Just Eat Takeaway.com N.V.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning. My name is Tasha, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Grubhub Q3 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. I would now like to turn it over to your host, Mr. David Zaragoza. Please go ahead.

[David Zaragoza:]

Good morning, everyone, and welcome to Grubhub's third 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. And 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 September 30, 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 will discuss non-GAAP financial measures in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables of the press release. Unless otherwise noted, all references to active diners, daily average grubs, and gross food sales exclude the acquisition of LevelUp, which was closed on September 13, 2018. And now, I'll turn the call over to Matt Maloney, Grubhub's founder and CEO. Matt?

[Matthew M. Maloney:]

Thanks, Dave. Good morning, everyone, and thanks for joining the call. As we head into the colder months of winter and our busier season here at Grubhub, we're enjoying a delicious breakfast here, courtesy of Protein Bar & Kitchen, a healthy Chicago favorite that partners with both Grubhub and LevelUp to grow their business across all online channels. Our relationship with Protein Bar is emblematic of what's occurring more broadly for restaurants in the U.S. For chains and independents across the country, it's no longer a question of if they should move into the online channel, but how. Restaurants making that decision have a lot of questions. How will this help me grow my business? Should I manage delivery logistics myself or find a partner? Should all my orders go online, including pickup? And how can I make the process smoother? How will this impact my in-store operations? How does my own brand fit into all of this? And how do I compete online if that's where new diners are? Grubhub's platform, with its unique focus on connecting restaurants and diners, helps restaurant owners answer these questions and navigate the transition to online, accessing new pools of diner demand, growth, and profit. Our comprehensive approach to partnership is clearly resonating with restaurants. We added more new restaurants to our network in the third quarter than any other quarter in the history of Grubhub. Our diners now have over 95,000 restaurants to choose from, including several thousand Taco Bell and KFC locations, which have joined our platform over the last couple of months. I'll talk a bit more about how we plan to capitalize on our growth momentum and extend the reach of our network even further. But first, I'll go through a few highlights from our record third quarter results. After that, I'll turn the call over to Adam, who will walk you through the P&L, our expansion and advertising plans for the fourth quarter, and some updated thoughts on our outlook. Grubhub generated 416,000 DAGs in a historically slower third quarter, growth of 37% year-over-year, up from 35% year-over-year growth in the second quarter. Stripping away all of the impact from acquisitions, this is our best quarter of growth in a year and a half. The success we've had this year with expanded marketing is driving outsized growth in new diners. And while new diners are a small contributor to order volume in any given quarter, the cumulative effect of our new diner success is beginning to translate into a meaningful increase in orders. This robust order growth translated to net revenue of $247 million, up 52% year-over-year, and up 3% from the second quarter. GAAP net income was $23 million, up 75% from $13 million in the prior year. Adjusted EBITDA in the third quarter was $60 million, up 41% year-over-year. Adjusted EBITDA per order was $1.57, up 3% from $1.52 in the prior year. In support of new restaurant growth and our broader Yum! partnership, we've already launched delivery in more than 100 new markets in 2018, putting us ahead of our target for the year. With DAGs in these launch markets scaling well, even before launching Taco Bells and KFCs, we see an even bigger opportunity in broadening our delivery coverage this year. We are moving quickly in the coming quarter to further invest in network expansion, positioning us to accelerate the shift of offline orders online and extending our runway for growth. Adam will discuss more details later on. We ended the third quarter with 16.4 million active diners, growth of 67% from the prior year. We added almost 800,000 active diners sequentially, a record in what is typically a slower seasonal period for us. As the quarter progressed, we saw increasing success with our marketing spend, and consistently strong diner quality allowing us to deploy an extra $3 million to $4 million of spend relative to the plan. This additional spend drove notable acceleration in new diner growth for the quarter, increasing each successive month. Our ability to increase spend effectively, despite our larger base is the result of many longer term efforts coming together at once. Broader logistics infrastructure has allowed us to add restaurant inventory in many areas we simply couldn't before. Greater geographic coverage, coupled with more selection and density in existing major markets improves the effectiveness of our marketing spend. As more diners download the Grubhub app or land on the Grubhub home page, the user experience is far better than any we've offered before. And finally, our exceptional service levels and the most competitive diner fees in the industry convert new diners into habitual users, generating healthy streams of future orders and profits. With over 180 markets currently served by Grubhub Delivery, awareness building in Tier 2 and Tier 3 markets, and thousands more Taco Bell and KFC locations expected to join our platform in the coming months, we believe we have the opportunity to further accelerate our growth rate. With all of these tailwinds, we have a great opportunity to invest behind the strong momentum we are seeing. As a result, we plan to invest $10 million to $20 million in incremental marketing spend in the fourth quarter. We will deploy this broadly across many of our channels, including digital, TV, and promotional offers. Very little of the incremental is committed. Our plan is to increase spend in channels where scale is working, but hold when we see ineffective incremental investment. As we have repeatedly seen, effective investment in core diner growth builds the foundation for DAG and profit growth for years to come. Further enhancing the breadth of our marketplace, we announced the proposed acquisition of Tapingo in September. Tapingo is a leading platform for campus food ordering, enabled on campus cafes, restaurants, and cashierless stores to accept online orders seamlessly, leveraging direct integration into college meal plans and in-store restaurant technology. Put another way, imagine college students ordering on Grubhub using meal plan dollars instead of a personal credit card. The acquisition of Tapingo will open up more new growth channels for us, positioning the Grubhub brand front and center in campus life for over a 500,000 active diners across 150 universities. Exposing these diners to the Grubhub brand and marketplace early in their lives will allow us to build relationships with those diners that we will keep as they leave school and become Grubhub diners wherever they land. We leveraged a similar strategy very effectively with our campus food acquisition over five years ago. We closed our previously announced acquisition of LevelUp on September 13, welcoming their employees to the Grubhub family and bolstering our restaurant technology effort substantially. While the LevelUp team will continue to make progress on their own initiatives, roadmap and restaurant partnerships, they are also already building new, robust POS integrations for restaurants on the Grubhub platform. These integrations will ease the operational hurdles of accepting online orders for existing restaurant partners and make it easier for new partners to join our marketplace, reinforcing the value we offer both restaurants and diners. We outlined our plan to sunset the Eat24 brand and migrate their diner base to Grubhub on our prior call. On October 1, we began this effort, encouraging anyone who visits the Eat24 site or app to try the Grubhub brand instead, driving a gradual initial shift in ordering habits towards Grubhub and away from Eat24. We will continue this process through the fourth quarter, with the final sunset occurring in the next six months. Finally, some bittersweet news. We are very proud to announce that Stan Chia has accepted an offer to become CEO at a local private company outside of our space. We are very excited for Stan as he takes the next step in his career. I want to thank Stan personally, and on behalf of the team, for helping us grow our restaurant network and build our delivery capabilities, and also for leaving us with a truly world-class operations team. We are excited to execute our growth plan for the fourth quarter, with multiple tailwinds, improved marketing effectiveness, increased marketing investment, more market expansion, and rapidly growing restaurant selection. We believe our efforts will yield more growth, not just now, but for quarters and for years to come. I look forward to giving you an update on our progress next quarter. And with that, I'll turn the call over to Adam.

[Adam J. DeWitt:]

Thanks, Matt. Our operating and financial results are clearly validating the strength of Grubhub's business model. There's a massive shift taking place, moving take-out ordering from offline to online. Our strategy focusing on connecting restaurants and diners is attracting and retaining millions of diners, while driving billions in sales to local restaurants. And we've demonstrated that we can provide delivery in an economically sustainable manner, allowing us to provide the most comprehensive restaurant marketplace. In short, as Matt's comments indicated, we are very encouraged by the trajectory Grubhub is on right now. The third quarter is typically our weakest quarter seasonally. But by a number of measures, it was Grubhub's strongest quarter ever. For active diner growth, this was clearly the case. Active diners increased organically by almost 800,000 sequentially to end at 16.4 million. To put this figure into appropriate context, our next largest quarterly add was just over 600,000. Matt talked about the increasing efficacy of our advertising, which enabled us to spend more than we had originally forecast in the third quarter at a very attractive return. We saw the ability to scale across most of our marketing channels without sacrificing quality at higher levels of spend. In fact, similar to last quarter, we acquired more diners at a lower cost and stable quality despite spending roughly 60% more on advertising than the prior year. This strength in new diner acquisition was broad from our most mature markets to our newest. As Matt noted, in addition to advertising, product improvements and restaurant selection also contributed to the robust new diner growth we saw in the quarter. But a surprising additional catalyst has been the new Grubhub Delivery markets we launched to support our Yum! partnership. We have now launched delivery in more than 100 markets this year in order to cover Taco Bells and KFCs across the country. Without much heavy-lifting, these markets have been driving high quality new diner growth, even prior to Taco Bells and KFCs going live. Momentum in these markets has been so good and we have accelerated our investment in Grubhub Delivery market launches to take advantage of latent demand. As expected, all this high quality new diner growth has translated into higher order growth. We processed 416,000 orders on the platform last quarter, a 37% increase from the third quarter of last year, and a smaller than expected 1.7% decline from the second quarter. For context, we typically expect a mid to high single digit sequential decline from the second quarter due to seasonality. Excluding Eat24, DAG growth was 21% year-over-year. When we strip out any additional impact from Foodler and OrderUp as well, organic order growth accelerated for the fourth consecutive quarter, with year-over-year growth roughly 300 basis points higher than it was in the second quarter. Gross food sales for the quarter were $1.2 billion, 40% higher than the third quarter of 2017, and roughly flat with the second quarter. Gross food sales growth, excluding Eat24, accelerated to approximately 23% year-over-year. Third quarter net revenues were $247 million, up 52% from the prior year, and 3% higher than the second quarter, up 34% when excluding the impact of Eat24 and LevelUp. Net revenue, as a percentage of gross food sales, was 20.4% during the quarter, up from 19.6% in the second quarter and 18.8% last year. As with recent quarters, the increase is due primarily to a mix shift towards more Grubhub delivered orders compared to orders delivered by the restaurant. We continue to see a small but steady increase in rate due to restaurants opting to pay more for more impressions on our network. Operations and support expenses were $112 million, a 71% increase year-over-year compared to $65 million in the third quarter of 2017. This was driven by increased delivery orders, the underlying growth of our order volume, and the inclusion of Eat24 orders. As we've explained in the past, we expect this line item to grow at a faster percentage rate than revenue, given the mix shift towards more Grubhub delivered orders. Last quarter, we highlighted revenue per order less ops and support costs as a reasonable proxy for overall delivery efficiency. According to this calculation, this figure for the third quarter was roughly in line with the second quarter. As both Matt and I have highlighted, we've been expanding new delivery markets aggressively in support of the Yum! partnership. In the early part of a market's lifecycle, driver operations are, of course, inefficient. Driver recruitment and on-boarding costs are higher, and we need to maintain a driver supply buffer to ensure a positive experience for early diners as market demand ramps. What you are seeing in the third quarter results is actually the combination of an increase in driver cost per order from these new markets, offset by a decrease in driver cost per order from our more mature markets. While temporarily more costly to operate, these new markets have been a fantastic source of growth for us, with high quality new diners coming for Yum! restaurants and non-Yum! restaurants in those markets. To take advantage of this, we have accelerated our Grubhub Delivery market rollout plans and will see a short-term decrease in overall driver efficiency as we ramp volume in these markets. Investing now will maximize long-term growth. I will go into more detail in this investment a little later. Sales and marketing expenses were $49 million during the third quarter, a 41% increase year-over-year and a 7% increase from the second quarter. In my comments last quarter, we guided to roughly flat marketing spend compared to the second quarter. However, given the effectiveness of our spend and the quality of the new diners we have been bringing in, we increased our level of spend opportunistically. You can see the impact in the growth of new diners during the quarter. Heading into the fourth quarter, we are excited to see even greater opportunities to acquire new diners at a reasonable cost. As with the new delivery market investment, I will go into more detail later in the call. Technology costs were $21 million in the quarter, 49% higher than a year ago, and up 14% sequentially due to continued investment in our tech and product teams, plus a small impact from including the LevelUp team. Depreciation and amortization was $21 million for the quarter, 66% higher than a year ago and 6% higher than last quarter. Most of the growth in this line item is due to the acquired intangibles from the various acquisitions over the last year, including LevelUp this quarter. G&A costs were $22 million during the quarter and included roughly $3 million in costs related to our acquisitions of LevelUp and Tapingo. Core G&A costs were up slightly compared to the prior quarter. GAAP net income was $23 million compared to the prior year of $13 million. Net income per fully diluted common share was $0.24 on approximately 94 million weighted average fully diluted shares. Growth in net income is inflated by the excess tax benefit of stock based compensation, which created an income tax benefit in the quarter. We still expect our go-forward tax rate to be approximately 28% to 29% before any additional impact from stock-based comp, which is very difficult to forecast. Non-GAAP net income was $42 million or $0.45 per fully diluted common share, compared to the prior year of $25 million or $0.28 per fully diluted common share. Adjusted EBITDA for the third quarter was $60 million, an increase of 41% from $43 million in the same quarter of the prior year. Adjusted EBITDA per order was $1.57 in the third quarter, up 3% year-over-year, but down sequentially, mostly due to seasonality and our investment in marketing. On September 13, we used approximately $373 million in cash to close the acquisition of LevelUp. We ended the quarter with approximately $310 million in cash and equivalents, $300 million in debt, and $50 million in committed but unused capacity on the credit line. Throughout the call, Matt and I have been talking about increasing investment in the fourth quarter to maximize growth. The reality is that we are investing in growth all the time. Marketing, product, restaurant network, and delivery capacity are some of the more obvious areas. We will spend easily more than $200 million on growth-related initiatives in 2018. That we can generate significant profit per order while maintaining an aggressive growth posture is a testament to the strength of the business model. If we are trying to optimize for cash flow, our EBITDA per order would be significantly higher than the $1.75 peak we recorded last quarter. This quarter, we're stretching our investment in two growth channels. One, the rollout of new Grubhub Delivery markets; and two, marketing spend. As a reminder, when we launch new markets, there are very few capital expenditures. The bulk of the cost or investment is building a supply of drivers and making sure drivers are available to deliver orders, even if the volume is insufficient to balance supply and demand until orders reach critical mass in that market. These costs show up in our ops and support line as operating expenses. While these markets are inefficient when we launch, we have found that Grubhub Delivery restaurants drive additional demand and additional diners, creating liquidity and driving down ops and support costs per order over time. Based on current plans, we will have launched delivery in more than 200 new markets in 2018, with approximately 100 from October to December alone. This dramatically expands our ability to provide the most comprehensive restaurant selection, and will translate into new and higher quality diners. The total investment associated with providing sufficient driver capacity in these additional launch markets will be approximately $10 million in the fourth quarter. That means that the ops and support line will be roughly $10 million higher than it would have been because of extra capacity in the launch markets. We currently expect to start gaining some efficiency back in these markets early in 2019. This investment is not unlike when we first launched delivery in the second half of 2015, saw depressed EBITDA per order in the third quarter of 2015, and then steadily recovered to reach a record high in the second quarter of this year. We are also planning for an increased investment in marketing during the fourth quarter. We believe this is a great time to increase spend for a number of reasons. First, we have been slowly increasing our spend all year, and it's actually increasing effectiveness as we've spent more. Second, our restaurant network is better than ever, due to the Grubhub launch markets and adding thousands of Taco Bells and KFCs. Third, our product has improved dramatically over the past few years. And finally, the fourth quarter is typically our strongest for new diner acquisition because of weather and school schedules. We currently anticipate spending somewhere between $10 million and $20 million more in marketing than was previously baked into our guidance for the fourth quarter. This includes some incremental discount offers that show up as contra revenue. The range is intentionally broad as we plan to be opportunistic based on what we are seeing in the market. Our framework for success will be the same as it has always been, attracting high quality diners at a reasonable cost, with CPA comfortably below LTVs. We plan on being aggressive, but as Matt noted, have committed very little of the new spend and will only be at the high end of the new range if we find quality opportunities. It's very possible we spend at either end of the range depending on the data we are seeing. The data will also help us determine our 2019 marketing plans, which we will talk more about after the fourth quarter. To some degree, we believe these incremental investments and launch markets in marketing complement each other very well. As we roll out more markets, our marketing efforts, in particular TV and easy-to-launch digital programs drive growth at a very reasonable cost and without much heavy-lifting. The increased marketing helps drive volume, which will help the new launch markets get to efficient scale more quickly. To be clear, our long-term strategy is to grow profits per order over time. However, we see unique opportunity to create substantial long-term shareholder value by making this investment now. Before I detail our guidance, I wanted to give some insight as to the impact of LevelUp, which closed on September 13, had on our financials. It contributed roughly $2 million in revenue and less than $1 million drag on EBITDA. Baked into our guidance for the fourth quarter is a little less than $10 million in revenue and $2 million to $3 million negative impact to EBITDA. We have also excluded operational metrics from LevelUp, given the substantial difference in their business model. As Matt noted, the relationship is already creating value for us through POS integration work, and we believe we will unlock even more value through more complete product offerings for restaurants. We have not included Tapingo or the acquisition of incremental OrderUp markets in our guidance as those transactions have not yet closed. We expect them both to close in the fourth quarter and have a de minimis impact on fourth quarter results. We are setting fourth quarter revenue guidance at a range of $283 million to $293 million, which is an increase from the implied guidance of $262 million to $271 million from our second quarter call. This roughly $20 million increase is split pretty evenly between the LevelUp impact and higher than expected growth in order volume based on recent trends. As a result of this growth in the aforementioned investments, we are setting fourth quarter EBITDA guidance at $40 million to $50 million. This is roughly $25 million lower than our prior implied guidance. This includes the $10 million to $20 million investment in marketing, the $10 million investment in new delivery markets, and the $2 million to $3 million investment in LevelUp, partially offset by increased orders from stronger organic momentum. With that, Matt and I will take your questions. Operator, please open up the lines.

[Operator:]

Thank you. Your first question comes from the line of Ralph Schackart from William Blair. Your line is open.

[Ralph Edward Schackart:]

Good morning. Two questions, if I could. During the call in the prepared remarks, you talked about better restaurant selection, an improved ordering platform, and more strategic marketing driving higher quality diners. Can you give us some perspective if one of those categories is having a greater impact? First question. Second question. Some perspective also on how the cohort behavior of the new diners coming in is comparing to your older cohorts? Thanks.

[Matthew M. Maloney:]

Hey, Ralph. It's Matt. So, yeah, we listed all of them because, frankly, they're all having a big impact on the numbers we just posted. So, I mean growth was tremendous, as you can tell. A lot of it is because, over the course of the year, the marketing has actually been getting better. It's not just the messages, which we have been refining throughout the year, but also the channels. We have been doing a lot of A/B analysis on different channels, on different tweaks to the channels. We continue to optimize that. And as that's optimized, it's being leveraged across many, many more markets. So it's not just the number of restaurants, as you mentioned. It is the number of restaurants in the current markets. But it's also the acceleration of the new delivery markets in advance of the Taco Bell and KFC rollouts that we're seeing a tremendous amount of growth. So, when we planned on just the orders from the Taco Bells and KFCs and some of the brand new markets that we launched, we were able to get in there aggressively, sign up a bunch of local independent restaurants, amortize the overall cost of the delivery, and get a lower incremental cost as we went forward. So, it's the new markets. It's more restaurants in our existing markets. And then, as you noted and we said on the call, obviously the product continues to get better. The conversion rates continue to get higher. The lifetime value continues to get higher. The repeat purchase continues to get higher. And the new diners continues to, frankly, to scream. I mean, 70% year-over-year was really impressive. I'm very proud of the team. So, I think it's all of that put together. And based on the results that we saw in the third quarter, and not just the results, but the acceleration of investment and the continued increase month over month in the third quarter, we're very excited about pushing much more aggressively on the gas in the fourth quarter, and it's because of all of those elements working together.

[Adam J. DeWitt:]

Yeah, and Ralph, in terms of the cohorts and what we're seeing, I think the answer follows pretty closely to what Matt was saying, right? So better restaurants, better product, better reach, better service, right, is all leading to better and more valuable cohorts over time. So, that relationship that we've talked about, or dynamic that we've talked about for many years where the cohorts are growing in value over time still holds. And I'd add that if your question is more about the newer cohorts, we're obviously really encouraged. I mean, we talked about in the call how we've been increasing our marketing spend throughout the year, and the reason that we've been doing it is because we see the value or the quality of the diners being very stable. But just being able to ratchet up our marketing and continue to have really high value cohorts, and it's because of all the things that Matt talked about.

[Ralph Edward Schackart:]

That's helpful. Thanks, Matt. Thanks, Adam.

[Operator:]

Your next question comes from the line of Ron Josey from JMP Securities. Your line is open.

[Ronald V. Josey:]

Great. Thanks for taking the question. Two, please, if possible. So, maybe, Adam, on the $10 million investment delivery in the fourth quarter on new markets, can you just talk about how improving efficiency works here? How quickly you can get back to maybe that $1.75 per order. And I guess I'm just asking about the investments now. And then maybe how many quarters do you think you actually see efficiency for these markets to become efficient? Or perhaps a better way of asking that is just, you talked about lower cost per order in existing markets, and just wondering maybe the delta between the two? So any insights there. And then secondly, on Taco Bell and KFC, I think, Matt, you mentioned a few thousand on the platform. Have you begun co-marketing this quite yet? And if not, any insights on timing on the co-marketing. What it might look like, if you test any specific messaging and curious how the demand's been thus far. Thank you.

[Adam J. DeWitt:]

Yeah, how you doing, Ron? So, the first question, the $10 million delivery investment. So, as we talked about on the call, and as I've talked about in the past, the $10 million is really an investment in extra capacity and building capacity ahead of demand. And the reality is that the markets that we're going to, right, we originally talked about going to 100 new markets in 2018. We've now pushed that up to 200. And so we're adding a lot more capacity quicker than we would have, right? So the $10 million in capacity that we're adding in the fourth quarter, we probably would have added over the next year or two and rolled out those quarters anyway, and we're really just accelerating. In terms of how we get back or when we get back, I think I mentioned in my remarks, so we expect to start seeing some efficiency early in 2019. If you think about this $10 million specifically, you're really – of the EBITDA per order impact, it's really about a $0.23, $0.24 impact in the fourth quarter and we expect that to shrink over time. I'm not sure if we get all $0.23 back next year, but we very may well do so. I think next year overall, the EBITDA per order, we also have to think about the marketing spend. Of the $1.75, $1.57 in the third quarter, of that reference, the marketing impact is a bigger impact in the fourth quarter. And like we said in the call, we're going to see how things go in the fourth quarter, and let that impact, or let that guide how we think about 2019. But we expect to see some improvement in that EBITDA per order over the course of next year for sure from that delivery investment.

[Matthew M. Maloney:]

And hey, Ron, about the Yum! co-marketing, we have thousands of restaurants live already. And there is many more thousands coming on by the end of the year. So, we want to make sure we have as many locations live on the platform and taking orders integrated in their POS as possible before we really start driving the marketing. We've definitely been doing a lot of testing. We've been working with some specific franchisees in different markets to push their franchise locations where they have fully integrated, and those individuals want more orders. We've also been doing a lot of testing with the national brands around what works, what channels, is it more social, is it TV, is it display? So there's a bunch of things you might see end market that we're playing around with, but that's really to measure effectiveness. So when we're ready to go strong in 2019, we're going to nail all the right channels at the right time.

[Ronald V. Josey:]

That's great, thank you. Adam, can I just follow up? Is it 200 new, like, total 100 new delivery markets in addition to the 100 new? Or is it 200 total? Thanks.

[Adam J. DeWitt:]

200 total. 100 additional from what we talked about earlier in the year.

[Ronald V. Josey:]

So it'll be 280 in total at the end of the year?

[Adam J. DeWitt:]

Roughly, yeah.

[Ronald V. Josey:]

Thank you very much.

[Operator:]

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

[Heath Terry:]

Great. Thanks. Obviously, a lot of headlines here recently around some of the competition in the space and the numbers in growth that they're seeing. I just want to get an update on your view of that landscape and what impact, if at all, you think it's having on cost of customer acquisition or cost of labor acquisition. And then just as we think about the next 100 market, is there a way that you can sort of scale those for us just in terms or quantify in terms of the size of those markets relative to the last 100 or this current 100 that you're launching or the size of the existing markets that you're in? Thanks.

[Matthew M. Maloney:]

Hey, Heath. Happy to comment on the competition, as always. I think that we've seen a lot of competitors enter the space obviously build out platforms, but we still haven't seen the entry of any competitor impact our growth in any of our markets, and we actually see more opportunity now than ever. I mean, that's part of this investment. It's almost like the classic Starbucks case, where Starbucks comes in and everyone sees more business. It's bringing awareness. I think that we're seeing an accelerated transition from offline to online in our space. I think you're seeing more diners receptive to using their mobile devices to order dinner, and I think everyone is benefiting from that. And that's part of why we're seeing and you asked me about CPAs. We're seeing CPAs decrease overall over the year, which is fantastic. Adam mentioned earlier that we're seeing very stable cohorts, and we're seeing the cost of acquisition decrease. We're seeing the lifetime value overall go up, and that's why we're so aggressive right now to push the big marketing investment but also the markets because the markets are driving a lot of this growth as well. And I don't think we've seen any impact to labor cost acquisition from competitors. I think it's pretty standard. And we haven't even seen it change as our growth has scaled in many markets. So, I mean, as I say, every time when somebody asks me about competition, we believe we still have a significant structural advantage. We're known for only one thing, which is take-out ordering, and we back it up with incredible support. And we have the lowest diner-facing fees. I think the transactional cost is a big deal here, and over time as there's more platforms, whoever has the lowest fee to order is going to win. Whoever has the most restaurants, which is clearly us at this moment, and the lowest transactional fees, which is also us, I think has the longest term advantage in this market.

[Adam J. DeWitt:]

And then, Heath, I'll answer the 100 market question, but just one last thought on Matt's comments about the competition and affecting our ability to grow. So, we talked about in the script about acceleration and organic growth of 300 basis points. It was probably a little higher than that. And I think it's important to note that we saw that acceleration in all of our markets, right? So whether it's markets that we've been in a long time, like New York or Chicago, markets we've been in a little bit of time, like Dallas or Houston, or markets that we've barely entered, like Portland, Maine. So, we're seeing acceleration across the board. And particularly those newer markets have accelerated even a little bit more than the more mature markets. In terms of the delivery market expansion in those 100 markets, I mean, look, obviously as we get farther down the list in terms of markets that we're launching, and they're clearly going to be smaller relative to the CBSAs that we launched delivery in earlier, right? So those last 100 are definitely smaller. But, as we've talked about, when you have a $200 billion market opportunity, even the smaller markets can contribute in a meaningful way over time. So, we think it's valuable to go to them now and start planting the seeds for future growth.

[Heath Terry:]

Great. Thank you.

[Operator:]

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

[Jason Helfstein:]

Thanks. I guess two questions. So, given that you're saying the investment is not driven by increased competition, and you're justifying that by basically saying CPA was down in the quarter year-over-year, does this mean, when you put this all together, that we should be thinking about organic growth accelerating next year? I mean, we're not asking you to give specific guidance, but the point being that 37% organic growth, just any color around that. And then, secondly, can you talk about the timing of new product offerings that relate to LevelUp? And do we need to think about increased R&D next year as you support the software platform broadly?

[Adam J. DeWitt:]

Yeah. So, Jason, I'll take the first question on the organic growth. So, we're not guiding yet for 2019. But I think the best answer to that question is we saw acceleration in the fourth quarter. I'm sorry, in the third quarter. And as a result, we're pressing the gas down in the fourth quarter, right? I think our guide, if you look at our guide, it implies a higher growth rate than either the first quarter or the second quarter. I think at the midpoint, it's at least on par with the third quarter in terms of order growth. And so, we're seeing an opportunity to drive more growth. In terms of what exactly you should bake in for 2019, we'll talk more after the fourth quarter. But we certainly see a very strong trajectory right now. You saw the new diner adds accelerate. Net adds grew by almost 200K more than the next biggest quarter that we had. And so, if you maintain a steady new diner increase, over time that drives more growth. And so, that's why we're investing in the marketing and the delivery markets now.

[Matthew M. Maloney:]

Hey, Jason, I can comment on the LevelUp product integration timing. So our immediate plans don't call for integrating the experiences of LevelUp and Grubhub. There's definitely going to be some cross-sell opportunities on the restaurant base. But the near-term main value of LevelUp is going to be the POS integrations that the LevelUp team is already enabling for us aggressively. So when you think about the product suite overall, the real value is in partnering with restaurants, partnering restaurants especially the larger enterprise brands to build out their own branded channel. And maximizing growth in legacy product is not really our ultimate goal. In terms of R&D expense, I don't think it's going be pretty de minimis. But I would say – think about LevelUp as a massive increase in our tech and product teams with extremely strong and relevant product experience, with an ancillary product that generates revenue to cover expenses. And I would actually add one thing about LevelUp to what Heath was asking a minute ago on the competitive situation. LevelUp is all pickup. All of its orders are pickup. And so, we see a lot of potential synergy with applying delivery capabilities to such a large pickup marketplace. And we're the only player that has an aggressive pickup pipeline. We see pickup as a giant opportunity, potentially nearly half of the $200 billion market cap – or the TAM that we keep talking about. And a big part of that and a big part of our plans to address that opportunity is the LevelUp acquisition and its Tapingo acquisition.

[Adam J. DeWitt:]

And then, Jason, just to make sure what Matt is saying is clear. So, I don't think we'll see an increase from where we are, but just combining LevelUp – just folding LevelUp team and the Tapingo team when it closes into our existing infrastructure is a ramp in the R&D in and of itself, right? So the expenses that you're going to see from LevelUp is, in part, an investment in R&D. The great thing about it is, as Matt pointed out, they have an ancillary product that's already essentially funding that R&D.

[Jason Helfstein:]

Thank you.

[Operator:]

And our next question comes from the line of Brian Nowak from Morgan Stanley. Your line is open.

[Brian Nowak:]

Thanks for taking my questions. I have two. Just to sort of drill into the marketing investment a little further. Understanding overall acquisition costs are falling, but can you maybe just talk to what you're seeing for customer acquisition costs in some of your newer markets? And what metrics or KPIs are you monitoring, you can help us understand just so that we can have a higher degree of confidence that the incremental unit economics in these new markets are not going to be lower. And then just as sort of a follow-up to that, you've talked about kind of EBITDA per order across the different mature markets and things. Can you help us on a range so what does your EBITDA per order look like roughly in your core six as opposed to mature delivery and then the newest delivery markets? Thanks.

[Adam J. DeWitt:]

Hey, Brian. It's Adam. So, I think I can handle both of those. In terms of the marketing and how we're thinking about it, just to take a step back. The way that we've always talked about the difference in CPAs across markets is that they've been relatively similar. The difference is that in more established markets, we can spend more at the same CPA levels, right? So, in newer markets, we may have to take a broader approach and limit it to the national advertising supporting SEM. And in more mature markets like New York, you may see us wrap subways and do billboards and even support with local TV at times. And so, it's really about how much we can spend rather than an increase in the CPAs. We do look at – in terms of what we're looking and how we're thinking about ratcheting up that investment, and where we end up being comfortable, we're looking at the CPAs and then we're also looking at how those diners perform over a short to medium time horizon to get an idea of their LTV. And just to be a little bit more specific, we had a pretty good read on a cohort of diners even after seven days. And we get an even better view of those diners after 15 days. And we're pretty good at projecting out based on the repeat behavior that we're seeing in those time periods, what their LTVs are going to look like. And so, when we see opportunities where CPA is significantly below the LTV, and we feel like we can spend more, we push. And then we continue to watch that in an ongoing cycle, right? It's an ongoing process. And we test in the different channels, different messages, et cetera, et cetera. And so that's the approach that we're taking in terms of figuring out kind of where that investment in the fourth quarter ultimately lands. In terms of EBITDA per order, I don't think we really differentiated EBITDA per order by market. I think that from an operational perspective, most of the costs or a lot of the costs, incremental costs are shared, right? And so the EBITDA per order is very similar. I think the big difference is in highly concentrated and we've talked about this before, in markets like New York, Chicago, Boston, where we have a lot of restaurant inventory and a lot of diners, there's a naturally higher commission rate on the marketplace because restaurants value impressions more than in markets that are earlier and haven't developed as much. And so, that's the real difference. But from a service perspective, excluding delivery, the costs are very similar, right? I think delivery is a little bit of a different story where very new markets have a higher cost, which is what we're talking about in terms of the $10 million. But overall, bigger markets and smaller markets, we've been able to balance pretty well over the last couple of years. So, you see a similar delivery cost per order in a Chicago as you do in a market where we're doing less volume, like a Dallas.

[Brian Nowak:]

Got it. So, markets with more delivery mix do have a lower EBITDA per order then, just because if you include the delivery cost?

[Adam J. DeWitt:]

So, excluding the $10 million delivery investment, I don't think that's – I think that we're roughly equivalent. And this is what we talk about kind of going into the end of 2017, beginning of 2018 where we've reached kind of this economic parity, right, where we're generating enough incremental revenue from delivery itself to offset the delivery costs. So the EBITDA per order in those markets is relatively similar once you exclude the investment that we've highlighted separately, right?

[Brian Nowak:]

Got it.

[Adam J. DeWitt:]

Like, if you back out the investments that we're talking about this quarter, you're at an EBITDA per order that's higher than the third quarter, overall.

[Brian Nowak:]

Right. Right, in 4Q. Yep. Okay. All right. Thank you.

[Operator:]

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

[Matthew DiFrisco:]

Thank you. I just had a couple of questions. Did you guys detail how much the delivery was of the GFS or how much that is on a run rate basis? And then I just had a question with respect to the Yum! marketing. Is that, since you're going faster in the markets and you're now going to be 280, presumably the support of marketing dollars, I would think would be coming faster than originally planned in partnership with Yum! Would that be coming – can you give us some timetable of when that would be introduced?

[Matthew M. Maloney:]

Hey, Matthew. So, we're on track current run rate of $1.6 billion annualized GFS. So, in terms of the Yum! co-marketing, I think that we're still targeting 2019. Is it going to be Q1 or Q2? I think we're going to make sure we have the right number of franchisees live. I mean, we definitely have plans, and we're accelerating as fast as we can, because clearly we're seeing a lot of opportunity, and especially in these deeper growth markets. It's part of why we're launching 100 new markets in the fourth quarter, which is extremely aggressive. But we know there's that many more, not only Yum! franchisees out there in these markets, but also other major enterprise partners that we're still piloting with and will be going live with. And also, we haven't talked much about the Tapingo acquisition, but they have more than 150 major university markets where they facilitate the meal plan dollars through their network. And I think that the more markets we can deliver in faster, the better we're going to be able to leverage not only our enterprise relationships but also our recent acquisitions.

[Matthew DiFrisco:]

Excellent. And then I guess just to follow up that 100 markets being pulled forward in the fourth quarter, is that an indication then that there would be a breather a little bit in 2019, and you'll build into getting leverage off of the overall 280? Or is that pace of acceleration in new markets something we should expect also to continue into 2019, first half?

[Adam J. DeWitt:]

Yeah, so I talked a little bit earlier, I think we had a question about the leverage. We expect to start seeing leverage in the first quarter. We haven't mapped out the rollout plans, but we've obviously accelerated a lot of our expansion plans into the fourth quarter. So I expect to see that – we expect to see that come down and get some leverage early in 2019.

[Matthew DiFrisco:]

Excellent. Thank you.

[Operator:]

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

[Jeremy Scott:]

Hi, thanks. Just two bigger picture questions in light of the accelerated investment. I think given that you're clearly seeing organic top line return from your prior investments in marketing delivery, just stepping back a bit, it seems like we're at this point in the cycle where your major restaurant partners are exiting the trial mode and entering active engagement and your active diners we're seeing all these new delivery options all at once, so just looking forward into the next couple years, how wedded should we be to EBITDA per order growth? If anything, isn't it reasonable to think as long as you're seeing such strong organic order growth that whatever efficiency gains that you may see in 2019 that you're just going to plug that back into the system and step even harder on the gas pedal given where we are in the cycle?

[Adam J. DeWitt:]

Yeah, I mean, we need to think in aggregate, right? Are we adding more value to shareholders over time by investing? And so that's what we're thinking about, right? We obviously think in the fourth quarter, right, spending the $10 million to $20 million in marketing to accelerate growth over what it would have been is a clear winner for shareholders over time. And accelerating that $10 million in delivery investment will also accelerate growth over time. And in both cases, I think the math works out very well. I think, as I mentioned in the remarks, it's about what happens and what do we see in the fourth quarter. How many diners can we add, what pace can we add, and what the value is. But it kind of all goes into the equation, right? And thinking about EBITDA per order is one metric, right? Thinking about the delivery efficiency is another metric. It kind of all goes into the math. And so, we have to figure out how to maximize the value for shareholders, right? If EBITDA is slightly less, but it's a lot more orders, right, you take that trade every time. And so that's how we're thinking about it. It's aggregate value. It's not necessarily just maximizing EBITDA per order. I think that was clear in the earlier remarks, right? If we're trying to maximize EBITDA per order, we'd be well above $1.75, which is our high watermark.

[Jeremy Scott:]

Right, okay. And Matt, you started the call with a number of questions that your restaurant partners ask you or ask themselves. And I think just going back a couple of quarters ago when I asked why restaurants chose Grubhub over others when you take scale off the table, I think you had answered that we can't exactly dismiss scale, but given some of the acquisitions that you've made that have upgraded the sophistication of the platform and that has changed your relationship with the restaurants, and that will evolve over time, do you still maintain that view especially as your competitors seem to be increasingly willing to sacrifice economics and explore other verticals?

[Matthew M. Maloney:]

No, I think that my perspective on competitive differentiation has definitely evolved. I mean scale earlier was absolutely in our favor. And as you point out, as other people are more willing to sacrifice basic profitability and unit economics in order to achieve scale and come to build a network that would rival ours, I think you have to think on a longer term basis about what are the fundamental drivers in the industry? And so you think about the $200 billion that's spent and you think about where it's spent and how it's spent, and then you start talking to restaurants. And this has been pretty interesting as I talked to a lot of restaurants. And that was what I was communicating in the first part of my comments, was that restaurants are increasingly frustrated. Management teams don't really know where to go. Because on one hand, they want to own the store, and they want to build out the technology, and they want to pay zero incremental fee on orders, but that's not realistic. I mean, spending anywhere close to what we're spending on an annual basis on a product technology budget. And then to support that over time, as it grows dramatically is not realistic in the world of restaurant management. And so the other option is, you partner with a bunch of platforms and you see how much growth you can find while the platforms support that growth. Which is reasonable, except for then you think you basically have a 30% toll on all of your future growth. And what does your P&L look like when, in the foreseeable future, more than half of your revenue is coming from digital, of which you're paying this tax on. And that's also not a sustainable situation. So, they're frustrated. They're trying to figure this out. A lot of the insight we've been gaining from our Yum! relationship with RD being on our board, better understanding the nature of what it's like to run a restaurant that's been really beneficial. And so, you can tell a market shift in our acquisitions from just scale to strategic product fits that continue to increase what we're able to do for our restaurant partners. So when you think about LevelUp, I want to help build a branded platform for them. I want to support their pickup business. I want to support their CRM. And I want them to be able to tap into my network whenever they want additional incremental growth. And that's a way to create a sustainable long-term revenue model on a digital basis with a third party for restaurants. And I think that nobody else in our industry has figured that out. And we are absolutely pushing as hard as we can, not just to grow our marketplace, but to grow the way we're able to partner with restaurants and support their long-term business goals.

[Jeremy Scott:]

Thank you. That makes sense. Thanks.

[Operator:]

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

[Thomas Champion:]

Hi, guys. Good morning. Thanks for squeezing me in. I was curious if you could maybe just elaborate a little bit more on the opportunity with chain restaurants specifically, and how LevelUp maybe changes the partnership opportunity there. And I think you mentioned 125 chain partnerships last quarter. Just curious if there was any increase there. Kind of what you see as the opportunity there long-term. And then maybe just one last one for Adam. You've taken on some debt to do the M&A. Just curious how we should think about long-term leverage and cash on the balance sheet. Thank you.

[Adam J. DeWitt:]

Yeah, I'll start with the debt question or cash question, and I'll let Matt talk about the chains. So, in terms of the capital, I think we're thinking strategically about it. When I look at what we're generating in terms of EBITDA and our size, we certainly have capacity from a debt perspective. We haven't been shy about putting leverage on the balance sheet. I think it's all about making decisions at the right time, and balancing the need for dry powder and committed capital. And also figuring out the cost of capital calculation when you're thinking about funding acquisitions like we've done over the past couple quarters. So, I mean, we have an appetite for debt. We have some on the balance sheet. I don't think we're looking to be a super high leveraged company. But I think our business model certainly supports it and we'll think strategically about how to best allocate our capital.

[Matthew M. Maloney:]

And then in terms of chains, so we're always adding new chain partners. We're not really commenting on this anymore. We wanted to give everyone insight into the meaningful partnerships we were building early on so that people could see the momentum and see the growth. But at this point, no one partner has a significant piece of our business, and it makes more sense to focus on the variety and the strength. But I'm happy to comment on LevelUp and the changing nature of some of those partnerships. Primarily, LevelUp is doing the POS integration for us. That's really why we acquired them. Outstanding technologists in Boston that are able to actually keep multiple integrations in parallel. It's really wonderful to watch. And then as you think about their fundamental business model, you can think about like a Potbelly, which is another great Chicago QSR where they rely on LevelUp to run their branded application, their website, their CRM programs. And it makes sense for Potbelly to execute in partnership with LevelUp. Potbelly is also simultaneously a customer of Grubhub where they tap into our marketplace when they need growth either in specific restaurants or across the board if they're doing something special. So, the ability to put those two products together and make it really easy for Potbelly to manage their digital customer base, to grow their customer base, and to have insight across the board as to what's going on with their digital customers is really beneficial. And that's how we're thinking about leveraging LevelUp in a go-forward way for some of our key enterprise partners.

[Operator:]

And our last question today comes from the line of Nat Schindler from Bank of America Merrill Lynch. Your line is open.

[Nat Schindler:]

Hi, guys. Just a clarification here. On the 280 markets that you were going to be delivering in by the end of the year, first, can you define a market? And also, can you give us rough scale of what percentage of the U.S. population does that cover? Or what percentage of your restaurants does that cover? I don't know what the right metric to look at there is, but it's just for clarification.

[Adam J. DeWitt:]

Yeah, how you doing, Nat? So the way that we're talking about those markets, you hit on a good point. There's a lot of ways to define them. The 280 is a CBSA number. And I don't want to get into the population percentage game per se, but I would say that it's a vast majority of the U.S. population, and virtually all of the major population centers are in that 280. And then past the 280, the ones – the additional CBSAs that we're talking about are much, much smaller. In terms of our restaurants, I think it's fair to say that there are very, very few markets where we have self-delivery only at this point. I think it's a very small fraction of our markets. After – once we roll out the additional 100 by the end of this year, it's a very small number of markets and I don't think there's any where we have a substantial presence and we don't have delivery.

[Nat Schindler:]

Okay. And just so suffice it to say we're not going to hear and we're doubling the number of markets again next year, because that's not going to be – you will have everyone basically at the end of this year?

[Adam J. DeWitt:]

Like, the ones that really matter from a size perspective, we will have, right? In terms of how many markets we launch next year, I don't know, but it's not going to be at the expense of the markets that – on a similar level of expense or investment as the markets this year by any stretch.

[Nat Schindler:]

Got it. Thank you.

[Operator:]

That does conclude today's conference. Thank you for your participation. And you may now disconnect.