants, understanding what the restaurants really need and trying to help them achieve their business goals and digital pickup.And you see a lot of investment on our enterprise side, with loyalty programs, with POS integration, with specific tools, building white label apps for restaurants, helping them own their customer because that is a valuable asset for their businesses for the long term. It's accumulating in the perks product that we're talking about right now, where we expect to see hundreds of millions of dollars in restaurant-funded incentives. And if you think about the broader scale, and especially in my prepared comments around price gouging and our industry right now, it really is kind of a Wild West what you saw in travel years ago where objective price is kind of unknown, that's why I called out our menus and our platform as the one that has no incremental fees. So you can actually do your homework and understand how aggressively competitors are charging. I think there was a sell-side report yesterday in fact highlighting that we significantly beat everyone else in the actual amount that the consumer pays.And I think that over time, as you saw in travel, consumers will wise up. They will be more intelligent. And if that is our -- if that's the way we're going to differentiate and if that's what we were going to win over the long time, I think you see how the Perks program really dovetails with our partnership strategy and our low entrenched parent fee strategy and it all works out to be a significant economic win for the consumer, which over time will win. So that's the way we're thinking about it. I'm not thinking about M&A specifically, either acquisition or exits. We have a real opportunity to win in a big industry, and we are aggressively chasing that down and really doing everything we can to win.

[Adam DeWitt:]

And Maria, on your second question about leverage, I mean, look, there's a lot of opportunities, right? There's fixed cost of the business, there will be continued delivery efficiency over time. We'll likely get some operating leverage on sales and marketing next year, but I think, look, it's important to remember that we are, as I said in the last question, we're not trying to maximize profits, right, we're -- or maximize cash flow, and we're thinking thoughtfully about growth and how do we make investments for growth. So those are the areas where you could see operating leverage. We do think our -- we have a very profitable model in terms of long-term sustainability, the breadth of restaurants, the combination of how we charge diners and what the restaurants pay us and the formula works. So it's -- we feel great about the $1.50 number in the fourth quarter and there's a lot of -- there's a natural tailwind in the business going forward and it could be in any of those line items or some of them.

[Operator:]

Your next question comes from Jeremy Scott with Mizuho.

[Jeremy Scott:]

So look, lots of work being done on both the restaurant and the customer experience. It seems like the leap in delivery mix has prompted restaurant operators to accelerate their investments in their own in-house technology, in their own branded ecosystem. In certain cases, that seems to have less room for a new crop of these third-party online ordering platforms to wedge their technology in between. So I'm wondering how your strategy may shift in an environment where your restaurant customers seem to be putting more effort into pursuit of direct channel. You talk about white-label solutions, loyalty and now the Perks launch, but how do you say inside the tent and do you need to expand your suite through any vertical M&A?

[Matthew Maloney:]

Jeremy, I would say it's completely in line with our strategy. This is what we do. We support the restaurants and look at the Yum! partnership. On one hand, you have KFC, which has had limited investment in technology over time and we're supporting full stack over there. We're even building their white label app. On the other side, you have Pizza Hut, which has a fully functional built out website app delivery infrastructure capability, I mean the whole thing. And so we are also piloting and figuring out where the various feature options that we offer will fit into their existing infrastructure and how we can make them more efficient or perhaps extend their delivery boundaries by augmenting our delivery capabilities in addition to theirs. So there's different ways we can work and it's a very flexible solution.I think your question, which is a good one if you're thinking about other offerings in the space, it is a one-size-fits-all for restaurant. I would say that's not very partnership friendly. And in those cases, they will need to figure out a way to work with restaurants that rightly don't want to pay the full commission rate on 100% of their digital orders. This is the rock and a hard place that I've been talking about for a few quarters now where the restaurant management teams have an issue. They don't have the experience or the resources to build out a full technical infrastructure and yet they also don't want to pay 30% for a significant portion of their revenue.So we have been very upfront, especially with our enterprise partners first saying, we want to help you build your asset. We want you to own your diner. We want to help you through the loyalty programs, through white label support, through POS integration, through comarketing opportunities help you build your branded asset. And then when you are looking for growth, when you are looking to increase your same-store sales on an annual basis, you can come to our platform first because we're the most integrated and the diners that you acquire through our Grubhub networks are then able to be tapped into again and again through your own branded channel. So I don't think we need any M&A, directly to your question. I think we have it all. I think we're already doing this. We're doing this very effectively.

[Jeremy Scott:]

Got it. And just maybe to follow up on that. There's a bit more focus in your prepared commentary on independent restaurants. I was wondering if that was a response to some of the press reports that you mentioned or if you're signaling that you're leaning a bit more into that side of the business given the suite that you currently offer caters a bit more to their needs. And then simultaneously, would that also mean you're shifting away from securing larger national chain businesses where the economics seem to be a bit more volatile?

[Matthew Maloney:]

No, I don't think so. I think that the prepared remarks focus on independent restaurants was, frankly, we haven't talked about independent restaurants in a while. We keep talking about our success in the enterprise side, and we're investing very heavily to support our new enterprise partners. And I think you will hear a steady drumbeat of significant partnerships in the near future from us.But in all of that, I want to be sure to make sure everyone is aware that the majority of our orders are coming from independent restaurants. The significant amount of the growth -- as we talked about our small markets that are new delivery markets becoming more efficient, that's because of independent restaurant growth. We're adding thousands of independent restaurants in these small markets to give diners other options when we have our kind of our Keystone Yum! partners in these markets. We then flesh out the rest of the market with independents.And so the tools that we're building now for enterprise, specifically around POS, around CRM, around loyalty, they will also trickle down into our independent restaurant offerings. Perks is one of the first times that's happening. Perks are not only restaurant -- enterprise restaurant loyalty programs, an enterprise restaurant CRM incentives but they're also the local independent restaurants loyalty offerings that we are starting to work with them on.

[Operator:]

Your next question comes from Heath Terry with Goldman Sachs.

[Heath Terry:]

I guess one maybe technical question. But just curious how you're thinking about the potential impact of A/B 5, should it be implemented in California and what you think that process would look like. And then, Matt, fully get the difference that you've talked about in terms of price. Anything that you guys think you can do to sort of get that message out there beyond just waiting for people to sort of figure it out from their credit card statement? I think as any consumer who has noticed that knows it's a pretty big difference. It seems like it could be a pretty powerful marketing message for you communicated the right way.

[Matthew Maloney:]

Yes. I'm not sure if I was clear, but I tried to make that point in my prepared remarks, Heath. But I -- no, I -- it's hard for, in a very competitive industry, for one competitor to kind of hang their hat on their differentiation being price. But I mean the reality is, it's crazy out there. I think you've noticed that there are -- like I said, though -- I've had so many conversations with diners and it's not just run-of-the-mill, typical at-home individuals. I've had real conversations with producers at major media outlets who are adamant that they left a seamless product for a competitive product when they moved out west for a job that they paid zero in delivery fees and we literally have them bring up their last receipt and show them the 35% service charge that they paid unwittingly.So I think it's ridiculous. I've seen some third-party research. I'm putting our platform out there as a baseline. I hope that there is more about this. I hope that banging this gong, there has been a fair amount of tension on our practices on the restaurant side in New York that I have been very clear is bogus. We're -- but there are bad actors in the space, and so I hope that we can reorient this attention to some of those negative practices because that's really hurting consumers. And like I said a couple of times, I think it's going to be growth limiting for our industry and over time, I think that the executing aboveboard will be the winning strategy, and we're just going to continue doing that as long as forever.In terms of the California legislation, we definitely have teams that are following the legislation. We're engaging with government agencies when it's appropriate. I'll say that I don't think this is good for our industry, and I don't think it's what drivers want either. But a couple of things to keep in mind

[Operator:]

Your next question comes from Brian Nowak with Morgan Stanley.

[Brian Nowak:]

I have two. So to go back to the full year revenue guidance change, I know there's a lot of puts and takes in an outlook. But can you just sort of talk to us about the one or two largest mathematical drivers of the lower revenue expectation for the year now? And then just to come back to the delivery efficiency point, it looks like ops and support per order was up sequentially and was actually a little higher than we thought. Is there something going on in that line where it's sort of obfuscating delivery efficiency or how should we think about ops and support per order as we go throughout the course of the year and into next year?

[Adam DeWitt:]

Yes, Brian. Thanks for the question. In terms of the revenue outlook, I mentioned -- look, there's a lot of things on the pricing side. I also talk a lot about in my prepared remarks different ways to invest in growth. And that can come in the form of offering free delivery for new diners, it can come in the form of just low overall pricing or some other mechanism that we choose to -- basically marketing that we choose to put through the revenue line as opposed to put through the marketing line. And so those are the types of things that you're seeing drive the revenue guide for the year. Overall, we feel really good about the order forecast being very similar to what was baked into the forecast previously or baked into the guidance previously.On terms of the ops and support and per order, I think the better way to think about this, and we talk about this -- I talked about it in my prepared remarks and just overall, I think it's better to talk about in terms of revenue less the ops and support. I think it gets confusing. Ops and support is going to go up disproportionately to revenue because we're mix-shifting towards delivery. So as you're increasing your mix of delivery orders, that line item is going to grow quicker, right? But it's going to be offset by increases in revenue. But because revenue is at a higher overall level, it's kind of obfuscating the relationship there. So you're going to see ops and support go up and in most cases, disproportionately to order growth. But when you look at revenue less ops and support, you're seeing some pretty good momentum on the -- I don't recall a contribution profit but kind of revenue less variable costs of the orders. Does that make sense?

[Brian Nowak:]

Yes, that makes sense. I guess the only challenge I guess is the revenue is going down and ops and support per order keeps going up, I guess is -- how are you sort of thinking about managing that equation into next year?

[Adam DeWitt:]

I'm not sure. So the revenue's going up though too, right? And the revenues going up more than the ops and support cost per order, right?

[Operator:]

Your next question comes from Ron Josey with JMP Securities.

[Ronald Josey:]

Maybe two, please. Adam, you talked just -- I wanted to talk about the DAGs growth in 2Q and understood Q2 didn't have delivery or the national campaign with Taco Bell. But I'm wondering if that 16% is maybe the underlying growth for the biz maybe on organic level and just if you could remind us how you're thinking about the trends in the 3Q and 4Q. Understood what you just told Brian. And then also you mentioned the mix shift away from New York City and corporate diners and just wondering if you can give us some insights in the growth in Tier 2 and 3 cities around the size of these markets and relative to how big they are to GFS overall. I think that would be helpful.

[Adam DeWitt:]

Yes. So in terms of the growth rate, you highlighted the 16%. Look, it's a good baseline for the organic growth. When we think about it in the context of the first quarter growth of 18%, 19%. But then as we mentioned in our prepared remarks, you remove the big tailwind we had in the first quarter from Taco Bell and then you also have a little bit of, I mentioned in my prepared remarks, a little bit of the Easter overhang. And you see a sequential decline of 6% and it kind of all lines up with how we performed historically from the first quarter to second quarter, so we feel really good.In terms of patterning for the rest of the year, I would assume we're going to see a little bit of a step down in the third quarter like we typically have and then a pretty good step-up in the fourth quarter. And given the comments I made about our revenue mix, our revenue pricing, you can kind of back into what those -- what a reasonable growth rate is. I think the thing I want to point out is at 16%, that includes the Eat24 business, that includes Yelp, that includes corporate, it includes some of our older markets. And so when you're thinking about all of that and then look at what we're doing a year ago, the 16% is actually quite a bit higher than where we were in the second quarter of last year. If you go back and add in what Eat24 was growing at, what Yelp was growing at, what corporate was growing at the time. So in turn -- longer answer. The short answer is it's a good jumping off point from an organic perspective.And then I think you asked about the mix in the markets. I think it's been a story that -- it's a story that's similar to what it's been over the past several quarters, which is those Tier 2, Tier 3 non-original seven markets that we've been in are driving disproportionately the growth for the company. The original are still growing, but they are certainly growing at a lower rate than those Tier 2s, Tier 3s. So we become more and more geographically diverse. I think last quarter, we mentioned 60 markets that were over 1,000 DAGs and 20 markets that are over 3,000 DAGs, I'm guessing because the seasonality that hasn't changed much. But we do see those markets as a whole driving a larger percentage of our DAGs than they have even last quarter.

[Operator:]

Your next question comes from Nat Schindler with Bank of America.

[Nathaniel Schindler:]

Just a question on the active diner growth that you had and the accelerations you had since previous years. Are these diners similar in behavior to previous cohorts of diners that you've taken? And if so, could we expect gross food sales growth to go up towards the level of your active diner growth as this cohort actually were...

[Adam DeWitt:]

Yes. Nat, you're starting to cut out. But I mean I think I understand the gist of your question. I -- in the prepared remarks, I talked a little bit about frequency and what is weighing on frequency. And I think that is a structural headwind as opposed to an ephemeral headwind, because the diners in New York and the diners in corporate are going to -- are always going to order more than the newest diners outside of New York and corporate. As we look out into the farther markets, we are seeing good frequencies and ramps in frequencies over time. I think the other thing that -- the other impact that will go away over time that's weighing on frequency a little bit is that we've gone through this period of really strong new diner acquisition. And so just mathematically, when you have newer diners disproportionately in your active diner base, it's going to weigh on frequency a little bit. So that impact should go -- would go away over time if new diner growth doesn't stay at a super high level, but the other kind of structural difference will be there forever.

[Nathaniel Schindler:]

Okay. And one further clarification on this. Have you seen any indication -- I know you said in the past that you're not fighting for share of stomach in marketing? But have you seen any data that suggests your diners are using multiple different services or different apps over the course of a month? Or are they really sticking to a single platform?

[Adam DeWitt:]

Yes, we haven't seen it. I mean what I can tell you is once a cohort becomes stable, we're still seeing really consistent behavior like what we showed you in the supplemental disclosure deck last quarter. So I can't remember what year it was. It was '15, '16 or '17 cohort. We're not seeing that change, and we didn't see a change last quarter and it didn't -- it hasn't changed in an appreciable way this quarter either. So if it's happening, it's happening in addition, as opposed to substitutive.

[Nathaniel Schindler:]

Okay. And one real final question. I know you calculates out into the low $1.50 EBITDA per order by Q4 kind of based on your guidance. And that's a little bit below what you had said returning to Q3 levels of last year, which was $1.57. I know just a tiny bit. Was that an intentional change or is this just rounding?

[Adam DeWitt:]

I mean, I think that baked into the guide is above $1.50. I think we have to keep in the context -- look, we're at $0.98 in the fourth quarter, right? And we're at $1.23, so we've improved profitability per order by 25% in two quarters and it's in a much slower seasonal quarter. So we've made a lot of progress and we're talking about making another 25% in the next two quarters. So $0.01 here or $0.01 there, I'm not going to get caught up in. So I feel -- we feel really good about the leverage that we're going to get on the delivery side and really good about the leverage that we're going to get on the marketing side. And then also good about just in general as order volume goes up, we're going to leverage the fixed investments that we've made LevelUp and Tapingo technologists, other product and technologists and kind of other overhead. So I think we're talking about pennies here that don't add up to a lot.

[Operator:]

This concludes the question-and-answer session for today's call. Thank you for your participation. You may now disconnect.