Just Eat Takeaway.com N.V.
Q1 2018 Earnings Call Transcript

Published: 1 May 2018

[Operator:]

Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrubHub Q1 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Dave Zaragoza, Head of IR. You may begin your conference.

[David Zaragoza:]

Good morning, everyone, and welcome to GrubHub's first quarter of 2018 earnings call. I'm Dave Zaragoza, Head of Investor Relations. Joining me today to discuss GrubHub's results are our CEO, Matt Maloney; and 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 in the Safe Harbor Provisions of the Securities and Exchange Act in 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 including 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, 2017 filed with the SEC on February 28, 2018 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 that will be filed with the SEC. Our SEC filings are available electronically on our Investor Relations 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'll discuss non-GAAP financial measures in talking the about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. And now, I'll turn the call over to Matt Maloney, GrubHub's Founder and CEO.

[Matthew M. Maloney:]

Thanks, Dave. Good morning, everyone, and thanks for joining the call. We had so much fun last earnings call with our breakfast that we're making it a quarterly event. Hot breakfast delivered by GrubHub and we're calling it Grubfest. So, I hope you're all enjoying a hearty Grubfest today. I know Dave, Adam and I are with our hot and tasty bacon burgers and cheese dogs from our newest partner, Five Guys. We entered 2018 with ambitious plans for growth. We outlined plans to more than double market coverage for GrubHub Delivery in support of current and future partnerships and to bring our industry-leading network of more than 80,000 restaurant partners to the massive Yelp audience. We also planned to build upon our successful 2017 marketing strategies to push diner acquisition and awareness even more aggressively capitalizing on the massive secular shift from offline to online takeout ordering. Our execution so far this year has been exceptional. We've already launched Delivery in dozens of new markets like Charleston, Honolulu, Memphis, Shreveport and Portland, Maine. We've completed our integration with Yelp earlier than planned, bringing our 80,000 restaurants, many powered by GrubHub Delivery, to hungry Yelp diners. We've already finished our migration work for Eat24, moving it to GrubHub's technology in March ahead of our Q2 target. Eat24 diners now have access to all the same great restaurants, recommendations, sort functionality and optimized order flow as GrubHub and Seamless diners. And finally, we've attracted more organic new diners to our platform in the first quarter than ever before, driven by our national diner acquisition efforts and more targeted and engaging CRM initiatives. I'll talk more about these successes in a bit, but first I'll run through a few highlights from the quarter. After that, I'll turn the call over to Adam, who will walk you through the P&L and some updated thoughts on our outlook. GrubHub generated 437,000 DAGs in the first quarter, up 35% year-over-year. Notably, pure organic DAG growth accelerated from the fourth quarter, driven by strong momentum across our Tier 2 and smaller markets. Organic DAGs grew at their fastest pace since the second quarter of last year and Tier 2 DAG growth was the highest it's been since 2016. While still smaller in absolute volume when compared to our earlier markets like New York and Chicago, growth trends we see in these smaller markets give us increased confidence that they will move the needle on total company growth over time. This robust order growth translated to net revenue of $233 million, up 49% year-over-year. Amplifying our growth in revenue is the continued strong growth of GrubHub delivered orders, now an annualized run rate of almost $1.3 billion in Gross Food Sales. On average, our drivers are ringing doorbells with delicious meals from local restaurants, more than once a second. GAAP net income was $31 million for the quarter, up 74% from $18 million in the prior year. Adjusted EBITDA was $64 million, up 51% year-over-year. Adjusted EBITDA per order was $1.63, up 12% from the $1.45 per order in the prior year. Overall growth in orders and revenue drove the strong bottom-line performance, but the early migration of Eat24 and the completed integration with Yelp also pulled forward some operational efficiencies that we previously expected during the second quarter. We ended the first quarter with 15.1 million Active Diners, up 72% from the prior year. Building on our successful campaigns in 2017, we've continued testing messaging and tactics to attract new diners to GrubHub and improve engagement of our existing diners. Recently, we launched our new TV spot Behind Every Order, which emphasizes the passion of our restaurant partners and demonstrates how GrubHub connects diners to those chefs. Our creative allows us to showcase some of the great food you can find on our platform like P.F. Chang's Mongolian Beef, while also educating those who are still unfamiliar with GrubHub. Our CRM team continues to come up with new ways to increase engagement with our 15 million diners, leveraging our rich order history to predict diner tastes, preferences, and behavior, we have improved our targeting and highlight great new options to diners, driving more orders to our restaurant partners and reinforcing the strength of our two-sided network. Last quarter, we talked about our Delivery expansion plans designed to support KFC, Taco Bell and other restaurant partners we may add over time. We see the potential to add GrubHub Delivery in more than 100 new markets this year, more than doubling the 80 markets we served exiting 2017. Only four months into the year and we've already added almost 50 markets across the country. Leveraging our existing chain partners, many of whom have locations in these new markets, we're quickly ramping volume and expanding customer access to online takeout. We've also begun the process of ramping Yum!, engaging with large and small KFC and Taco Bell franchise owners over the past few months. These local franchisees share our excitement about the potential for online ordering and delivery at their stores. While we may still have work to do building the white label experience and integrating into their back-end systems, we're optimistic that KFC and Taco Bell will start to add meaningful volume to our platform towards the end of 2018. We're also excited to have closed the Yum! investment and added Artie Starrs to our board. In addition to solidifying our partnership with Yum!, Artie adds a wealth of experience in food ordering and delivery to our boardroom, which will be incredibly valuable as we continue to expand the most comprehensive restaurant network in the nation. Along those lines, we recently formed new partnerships with Five Guys, Corner Bakery, Ruby Tuesday, Argo Tea and regional favorite Newk's. We're excited and proud that each of these chains have chosen GrubHub as the partner to grow their business outside of their store footprint. Continuous improvement of our diner-facing product remains a priority and a source of growth for us. Recently, we re-engineered our mobile experience, implementing a new cleaner, tile layout for restaurant search, as well as improvements to navigation and a more photo-forward approach to discovery. We also announced payment integration with Venmo across GrubHub, Seamless and Eat24. With Venmo as a payment option, diners can now split the bill with friends, making ordering for a group easier than ever. We see tremendous potential for online ordering in the U.S. as consumer habits shift and awareness of our product grows. We are committed to making investments today to support long-term profitable growth. And even as we reap the benefits of our work over the past few years, we are getting more aggressive in 2018. I look forward to updating you more on our progress next quarter. And with that, I'll turn it over to Adam, who will walk you through the financials and guidance. Adam?

[Adam J. DeWitt:]

Thanks, Matt, and good morning, everyone. As Matt highlighted, our strong execution drove better-than-expected results in the first quarter and the success we've had in accelerating organic growth in newer markets, achieving economic parity for GrubHub Delivery orders, scaling delivery coverage efficiently, and completing the Eat24 and Yelp integrations earlier than expected, positions us well for short and long-term profitable growth. Our significant scale and robust unit level economics give us the flexibility to invest aggressively for future growth in support of our 80,000 plus restaurant partners, while simultaneously increasing shareholder profits. GrubHub processed 436,900 Daily Average Grubs in the first quarter, up 35% year-over-year. DAGs grew approximately 18% to 19%, excluding the acquisition of Eat24, which closed early in the fourth quarter of last year. As Matt noted, excluding the impact of all acquisitions, we believe organic DAG growth accelerated for the second quarter in a row, even after taking weather and holiday timing into account. We're particularly encouraged by the breadth of the DAG growth we've seen recently. Tier 1 markets continue to show consistent, sustained growth, speaking to the large opportunity, even in markets we've been in for many years. Our growth outside of Tier 1 markets is at its quickest pace since 2016. As we partner with more and more high-quality restaurants in these less mature markets, our advertising has become even more effective. We are now generating over 1,000 DAGs in more than 40 markets and over 2,000 DAGs in more than 25 markets. In support of the Yum! partnership, we launched Delivery in 34 new markets during the first quarter, almost 50 if you add those launched in April. While many of these markets will take time to get to meaningful scale, early indicators are great. Restaurants that have never done delivery before are eager to join our platform, diner habits are shifting as delivery becomes cheaper and more available, and our delivery efficiency has even been a little better than expected. Active Diners grew 72% year-over-year to 15.1 million during the first quarter. This growth figure is obviously impacted by the roughly 4 million diners we added in fourth quarter from Yelp and Eat24. That said, Active Diners grew sequentially, which is a clean comparison period, by more than 600,000 from the fourth quarter, making Q1 our best quarter of organic net diner adds ever. This increase was driven by healthy underlying new diner growth and strong diner retention rates. Given the trends, we feel very good about new diner growth going forward. But the year-over-year growth rate will obviously come down once we lap the acquisition of the slower growing Eat24 diner base in the fourth quarter. We believe organic net diner additions will remain strong and likely increase over time, despite this impact on reported year-over-year growth percentage. As a result, sequential diner growth may be a better metric by which to gauge diner growth. Similarly, calculated frequency per ending Active Diner was up from the fourth quarter, reflecting typical ordering habits in our business. Year-over-year frequency per ending Active Diner was down, reflecting the incorporation of lower frequency Yelp and white label diners as well as the ongoing mix shift of our business away from our highest frequency market, New York. Of note here, orders per Active Diner increased from the fourth quarter to the first quarter at a greater rate than they did last year, reflecting strong underlying engagement of our diner base. Gross Food Sales for the first quarter were $1.2 billion, growing 39% from the prior year, with average order size up 3% during the quarter. Excluding the acquisition of Eat24, Gross Food Sales grew by approximately 22% year-over-year. First quarter net revenues were $233 million, 49% higher than the year-ago quarter of $156 million and approximately 36% higher excluding Eat24. Net revenue as a percentage of Gross Food Sales was 18.7% during the first quarter, up 130 basis points from the prior year and up about 65 basis points from the fourth quarter. Driving this increase was our mix shift towards GrubHub Delivery, including Eat24 and Yelp diners, and restaurants continuing to opt to pay for more impressions on the platform. Delivery mix should continue to push capture rate up over the short to medium term, and we also continue to see potential upside from restaurants opting to pay more for more impressions over time as markets grow. Operations and support expenses grew 62% year-over-year from $59.5 million to $96.3 million in the quarter, driven by increased delivery orders, the underlying growth of our total order volume, and the inclusion of Eat24 orders. As anticipated, new delivery market launches impacted driver pay per order slightly in the first quarter, but they were more than offset by scale-based efficiencies in our existing delivery markets. Overall this dynamic resulted in lower driver pay per order compared to the fourth quarter despite the addition of many new sub-scale markets to the mix. Going forward, we expect the increasing number of launch markets through the remainder of the year to likely limit further decreases in driver pay per order and may even temporarily increase cost per order, while we scale these newer markets. Sales and marketing expenses were $48.8 million in Q1, a 38% increase compared to the same quarter last year and a sequential increase of 7% compared to the fourth quarter. This increase was driven by a sequential ramp in advertising spend as we saw more opportunities to spend effectively. Partially offsetting this increase was a roughly $2 million benefit from a change in accounting policy for sales commission expense, which was included in our previous guidance. This is a result of the new revenue recognition standards that went into effect on January 1, and calls for the capitalization of certain commissions we pay salespeople, which are then expensed over the life of the relationship instead of when paid. This is the only meaningful impact on our P&L from the new revenue recognition standard. As we enter the seasonally slower summer months, we expect to decrease our advertising spend likely resulting in a sequential decline in Q2 sales and marketing. Advertising spend in Q3 should be relatively flat to Q2, before we ramp into the seasonally strong months, and the back-to-school season. Technology expenses excluding amortization of web development were $17.3 million for the quarter, increasing 31% from the first quarter of 2017. Depreciation and amortization was $21 million for the quarter, up 12% from the fourth quarter and up 109% year-over-year. The increase from the fourth quarter included a small write-down of legacy Eat24 technology as we migrated a significant portion of Eat24 volume to GrubHub's infrastructure during the first quarter. G&A costs were $17.7 million, down slightly from $18.4 million in the fourth quarter primarily due to lower merger and restructuring related costs during the quarter. GAAP net income was $30.8 million compared to the prior year of $17.7 million. Net income per fully diluted common share was $0.34 on approximately 90 million weighted average fully diluted shares. Growth in net income benefited from the excess tax benefit of stock based compensation, an effect that we've discussed in the past. Given the first quarter timing of some annual (16

[Operator:]

Your first question comes from Ron Josey with JMP Securities. Your line is open.

[Ronald V. Josey:]

Great. Thanks for taking the question and lots going on here, so maybe I'll just dig in a little bit more on the Yelp partnership, guys. So, you mentioned we're a month into, I think, the Eat24 integration on Grub, a few weeks on the Yelp integration. Just can you talk about some of the early benefits? Adam, I think you talked about EBITDA per order is now on par at Eat24 with Grub. But any potential benefits on the top-line in terms of orders growth as Yelp plans to ramp promotions and marketing as the year progresses here? And then on the guidance side in terms of Yelp, does the guidance include any additional benefits, or can you help us understand the benefits from Yelp that's included in guidance? Thank you.

[Adam J. DeWitt:]

Yeah. Thanks, Ron. How are you doing? In terms of the Yelp, Eat24 integration, as I mentioned in the prepared remarks, there's a clear benefit both on the EBITDA per order, but also on the revenue side. I gave the comments on the capture rate. What we're seeing is the Eat24 and Yelp diners are choosing restaurants in greater frequency than actually we anticipated that were legacy GrubHub that have higher commission rates. So that was a little bit of a tailwind and explains a little bit of the move in capture rate from the fourth quarter to the first quarter. I think from an orders perspective, I think it's a little bit of a mix story. The growth or the organic growth of the Eat24 and Yelp is really good. Eat24 has a historical legacy of being very active on the couponing front and had a bunch of customers that used coupons frequently and only ordered when they used coupons. We've kind of weaned the use of coupons, as we've found in testing that long-term, we generate a much higher diner LTV by reducing the frequency of coupons. And so, the DAG story probably had a little bit lower – or a little bit of a headwind impact from reducing the usage of coupons, but it increased because of the breadth and scope of restaurant offering. And so what you're seeing net-net is DAGs are probably a little bit closer to flat, maybe slightly lower on Eat24, but revenue higher, EBITDA higher and the path for growth is set up now because I think we're in a good spot from a base perspective. And then Ron, by the way, that includes both – that's both the Yelp transaction platform and Eat24. And then all of that impact is, in fact, included in the guidance going forward.

[Ronald V. Josey:]

Okay. Great. Thank you.

[Operator:]

Your next question comes from Ralph Schackart with William Blair. Your line is open.

[Ralph Edward Schackart:]

Good morning. Adam, you talked about going forward, the EBITDA per order metric may – I'm sorry – the cost may increase going forward, yet had a pretty strong EBITDA per order this quarter. And then, additionally, you talked about pulling forward some acquisitional operational efficiencies, more than expected in Q1. Can you sort of help us think about what was the order of magnitude, the efficiencies you saw in the quarter, and how we should think about that EBITDA per order metric going forward?

[Adam J. DeWitt:]

Yeah. I mean, we have a balance of things going on. I think we're still seeing operational efficiency overall. We did accelerate that investment in the markets. So, we rolled out – I think as Matt pointed out in the prepared remarks, we're in kind of 50 new markets out of 100. And so, those, obviously, weigh a little bit on the EBITDA per order metric. We also – a couple of other things going on. And I think in the first quarter, I mentioned in the prepared remarks, we had a little bit of an accounting benefit that made sales and marketing look like it increased kind of 38% year-over-year, but the reality is that from an advertising perspective, we saw a lot of really strong channels and strong response, and so we actually got more aggressive. Advertising was probably up closer to – by itself was up closer to 60%. And as a result of some of the opportunities that we're seeing in the market, I think we actually incorporate a little bit more spend in kind of the second quarter and beyond, and that's all incorporated in the guidance. And then balancing that out for second quarter and third quarter seasonality, we obviously have fewer DAGs, and so that leverages our fixed infrastructure a little bit less. And so the EBITDA per order, we're not anticipating a big improvement in EBITDA per order kind of second quarter, third quarter. But as you get into the kind of seasonal strength in the fourth quarter, we do think that there's likely to be some pickup there.

[Ralph Edward Schackart:]

Okay. Thanks, Adam.

[Operator:]

Your next question comes from Brian Nowak with Morgan Stanley. Your line is open.

[Brian Nowak:]

Great. Thanks for taking my questions. I have two. The first one, you mentioned some delivery efficiencies in the quarter that were a little better than expected. I guess I'd be curious to learn about more detail on what those delivery efficiencies were, and how has your go-to market, as you address new markets on delivery, changed over the last couple years to really make yourselves more efficient as you're scaling into these new 50 going to 100 markets? And then the second one on Yum! I remember last quarter you talked about how EBITDA per order at Yum! could roughly be on parity with the company average. Maybe just talk through kind of qualitatively how we should think about the sources of that leverage? Is it commissions, advertising, tech investment? What gives you confidence you can get to parity on EBITDA per order for Yum!? Thanks.

[Matthew M. Maloney:]

Hey, Brian. This is Matt. In terms of delivery efficiency, a lot of the efficiencies we're seeing is scale based. So as we continue to expand markets and we add as many markets as we have in the first quarter, you're seeing continued efficiencies across the entire network. It's the ability specifically to staff, to dispatch, to route and batch orders. Basically as throughput of the network goes up, our driver cost per order goes down. In terms of go-to-market strategy, and we've been doing that a lot lately, we're really relying on our chain partners. It's really great when we have a Five Guys, a bunch of different chains in each market. And specifically on the Yum!, since the deal closed last week, we have really been engaging with franchisees and both the large and the small franchisees are really excited about rolling this out. And we have a lot of Yum! franchisees already active across the country with tablets even prior to the integration being completed. So by leveraging our chain partnerships where they have a lot of footprint and a lot of excitement where they can see more growth, we can kind of create those anchor tenants and then we fill out the mom-and-pops as we continue to expand our market coverage in these nascent markets.

[Adam J. DeWitt:]

And then, in terms of the EBITDA-per-order contribution, I think the way that we're thinking about that relationship and the way that we kind of modeled it out is we have to look at the value of the total relationship, right. And so at the end of the day when we look at the orders that we think that we're going to get either directly from Yum! restaurants or indirectly as a result of the Yum! relationship through other restaurants, we think in aggregate that we get to an EBITDA per order that is not significantly accretive or dilutive and instead just adds a lot of growth and helps us grow as, as Matt mentioned, this anchor tenant concept in markets where we don't have any presence. And it kind of really helps catalyze the – it gives us a catalyst for awareness. And so at the end of the day, when you think about the orders that we get both directly and indirectly, it ends up being kind of an EBITDA-per-order neutral impact.

[Brian Nowak:]

Okay. Thanks.

[Operator:]

Your next question comes from Jeremy Scott with Mizuho. Your line is open.

[Jeremy Scott:]

Hi, thank you. So just – you've seen substantial growth in EBITDA per order and that's inclusive of some of the early investments you've made on expanding delivery coverage. I was hoping to dig a bit more into the ops and support line, specifically driver pay following that last question. I was wondering if there's any way you can quantify in addition to the $10 million that you're investing this year, how much of your operational spend today would you characterize as investment in coverage? So driver acquisition, true-up for minimum payments. I know there's a lot of moving parts in the number but just trying to determine how much margin per order can be recaptured as these markets ramp up and your ops become primarily pass-through.

[Adam J. DeWitt:]

Yeah. Hey, Jeremy. It's Adam. I think I know what you're asking. At the end of last year – and we said this on our last call – we felt pretty good that we were at parity in terms of economics per order, right. So if you looked at a delivery, it's kind of – the slide that we put up on our Investor website a long time ago that walks you through the economics of a delivery order compared to an order that the restaurant delivers for itself, and you're basically just grossing up revenue and grossing up expense. But even at that level, if you're growing delivery orders faster than you're growing orders that the restaurants deliver for themselves, you're still going to see a margin percentage deterioration, right. But because of the leverage on the fixed overhead, you see that EBITDA per order going up, which is kind of what's driven our EBITDA per order going up over time. I think a good indication that we've reached – or part of it that we've reached kind of the stage where we're close to parity is if you look at ops and support as a percentage of revenue, it hasn't really moved that much in the last year or so. And so what that's telling me from a headline perspective is that even though the mix towards more delivery orders is driving that percentage up, we're getting efficiencies that are driving it down. And so really at the end of last year, there was very little kind of excess investment, right. There's always going be some – I think what you're alluding to is kind of some excess capacity in the network, right. There's always going be some excess capacity, so that we can reach certain service levels. But we were at the right or at the appropriate long-term level kind of exiting last year. And so this $10 million that we're talking about in terms of the Yum! partnership is really – we would have improved by $10 million more than we are. But I don't see – per my comments to Ralph a couple questions ago, I don't see a big step back in EBITDA per order this year. I just think the improvement's going to have to wait a little bit.

[Jeremy Scott:]

Right. And maybe could you talk a little bit about your pipeline for chain partnerships? I mean Five Guys is a great brand to add to your portfolio. And I think there is some expectation following the Yum! partnership that this would motivate other chains to accelerate their rollout maybe nationally. So if you can add some color on your conversations and where they stand?

[Matthew M. Maloney:]

Yeah. Sure, Jeremy. I can give Adam a break for a second on this stuff. So if you take a step back and look at the restaurant industry obviously, it's not a significant growth story, with the exception of online ordering. So every boardroom is asking the management team, what are we doing about online ordering. And they're foolish if they're not evaluating GrubHub given our scale, given the validation from the Yum! Deal, and given all of our expansion efforts. So I think that there's a lot of conversations happening. If you look on the platform, you'll see a lot of pilots out there that we haven't talked about, and you just see a lot of activity. So we're kind of commenting as the pilots become commitments. And so far all of our commitments have scaled and expanded, which is an outstanding story. But I think that we have the most competitive offering in this space, and we're going to continue to add chain partners very, very aggressively, especially since it supports our Tier 2, Tier 3 growth story, which has been an incredible reacceleration in the first quarter this year.

[Jeremy Scott:]

Great. Thank you.

[Operator:]

Your next question comes from Jason Helfstein with Oppenheimer. Your line is open.

[Jason Helfstein:]

Thanks. So just I'll ask chain deal and more follow up. So when you lose a chain deal to competitors, I think there was one recently in the news, what would be the number one or number two reason you think you don't win those deals? And then secondly, just on the Yum! I mean you talked about, could be meaningful by the end of this year or early next year. I mean once we get to that point, is it like are all the restaurants on the network, or is this gradual through 2019? Just want to understand kind of momentum there. Thanks.

[Matthew M. Maloney:]

Hey, Jason. I'm actually unaware of any chain opportunity that we have lost in an exclusive way. You see a lot of news about people working with people, and as you guys know, a lot of our competition are effectively free, and that's not the type of deal we structure because we want the partnership, and we want to integrate the supply chain and make sure that we're providing the absolute best possible experience. So I'd say that everyone at this point's talking to everyone with the exception of Yum! obviously has said we are the exclusive provider, domestically at least. So in terms of when can that Yum! deal be meaningful, I think by the end of this year you're going to start to see real numbers because we're going to have the integrations and all of the white label stuff done. A quick aside on white label, it's not the biggest value we provide, but it's a really good opportunity to tighten our integration with these restaurant partners. And as you think about competitively how chains work with multiple platforms, providing that white label really brings the restaurants closer to our platform, and because of the volume of orders, we are able to service them a lot better. So using our order management, using our customer care functions for the white label orders actually provides a better service for the diners, the restaurants are happy, and in general it accelerates the change and consumer habits by having more online ordering opportunity. But you're right. Even though you'll start to see numbers posted this year, material numbers, it's going to be through 2019 as we continue to ramp up the volume or the majority of the Yum! franchisees. I'm not really sure what the curve looks like on adoption for this, but I can tell you that the franchisees are extremely excited. And like I mentioned earlier, we have a lot of stores on tablets currently which is not operationally very efficient. It's definitely not the ideal state, but they want the orders quickly. And so we're helping them get these orders quickly and then we're going to – as well we're building the integration with their back-end systems.

[Jason Helfstein:]

So is there a – just given everything you just said, do you think there's a threshold, whereas at a certain size it makes sense for exclusivity given you're implying that the bulk of the discussions out there are not exclusive?

[Matthew M. Maloney:]

I would phrase it differently. I think that restaurants are still trying to figure out how to integrate online ordering and delivery into their growth story. With Yum!, using them as really good example, because we power their white label, because we will be powering their white label, it's definitely advantageous to consolidate your ordering on one platform because then it all comes through a single POS integration. And when you're at our scale, POS integrations is a must-have. You can get away with not being POS integrated when you have not hit critical mass as a few of the players in our space have. But it's really important once you're driving material growth to a chain. And so I think that when you're a chain and you're looking for a partner who can support you at a high service level, and you're looking for growth, and you agree that outsourcing effectively the order management for white label, I think that it makes sense to consolidate on one platform because you can have a lot more control over the output.

[Jason Helfstein:]

Thank you.

[Operator:]

Your next question comes from Michael Graham with Canaccord. Your line is open.

[Michael Graham:]

Thanks. Just wanted to ask on tipping of the drivers, like, give us an update on how that's going and is that a potential opportunity to enhance the profitability per order. And then I also just wanted to ask, a couple years ago we were operating under this framework. At least our own assumptions were that New York and Chicago were half of Gross Food Sales and the top 10 markets were 75%. It seems like the smaller markets have been growing a lot faster for many quarters since we sort of made that assumption. I just wonder if you can give us an update on like do you think that the top 10 markets can fall out of being a majority of your Gross Food Sales any time in the near future or just any color you can put around the relative sizing there.

[Adam J. DeWitt:]

Yeah, Michael. For your first part, tipping, every penny of a tip goes to the driver. So I don't think any changes in tipping can change our economics or profitability because every single penny goes across. In terms of the other, I think that's a great question. We have definitely seen notable acceleration in Tier 2 and Tier 3 markets. In the past two quarters, it has been enough to move the needle on total company growth. And this is actually a really interesting quarter if you look at the financials because it's extremely clean. The M&A impacts aren't there. We saw order growth, excluding Eat24, accelerated 50 basis points from the fourth quarter. And excluding estimates for how Foodler and OrderUp, weather, holidays, et cetera, growth accelerated on a year-over-year basis. So I think this is the time that we've been waiting for. We've been investing in a lot of these smaller markets, and we're really seeing them grow faster than they've ever grown before, and a lot of things are working right now. We're seeing the restaurant chain strategy playing out in markets that we haven't been in before. We're seeing the anchor tenant concept supporting our delivery, and we're seeing the national television advertising really working. So I think the old model is definitely not applicable now, and we are seeing growth across the board, across the country, and it's really setting us up well to sustain that growth.

[Michael Graham:]

Thanks.

[Operator:]

Your next question comes from Heath Terry with Goldman Sachs. Your line is open.

[Heath Terry:]

Great. Thanks. You guys have called out in a couple of places in the press release sort of the organic growth that you're seeing accelerating or hitting record numbers depending upon the metric that we're talking about. Do you have a sense of sort of what your expectations are for what that number can get to over the course of the year as you roll out some of these newer markets, or you continue to see the adoption that you have? Is there sort of an internal or back-of-the-envelope sort of expectation that you would have for your ability to continue to accelerate organic growth? And to the extent you're willing to quantify or qualify that in any way, that would be particularly helpful.

[Adam J. DeWitt:]

Yeah. Thanks, Heath. Like Matt mentioned, we're really encouraged by the recent trends, kind of, fourth quarter, first quarter acceleration in those Tier 2 and Tier 3 markets. We moved up our – in terms of where we see it going, we certainly see a lot more opportunity, or we certainly see a lot of opportunity. We moved up our guidance, the midpoint of our guidance, a fair amount on the full year. We don't get into exactly where we think the DAG growth is going be, but we're really optimistic. I mean, it's not just the tier – it's not a situation where the Tier 2 and Tier 3 markets are accelerating and the Tier 1s are weighing them down. Tier 1s, as I mentioned in my remarks, continue to grow at a good clip. They're not decelerating, and you see the Tier 2s and Tier 3s kind of driving acceleration in the overall business. Where it can go? There's a lot of opportunity, right. There's a lot of runway. I mean we talk about the size of the industry. You can make an argument that it gets close to $200 billion opportunity a year, and we're at closer to a $5 billion pace right now, and we're the largest in the industry. So there's a lot of opportunity. I think it's about figuring out how to accelerate the adoption as much as possible from offline to online. And we've been talking about it for a couple years. It's getting more awareness. It's getting more creative about getting more awareness. So it's doing things like the Yum! Partnership, like the Yelp partnership, as Matt mentioned, more effective advertising, and the broader our network gets with these anchor tenants and with delivery, the easier it is for us to use other awareness tactics. And so it's kind of all this together that we're using to accelerate as much as possible. We certainly see a lot of opportunity given where we've moved guidance. We certainly feel like the number is likely to be higher than where we thought it was going to be before. And we're really optimistic for growth, not just this year but also into next year, especially when we start lighting up more of the Yum! franchises and lighting up the co-marketing initiatives that we have with them. I mean very little of that's baked into our 2018 guidance.

[Heath Terry:]

Got it. Great. Thank you very much.

[Operator:]

Your next question comes from Nat Schindler with Bank of America Merrill Lynch. Your line is open.

[Nathaniel Schindler:]

Yes. Hi, guys. In Q3 2016 you called out the Olympics having a substantial impact on that what was really quite a big beat in that quarter. Did you notice any impact from the Winter Olympics this quarter? And, also, can you talk about any effect, particularly the April bad weather in the Northeast has been having on your business?

[Matthew M. Maloney:]

Yeah. So, Nat, good memory. I think the – so the third quarter of 2016 had a bunch of positive impacts in it. I think in addition to the Olympics I think we had some pretty significant weather help as well. I think if you're fast forwarding to first quarter, we didn't really see the same kind of pop that we saw. I think it's really – the difference is that people stayed in and watched the Summer Olympics, whereas in the past, those people would have been out because seasonally people don't sit around as much and watch TV and they're out more. I think that's why we saw the pop. I think the winter is seasonally strong regardless. And there may have been some issues with the time zone. But this quarter, from a noise perspective, I would say it was pretty clean. You mentioned April storms, that's second quarter but if you look at the weather for the first quarter, the combination of weather and Easter timing kind of canceled each other out. And so the first quarter growth rates were pretty clean. And the acceleration that we saw overall, we're very comfortable saying that it existed regardless of the little bit of noise. Any positive impact that we had for April, we've included in the second quarter guide. So that's in there already. Obviously, we're not assuming that the weather's going to be particularly bad or particularly good for the remainder of the quarter but we have April baked in.

[Nathaniel Schindler:]

Great. Thanks.

[Operator:]

Your next question comes from Tom Champion with Cowen. Your line is open.

[Thomas Champion:]

Hey, guys. Good morning. I'm curious if you could just comment a little bit on Delivery service awareness levels on Yelp. And maybe how that could be improved over time? And then second, just a clarification of the $10 million in investment for Delivery you called out obviously really strong progress in expanding markets. Was any of that included in 1Q results? Thank you.

[Matthew M. Maloney:]

Hey, Tom. I can definitely take the first one. So the awareness of Delivery service on Yelp is obviously a key topic between us and Yelp. And we're working very closely with Yelp. Weekly calls between our product teams, I'm in touch with Jeremy frequently as well because this is found money for them. So this is really exciting. And they want to increase conversion as much as possible. And obviously we have had a multiyear focus on constant optimization of our diner ordering platforms, so this is just something we do habitually. So we're very aggressive on evaluating the platform, evaluating the user interface, optimizing conversion and iterating on AB testing. We just consider the Yelp interface as one more platform that we can continually iterate against, and I think we will see the effectiveness of that increase over time, just from a UX perspective, not even to mention the jump in effectiveness between putting all of our delivery restaurants on Yelp.

[Adam J. DeWitt:]

In terms of the $10 million, there was definitely some impact in the first quarter but it's smaller than a pro rata, even though theoretically, the earlier we are in a market the more it's going to cost us. But we really – we launched most of these markets towards the tail end of the quarter, those 34. So you're not seeing a big impact in the first. I think you'll see more of it throughout the remainder of the year. But it's all baked into the EBITDA guidance.

[Thomas Champion:]

Thanks, guys.

[Operator:]

Your next question comes from Mark May with Citi. Your line is open.

[Mark A. May:]

Thanks. Thanks for taking my questions. First one, marketing's obviously one of the most important elements of the Yum! deal. Was hoping that you could help us understand sort of the value of the marketing support that you're getting from Yum! and its franchises or that you expect to get, maybe frame that. And I believe you referred to it as co-marketing; if you could maybe help with how much of that value or that marketing will be borne by or supplemented by GRUB. And then the second question has to do with – I think you talked about meaningful volume by the end of the year, but probably really more like next year from the Yum! deal. I was just curious how you're defining the volume. How much of that do you think will initially be more takeout versus delivery? And then, yeah, I know there's – you're expecting some indirect benefits as well. Are you referring more to the volume impact on the indirect restaurants from the customers that you acquired from that deal? Thank you.

[Matthew M. Maloney:]

Yeah. So, Mark, just to give you a little bit more color on the co-marketing. Part of the relationship is a commitment by both parties to advertise together. So you'll see our brands together and GrubHub as the takeout partner for Yum! Brands, specifically for KFC and Taco Bell. And that's part of the relationship. In terms of the value to us, I don't think we've quantified it specifically. But what I'll say is compared to our annual marketing spend or our current rate of advertising that we spend on GrubHub and Seamless and Eat24 brands, it's a significant portion of that. So it's going to increase our effective advertising dollars that are in market by a significant percentage. It's not just about the dollars; it's about the breadth; it's about the locations; it's about in-store; it's about TV and all kinds of things. I think the other thing that we have talked about and we talked about last quarter when we were detailing the partnership a little bit more was just, it makes more sense to roll out those initiatives as we have better coverage, right? And that's why we're kind of in this phase where we're spinning up delivery coverage in 100 markets, right. And we're already into 50 of them but we have 50 more to go. And when we start getting kind of two-thirds to three-quarters coverage of the Yum! stores, I think then it starts to make a little bit more sense to do the co-marketing, right. We don't want to be out there in market, spending a lot of money on TV ads when half the people that are seeing them can't get GrubHub Delivery. And so that's kind of – when we talk about the timing kind of later this year, early next year, that's really going be the big catalyst for Yum! volume is when we start spinning up that co-marketing that you're talking about. Is that – does that, in terms of – go ahead, I was going to hit the takeout.

[Mark A. May:]

The co-marketing element of it is where you guys actually start to spend money behind it as well, but could that also be significant? You said that you're...

[Adam J. DeWitt:]

You're not going to see our advertising dollars go up unless – the way that you see our advertising dollars go up is if, as a result of the Yum! partnership working so well that we decide to spend extra money on GrubHub advertising, but you're not going to see our advertising spend go up as a result of just the co-marketing spend. Does that make sense?

[Mark A. May:]

Yes.

[Adam J. DeWitt:]

And then, when you talk about takeout versus delivery, one of the reasons that we're so excited about this partnership is that we're a comprehensive partner. And like I mentioned, you're going to see in-store marketing and it's going to drive brand awareness for GrubHub, whether people are picking up, delivering, white label, or going to grubhub.com, or our apps on the phone. And so we really structured the deal in a way that we're indifferent to drive as much volume as possible to our platform, and pickup is certainly a big opportunity. If you think through the use cases, right now, the equivalent option in a lot of the Yum! restaurants is drive-thru. I can make an argument that doing a pickup on your phone when you're 10 minutes away from the restaurant parking in a – if we can figure this out, but parking in a special spot close to the restaurant and picking up the food could be in a lot of cases even more efficient than the drive-thru, and so it's absolutely a good opportunity. From an economics perspective, like I said, we've structured the deal such that all of these different forms of orders have a similar impact. And then, I think your last point, your conclusion is the right one. I mean, just bringing people to the GrubHub platform that haven't been there before and exposing them to the breadth of choice in different cuisine categories is going to drive orders to other restaurants beyond the Yum! folks, and that's absolutely part of how we think about the value of the relationship.

[Mark A. May:]

Thanks.

[Matthew M. Maloney:]

And real quick. Mark, thanks for bringing up the pickup point, because I forgot to mention earlier in Jason's question when I was talking about restaurants consolidating their ordering on one platform that can provide them with a white label solution. Pickup is a big part of that, because, competitively, I think we're really the only one that provides a full solution for online ordering, pickup first and delivery. Everyone else in our space is really predicated by delivery. And it doesn't make sense to order pickup from a logistics delivery platform, whereas we're a marketplace for restaurants to drive demand. And so the ability to support significant volumes of pickup on a white label solution is really important to a lot of these chains. That's a good point. Thanks for bringing it up.

[Operator:]

And your final question comes from the line of Matthew DiFrisco with Guggenheim Securities. Your line is open.

[Matthew DiFrisco:]

Thank you. Sorry if I missed this, but I didn't hear yet if you mentioned any commentary on the GRUB delivery run rate, what you are doing sort of those restaurants that are supported and sponsored by your Delivery product.

[Adam J. DeWitt:]

Yeah. I think Matt said in his script that we're at a run rate of about $1.3 billion annualized in Gross Food Sales.

[Matthew DiFrisco:]

Okay. And then, I guess, just a question then if I could have a follow-up. With respect to the Tier 2 and Tier 3 momentum you're seeing there, are we at a stage now where you think those markets are maturing where the category competitive-wise people are – the restaurant is seeing the logic in selecting one partner rather than the initial stage of let me partner up with as many guys as I can and see how many eyes and orders can be driven to my restaurant?

[Matthew M. Maloney:]

That's a really interesting question. I think that online ordering is broadly extremely early in the country, and even more so in some of the Tier 2, Tier 3 markets. We're just breaking into a lot of these markets with the support of significant restaurant chains, it feels like, and there's not a lot of good data behind this, but it feels like restaurants are still testing the waters and trying to understand how online ordering and online delivery support their overall growth. Clearly with the validation we have through our existing partnerships and the ones that are in the pipeline, everyone's looking at us. And we are likely, since we're the industry leader, the team to beat, and so we're really taking advantage of the momentum we have by aggressively selling into the Tier 2 and Tier 3 markets mot just with the expansion of Delivery, but by accelerating our restaurant sign-up teams.

[Matthew DiFrisco:]

Excellent. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.