Just Eat Takeaway.com N.V.
Q2 2018 Earnings Call Transcript

Published: 25 Jul 2018

[Operator:]

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Grubhub Q2 2018 Earnings Conference 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. David Zaragoza, you may begin your conference.

[Dave Zaragoza:]

Good morning, everyone, and welcome to Grubhub's second quarter of 2018 earnings call. I'm Dave Zaragoza, Head of Investor Relations, and joining me today to discuss Grubhub's results are our 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, 2017 filed with the SEC on February 28, 2018, and our Quarterly Report on Form 10-Q for the quarter-ended June 30, 2018 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 when talking 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 are enjoying another great Grubfest here in Chicago this morning from one of our regional chain partners, Roti. Roti is a great example of the more than 125 well known chains now growing their business through online ordering on the Grubhub platform. While online ordering may still be in early days for many of these chains, taken together this group currently generates more than $100 billion in annual gross food sales through their physical footprint, driven by their strong consumer brands, quality of product, and in-store experience. These powerful brands combined with our increasingly efficient delivery network and Grubhub's own strong growing brand are driving more diners and more orders to our platform. In the second quarter excluding impacts from acquisitions, more new diners tried Grubhub for the first time than any quarter before. And notably we accomplished this record new diner acquisition in a seasonally slower quarter, spending less money on advertising than we did in the first quarter. What we are most excited about is the great repeat behavior of these new diners, the best for second quarter diners in several years. Our second quarter results were strong and leading indicators for growth are robust. In short we are excited about our momentum and trajectory. To reinforce that trajectory, today we announced the proposed acquisition of LevelUp, the leader in mobile diner engagement and payment solutions for national and regional restaurant brands. LevelUp's world-class technology and team will expedite Grubhub's integrations with the nation's top restaurant brands, provide more tools to help them attract new diners and position us to accelerate order growth on the Grubhub platform. Over 200 premier restaurant concepts including our partner, Roti, use LevelUp to create a seamless diner experience in-app, online and in-store. I will talk a bit more about LevelUp and some other exciting things we have going on, but first I'll go through a few more highlights from our second quarter results. After that I'll turn the call over to Adam, who will walk you through our P&L to more detail on the anticipated acquisition and some updated thoughts on our outlook. Grubhub generated 423,000 DAGs in the second quarter, up 35% year-over-year, maintaining the strong growth momentum coming out of 2017 and through the first quarter. Once again, DAG growth, excluding Eat24, accelerated from the prior quarter, driven by strength across all of our markets. This robust order growth translated to net revenue of $240 million, up 51% year-over-year, and 3% up from the first quarter. GAAP net income was $30.1 million for the quarter, up 104% from $14.8 million in the prior year. Adjusted EBITDA was $67 million, up 61% year-over-year. Adjusted EBITDA per order was $1.75, up 19% from $1.47 in the prior year. Strong growth in orders and revenue combined with scale benefits and operational synergies from the migration of Eat24 and integration with Yelp drove this strong bottom-line performance. Our growing restaurant network, broader delivery capabilities and continuously improving product are all enhancing the diner experience on Grubhub, strengthening the powerful network effects that drive our growth. With a better overall experience, new diner retention rates improve and diner LTVs grow, allowing us to be more aggressive attracting new diners to our platform and further enhancing the value we drive to our restaurant partners. We saw this clearly in the second quarter. As I said earlier, organic new diners set another record in the quarter, surpassing our first quarter record despite summer slowness and lower advertising spend. June, typically the worst month of the quarter for us was actually the best of the quarter, and this trend has continued into July. We are encouraged by the leading indicators we are seeing given the quantity and quality of the new diners joining our network, and we will continue spending into this strength in the third quarter. We ended the second quarter with 15.6 million active diners, up 70% from the prior year including the approximately 4 million active diners added from the Eat24 acquisition late last year. With such a large opportunity in front of us, we believe bringing the LevelUp team and technology to Grubhub will allow us to grow even faster. For the last seven years, LevelUp has focused on helping restaurant partners engage their diners in app, online and in-store, forming tight partnerships by seamlessly integrating into existing restaurant systems. They helped brands like Roti, Pret A Manger, Zaxby's, Just Salad, Potbelly, Chopt, Bareburger and Dig Inn grow through digital extensions of their own respective brands and building tight, robust integrations into the restaurant's existing point-of-sale systems. The addition of LevelUp will accelerate Grubhub's own integration efforts, adding more than 200 live clients with robust point-of-sale integrations, supported by over 100 world-class engineers in what will be our newest center of technology excellence, Boston. Over 100,000 daily orders and about $400 million in annualized restaurant sales currently go through LevelUp's products. Many of you are, in fact, already using their platform without even knowing it. LevelUp's technology and expertise will enable Grubhub to create products that will help restaurants grow while easing the operational costs of managing more online orders. Our vision is to be a true partner to restaurants, helping them grow through our platform, as well as amplifying their existing efforts. With support for over 10,000 locations of well-known brands on Grubhub right now and the potential to support tens of thousands more, we see tremendous opportunity to unlock growth and increase efficiency for our partners, maximizing their opportunity across the online channel. Supporting KFC, Taco Bell and our growing network of national and regional chains, we've now launched Grubhub Delivery services in over 70 new markets this year. While markets like Reno, Lexington, Lansing and Springfield may be smaller than our initial Grubhub Delivery markets launched back in 2015 and 2016, we are getting good early traction and see potential for many of these to grow into strong markets for us over time. The rapid expansion keeps us on track to more than double our delivery market footprint by year-end and cover a vast majority of the Taco Bell and KFC stores nationally. Adding great progress on tech integration and product, we expect to begin on boarding larger numbers of KFC and Taco Bell locations later this year. When we completed the acquisition of Eat24 in late 2017, we discussed the trade-offs of supporting a third brand in our portfolio. Since then, we've completed an extensive brand study with thousands of diners in many of our markets in order to determine the best path forward. What we found was that the incremental value of maintaining Eat24 indefinitely as a third brand did not justify the additional cost. So we've made the difficult decision to sunset the Eat24 brand later this year. It's definitely with a heavy heart that we bid farewell to the brand that encouraged us to say no to pants and stay in for dinner. I want to give a big shout out to the amazing job that the team did to build that brand over the many years. They epitomize one of Grubhub's core values, scrappiness. We plan to start diner migration later this year. Our roadmap calls for a much more gradual approach than the Foodler and OrderUp hard cut orders. We currently expect an elongated soft migration period during which we'll encourage diners to move to Grubhub. Only after the majority of diner usage has migrated will we begin sun-setting the Eat24 app and websites, minimizing potential diner churn and maximizing the benefits of consolidated behind one national brand. Everyone here at Grubhub is energized by the momentum in the business right now and the tremendous opportunity in front of us. I look forward to giving you all another update with our progress capturing this opportunity in the fall. With that, I'll turn the call over to Adam.

[Adam J. DeWitt:]

Thanks, Matt. I'll start with our record second quarter results, go into a little bit more detail in LevelUp's business and then give some updated thoughts on guidance before opening the call up for Q&A. Grubhub processed 423,000 daily average grubs in the second quarter, up 35% year-over-year. DAGs are down approximately 3% from first quarter, as expected, given seasonality. If anything, they are probably down a little less than we would typically expect, given summer vacations and warmer weather. Excluding the impact of Eat24, which we acquired late last year, DAGs grew approximately 19% from the prior year. And, as Matt noted, we saw organic DAG growth accelerate for the third consecutive quarter. We've now launched Grubhub Delivery services in over 70 new markets year-to-date, greatly expanding the number of potential restaurants we can partner with and supporting more local operations for our growing network of regional and national chains. We are very much on track to being able to cover more than two-thirds of KFC and Taco Bell's footprints by the end of the year. The current contribution to total company growth from these launch markets is modest, given their early-stage, but diner and restaurant engagement is strong. And we see the beginnings of the network effects that support the consistent growth of established markets. Like our Tier 2 markets, which contribute more meaningfully to overall growth each passing quarter, we expect these launch markets to increase in impact over time. Active diners grew 70% year-over-year to 15.6 million in the second quarter, including approximately 4 million diners from the Eat24 acquisition. Excluding these Eat24 diners, organic Grubhub diner growth was consistent with the strong trends we saw in the first quarter. We added more than 0.5 million active diners in the quarter. As you can tell from our remarks, we are excited about recent new diner growth. With reasonable acquisition costs, improving repeat rates and consistent diner retention, we've been a little bit more aggressive with marketing spend and expect to continue spending as long as we are acquiring high-LTV diners at a reasonable cost. Gross food sales for the second quarter were $1.2 billion, growing 39% from the prior year with average order size up 3%. Excluding the acquisition of Eat24, gross food sales grew by approximately 22% year-over-year. Second quarter net revenues were $240 million, up 51% from the prior year and up approximately 34% excluding Eat24. Net revenue as a percentage of gross food sales was 19.6% for the quarter, up 160 basis points from the prior year and about 100 basis points from the first quarter. And increasing mix towards Grubhub delivered orders on all of our brands, but particularly on our newer properties, Eat24 and Yelp, drove most of this increase; with the smaller impact from restaurants continuing to pay more for more impressions on our platform as the value of the two-sided network grows. Operations and support expenses grew 63% year-over-year from $62.9 million to $102.4 million in the quarter, driven by increased delivery orders, the underlying growth of our order volume and the inclusion of Eat24 orders. We did see an improvement in second quarter driver efficiency relative to first quarter. You can see this in the increase of revenue per order less ops and support cost per order. That said, we expect our aggressive launch plan of new and, therefore, less-efficient delivery markets throughout the second half of the year to limit further improvement and possibly even become a slight drag on efficiency until those markets get some scale. Sales and marketing expenses were $46.2 million in the second quarter, a 33% increase compared to the same quarter last year, but down 5% as expected from our seasonally-stronger first quarter. Given recent strong new diner trends and a ramp into the back-to-school season, we expect only a modest decline in third quarter sales and marketing relative to the second quarter, which probably implies a little higher spend in the third quarter than we had in our guidance previously. This reinforces what I noted earlier about seeing more opportunities to acquire high-quality diners at a reasonable cost. This incremental spend now will create meaningful incremental shareholder value over the life of the diners. Technology expenses, excluding amortization of web development, were $18.7 million for the quarter, increasing 33% from the second quarter of 2017. Depreciation and amortization was $19.8 million in the second quarter, down 5% from the first quarter, which included a write-down of legacy Eat24 technology following the migration of their volume to Grubhub's infrastructure. G&A costs were $18.2 million, up 23% from last year, and up slightly from the first quarter with overall growth in our business. GAAP net income was $30.1 million, compared to the prior year of $14.8 million. Net income per fully-diluted common share was $0.33 on approximately 92.5 million weighted average fully-diluted shares. Growth in net income benefited from the excess tax benefit of stock-based compensation, an effect that drove our effective tax rate to about 12% in the quarter. Our go-forward tax rate is still approximately 28% before any additional impact from stock-based comp. Non-GAAP net income was $46.3 million, or $0.50 per fully-diluted common share, compared to the prior year of $23.2 million or $0.26 per fully-diluted common share. Non-GAAP net income excludes the amortization of acquired intangibles, acquisition, restructuring and certain legal costs, and stock-based compensation expense, as well as the income tax effects of these non-GAAP adjustments. Adjusted EBITDA for the second quarter was $67.4 million, an increase of 61% from $41.9 million in the same quarter of the prior year. Adjusted EBITDA per order, which we view as the best gauge of our profitability, was a record $1.75 in the second quarter, up 19% year-over-year. We ended the quarter with approximately $480 million in cash and equivalents, $120 million in debt and $225 million in committed but unused capacity on the credit line. This cash balance includes $200 million in proceeds from Yum!'s purchase of 2.8 million shares of primary stock, which closed during the quarter. At this point, I'll give you a little bit more insight on our new acquisition, LevelUp. LevelUp provides technology for over 200 regional and national restaurant brands to create a comprehensive online ordering experience. This experience is personalized for each restaurant's brand and product, with a look and feel that represents that restaurant's food and in-store experience. LevelUp enables online ordering through the restaurant-branded properties, facilitates in-store payments through QR-based transactions and provides CRM tools for restaurant brands to drive diner engagement. Almost all the volume going through LevelUp's platform is pick-up based through a restaurant-branded application or website, whether the order is placed ahead of time or real-time, once a diner is in the store. LevelUp is not a demand-generating aggregator like Grubhub, but they have exceptional restaurant-facing technology when it comes to branded online ordering and diner engagement. It will take time for us to realize the full benefits of the acquisition, but in the shorter-term, we are very excited to leverage the extensive and seamless POS integrations that LevelUp has built. Over the medium and longer-term, LevelUp's technology and world-class team will help Grubhub dramatically expand our product offering for restaurants, helping them compete most effectively in the online world for delivery and pick-up business. We will update our guidance and go into more detail on the financial and operating metric impact once the acquisition closes. But to give you an idea of what their business looks like today, LevelUp is processing a little more than 100,000 orders a day, representing roughly $400 million in restaurant sales. The business is almost exclusively pick-up. LevelUp's current business model is to generate revenue from all the customized development work they do, a subscription fee for restaurants they work and a small transactional fee. Altogether, right now the business is generating an annualized run rate of $30 million to $40 million in revenue, with a de minimis monthly EBITDA burn. We have no plans to change their business model or pricing out of the gate. Growth has been strong, with current revenue growth around 50% year-over-year, and we would expect continued growth to help the company get close to breakeven relatively quickly. Now I'll turn to guidance. Please keep in mind that our proposed deal with LevelUp is subject to closing conditions including antitrust review. As such, we've excluded any potential impact from LevelUp from our current guidance ranges. We currently expect third quarter revenue to be in the range of $232 million to $240 million and are increasing our full year revenue guidance to a range of $966 million to $983 million. Embedded within this guidance is a seasonal sequential decline in DAGs for third quarter relative to second quarter, slightly greater than the sequential decline we saw in the second quarter, and a strong seasonal uptick in the fourth quarter. We expect third quarter adjusted EBITDA to be in the range of $58 million to $64 million and are increasing our full year EBITDA guidance to a range of $256 million to $270 million. This includes some incremental marketing investment in the third quarter, designed to capitalize on the strong diner growth trends we saw in the second quarter that have extended into the beginning of the third quarter, as well as the impact of our previously discussed investment in delivery expansion. With that, Matt and I will take your questions. Operator, please open up the lines.

[Operator:]

Thank you. And our first question comes from the line of Ron Josey from JMP Securities. Your line is open.

[Ronald V. Josey:]

Great. Thanks for taking the question. Congrats on LevelUp. So many things to ask here, but maybe I'll just stick with LevelUp for now, guys. You all have done a very good job of incorporating and integrating the POS systems from some of the major providers, and so now it's LevelUp. Can you just talk about how LevelUp complements your overall tech stack as you sort of go after the vision, Matt, that you talked about, about being a true partner with restaurants? And then also as it relates to LevelUp, how you think it expands your addressable market? You talked about their product with white-labeling, restaurant ordering and CRM. But then also, Adam, I think, you talked about Grub can expand its products as well with LevelUp. So any insight on those things around POS improving Grub's products but then also expanding the addressable market would be helpful. Thank you.

[Matthew M. Maloney:]

Yeah. Hey, Ron. This is Matt. So LevelUp, it's – it is an exciting opportunity for us when we look at it. You're right, we have been investing in our POS integrations for a bunch of quarters now. And when we look at what LevelUp's been doing over the past seven years, it's not just the POS integrations, although I would say that the integrations themselves would justify the acquisition. But they've been building relationships with over 200 chains. They have the best white-label product out there for restaurants, and as you know, part of our – part of the big positive of our Yum! relationship is that we power their white-label platforms and all of the – we're indifferent if the order comes across our platform or their platform and that is a very positive relationship. And as we've been building that out, we believe that it's very important, especially with key clients, key restaurant chains, that we get as close to that as we can. And so, when we look at LevelUp, we think that this will help us replicate in scale that model of restaurant relationship across hundreds, if not thousands of chains. And then, on top of that, they have what we believe is the best diner engagement and restaurant facing tools. So this is a significant investment in the restaurant side of our two-sided marketplace, not only in integration but also in the feature set that we're going to be able to provide restaurants. And, ideally, like I said, be an outstanding partner and allow them to build their business fully on our platform.

[Ronald V. Josey:]

Great. Thank you.

[Matthew M. Maloney:]

Yeah. I think that was it.

[Ronald V. Josey:]

Yeah. Thanks, guys.

[Operator:]

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

[Matthew M. Maloney:]

Hey, Brian.

[Brian Nowak:]

Gross food sales is being delivered in-house at this point taking advantage of your delivery. Are you seeing incremental orders per diner, or is there some cannibalization? And then, the second one on Yum!, I know in the past you've talked about EBITDA per order on Yum! being roughly at parity, roughly equivalent to the overall business. Is that still the right way to think about it? And how do we think about sort of OpEx versus take rate in that equation? Thanks.

[Matthew M. Maloney:]

Hey Brian. Can you repeat the first question about the GFS on delivery? We missed the first like three-quarters of it.

[Brian Nowak:]

Yeah. Sorry. No problem. The first question was just sort of on trying to get an idea of how big delivery is as a percentage of the total GFS. And then, for your diners that are participating in your in-house delivery, are you seeing an increase in orders per diner as evidence that delivery is actually leading to incremental growth within those diners?

[Adam J. DeWitt:]

Yeah. So I'll take those questions. So in terms of the delivery business, it's certainly growing as a percentage of our overall orders over time. I think, it's safe to say roughly a quarter of our GFS now is being delivered by Grubhub drivers. I think the best way to think about the incrementality is the same way to think about the incrementality from an additional restaurant, right? It's not just whether we're doing delivery or the restaurant is doing delivery, it's just a question of whether we add additional inventory onto the platform, right? And so, what we've seen from an experience standpoint in every market that we've been in as we add more restaurants onto the platform, we drive incremental orders. So every restaurant that we add to the platform is driving incremental value to the whole platform. And there's a number of different ways to see this. I guess, the clearest way to answer your question is that we see activity rates or frequency rates in a given market increase over time as the number of restaurant options goes up, and we've seen that in pretty much every single market that we've been in. Your other question in terms of the EBITDA per order for Yum!, I think the way that we – the way that we're thinking about the relationship with Yum! and other chains is that overall, right – and this is what I said, just to be clear, overall, we don't think the Yum! relationship or other chain relationship is going to have a detrimental impact on our EBITDA per order, right? It's impossible to think about just the economics of the Yum! deal without thinking about the value of the advertising that we're getting; the value of the co-branding that's not explicit, that's more implicit; the new diners that we're getting; the value of the – the value of just having the brands on the platform and driving new drivers. And so, you need to take all that into consideration and we still think that – we still feel really good that over time even in the kind of short to medium term, you're not going to see a detrimental impact to EBITDA per order related to the Yum! deal or other deals.

[Brian Nowak:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Jason Helfstein from Oppenheimer. Your line is open.

[Jason Helfstein:]

Thanks. Two questions. Can you give us a bit more detail on why you're seeing better trends in June and July relative to seasonal patterns? And then could you possibly give us an update of how business is doing on the West Coast in specifically like L.A. and San Francisco and how those growth rates for organic GFS compare with, let's say, your East Coast markets? Thanks.

[Adam J. DeWitt:]

Yeah. What I'd say in terms of June and July, I think, we had comments in the prepared remarks about new diner strength. We feel really good about where we are. We feel really good. We talked – I talked a little bit about spending a little bit more in the marketing side and seeing not only really good diner acquisition, but high-quality diners at a reasonable cost. And we've absolutely seen that continue into July. We don't really talk about intra-quarter order volumes. I mean, it's safe to say that everything that we have in terms of data is incorporated into our guidance for third quarter, right? So that reflects our view of what happened in June and what's going on in July. To answer your question about the West Coast, I'll go even broader and say that the acceleration and the new diner strength is really uniform across all of our markets, whether it's on the West Coast or East Coast or middle of the country. We've seen strength kind of everywhere. I think, it's a testament to just the continual improvement in the restaurant network that I mentioned in the last question where adding new restaurants drives incrementality, and so we have a better restaurant network. And so advertising and awareness, driving people to Grubhub, seeing more and better restaurants is doing the job of driving new diners and new orders. So we're seeing that everywhere including L.A., San Fran.

[Jason Helfstein:]

Thanks.

[Operator:]

Our next question comes from the line of Ralph Schackart from William Blair. Your line is open.

[Ralph Edward Schackart:]

Good morning. Just circling back on LevelUp, can you maybe speak to the timing of the transaction? Is this something you've contemplated for a while? Did you need sufficient scale to sort of move forward with it? And then also to, again on LevelUp, it talks a lot about its success of loyalty program and the benefits there. I think, it highlights Potbelly's having about 400,000 or so customers in its loyalty program. Maybe sort of speak to your opportunities to take that loyalty program to your broader base of restaurants. Thank you.

[Matthew M. Maloney:]

Hey, Ralph. In terms of timing, I would say that we started talking to LevelUp earlier this year in the context of a partnership because of their scale with restaurant relationships and their ability to integrate to the POS. And then as we continued to work through what a partnership would look like, it became very obvious that strategically, we were both aligned and it made most sense to actually go ahead and acquire them. The loyalty element, it has been a big part of their business, but it's just one small component of the overall benefit that we see on our platform. And like I said earlier, in the short and medium term, you're going to see us taking advantage of the POS integrations and the white-label stuff a lot faster. I think that has a lot more immediate relevance to what we're trying to get done. But we do want to be the comprehensive solution for online ordering to restaurants from demand all the way through fulfillment. Loyalty plays a part in there. I would hesitate to say that we're going to do a lot with that in the near term.

[Ralph Edward Schackart:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Heath Terry from Goldman Sachs. Your line is open.

[Heath Terry:]

Great, thanks. The 70 new markets that you've launched on the back of the Yum! relationship, can you give us a sense of what the average number of restaurants that you're launching this, and particularly the average number of non-Yum! restaurants that you're launching, these markets in is looking like? And to the extent you've got any markets where you've got a few months now of insight, sort of how that restaurant addition ramp is looking relative to what you guys would consider a normal market of somewhat similar size. And then, as you're looking at the Tier 2 and 3, and sort of whatever we're calling this next wave of markets, like Memphis and Shreveport and all that are coming on with Yum!, when you look at the initial returns from those markets, and particularly when your teams there look at the competitive environment compared to what you'd see in some of your Tier 1 markets, what's it telling you? Or how is it affecting your thinking about what penetration rates can look like in those markets longer-term?

[Adam J. DeWitt:]

Yeah. Heath, I'll take it. I think both of those questions are along similar themes. Certainly, overall, I think you hinted at this, right? The first 80 markets that we rolled out delivery to in general are significantly larger than the next 100 that we're going to, that we're in the process of rolling out delivery to. So in general, that next 100, including the Yum! markets that we're rolling out delivery to, are smaller, right, than our existing markets. What I'd say is because they're smaller markets, we're going to have somewhat fewer restaurants, but that doesn't mean that there's not great inventory, right? So when I log onto Grubhub in Chicago, I see 450 restaurants that will deliver to me. You're not going to get 450 in Shreveport, but you're certainly going to have enough to make – and we are seeing enough to make Grubhub work. And I think we said this in the prepared remarks, very early returns are positive from these markets, and you can actually see it in the EBITDA per order and kind of the flow-through on our driver efficiency. Frankly, we thought it was going to be a little bit higher from an investment standpoint in some of these markets before they got to scale, but they got to scale or at least more – higher – better scale quicker than we thought. And so, we're seeing the model work. We're seeing CPAs, diner acquisition CPAs, be reasonable. We're seeing the diner retention rates very similar to other markets that we've developed over time, and we expect them to continue to get better. I mean, overall, right, those markets represent a smaller percentage of overall sales, right, in the restaurant industry, but it's a significant amount. And we're seeing growth, and certainly some of the positive momentum on the order side is coming from those earlier stage smaller markets. I think the key thing to remember is that even though they're smaller, there's a lot of room for growth from where we are today.

[Heath Terry:]

That's really helpful. I guess maybe just one follow-up along that theme on the other side of this is can you give us a sense of sort of what you're seeing from a labor cost perspective in these markets? I guess both from just a pure maybe dollars per hour or equivalent expectation on the part of the drivers and your salespeople in these smaller markets? But then also to the extent that there's any sort of efficiency, either offset or sort of additional efficiency cost associated with these smaller markets?

[Adam J. DeWitt:]

Yeah. I mean, the additional cost is kind of what we wrapped in. I think, we talked a couple quarters ago about investing in these markets this year and it being about a $10 million cost for the year. And that includes having to invest in drivers before we have the scale for whatever reason, right? Some markets are going to cost a little bit more. Some markets will have to have drivers sitting around, et cetera. And what we've seen to-date is that that $10 million, it's going to be smaller than that $10 million, if anything, because we're seeing better scale, better take up. I mean, look, there's a lot of different variables, right? It's the hourly cost of – or the equivalent cost of drivers. It's the liquidity in the market, supply and demand. It's kind of everything. And when you – it's impossible to talk about every individual market. But on the whole, what we're seeing is the cost, the supply/demand relationship is better than what we had expected. And you can see that because our EBITDA hit a record number in the second quarter, which is typically a slower quarter for us.

[Heath Terry:]

Great. No, that's very helpful. Thank you.

[Operator:]

Our next question comes from the line of Matthew DiFrisco from Guggenheim. Your line is open.

[Matthew DiFrisco:]

Thank you. I just had a question with respect to in the release, I think, you said that you have 85,000 or greater restaurants now. How does that reconcile with the goal of 100,000 by the year-end and the two-thirds of the Yum! portfolio covered? Should we be seeing a on-boarding? Is that a reference to potentially two-thirds of the Taco Bells and KFCs being on-boarded over a certain period of time?

[Adam J. DeWitt:]

Yeah. I don't – I'm not sure where the 100,000 is coming from. Maybe it's context. Our goal – and we intentionally don't report the number of restaurants on our platform as an operating metric, because the number of restaurants isn't necessarily the best indicator of the health of the network. Maybe we said – it's possible we're talking about the 100 markets that we talked about launching in, in which case we're making very good progress against those and still plan on being in the 100 new markets for Grubhub Delivery. But just going back to the restaurants, for us, it's all about the quality, right? And 85,0000 – the metric of how many restaurants we have in the platform is a good indication of the scope and breadth, but it's really more important the quality of the restaurants. And throughout the end of the year, we're obviously planning on adding a number of Yum! restaurants to the platform; Taco Bells and KFCs, but also a whole bunch of other restaurants. And we talked – Matt talked a lot about the LevelUp acquisition. They have relationships with 200 chains. And Matt also talked about we have already a Grubhub relationship with 125 chains, and so there's a lot of paths for us to be adding high-quality restaurants in really valuable markets, whether it's Chicago, New York, or as Heath was talking about on the last question, Shreveport or Portland, Maine.

[Matthew DiFrisco:]

Understood. I guess just though with reference to two-thirds of coverage by the end of the year, does that mean that you'll be having them – there's the potential, or should – is that too aggressive to think that two-thirds could be on the Grub system by the end of the year or by mid-2019?

[Adam J. DeWitt:]

Yeah. We've only – the only target that we've set out, and it's in relationship to this rollout of additional delivery markets, which we've accelerated because – in-part because we've had the ability to have an anchor tenant like Yum!. The markets will cover – in other words, we will be able to deliver to two-thirds of the KFC/Taco Bell footprint by the end of the year. I don't think we've set any targets in terms of how many of those restaurants will be on the platform versus not on the platform.

[Matthew DiFrisco:]

Understood. Thank you so much.

[Operator:]

Our next question comes from the line of Tom Champion from Cowen. Your line is open.

[Thomas Champion:]

Hi. Good morning, guys. Just curious if you could talk about the gating items remaining with Yum! integration. It seems like you're at 70 delivery markets, so you're adding those at a pretty rapid clip. But what are the major hurdles or challenges remaining? I'm just curious. Is that the point-of-sale or the white-labeling? And then, curious if you could – thank you for the color on Eat24 and the brand. I'm just curious if you could talk a little bit about diner behavior there and if there's any perceptible difference in that cohort relative to the core customer now that you've kind of weaned them off couponing? Thank you.

[Matthew M. Maloney:]

Hey, Tom. I'll take the first one with Yum! and then Adam can speak to the cohort behavior on Eat24. So, yeah, there obviously it's the delivery coverage, which we've talked a bunch about and we're ahead of plan on. There's a technical integration, which we're on plan, if not ahead of plan. We're already piloting a bunch of restaurants across the country. And then, the final gating item is actually the franchisees. It's – because they're all – the vast majority are owner-operated. We have to go to the franchisees and actually sign them up on the platform, which is not a Herculean task given that we have the broader arrangement with corporate, but we do need to onboard the restaurants, train the staff, make sure that it's all working, send a few test orders, so everyone kind of understands what's happening. So I think that's going to be the long tentpole in getting all Yum! restaurants on the platform. But that's just execution, and we're prepared to the launching of that.

[Adam J. DeWitt:]

And, Tom, on the Eat24 diners' brands, I think we mentioned either the quarter – last quarter or the quarter before, as you hinted, about the couponing. We really took the couponing down quite a bit. I think, we've worked through most of the impact from that couponing and just to be very clear, from a financial perspective, this is net positive for us. So getting rid of the coupons has actually improved the overall economics of the diners to Grubhub. What I will say is that diners that are here were starting – were absolutely seeing the benefits of a better deeper restaurant network where – that include Grubhub delivery restaurants as well as self-delivery restaurants, as well as their favorites from Eat24 and newer restaurants on Grubhub. And you can kind of see that it our numbers a little bit. You see capture rate is up quite a bit quarter-over-quarter, and a lot of that's a onetime step up from Eat24 diners ordering from restaurants that are paying a higher commission from – on the Grubhub network, whether it's delivery or self-delivery. So we're really excited about the behavior we're seeing there. We're obviously investing less in that brand. As Matt noted in his remarks, we're going to be retiring the brand towards the end of the year here, so we're not – we're obviously not seeing as much from a new diner acquisition, but we are more than offsetting that by reinvesting in the Grubhub brand and seeing real strength in those markets.

[Thomas Champion:]

Thanks, guys.

[Operator:]

Our next question comes from the line of Brad Erickson from KeyBanc Capital Markets. Your line is open.

[Brad Erickson:]

Hi, guys. Thanks. Just had two. One, first on take rate. Obviously, continues to kind of exceed expectations. Is that – are the same drivers in play there, usually slight (44

[Adam J. DeWitt:]

Yeah. So it's a good question on the take rate. I kind of just hinted a little bit as to some of the dynamics that are going on. You see the big increase year-over-year of 160 basis points and about 100 basis points quarter-over-quarter. What we're seeing, a lot of that 100 basis points quarter-over-quarter is related to the Eat24 diners now ordering on Grubhub. And it's a combination of Eat24 diners ordering from higher-paying restaurants and then separately but not unlinked is Eat24 diners ordering delivery, which by nature, has a higher take rate. So that was about half of that increase relative to the first quarter, and the rest of it is going to be split between just a general overall mix shift towards delivery and a smaller but not insignificant higher take rate, core take rate for marketplace, right, where restaurants are paying us more because of more exposure because the network's getting bigger, et cetera. Obviously, that's the smallest impact of the 100 basis points. But it has a direct impact on the bottom line as all that flows through. And I think you're seeing that in the EBITDA and EBITDA per order.

[Matthew M. Maloney:]

And then in terms of the franchisee conversations, they're going really well. There really has been no pushback with the exception that their franchisees want to be on the platform as fast as possible. In fact, I believe the largest franchisee of KFC has gone live with hundreds of their restaurants on our tablet product, which is not ideal from an operational perspective, but they believe that the benefits of being on the platform and driving increased volume more than outweigh the operational increase in cost to staff someone to dual entry the tablet into the POS. So really, it's a matter of how quickly can we finish the work to be able to onboard thousands of franchisees.

[Brad Erickson:]

Got it. That's great. Thanks.

[Operator:]

Our next question comes from the line of Mark May from Citi. Your line is open.

[Mark A. May:]

Thank you. I have two, if I could. Just following up on Adam's comment about the take rate drivers. As you sunset Eat24 and transition its customers to Grub, it would seem based on your comment just a minute ago that that would also benefit take rate over the next six, nine months as that transition occurs. Is that accurate? Maybe if you could provide some color, how to think about that. And then secondly, on LevelUp, I'm sure the answer is both but if I think of the synergies here, one being taking advantage of Grub's demand and pushing it to these 200 and growing brands, or leveraging Grub's restaurant relationships to grow the 200 LevelUp brands, which of those two do you see the initial synergy coming from or maybe there's a third I'm missing? Thanks.

[Adam J. DeWitt:]

Yeah. Mark, I'll take the first, I'll let Matt give you a little bit more color on the LevelUp. So I'm glad you asked the take rate question. Give me a chance to clarify a little bit how this works. So we are sunsetting Eat24 brand, but we've already moved the Eat24 brand to the Grubhub stack and so the Eat24 diners are already seeing the restaurant inventory that they will see once the brand is sunset. So there's not really going to be another step up on take rate. We saw the take rate once we took the Eat24 front-end and put all the Grubhub restaurants on that front-end. So that 100 basis point improvement in the first quarter is really, I don't want to say is one-time, but a lot of it is one-time in nature, right. We're still going to have half of that was all related to that one-time step-up from Eat24 diners ordering delivery and also ordering from Grubhub restaurants. So you'll still see some tailwind from mix shift towards delivery and we still believe that over time you're going to see a small improvement in the core take rate because restaurants want to pay us more to get access to more diners, right. And that relationship only gets more powerful as the number of diners that we put on the platform gets bigger.

[Matthew M. Maloney:]

And, Mark, you are thinking about the LevelUp synergies in the right way. I think that if I kind of step back, obviously, LevelUp does the white label, does the infrastructure for the restaurants to promote their own digital orders. So one thing they're not able to do is drive demand from a platform the way that we are. So there's clearly going to be growth as you allow restaurants that are on the LevelUp platform the ability to drive demand through our marketplace. Another way to think about this also is currently all of LevelUp's orders are pickup. There is no capability to execute delivery because that's not what they do. So, there is going to be another element of potential growth where restaurants that are active on the LevelUp platform are going to be able to opt-in to delivery orders that then Grub would fulfill. And I think that's going to be a big growth, but then if you think about how the features of LevelUp can potentially grow Grub's platform, the fact that there are 100,000 or so pickup transactions a day is really interesting. We said before pickup currently is in the mid-to-high single-digits of our overall transactions, but it's obviously a huge opportunity. And no one has really cracked this nut, but because we are a marketplace and because we allow, we are not just a company that fulfills every order, like a lot of the other players in the space, we support growth. And I think this uniquely positions us to be a true partner to support overall growth for the restaurants, not just fulfill delivery orders. But we think this could be a real competitive differentiator in the future. And so we're going to work really hard to figure out how do we take advantage of pickup and push that throughout our platform and not just in the core dense urban areas but even in a lot of these newer markets where curbside pickup, for example, is a much more relevant use case.

[Mark A. May:]

Thanks.

[Operator:]

Our next question comes from the line of Jeremy Scott from Mizuho. Your line is open.

[Jeremy Scott:]

I'm wondering if you could dig in on customer behavior in the markets that you've launched over the last year and how that's influencing your decision to ramp your sales and marketing in new markets. I guess, presumably, these customers in new markets have become aware of delivery through other platforms and the traditional thinking is that the customers' relationship with the first platform is sticky, what are you seeing today that suggests that's not the case and that you're getting a good conversion on your marketing? And then, separately, along those same lines, are you seeing any need to fortress your core markets?

[Adam J. DeWitt:]

Yeah. So I'll try to take both of those. To address your question directly, I think it's helpful to just remember how large the market is, right? And so, by conservative metrics, right, you can get to $200 billion in take-out for restaurant sales in the U.S. across the country. And even if you get aggressive in terms of counting dollars that are online, it's really, really hard to get over $20 billion, right? So 90% of the market out there is still offline and moving to – we assume that in the next 10 to 15 years, right, nobody is going to be calling up a restaurant to order the way that they did 10 years ago, right? Everybody is going to want to order through their phone or through their PC. And so, there's a massive, massive opportunity. So it's not like when we're going to markets, we're acquiring diners by stealing them from other providers. We are getting diners and acquiring diners that aren't even aware that they can order online. And that's really how we're making progress, especially when you talk about Shreveport's and Portland's. It's by getting a good base of high-quality restaurants on the platform and then generating awareness, sometimes having to touch the diner two or three times to make them aware of what Grubhub does and what it is. But once they try it, as you pointed out, it's extremely sticky. And so that's what gives us the confidence to keep investing in these markets, right, even though they're smaller, is that we are seeing this pattern where we go in, we develop a high-quality restaurant base, whether it's us delivering or the restaurant itself delivering, or the diner picking up. It doesn't matter. They go to Grubhub, they see all the restaurants and all the occasions for them to use it. And they try it and they realize that it doesn't make sense to do what they were doing before. And then, they stay with us and become habitual. I think, to some degree, that explanation extends to our current markets as well. We are still early stages in this evolution. You think about a market – a lot of people ask us about New York, right? We've been in New York as seamless, if you count the corporate days, for 20 years. And you got to remember that New York is not just Manhattan and New York has 20 million people. And a lot of the suburbs, you can get to the suburbs, but a lot of the city parts of New York haven't had this, haven't been fully-penetrated or even close to fully-penetrated with online ordering. And so there's a massive opportunity even in New York in terms of the green space. And so what we're focused on now isn't about stealing diners. What we're focused on now is how do we accelerate, right, that growth from where we are today in online penetration of 10%, call it, to a much higher number. How do we get in the pole position for acquiring a disproportionate number of the diners as they move over from offline to online. And we're doing – when we talked about adding high-quality restaurants, driving awareness, the deal with LevelUp kind of expands our product, so that we can become kind of the default choice for restaurants and so kind of it all reinforces itself.

[Jeremy Scott:]

Got it.

[Adam J. DeWitt:]

Does that make sense?

[Jeremy Scott:]

Yeah. It does make sense. And just maybe if you can comment on the competitive environment in the context of negotiations with certain chains. We've heard anecdotally that there may be some smaller players willing to sacrifice economics for deal headlines. It's just given the state of the evolutionary market that we're in, headlines may be more important in their ability to raise capital. So what are your thoughts? Obviously, it's not impacting your headline take rate today, but what's the influence on your conversations by some of these smaller players willing to sacrifice their economics? And does that shape the outlook for future take rates at all?

[Matthew M. Maloney:]

I don't think it does. I mean exclusivity has always been the exception in our industry, and you'll find lots of brands on multiple platforms as they try to figure out what their long-term strategy is in the digital space. I think especially with the LevelUp acquisition, I think Adam put it really well. We are becoming, if we have not become, the default choice. And by providing all elements of digital ordering including integration with existing point-of-sale systems, CRM tools, I mean I think that it's more likely for restaurants to want to channel their orders through our platform. And it's definitely a part of the strategy behind the white label rule set that we just invested in. I think that if you take a step back, we're not going to cut rate just to match a deal. We have over 125 brands at this point, over 10,000 locations. This isn't about one brand versus another brand; this is about how much supply can we contract and offer to our diners across the country. I think we have the best products. We definitely have the deepest integrations and we're the most competitive platform out there in terms of giving restaurants what they want because we view our position in this industry as a true partner to support growth. So I think that if a restaurant's single decision factor is price and they will not work with any other platform that does not match the lowest price, then I think that's a shortsighted view on the industry, but they're welcome to make that decision.

[Jeremy Scott:]

Okay. Thank you.

[Operator:]

Our final question today comes from line of Maria Ripps from Canaccord. Your line is open.

[Maria Ripps:]

Thanks, and congrats on the strong quarter.

[Matthew M. Maloney:]

Thank you.

[Maria Ripps:]

LevelUp is interesting, and I understand the technology benefits. Are there any savings on payment-related fees that you're expecting to see that could improve margins over the long-term here?

[Matthew M. Maloney:]

This definitely isn't about payment processing. We've always accepted payments, obviously, through our online ordering platform. I think that it's the novelty that they're doing around the QR Code, physical payments, similar to how the Starbucks app works, I think is really interesting and reinforces the pick-up opportunity, which I'm far more excited about than necessarily the payment processing element. But it's something that – this is one of the ancillary features that is part of the acquisition that we're interested in and we'll kind of poke around and figure out how to best integrate it with our site. But I mean I definitely wouldn't set expectations that we're going to find cost savings or that this is a significant focus of ours in the integration.

[Adam J. DeWitt:]

Yeah. Just to clarify more specifically, we're not a payment processor, right? We process payments because it's a means to an end of driving more orders to our restaurant partners, and that's very much how we're thinking about the payment processing capabilities of LevelUp, right? How do we figure out how to leverage what they're doing around processing payments to drive more orders to our restaurant partners? It's not about driving more revenue and becoming a profit center on payment processing.

[Maria Ripps:]

Great. Thank you.

[Operator:]

And this concludes today's conference call. You may now disconnect.