Just Eat Takeaway.com N.V.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Good morning, my name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grubhub first quarter 2017 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, Head of Investor Relations, you may begin your conference.

[David Zaragoza:]

Good morning, everyone, and welcome to Grubhub's first quarter of 2017 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 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 filed as an exhibit to a Current Report on Form 8-K filed with the SEC. I'd like to take this opportunity to remind you that during the course of this call, we will be making 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on February 28, 2017, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 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 the call, we'll discuss non-GAAP financial measures in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. And now I'll turn the call over to Matt Maloney, Grubhub's CEO.

[Matthew M. Maloney:]

Good morning, everyone, and thanks for joining the call. 2017 is off to a strong start and I'm excited to share our progress. Capitalizing on our business and product transformations in 2016, we've become more aggressive in showcasing our improved platform to a wider diner audience than ever before. Our product is the most engaging and personalized it's ever been. Our brand is resonating strongly with diners, and our restaurant network is getting better in quality and quantity, most notably in Tier 2 markets. The numbers speak for themselves. In the first quarter, we added more Active Diners and more restaurants than ever before. We sent $10 million in takeout orders to our more than 50,000 restaurant partners every day. We generated close to 40% year-over-year revenue growth and increased our EBITDA per order by 10%. We're capitalizing on the enormous market opportunity and we're excited about what's ahead of us. Grubhub generated $156 million of net revenue in Q1 compared to $112 million last year. We saw our typical uptick in business in the first quarter, even with some abnormally mild and dry weather patterns across the Northeast and Midwest. Chicago, for example, had no snow in January or February for the first time since weather has been tracked. Nonetheless, our growth was deep and broad; 28 of our markets generated more than 1,000 DAGs, up meaningfully from 22 in the fourth quarter of last year. Net income was $17.7 million for the quarter, an increase of 78% from the prior year. Adjusted EBITDA was $43 million for the quarter, growing 32% year-over-year. Adjusted EBITDA per order was $1.46, up from $1.33 per order in the prior year. Over the course of last year, we have improved our delivery efficiency significantly, allowing us to invest in product and marketing, while simultaneously increasing our profitability. These investments will drive growth in diners, orders, and ultimately EBITDA. We ended Q1 with 8.8 million Active Diners, a growth of 26% versus the prior year. Our traction in Tier 2 and Tier 3 markets is strong, growing twice as fast as our Tier 1 diner base. This accelerating pace of diner growth was driven by our best quarter ever in Active Diner additions and highlights the success of our increased advertising in the first few months of the year, as well as the opportunity ahead of us. Given our performance year-to-date, we are optimistic about our ability to continue this high level of advertising throughout 2017 while maintaining high ROIs. We generated gross food sales of $898 million for our local restaurant partners in the quarter, an increase of 26% year-over-year. While adding new restaurants helps drive our gross food sales and diner growth, it also creates a rising tide that lifts all boats in our ecosystem, driving more orders to all of our restaurants. This network effect makes us an increasingly important partner to all our partners as the business grows. Restaurants that have been on Grubhub for more than two years generated greater than 10% gross food sales growth year-over-year in Q1 of 2017. It's clear we provide a tremendous benefit to our restaurants and we're pleased to be able to help them grow year after year. This is the reason that our non-delivery commission rates have gone up every year. At the beginning of 2017, we spoke about our plan to invest more aggressively in advertising than we did last year. We have improved our product, our restaurant network and the overall diner experience. These improvements give us confidence that when we bring on more new diners outside of our Tier 1 markets, they are going to love what they see. As planned, we ramped up our advertising in the first quarter. We were able to increase spend effectively within online channels that were leveraged in the past, like search, social and a variety of other digital media. In addition, our improved restaurant network breadth enabled us to deploy broader-based offline media and still yield strong returns across markets. Many of you have seen our national TV campaign over the past few months. Early results have been extremely positive, driving unaided brand awareness and new diner growth primarily in key Tier 2 markets. As our Tier 2 markets continue to grow, we can more effectively push out-of-home advertising on a market-specific basis as well. Our diners in New York, Chicago, and the rest of our Tier 1 markets have always seen Seamless and Grubhub media around their cities. We're now at sufficient scale to extend that to a number of our Tier 2 markets. We had great results from these efforts. In Q1, we accelerated Active Diner growth, posted our best quarter of organic diner net adds in the history of the company and cost per net new Active Diner was on par with the fourth quarter. Given this success, we will maintain a more aggressive stance on marketing and look for efficient opportunities to spend into this strength. We also continued to make great strides on our restaurant network. After an outstanding fourth quarter, our sales force outperformed themselves yet again, and recorded our highest quarter of restaurant additions ever. We are notching successes across the board. Not only did we add several exciting new chain partners over the past few months, including TGI Fridays, Chili's, Maggiano's, and Rubio's Coastal Grill, but our existing partners continued to expand their coverage with us. After strong initial pilots, we're now supporting around 750 locations for Subway, 50 for Red Robin Gourmet Burgers, and over 100 for Buffalo Wild Wings, and over 125 for Denny's. The chain momentum is great, but we've also continued our focus on adding local cult favorites that our diners love, like The Meatball Shop in New York and Revival Food Hall in Chicago. Our goal is to have exactly what each diner wants the moment they come to Grubhub, whether that's fast food, fast casual, full service, or value-price points, or even a white tablecloth meal delivered to their door. We will have it all at the lowest possible price. We are already delivering on the promise of the most comprehensive takeout marketplace in the U.S. and we see a lot of opportunity to make it better. On the product side, our team continues to be heads down focused on anything and everything that can improve the diner experience and diner lifetime value. Our recent tests run the gamut from more complex projects like improving our sort algorithm and beta testing the dietary tags, some of you have already noticed, to smaller and less noticeable changes like the positioning of fields and our checkout process, or upselling diners on additional items. Our product team is also increasingly partnering with marketing to place the Grubhub ordering platform front and center for consumers however they want to engage with us, whether it's using Alexa voice ordering on an Amazon device or by sending a gift card to a friend via iMessage for that special occasion. Finally, on the operational side, we're moving quickly on streamlining our delivery operations and technology. We discussed last quarter that we would be consolidating our RDS platforms onto the Grubhub brand in 2017 and we're ahead of schedule. If any of you happen to have visited DiningIn, Restaurants on the Run, Delivered Dish, or LAbite in the last few weeks, then you have noticed that those sites now link consumers through to Grubhub for our UI restaurant network and lower diner facing fees have the potential to increase ordering habits. For the corporate clients of our acquired RDS brands, we're now offering what we have branded as Grubhub for Work. Focused on the small business portion of the corporate market that the RDS has generally served, this product offers robust functionality around scheduled recurring orders, catering orders, and customized group ordering. While in the very early stages, we will refine and grow this product over time to serve the broader overall SMB market nationwide. We're excited by the progress we have made so far in 2017 in such a short period of time. All the teams here, from technology to marketing to delivery and product are reinvigorated by our success and the large and growing opportunity in front of us. I look forward to giving you more updates on our success as the year rolls on. And with that, I will hand it over to Adam who will walk you through the financials and future guidance. Adam?

[Adam J. DeWitt:]

Thanks, Matt. Good morning, everyone. As Matt highlighted in his remarks, we are pleased with our start to 2017. Our Active Diner growth accelerated to 26% compared to the first quarter of last year, our highest growth rate since 2015 and easily the most net Active Diners we have added organically in a quarter. We've processed 324,600 Daily Average Grubs and nearly $900 million in Gross Food Sales during the quarter, a 21% increase and a 26% increase year-over-year respectively. The acquisition of LAbite, which we'll fully anniversary in May, contributed approximately 1.5% to Active Diner growth, 1% to DAG growth, and 3% to Gross Food Sales growth. First quarter net revenues were $156 million, 39% higher than the year-ago quarter of $112 million. If we exclude the impact from LAbite, revenue growth would have been approximately 34%. Net revenue as a percentage of Gross Food Sales was 17.4% during the first quarter. This compares to 15.7% during the first quarter of last year. We have talked about how our capture rate has increased over the past 24 months due to the increase in the percentage of orders that we deliver because those orders carry a higher capture rate than orders that restaurants deliver for themselves. But it has also increased because, as our marketplace grows, restaurants want to pay a higher commission rate in return for exposure to more diners on our platform. This latter dynamic, while much smaller than the delivery impact, has an exaggerated impact on our bottom line, as nearly all of the increased revenue capture flows through to profit. We hope to continue to see some benefit here over time, due to our strong network growth, as well as newer opportunities for restaurant visibility on our platform, like sponsored listings, carousels, and more targeted CRM. Matt and I have both noted the strength in new diner acquisition during the first quarter, which certainly contributed to order growth. However, it's worth noting that 95% of our orders come from repeat diners. Our cohorts remain extremely sticky, and generally drive more revenue over time. For example, diners that ordered with us the first time in January of 2013 generated more revenue for us in March of 2017 than they did in March of 2016. This creates a natural, perpetual tailwind for long term revenue growth. On the expense side, total sales and marketing expenses were $35.4 million in Q1, a 23% increase compared to the same quarter last year, and a sequential increase of 20% compared to the fourth quarter. Last quarter, we highlighted our intention to increase advertising spend this year, and the Active Diner growth I highlighted earlier is a testament to our ability to maintain effectiveness at a higher level of spend. Of note, this strength in new diner acquisition was broad, in our most penetrated markets as well as our smallest, newest markets. When a diner joins our platform and has a good experience in terms of restaurant selection, restaurant quality, diner fees and service levels, they tend to become habitual, repeat diners. Given this predictability, we have good insight into diner lifetime value by market and by channel. This makes us comfortable spending up front to acquire diners that generate long streams of profitable revenue over time. Of note, the strong recent growth of our restaurant network, both in quantity and quality in many of our less-penetrated markets has improved the first-time diner experience, giving us the ability to spend more dollars in these markets, while maintaining reasonable CPAs and high lifetime values. We'll continue to take advantage of these opportunities as we see them. However, we expect sales and marketing spend to be down in the single digits sequentially because of seasonality. This is less than it would typically be down in the second quarter, which along with the third quarter, make up the softer half of the year for us. We do expect total sales and marketing percentage growth to be in the mid-to high 20%s for the full year 2017, consistent with prior expectations. Operations and support expenses in the third quarter (sic) [first quarter] (14

[Operator:]

Your first 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 the first one on the Tier 2 markets. It seems like you're making good traction in the markets with Active Diners. I'd be curious for anything, early learnings or observations of how these new Active Diners are acting in the new markets compared to the core markets. Any reason to assume that the cohorts and the purchase velocity wouldn't be similar? And then secondly, Matt, you talked about drivers of higher delivery efficiency. Can you just give us some examples of how you're making the delivery process more efficient? What are still some low-hanging fruit opportunities to make delivery even more efficient? Thanks.

[Adam J. DeWitt:]

Hey, Brian. It's Adam. I want to take the first and then I'll let Matt take the second. So in terms of the diners for the Tier 2 markets, really I think it's the same story that we've been seeing throughout the past several years, which is you really have a difference in behavior in the Manhattan and corporate diners, and then the rest of the country is very similar. So the Tier 2 markets, obviously there's some diversity amongst those, but they're generally in the same vicinity. So if you are comparing it to the overall, we obviously have a lot of business in New York and with corporate. So on the average, it's a little bit lower, but they're behaving very similar to other markets outside of Manhattan and corporate.

[Matthew M. Maloney:]

Hey, Brian. It's Matt. In terms of delivery efficiency, really, where we're seeing the gains is all around things that are scale-based. So as our order volume in the market increases, our ability to staff, dispatch, route, batch orders, this all improves. This all drives the throughput of our driver network up, and obviously our driver costs down. One other element when we think about efficiency, the dirty secret in all of this delivery is all the non-driver costs. And people don't really talk about that. Breakeven on a driver pay basis is really only half the battle. And we've actually found ways to noticeably improve our cost efficiency in things like driver recruiting, driver on-boarding, gear distribution and a lot of other of these non-driver pay-related areas of delivery, which overall increases our efficiency.

[Brian Nowak:]

Great. Thanks.

[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. I wanted to ask on just marketing campaigns, given it's coming in full swing here. Can you just remind us a little bit more about how you think about the ROI and payback period for marketing spend? And then the tools you all have to basically get these newer diners to repeat and increase and drive engagement higher. And then, bigger picture, Matt, in terms of delivery. Have you ever thought about potentially, now that delivery is in, what, 70-plus markets with more national coverage, potentially offering a subscription product for unlimited delivery or things along those lines? Thanks.

[Adam J. DeWitt:]

Hey, Ron. It's Adam. I'll take the marketing question. So how we think about ROI, what I talked about in my script, I think Matt mentioned it as well, when we have diners come on board, they tend to stay with us for a very long time. I think we've talked about in the past, when we're generating internal lifetime value models, that we actually have to force attrition into the model even though we're not seeing it. We've always talked about the cohorts increasing in value over time after the first few months. So, the lifetime values are very high. Generally, what we see on the CPA side is that it's coming in generally a lot lower than our LTVs. And so we feel very comfortable. It's just when we talk about the limits of our marketing and being able to spend efficiently, we get to this point in some of these channels where the increased spending actually doesn't generate any new diners. And so we're generally spending to that point of, what I call, dramatic inefficiency. If you're thinking about payback time, I think it depends on channel, depends where we're getting the diners from. And so it could be anywhere from a few months to even less, to all the way up to a year. But we're getting payback from those diners over a very long period of time. I think you asked about the re-engagement. I think one of the things that we've been doing differently there or we've improved on over the past 12 months to 18 months, is a lot of personalization. And I think part of what's enabled us to do that is, especially in the Tier 2s, where we've dramatically improved the quality of our restaurant network and so we're able to match specific diners with specific restaurants that we know are really popular. And we have a really good hit rate because of the breadth of restaurants that we have. And so being able to send an email at the right time to encourage an order on a Tuesday night when a diner typically orders on a Friday or Saturday and get them to order more is something that we've been able to have a lot of success on.

[Matthew M. Maloney:]

Hey, Ron. In terms of a subscription-like service, we have always been testing things. We've tested subscription services before. We haven't really found that right balance of something that'll really lock in that diner-side demand. And part of the problem is the economics. I mean, they are just tight. You can do the math yourself. And in order to even come close to break-even, it's a pretty hefty annual fee in order to make something like this happen. But, remember, we're testing delivery fees on a city-by-city basis constantly making sure that we're optimizing for conversion rate and making sure we can float the economics. And when we think about diners that are cost-sensitive, remember, we have over 10,000 restaurants that have free delivery always on the site because they do their own delivery, and they don't have a delivery piece (27

[Ronald V. Josey:]

Great. Thank you.

[Operator:]

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

[Ralph E. Schackart:]

Good morning. Looking at the strong diner additions in Q1 and clearly the marketing campaign is showing some early positive signs, how should we think about the pace of that sort of diner addition throughout the year, as you add on incremental marketing campaigns? Thanks.

[Adam J. DeWitt:]

Yeah, so, Ralph, I think I mentioned in the script that even though sales and marketing, I think, will be down a few points in the second quarter, but that that's actually a little bit higher than it would typically be in the second quarter. So, we're going to continue to spend at a higher level overall. And we expect to see good continued growth in new diners. In terms of the percentage, I think it's a little tough to handicap. Obviously, our guidance has a range of outcomes. We have a lot of confidence that the additional spend is going to yield new diners. And over time, it's going to lead to more order growth. I think, just one thing to remember for your modeling is LAbite, we were lapping in the second quarter, and I think we talked about before that something around 100,000 diners or something we acquired in last year's second quarter, so that will affect your modeling a little bit.

[Ralph E. Schackart:]

Okay. Thanks, Adam.

[Operator:]

Your next question comes from the line of Paul Bieber from Credit Suisse. Your line is open. Paul Bieber - Credit Suisse Securities (USA) LLC (Broker) Good morning, and thanks for taking my question. I was hoping that you could help us reconcile the comments about the stable costs of net new Active Diners, just for the fact that the competitive landscape is pretty intense. It's pretty unusual to see stable customer acquisition costs in a very competitive market. So, I was hoping you could provide some color about that.

[Matthew M. Maloney:]

Sure. Paul, I can kind of address the competition question head on and then how an increasing competitive arena impacts CPAs, maybe Adam can follow-up a little bit on that market. I mean, I think, I have answered this question pretty consistently on the past four or five, maybe six earnings calls, but we just continue to show great growth rates across our business, and again, we just posted our best quarter of diner adds in the history of the company. And don't forget that all material or meaningful competition was in the market more than a year ago, as well. So, when I look at the marketplace, I see that we have significant structural advantages in that we are known for just one thing. Like, we just do take-out ordering, and we back it up with world class service, and we'll succeed because of the singular focus and our ability to engineer our entire product around this purpose. The Grubhub for Work products that we talked about – or I talked about today in the prepared remarks is a classic example of this. We've really talked to our customers, found out what they wanted, how they wanted to engage with their local restaurants and we built the tool around that specific use case with only that use case in mind. So, industry-wide, I think, we have a huge advantage, because we clearly have the most restaurants, over 50,000 now, and the lowest diner-facing fees, like I just spoke about in terms of – to Ron, actually. And so you think about – we have the best product experience. We have the most restaurants. We have the largest platform, we have the best customer support. We continue to accelerate on all fronts. And it's a massive marketplace. So, as the industry is growing, and I believe, competition is increasing awareness, broadly, which is accelerating our offline to online transition, I think, it's just a big growth time for this industry. And as you look at our distinct competitive advantages, just to break it down one level deeper, I mean, scale – we have the largest scale in the industry and that gives us meaningful efficiency and competitive advantages others just can't reproduce. The product focus I talked about, that's all we do. That's all we think about. All of our people do this. That's what we do every day. We're not going to be held up by delivering iPods or toothpaste or groceries. We have the lowest facing fees and I believe everyone will agree that cost matters to consumers. We pride ourselves on cost transparency, the best service, the lowest fees. And we're not at a significant disadvantage to anyone in terms of delivery time. In fact, oftentimes, we are the fastest and most consistent food-delivery option available, especially during rush hour, or as we call it dinner time. Adam?

[Adam J. DeWitt:]

Yeah, I – just to answer, just more – just the more specific question about CPAs, I think, what we see over time is you have to remember this is – as Matt mentioned, kind of, we're capturing an offline to online transition, right? And so there's more eyeballs available for us on the web. And so it's not a matter of having to bid more for keywords, it's getting more clicks and it's expanding the keywords, right? As we expand our restaurant network. So that's an easy way to think about the costs kind of remaining stable while we increase new diners. I think adding high leverage out of home. Our offline advertising, like TV, that can boost the efficiency of our online digital, I think, are other ways that we've kind of managed to keep CPAs relatively flat. And as Matt said, look, if there is competition in certain markets, in some ways it is creating more awareness for the product. And remember, we're all trying to capture some of this offline to online transition. So, in some ways, that perhaps helps us. Paul Bieber - Credit Suisse Securities (USA) LLC (Broker) Okay. Thanks for the insights.

[Operator:]

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

[Jason Helfstein:]

Thanks. Two questions. One, any more commentary you can provide on competition by geography or tier size. And then, secondly, can you talk about product features that would address caller? So, specifically, we've done some work that suggested the biggest opportunity for you is to address basically diners who call the restaurant because they have questions and then end up ordering that way as opposed to through your app. Given the Facebook's presentation at F8 about messaging and partners, just some things they are doing with delivery.com, maybe just talk about how you plan to address in the future, being able to answer questions, so that diners don't have to call restaurants. Thanks.

[Matthew M. Maloney:]

Sure, Jason, let me – I don't really have much more commentary on competition. I kind of exhaustively covered that a minute ago. In terms of geo and tier, I think that Grubhub has a very secure base in the Tier 1 major metros and we're not seeing that eroded. In fact, we're seeing that grow. And then, in Tier 2, we've said a bunch of times that this is a key focus, Tier 2, Tier 3, on growth for us, given our success in delivery over the past year, and so we're seeing outsized growth there. Clearly competition isn't impacting our growth rate there either. Product features on callers – calling is tricky because it requires the bidirectional communication, and kind of what our product is doing is trying to alleviate the friction around the telephone. And so, we are definitely trying to figure out ways to answer diners' questions in real time, but without actually having someone at the restaurant have to pick up the phone. That is a very difficult problem to solve and I'd say we're definitely thinking about it, clearly with the advent of more automated – more automated systems around, like, chatbots and iMessage, I think, there is a lot of opportunity. Opportunities that have never been available before. Part of it is the actual communication. Another part of it is the metadata inside the menus. We spoke a few earnings calls ago about normalizing menu data and making sure that our menu data is comparable and understandable from a big data perspective. And we've actually continued to invest in that, which is really interesting. And one thing I didn't mention in the prepared remarks is that we – or I think I did, actually – we rolled out with some dietary tags in the menus, which are really interesting. It's a way for us to almost micro-select dishes across restaurants that are vegan, for example, or other various forms of dietary tags, and actually collecting that is non-trivial, and keeping that updated is harder than you would expect. And so we're working through elements like this. But, as we continue to flush out more data on a dish level, then it will be available to query from diners, and I think that's really where you're getting at.

[Jason Helfstein:]

Thank you.

[Operator:]

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

[Heath Terry:]

Great. Thanks. Adam, I guess just one quick housekeeping question on the – I believe, I heard you say that EBITDA would be down sequentially in Q2, were you referring to the midpoint, because at the higher end, it looks like it would actually – of the guidance, it looks like it would actually be up. I just wanted to clarify that. And then, Matt, as you talk about the customers that you're – the new customers that you're bringing on and the incredible growth that you saw this quarter in customer additions, do you have a sense of what the older cohorts in these Tier 2 markets that are predominantly – are becoming predominantly delivery-driven, how those perform as they age, relative to what you're seeing. I guess, you've talked about frequency before. How long do you see it taking before that once a month order in Denver gets to the four to six times a month that you see in New York, San Francisco, Chicago, et cetera?

[Adam J. DeWitt:]

Yeah, Heath, I'll take the EBITDA question real quick. Yeah, absolutely, I was referring to the midpoint. Our guidance, obviously, has a range of outcomes. Last year, we had – our EBITDA was a little bit higher in the second quarter than the first quarter, but my commentary is around the second quarter we typically expect it to be, all things equal, we would expect a little – it just makes sense that there is a little bit of a tiny step back, in kind of anticipation for the big step forward in the fourth quarter and first quarter. So, yeah, the commentary was around the mid-point as opposed to the high end of the range.

[Heath Terry:]

Got it.

[Matthew M. Maloney:]

And then, Heath, in terms of the older cohorts in the Tier 2, Tier 3 markets and how they're performing with additional delivery restaurants, they are all performing much higher than they were before. They're all getting better. I mean, if you think about cohort performance, it's really a function of restaurant density. And so as you add restaurants to a marketplace, you're going to see those older cohorts actually perform at a higher rate. And I wouldn't – you are exactly right, the spectrum is from the lower restaurant density markets that historically have not had a robust self-delivery ecosystem, all the way up to the high end, which is Manhattan, which is the highest performing marketplace in the country in terms of diner performance. And so, as we continue to add restaurants, you're going to see those cohorts perform more in line with what you'd expect. And I'd expect Denver to progress to more of a Chicago, San Francisco range before it ultimately gets up to Manhattan.

[Heath Terry:]

Great. Thank you very much.

[Operator:]

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

[Mark A. May:]

Thanks for taking my questions. First, I know the focus is more on EBITDA per order and that there are a number of variables that come into play in the capture rate, but can you talk about the top couple of factors driving the capture rate increase in the quarter? For instance, did sponsor listings play a key role? What about the mix of delivery? And then I know you've talked a lot about the performance of the Tier 2 markets, which is great. I just wondered – and sorry if I missed this, if you could talk about the growth rates that you're seeing in the Tier 1 markets and how those have trended in the last couple of quarters? Thanks.

[Adam J. DeWitt:]

Yeah, Mark. How you doing? It's Adam. In terms of the capture rate, happy to talk about that a little bit. In some of my prepared remarks, we talked a little bit about this. Clearly, look, most of the increase is the increase in delivery orders as a percentage of overall orders. On a delivery order, just to remind everyone, on delivery order, Grubhub gets the delivery fee, and also some additional commission from the restaurant. And most of that goes to paying for drivers. So we do see an increase in take rate. It's much higher on delivery orders. But most of that we see come back out in the expense side. But we do have, and we've had historically over time, had an increase in the commission rate that restaurants are willing to pay for the demand generation. And so as markets grow and there's more restaurants and more diners, restaurants will pay more for more exposure because there's more value on the network for them. There's more orders, there's a bigger audience, et cetera. And so restaurants are willing to pay for that exposure. You asked a question – so we've certainly seen some improvement in the capture rate there. It's a lot smaller than the delivery mix impact, but it does drop right to the bottom line. You mentioned, what's driving that? And the sponsor listings, it's basically there's a number of areas on the site, a number of opportunities for restaurants to get more exposure. And we've been continually working on that. One is the sponsor listings. Another is, if you use the platform, you'll notice there's carousels, whether it's on the home page or at the end of menus or other locations on the site. A third is, I mentioned earlier more targeted CRM. We're matching specific restaurants to specific diners, and we're getting better at it. So there's all these opportunities for restaurants to get more exposure and they're willing to pay more as a result. So we have seen an improvement in capture rate. It will be incremental over time and we think that we'll continue to see that.

[Mark A. May:]

What was the delivery mix in the quarter?

[Adam J. DeWitt:]

I don't think we've given specifics. In terms of delivery right now, if you look at delivery on our platform, we're at a run rate a little bit higher than 20% overall.

[Mark A. May:]

Thanks. Any comments on Tier 1 growth?

[Adam J. DeWitt:]

Yeah. So your second question, Tier 1 growth versus Tier 2 growth. I think it's a similar story as it is before. Tier 1s are just by sheer size make up a large percentage of our volume. So if their growth rate was significantly lower or higher than – it would be hard for Tier 1 growth rate to be much different than the overall company growth rate, I think, is an easy way to say it. It would be very difficult for...

[Mark A. May:]

Thanks. And Tier 2 growing twice as fast?

[Adam J. DeWitt:]

Yeah. We said that in the remarks, yeah.

[Mark A. May:]

Thanks.

[Operator:]

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

[Nat H. Schindler:]

Yes. Hi. Matt, not to belabor the point and I know you're sick of answering this, but I'm going to take it from a different angle. Clearly, you have network effects making competition within your Tier 1 markets very, very difficult. And it's undoubtedly over-talked about by Wall Street. But not the Tier 1, not the Tier 2s, not even the tertiary markets, but markets where you barely are, quaternary markets. Are there markets out there that could be substantial on your long-term calculations when you start looking at the market sizing, where you just haven't gotten around to really building up substantial presence that you see other players building in? And does that cut off any of the, to be honest, very long-term growth for the company? And then a second question for Adam just quickly. You mentioned the take rates are going up on the marketplace side. Just wanted to know if you could give any more color on that? The last time we really had a clean number for that, before you had delivery, I think it around 15.2%. And you said it was roughly stable because new markets come in lower and old markets go up, so they balance each other out. Where is that going and what do you think the dynamics that are really moving it around are?

[Matthew M. Maloney:]

Hey, Nat. Yeah, interesting way to position that question. So I think you're right. There's definitely a first-mover advantage in this industry because once you build scale and orders, the restaurants really want to work with you and it's that much harder to prove yourself as a second-comer. Because of that, for a long time we've been very aggressive expanding our services. So, clearly, before delivery, I think we were incorporating thousands of cities on our self-delivery platform. And that was our initial base. And then we saw how delivery could fundamentally accelerate the market dynamics and the flywheel in these markets. And so we went very aggressively into delivery a year ago. And I think we immediately were at like 70 or so, maybe 100 by now, I'm not really sure, markets. So when you think about are there potentially substantial markets that we're not in yet, I would say no. In aggregate, there are a lot of markets we're not in yet that together could be substantial for sure, but no one else is there. We're talking broad areas in the Midwest, for example. We hit the key markets. But in between Columbus and Indianapolis, for example, we have very little or no presence. In aggregate, those geographies are going to be meaningful in the long term. But I don't think any rational competitor is going to go aggressively into those spaces without first taking the intermediary second, third, and even fourth tier markets. So I don't see a strategic way for a competitor to cut off our long term growth by addressing these markets first. And, frankly, we're aggressively expanding in the suburbs of Indianapolis, for example. Those are geographies that you don't see other markets or other competitors expanding and it's because we do truly understand the impact of first-mover advantage in our space.

[Adam J. DeWitt:]

Yeah, Nat, in terms of the marketplace, our ad fee rate or however you want to describe it, we're not going to break it out from the overall capture rate. But what I can tell you is, obviously, that impact is a lot smaller on the capture rate than the delivery mix. When we're talking about increases, we're really talking about 10 basis points, 20 basis points, maybe 30 basis points at a time overall. And in the first quarter, we added to the commentary, just because it's larger than it has been. But even if you look at 10 basis points, 20 basis points, you apply that to all of our order volume, and drop it basically to the bottom line, it becomes material.

[Nat H. Schindler:]

Great. Thank you, guys.

[Operator:]

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

[Michael Patrick Graham:]

Hey, thanks. I wanted to go back to the diner ads, just because such a whopper of a number and congrats on that. You had a lot of improvements to the app over the course of the last 12, 18 months, and I'm wondering, given that your diner number is an annual backward-looking for a year, I'm wondering if any of the strength was due to retention, rather than gross adds. And I'm also wondering, some similar companies have – when they switch to more of a brand marketing emphasis, television and that sort of thing, they've noticed that the customers that are coming in are more sort of focused on aligning with the brand and the experience, and therefore they are stickier, more active, as opposed to a direct response. Customer coming in from search or a social ad. I'm just wondering if you're seeing the same thing.

[Adam J. DeWitt:]

Yeah, hey, Mike, how are you? In terms of your question on retention, it certainly helps the number, and we have seen the improvements in the product help our long-term retention numbers. A diner saved is the equivalent of a new diner. In some ways it's better. But to be honest, historically we haven't had a big attrition problem with diners that have been on the platform for a few months. So it helped. But I think, at the end of the day, it's really about the restaurant network, the more efficient advertising, and in this case, at least, it's been a little bit more top of funnel than it has been the throughput on the funnel. In terms of the diners, I'd say that they're similar, as opposed to much better or much worse. I think they do identify with the brand, but at the end of the day, you got to remember, what we're presenting to the market is a reason to move offline to online. And so a lot of cases these diners are not coming to us after one touch, right? They're seeing us on TV. They're seeing us on display. They're seeing us on SEM, and they're coming to us after a number of touches and they're high quality. I think the one thing I will say is TV diners are, and in all cases I think all diners are generally better if they're coming through some type of advertising medium or some channel that's not through a promotion. So, if you get a diner that's coming to us because of what we do, as opposed to a free meal or a free delivery, those diners tend to be higher quality.

[Michael Patrick Graham:]

Okay. Thanks a lot, Adam.

[Operator:]

Your next question comes from the line of Tom Forte from Maxim Group. Your line is open.

[Tom Forte:]

Great. Thanks for taking my question. So real quickly, wanted to see how you felt about chain restaurant delivery, specifically in the QSR category, given that McDonald's has started to ramp its efforts there. And then second I wanted an update on the economics of chain restaurant delivery versus independent restaurants. Thank you.

[Matthew M. Maloney:]

Hey, Tom. Yeah, chain delivery is a big area of growth for us. I went through a bunch of chains that we signed on with pilots. I think that people should assume that we're talking to every chain realistically that could benefit from delivery at this point. I also walked through a few partners of ours that we had a successful pilot and they're expanding our relationship, which is really an important point when you think about the growth of our business, especially in Tier 2, Tier 3 markets where chains just make up a higher proportion of not only the inventory but of what diners want to order in those geographies. So, I think that, from a chains perspective, they've always been interested in our demand and the ability to incrementally add revenue. Now with our ability to deliver, and deliver at a very high service level, very consistently, that was always a logistical hurdle that they were not interested in doing themselves for the most part. I mean, obviously, other than the major pizza chains, most chains just did not want to do delivery. So the fact they can partner with us and we will support them and be their partner in this delivery function, as well as bring tremendous new demand in a bunch of markets in ways that they were previously unable to do, this is pretty much a slamdunk from their perspective. In terms of economics, I can let Adam speak to that.

[Adam J. DeWitt:]

Yeah Hey, Tom, consistently the story with the chains has been on the economic side, that it's not materially different than our relationships with the independent restaurants. They are coming to us because we can provide something that is more efficient to get through Grubhub than it is through themselves. And, in most cases, that's a combination of the logistics and the demand generation. As our pool of Active Diners continues to grow, it's close to 9 million now, that's a way for them to drive volume where it's hard to access those diners in other places. So, we haven't found the economics to be really different between the chains that we've signed up and the independents.

[Tom Forte:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Aaron Kessler from Raymond James. Your line is open.

[Aaron M. Kessler:]

Great, thanks, guys. Just a couple of quick questions. First, can you just talk a little about the demographics of new users? Our survey work continues to show kind of younger users much more likely to join these or to sign up. Secondly, have you guys done much delivery pricing tests and are you still testing that? I have seen a lot of kind of variability on kind of delivery pricing in San Francisco, at least. Thanks.

[Matthew M. Maloney:]

Hey, Aaron, in terms of demographics, I mean, we're seeing adds across the board, honestly. I mean, clearly, Millennials and younger users are more apt to turn to their mobile phones for anything in their life at this point. But the success of our advertising across TV and other offline channels, really, has brought in a wide segment of new diners. And we're seeing it, honestly, across the board from older segments. Through kids we see a lot of new parents spike usage through college and even younger and frankly high school kids, when they have to figure out their own meal. So, in terms of demographics, you are not going to see outsized growth in one specific segment because the entire industry is transitioning, and that impacts everyone. For delivery pricing tests, I'm not sure if you are talking about fees to diners or if you're talking about fees to restaurants, but in both cases...

[Aaron M. Kessler:]

Yeah. Fees to diners, sorry.

[Matthew M. Maloney:]

Okay, yeah, we are absolutely testing this. I think I mentioned it earlier. We're testing on a per market basis. We're trying to figure out what is the expectation. The expectation of delivery fee is set from historical norms based on what their delivery ecosystem looks like. In Manhattan, it has always been free or very small. In markets where there isn't that much delivery available, they charge a higher fee in order to justify the incremental expense. So we're trying to gauge on a per market basis ultimately what impacts conversion the most because all we look at is lifetime value, and then what happens when we decrease that fee? Do we see an increase in frequency? Do we see people turning to their local restaurants more consistently to feed their families? And we're just constantly looking through for both product and advertising to, how do we increase the lifetime value, increase the conversion, increase the frequency of diners and we're constantly testing.

[Aaron M. Kessler:]

Got it. Great, thank you.

[Operator:]

And our final question comes from the line of John Egbert from Stifel. Your line is open.

[John Egbert:]

Great, thanks for taking the question. Matt, you noted that you are starting to push users of your acquired delivery services towards Grubhub, with them benefiting from lower delivery fees. Have you measured any change in order frequency for those customers? And, not to dwell too much on competition, but at restaurants where you overlap with other delivery services, have you looked at how your delivery fees compare on average? Are they meaningfully lower? And, if so, is that something that might ever become part of targeting marketing messages in those cities? Thanks.

[Matthew M. Maloney:]

Yeah, sure. We definitely see increased frequency as you decrease delivery fees to diners. I mean, it's classical. You reduce transactional costs and you see higher frequency of transaction. There's diminishing returns, I mean, the difference between a $10 transactional fee, and a $3 transactional fee is dramatic, in terms of diner frequency. The difference between a $3 and a $1 is definitely not as dramatic. There is clearly segments of diners that are very cost conscious, in which case they are always looking at our free-delivery restaurants, which are predominantly – are actually exclusively self delivery restaurants that recognize the value of low transactional fees. And I think, as I said before, we will always have that advantage because those restaurants do it themselves. We don't have to pay for the delivery there. So there's a slope of impact, and then that slope definitely has a different y intercept for various markets. Now, competitively, this is even more interesting because the way that we execute, we have a lower cost per delivery, especially from the groups that are doing non-contracted delivery. Anyone who is doing non-contracted delivery, your incremental cost is anywhere is from $6 to $10. And so you really can't get away with any type of diner fee less than that if you actually intend to make money at some point in the future. And so, we are clearly cheaper on a transactional basis for diners -- and on all basis this for diners than non-contracted. Versus other contracted shops, I think it really depends on how the restaurant contract is structured. But, generally, we are significantly cheaper than everyone else. And, in fact, we do use that as a key marketing message. Now, you don't want to cheapen the value of your product because fundamentally, we're here for selection, convenience, consistently high quality service. But, you know what? All things equal, pretty much everyone's going to choose the lower cost provider on that. And so, I think we sent out a broad-based email a week or two ago highlighting the fact that we have over 10,000 restaurants with no delivery fee and that's not a special that we have for this week or the rest of this month. This is a permanent fixture of the way our marketplace works, and we will always be cheaper than everyone else. So I think that there's a lot of legs on that marketing communication and we're going to continue to push that. And if you look at the rack rates for diners in terms of delivery fee across the competitive arena, I think you will agree that we are materially cheaper than everyone else.

[John Egbert:]

Great, thanks.

[Operator:]

This completes the Q&A period. I will turn the call back over to David Zaragoza.

[David Zaragoza:]

All right, everyone. Thanks for your time today and the questions. We look forward (1

[Operator:]

This concludes today's conference call. You may now disconnect.