Just Eat Takeaway.com N.V.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the GrubHub, Inc. Q2 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, you may begin your conference.

[David Zaragoza:]

Hi, everyone, and welcome to GrubHub's second quarter of 2017 earnings call. I'm Dave Zaragoza, Head of Investor Relations. 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'll 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 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 statement included in our filings with the SEC including the Risk Factor section of our 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 June 30, 2017, that will be filed with the SEC. Our SEC filings are available electronically on our investor website at investors.grubhub.com or the excerpt SEC's website at www.sec.gov. Also, I'd like to remind you that during the course of this call we'll discuss non-GAAP financial measures in talking about our performance. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables in the press release. And now I'd like to turn the call over to Matt Maloney, GrubHub's CEO.

[Matthew M. Maloney:]

Greetings, everyone, from Yelp's downtown San Francisco headquarters, and thanks for joining the call. We are just now finishing our lunch as courtesy of Eat24 and GrubHub. It's clearly been an eventful few months for us here at GrubHub, and we've got a lot of exciting news to share. As I'm sure many of you saw in the separate press release this afternoon, GrubHub has entered into a long-term partnership with Yelp. This partnership consists of two primary components. First GrubHub will be the preferred partner powering online ordering from restaurants on the Yelp platform. And second subject to regulatory approval and other closing conditions, GrubHub is buying the direct EAT24 business for cash. We believe the Yelp platform will drive millions of new orders a year for our restaurant partners and adding GrubHub restaurants to the Eat24 brand will increase the value of those unique diners. We believe this agreement is truly beneficial for all parties involved; diners, restaurants, GrubHub and Yelp. We announced a similar deal and partnership earlier this week with Groupon whereby we will acquire certain assets of their company-owned and operated OrderUp business and become the exclusive partner powering online food delivery on their Groupon branded platform. While the OrderUp business is smaller than the Eat24 business, much like Eat24 it has a strategic presence in some Tier 2 and Tier 3 markets highly complementary to our current footprint. Both of these partnerships further position GrubHub as the online takeout ordering and delivery partner of choice in this large and growing market. In addition to the secular offline to online trend, diners are increasingly turning to food delivery for everyday occasions and restaurant owners and operators are embracing this opportunity more and more. We believe our industry-leading scale, technology, customer support and logistics expertise give us the opportunity to capitalize on these trends and these partnerships will accelerate our efforts. I'll discuss both deals in a bit more detail later on the call, but first I'd like to run through a few highlights from the quarter. GrubHub generated $159 million of net revenue in the second quarter, compared to $120 million last year, growth of 32% year-over-year. DAGs were up 16% year-over-year in the same period, down slightly from the first quarter as expected due to vacations and milder weather in many of our major markets. Despite the sequential decline, revenue grew slightly from Q1 driven by the increasing mix of our business towards delivery and to a lesser extent, restaurants paying higher commission rates for more exposure on our platform. Net income was $15 million for the quarter, an increase of 15% from the prior year. Adjusted EBITDA was $42 million, growing 12% year-over-year, down only slightly from the first quarter. Adjusted EBITDA per order was $1.48, down 3% from prior year's $1.52, due to the ramp in advertising year-over-year. As we discussed coming into 2017, we are seeing more opportunity in diner acquisition as our restaurant coverage across many Tier 2 and even Tier 3 markets has significantly improved and we are pressing this advantage. We have been pleased with the results we have seen year to date. Driven by this growth in advertising, active diners grew 25% year-over-year in the second quarter, ending at 9.2 million active diners. As these new diners mature and turn from first time customers into habitual repeat diners, we expect they will contribute more meaningfully to order growth. GrubHub generated Gross Food sales of $880 million for our local restaurant partners in the quarter, an increase of 20% year-over-year. As I highlighted earlier, the secular shift occurring in the restaurant space is creating more opportunities for us to grow our restaurant base than we've ever had before. Bolstered by the GrubHub delivery platform, our sales force has seized the opportunity setting a record for the number of new restaurants going live for the third quarter in a row. Notably our restaurant network outside of Tier 1 grew at more than 40% year-over-year. The ecosystem in these markets is ripe for development, and we are pushing expansion aggressively. We also continue to make progress signing popular chains. This quarter we have entered into partnerships with Qdoba, Del Taco, Jack in the box, Moe's Southwest Grill, Wawa, Darden's Yard House and Capital Grille Concepts, BJ's, Le Pain Quotidien, Famous Dave's and Papa Murphy's. Our broad geographic coverage and strong service levels, not to mention our order volume, are compelling draws for well-known chains looking to tap into new demand pools. We consistently see chains expanding their relationships with us over time, and a good example of this is our traction with Subway. After an initial launch phase, we have grown to drive demand to and deliver for more than 1,000 Subway locations across the country. Our ability to support expansion of our delivery capabilities rapidly and efficiently enabled this growth. 18 months ago, we would not have been able to accommodate this. As the breadth of our restaurant network increases and the order volume we are sending the restaurants grows, we are becoming more thoughtful about how we support our restaurant partners through better product and technology. As a result, point-of-sale integration has become a bigger priority for us. We've been hard at work building these hooks, and now have integrations with multiple major platforms, Oracle's Microsystem, NCR's Aloha, Breadcrumb and Toast. These integrations will help restaurants improve their in-store workflow, eliminate time to enter orders, create more transparency and potentially shorten the window between customer order and meal prep. On the marketing side, we're increasing the nationwide presence of our brand and also employing more targeted media locally, where we see outsized opportunities. TV has been a great tool for us to get exposure across the country, but digital video and social have allowed us to bolster our message in markets where our restaurant network is particularly strong. Supplementing our national spend with increased investments in targeted platforms like YouTube and Facebook is proving to be a successful strategy to match awareness with restaurant density. Since their initial push into online food delivery, Yelp has significantly grown their engagement with diners on their platform, growing order volume and proving that their platform attracts transaction-ready diners. Given the scale of our restaurant network, in particular, our growing network of GrubHub delivery restaurants, we believe the opportunity to increase our exposure with Yelp diners will be incredibly valuable. In turn, the greater restaurant selection that Yelp will be able to highlight to diners should increase conversion and generate more orders flowing through their platform. The partnership will also yield tangible benefits to both sides of our marketplace, the diners and the restaurants. Diners will benefit from improved selection of low-cost restaurant options, combining Eat24's and GrubHub's complementary networks, making it easier to find all of their local favorites through either GrubHub or Yelp's simple-to-use interface. Restaurant partners at both GrubHub and Eat24 will see more new customers and more order volume as a result of the combined networks. We believe this is a clear win for all stakeholders involved. In connection with this partnership, Eat24 will become a part of the GrubHub family of brands. Shortly, we will add Eat24's roughly 15,000 incremental restaurants to GrubHub. While most prominent in San Francisco and Los Angeles, Eat24 has significant footholds in many Tier 2 markets, which will bolster our growing efforts there. We've seen in the past restaurant density is an enabler of diner growth, and Eat24's restaurant network will improve the GrubHub restaurant network materially. This will help us increase conversion and address an overall larger base of potential diners in many markets. Similarly, adding GrubHub's restaurants to Eat24's site and app should support more frequent ordering habits for their loyal base of users. Down the road, we see the potential for additional product-driven synergies from the combination as we will eventually power Eat24 with the optimized consumer ordering experience that has driven recent growth for GrubHub. We see similar benefits from our partnership with Groupon. While smaller in overall food delivery volume, the Groupon platform taps into a consumer experience that is differentiated from the typical GrubHub diner experience. By combining our restaurant network with Groupon's unique value proposition, we believe we can drive incremental transactions through that channel. OrderUp is a similarly-unique asset, while smaller than Eat24, they have focused on Tier 2 and Tier 3 markets like Baltimore, Nashville, Indianapolis, Cincinnati and State College. We view this transaction to be extremely strategic given our current restaurant density in these more nascent markets. Lastly, and once again on the corp-dev front, we announced the acquisition of Boston-based Foodler in early June and expect it to close shortly. Foodler was first to market with an online ordering platform in Boston and still has a great base of loyal and frequent users. The transaction brings incremental diners and order volume to GrubHub, and we view the potential uplift in giving Foodler diners new restaurant options, particularly those GrubHub delivers for as significant. GrubHub has made tremendous strides over the past two years. We've completely revamped our technology infrastructure and our user experience. We built a delivery logistics platform capable of supporting the largest chains in the country and we've executed a rebrand and marketing strategy shift that is yielding the best levels of diner growth we have ever seen. The benefits of these efforts will go far beyond the growth we've seen to date as they have put us firmly at the center of this tremendous opportunity. The partnership agreements announced over the past week allow us to extend our reach to some of the most well recognized consumer platforms on the Internet and we're excited to see where it goes from here. With that, I'll hand it over to Adam who will walk you through the financials and guidance.

[Adam J. DeWitt:]

Thanks, Matt. Good afternoon, everyone. We've got a lot to get through between the quarter and the partnerships Matt announced, so I'll dive right in. We executed well in the second quarter, growing both sides of our network and seeding a path for long-term growth. Active diner growth continued at a robust rate growing 25% year-over-year. To complement this growth, we're adding record numbers of new restaurants to the platform and showing that when new diners come to GrubHub they find what they're looking for. We processed 313,900 Daily Average GRUBs and $880 million in Gross Food sales during the quarter, 16% and 20% increases year-over-year, respectively. While we pass the anniversary of the acquisition of LAbite in May, it had an immaterial impact on growth for the quarter. So both of those figures are clean run rate figures. First quarter (sic) [Second quarter] net revenues were $159 million, 32% higher than the year ago quarter of $120 million. Net revenue as a percentage of Gross Food sales was 18.1% during the first quarter (sic) [second quarter], up more than 160 basis points from the prior year's 16.4%. This growth year-over-year is driven by an increasing mix of our business towards GrubHub delivered orders, as well as restaurants paying higher rates for more exposure on our site, a continuation of the trend we saw in the first quarter. On the expense side, operations and support expenses in the second quarter were $62.9 million, a 55% increase compared to the $40.7 million in the second quarter of last year and a sequential increase of 6% compared to the first quarter. This outsized increase relative to order growth is also due to the mix shift of our business towards more GrubHub delivered orders and to a lesser extent the underlying growth of our total order volume. As a reminder, delivery orders generally carry higher revenue per order due to additional payments by our restaurant partners and diner delivery fees. These are both offset by payments to drivers, which show up in the ops and support line. As we have stated since the outset of our delivery initiative, our goal is that the additional revenue completely offsets the additional cost, yielding a similar cash flow per order for delivery and non-delivery orders. We are extremely pleased by the progress we have made towards this goal. Underscoring this consistent progress, second quarter revenue per order grew $0.05 more than ops and support per order sequentially. The year-over-year improvement here is even greater. As a result, even though we accelerated both advertising and technology investment meaningfully year-over-year, EBITDA per order was $1.48, down only 3% from the prior year. We expect EBITDA per order to generally increase over time but it will vary based on seasonality and near-term investments in the business. As I mentioned, sales and marketing expense were $34.8 million in the second quarter, a 37% increase compared to the same quarter last year and a sequential decrease of only 2% compared to the first quarter when we would typically see a steeper seasonal decline. We saw strong levels of engagement in opportunities to acquire new diners at a reasonable cost as we progressed through Q2 and made the decision to spend slightly more into this strength. While these new diners only impact current quarter orders in a small way, we believe they will contribute more meaningfully to overall company order growth over time. We will continue to spend opportunistically to drive growth and while our expectation for sales and marketing growth remains mid-to-high 20s for the year, we believe at this point is more likely to be at the upper end of that range. Technology expenses, excluding amortization of web development, were $14.1 million for the quarter, increasing 33% from Q2 of 2016. This expense includes the full run rate for the addition of folks from Zoomer in the first quarter, as well as planned growth in the tech and product team to drive growth initiatives including POS integration, increased personalization and platform optimization. Depreciation and amortization was $10.4 million for the quarter, a sequential increase of 4% from the first quarter and 17% from a year ago. The year-over-year increase is due to investment in our platform and our headquarters build-out last year. G&A costs were $14.5 million, a sequential increase of 12% from the $13.0 million in the first quarter. Excluding some one-time merger and restructuring costs in the quarter, G&A was essentially flat sequentially. Net income was $14.8 million compared to the prior year of $12.8 million. Net income per fully diluted common share was $0.17 on approximately 88 million weighted average fully diluted shares. Our tax rate for the second quarter was around 33%, lower than our normalized full-year tax rate of approximately 40.5 %, driven by the new 2017 accounting rules for the tax benefit or loss related to stock-based compensation. Non-GAAP net income was $23.2 million, or $0.26 per fully-diluted common share compared to the prior year of $19.6 million, or $0.23 per fully-diluted common share. As a reminder, the prior-year net income figure does not capture the tax benefits from stock-based comp. Non-GAAP net income excludes amortization of acquired intangibles, acquisition or restructuring costs and stock-based compensation expense, as well as the income tax effects of these non-GAAP adjustments. Adjusted EBITDA for the second quarter was $42.2 million, an increase of 12% from $37.6 million in the same quarter of the prior year. Adjusted EBITDA margin was 27%, slightly lower than the first quarter due mostly to the mix shift towards delivery, and to a lesser extent, our previously-noted investments in marketing and technology. We ended the quarter with approximately $374 million in cash. As Matt said, we are extremely excited about the long-term partnership we formed with Yelp, including the planned acquisition of Eat24. Yelp's scale, in combination with the direct business of Eat24, will bring our platform more order volume and diner exposure, benefiting our restaurant partners with new potential diners and more orders. The Eat24 business, including orders generated through the Yelp platform generates a little more than $600 million in annualized Gross Food sales, growing in the low double-digits annually. This represents more than 50,000 daily orders that Eat24 is driving to its current network of restaurant partners. We believe the partnership will benefit all three consumer platforms

[Operator:]

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

[Mark A. May:]

Hey, guys. Thanks for taking my questions. First one, given that you're investing more heavily in some of the Tier 2 and Tier 3 markets, I wonder if you could comment a bit on what you're seeing in terms of customer cohort behavior and how that compares with some of your early kind of core Tier 1 markets. And if, I guess along the same lines, what you're seeing in terms of marketing efficiency, I guess, they're kind of interrelated, early on in some of these markets relative to some of your more established markets? Also wondering if Adam could comment a little bit on how the business is trending kind of exiting the quarter and kind of in the early parts of Q3 here? And maybe just lastly, if I could sneak in one last one. If you could talk about the progress you're making in actually lighting up and activating some of the chains? Thanks.

[Matthew M. Maloney:]

Sure, Mark. I'll take a few of those. Maybe let Adam cover the rest. So in terms of marketing efficiency diner growth, obviously, we're still spending aggressively into the Tier 2, Tier 3 markets. I'd say SEO/SEM is getting actually more effective as we have a broader restaurant network. That's one of the benefits not only of the expansion but also the acquisition we announced today. Like we said in, I'm not sure if it was last call or the call before that, the national media is still strong. It's working very well. We found really engaging interesting ways to target market by market, digital video, YouTube, social has been great for LTVs in targeting segments that we find high quality. To your first question, I mean, we're definitely looking to bring on board diners that will be consistent orders over time. Obviously, there's a one-and-done slope to every cohort and so we're trying to minimize that and we have all these record new diners and they're not building up into aggressive DAGs yet, but we expect to see that over time. So the cohort in short is still positive. It's not New York quality, but we've been saying for quarter after quarter that as we mix shift away from New York and the high frequency, especially the more corporate-oriented diners that we will have, we'll have a mix shift in terms of lower DAGs. So that's all expected. In terms of chains, we announced a bunch of chains today getting in the Darden Group is a big deal. The chains still find what we offer very attractive. POS is a big part of that. The POS makes the restaurants far more efficient. Chains are really paying attention to efficiency, so we're able to address their needs better. We're able to grow their demand. And our service is, you know, is the best in market right now. And so I think that is why chains are choosing us. That's why chains are choosing to expand their relationships with us, and, frankly I think that's why Yelp and Groupon both chose us to support their consumer networks online.

[Mark A. May:]

Thanks, Matt.

[Adam J. DeWitt:]

And, Mark, this is Adam. In terms of the business trends exiting the quarter, I guess, starting the third quarter, there's nothing of note, right? Our guidance has our current forecast baked in. There haven't been any unusual fluctuations or I should say dramatic differences between the beginning of the second quarter versus the end of the second quarter, versus the beginning of the third quarter. It's very stable. We feel good, as Matt was talking about, in terms of the growth in the Tier 2 and Tier 3 markets. And I thought in terms of the cohort behavior, the cohorts are very stable. In fact, in the markets where we're adding restaurant coverage, they're improving over time and we kind of see the same behavior that we have seen forever. And so, as Matt pointed out, you do see a little bit of a decline in the headline frequency number if you just take active diners and compare it to DAGs. But that's really reflective of a mix shift and a more aggressive new diner acquisition.

[Mark A. May:]

Thanks, Adam. Thanks, Matt.

[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. First off, congrats on Eat24 and the increased distribution on Yelp and Groupon. It's pretty impressive to see. I wanted to ask two questions around that. One is, Adam, if you can provide any insight on the timing of when this might be approved, that would be helpful? And then also bigger picture, if you could talk about the importance and necessity of delivery to these networks that you're partnering and acquiring with in terms of future growth? But then also, how you have built your delivery infrastructure in terms of being able to accommodate new demand, as I think you said Eat24 and OrderUp were more focused on Tier 2 and 3 markets where you may or may not have delivery. So if you can talk about that? And then one last one, sneaking it in, take rates up again in the quarter. Adam, I think you said capture rates went up because the restaurant is paying more. Can you just quantify how much more and maybe what they're paying for? Is it sponsored listings and carousel ads? Thanks.

[Adam J. DeWitt:]

Yeah, so I'll take the first, the timing question and the take rate question, and I'll let Matt jump in on delivery and how it's driving growth for us. So, in terms of the timing, as we said in the prepared remarks and in the release, there will be HSR review for the Eat24 transaction, that can take a little bit of time depending on where it ends up. In terms of integration post close, so post regulatory approval I think what I'd say is generally expect the restaurants to be put on both networks first and then the partnership quickly following. In terms of the take rates, I think last quarter we talked about a similar impact where the headline capture rate was up quite a bit, but there was some organic momentum in the underlying ad fee or marketplace rate. I think we said somewhere in the kind of 10 basis points to 20 basis points range. I think it's something similar this quarter. The one point, or the 160 basis points or so improvement year-over-year in total, almost all of that is due to the delivery mix and kind of a similar amount this last quarter is due to the organic ad fee going up.

[Matthew M. Maloney:]

Ron, in terms of delivery, it's hugely valuable for the networks we are partnering with, both Groupon and for Yelp. I know Jeremy is doing the call in a little bit, but we're nearly doubling the number of restaurants that are able to be ordered online on the Yelp transaction platform, which is not just more restaurants per market but it's more markets, and in all those markets, because we're able to deliver for restaurants, we're able to really bring some of the best restaurants that weren't able to be delivered through Yelp before. So because of all this, we expect meaningful synergy and growth in orders through the Yelp transaction network, which is very excited for us because it's going to be material to our bottom line. Now you're asking about with the partnerships in Tier 2, Tier 3 markets, we're already delivering in all the markets. If there's any markets that we're not delivering in already to support these partnerships, we can spin it up very fast. I'm not concerned about the scalability there. The way that the logistics have been built and the way the teams have been optimized over the past few years is really pretty incredible, and they have built what I believe is the market leading logistics system for food delivery in the country, if not the world, at this point.

[Operator:]

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

[Aaron M. Kessler:]

Great. Thanks. Couple of questions. First, can you tell us, maybe from a high level, is there a revenue share component with these deals? I guess, two, do you expect them to be accretive overall? I assume they would be. And then on the, I guess, from a high level perspective, from our survey work, about 12% of people are using online takeout services today. But about 50% said they are likely to use them in the future. What do you think the big delta is, and how can you maybe close that quicker to accelerate growth? Thanks.

[Adam J. DeWitt:]

Yes, Aaron, how are you doing? I'll take the first question. So in terms of how these deals work, there is a partnership fee for each transaction that goes to either Yelp or Groupon, and you can kind of think of it similar to a, from our perspective at least, as a marketing expense as opposed to traditional marketing. And what I'd say in terms of accretive, you know, because of the scale that we have and because of the volume that the Yelp transaction platform is going to be generating, this is going to be, or we think that this is going to be a very accretive or generate substantial contribution for both companies based on the way that we structured it.

[Aaron M. Kessler:]

A quick follow-up there on the timing of the deals. I didn't hear that. Is it kind of by the end of the year or how should we think of timing?

[Adam J. DeWitt:]

Well, the Yelp deal, Eat24 deal, is contingent on HSR review and approval. Hopefully we can close that as quickly as possible. But we're somewhat – we need to go through the process and kind of play that out. In terms of the Groupon transactions, we're obviously going to try to close all of these and the Foodler transaction as quickly as possible hopefully by, clearly, by the end of the year.

[Matthew M. Maloney:]

And, Aaron, your second part of the question kind of goes right to the heart of why we're doing these affiliate deals. I mean, 12% of the population have placed an order online, majority have not, and a lot of people say they want to do it in the near future and leveraging Yelp's massive network of consumers, I think over 100 million or something last I saw, Groupon, on top of that, we want to be where people are, where they're looking for food or looking for restaurants, when they're ready to make a transaction. If we can be there I think we'll capture a large percentage of those new diners going forward.

[Aaron M. Kessler:]

Got it. Great, thank you.

[Operator:]

Your next question comes from the line of John Egbert from Stifel. Your line is open.

[John Peter Egbert:]

Great. Thanks. So if you can think back to before the GrubHub Seamless merger, at a time when the two platforms were duking it out, spending heavily on marketing against each other in a few key cities, New York being a really notable one, I believe that you saw some real tangible benefits in marketing effectiveness when you combined and the platforms stopped spending against each other and you switched to a single brand focus in each city. So do you expect to see kind of similar benefits between, especially, Eat24 but maybe even OrderUp and Foodler in the markets where they're really strong and expect to maybe see your marketing dollars go further? And then on the technology side, also kind of going back to the GrubHub Seamless merger, the technology side of the integration took a lot longer, and there are, obviously, some bumps in the road in terms of platform stability. Have you learned some lessons there that can prepare you for the Eat24 integration down the road so that might go a little bit smoother? Thanks.

[Adam J. DeWitt:]

Hey, John. In terms of the marketing effectiveness or the kind of benefit of the transaction on acquisition, I think the way that we're thinking about it, the biggest benefit is going to come from having those additional restaurants on the network and building the restaurant side of the network to make us more valuable for diners, increasing conversion and driving more orders. You know, it's hard to say what the marketing dollars are going to return, but we're certainly going to see some benefit from the additional restaurants. We are – as Matt mentioned in his prepared remarks, the Eat24 brand is a very strong brand, and we're going to continue to support that. And so hopefully we'll continue to see acquisition through that brand with the additional restaurants, the GrubHub brand also with the additional restaurants.

[Matthew M. Maloney:]

And then on tech integration, yeah, we've definitely learned a few lessons since 2013. We've done a lot of technical integrations, not only the Seamless one, but obviously we acquired the four RDS' over the past two years as well. I think Eat24 is going to be significantly more straightforward than the Seamless migration. And you're right, over time, we absolutely want to support the technology on our common platform, so we can leverage our customer care tools, so we can leverage our broad CRM marketing capabilities, and the consumer optimization that we've done over the past 18 months, which has clearly reinvigorated growth on our platform. So we think we can – we hope we can do something similar on the Eat24 platform, but in terms of timeframe, I really couldn't tell you at this point.

[John Peter Egbert:]

Okay. Thanks.

[Operator:]

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

[Jason Helfstein:]

Thanks. Just two questions. Just one just clarifying again with Eat24. So when somebody goes and they click on a restaurant on Yelp, will it open up effectively your interface or the Eat24 interface? And then, when you're talking about improving Eat24, that's just basically leaving that legacy as a standalone, and trying to improve that with your learnings and knowledge? And then, I've got one follow up.

[Matthew M. Maloney:]

Yes, Jason. So, clearly, the acquisition is acquiring the traffic. We are going to lead the brand. And not only lead it, we're going to continue to invest in it. We're going to try to grow it. We think it has a strong voice. We think it has a strong resonance with segments of the population that will prefer it. And so we want to acquire that business, leave it standalone, and continue to push it. Now on the partnership side, we are going to replace the Eat24 interface with the GrubHub interface, and so we are going to point that traffic to our – what we have, I mean, our best performing from a national-perspective brand, and the one that's synonymous with the kind of service that we provide. So when it goes live as a partnership, you'll see the 75,000 restaurants across Yelp under a GrubHub brand name.

[Jason Helfstein:]

And then a second question. You talked about bringing a record number of new restaurants in the platform, both independent and chain restaurants. I mean, maybe talk about as you accelerate that, I mean is there a lag between when you bring them on and they're actually producing at a kind of normalized level relative to maybe a year ago, et cetera?

[Adam J. DeWitt:]

Yeah. We absolutely get the benefit right away, but you've got to remember that even if we're adding thousands of restaurants in a quarter, it's still a relatively small percentage, right? And so a small percentage of that small percentage is incremental volume, and so we are seeing it. I mean, you're right. It does take a little bit of time to mature, but it's a constant add over time of the restaurants. And what we've seen in every single market is that over time as we add new restaurants, we're adding more orders for every restaurant. And so it lifts all the restaurants up in terms of volume.

[Jason Helfstein:]

Thank you.

[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 Great. Thank you for taking my questions. I was wondering if anything's changed with the business of a competitive landscape that makes now the right time to embark on this pretty comprehensive partnership strategy. And then, second, when we think about the model, how should we think about GRUBs per Active going forward? Excuse me. Do you have a sense of where that will bottom out maybe over the next couple of quarters?

[Matthew M. Maloney:]

Sure. Paul, I'll take the competition thing. I mean, it's no secret that there are more well financed and aggressive competition than there were a year ago. I think it underscores and proves out the opportunity that we're all chasing after. We are still hitting our growth targets. We're clearly being opportunistic. We're being as aggressive as possible. We are pushing on the marketing, the new diners, we're seeing returns there, we're being opportunistic in terms of M&A, we're being aggressive on partnerships. I mean we're kind of firing on all cylinders. We still believe we have the structural advantage as I've talked about quarter-in, quarter-out. Scale, I think this is improved by the acquisitions. There's no disadvantage in terms of logistics or delivery time focus. I mean we are only doing food delivery, and that's why we were chosen by both Yelp and Groupon is because we do one thing and we do it incredibly well, better than anyone else. We have the lowest consumer fees, no menu markups. We have well over 10,000 menus at this point with free delivery because the restaurants obviously deliver it themselves and have no delivery fee. And then our extraordinary customer support, which was a really big deal for the Yelp team as they really focus on customer experience. So I think those are really the structural advantages we have, and I'm very confident moving forward, but there's a lot going on.

[Adam J. DeWitt:]

In terms of the GRUBs per Active Diner, look, what we've said in the past is if all else is equal, so let's say, we're not accelerating marketing in a quarter and driving some disproportionate Active Diner growth, you'd see that number decline a little bit because of the mix shift away from New York diners. If you think historically about our business, we've always had a significant component coming from New York, and it's still a significant part of our business. So as we add diners disproportionally outside of New York, there's a little bit of a drag on the frequency. I think it was a little bit exaggerated this quarter because of the things that we talked about in our prepared remarks related to marketing and just seeing some opportunities to acquire some additional new diners of quality but just not in New York. Paul Bieber - Credit Suisse Securities (USA) LLC Okay. Thank you.

[Operator:]

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

[Michael Graham:]

Thank you. I just have a couple follow ups on the Yelp, Eat24 combo. So the first one is, GRUB had 55,000 restaurants, Yelp had 40,000, so that's 95,000. And then you said 75,000 combined. So can you just make any comment about those 20,000 or so that were overlap? Like, were those concentrated in any area or were they sort of spread around the country? And then could you just clarify, I thought you gave a run rate Gross Food sales number for Eat24. And I just wonder if you could repeat that. And then just lastly, it seems like if all the Yelp restaurants come on to GrubHub, then the only real sort of rev share thing is going to be if a Yelp user orders. And I know you said that you're happy with the way that the deal is structured, but can you just make any more specific comment about like the economics on an order that happens that way? Do you feel like those unit economics are going to be on par with the company at large? Thank you.

[Adam J. DeWitt:]

Yeah, in terms of the overlap on the restaurant side, the 20,000 are spread around, but the most important thing to think about when you're thinking about the overlap is that it's not like that volume disappears, right? These are different diners that are coming over from Eat24 that are ordering from those overlap restaurants. So it's not a case where any of the volumes cannibalize, right. It's actually all positive because the Eat24 diners that had 40,000 restaurants to choose from before now have 75,000. And the GrubHub diners that had 55,000 will now have 75,000 to choose from. So it's completely additive, and even though there's 20,000 overlapping, there's no cannibalization in there. And in terms of where it is, it's spread over, but it's fair to assume that it's going to be skewed towards our bigger markets. I did give Gross Food sales annualized run rate of where we are now of more than $600 million, and that includes both the Eat24 direct business and volume that's going through the Yelp transaction platform. Finally your question on the economics. I think the key here is similar to the answer to the first question in that, we view this as accessing new diners and not cannibalized diners. And so it's a different way or a different marketing channel to access diners. We think that it's going to be additive. If you think about the market opportunity, and I think Aaron said something earlier about his survey where only 12% of his respondents had tried ordering online, that leaves 88% of folks that haven't ordered online. And so it behooves us to try to access that 88% any way that we can. And we view this as a way to access part of that 88%. So we think it's going to be additive. In terms of the economics, I think over time, it's not going to change, even if it got very large, it would not change the overall profit picture of our business.

[Michael Graham:]

Okay. Thank you, Adam.

[Operator:]

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

[Heath Terry:]

Great. Thanks. I'm wondering if you can just give us a sense of, in the second tier, third tier markets where you're seeing more delivery demand, how much overlap there is with existing restaurants that you've established delivery relationships with versus those for Eat24. Basically, just trying to get to whether or not this is disproportionately beneficial to your owned delivery business versus the restaurant delivery side of things. And then, just as you guys have been able to further consolidate the space around your own brand, do you see any longer-term benefit to cost of customer acquisition coming out of this, or your ability to accelerate growth through incremental marketing?

[Matthew M. Maloney:]

So, Heath, remember, Eat24 doesn't actually do delivery. So they don't have non-delivery restaurants. Those are all going to be new from what we bring, which is great news because we're bringing the demand from not only Eat24, but also from Yelp, because Yelp doesn't have any restaurants that don't do delivery, either. And so, if you think about this – I think this is where a lot of the strategic synergy comes from is because we're able to not only nearly double the restaurants on the transaction platform, but we're also adding much higher quality because these are everyone's favorites. These are the ones we went after first. We cherry picked these from the markets to do delivery for them because we knew the demand was extreme. And so we're really excited to be able to bring online ordering to the Yelp transaction platform for the restaurants that people who are on Yelp really want to order from. And that's really exciting.

[Adam J. DeWitt:]

Yeah. And, Heath, in terms of the cost of the customers. We talked about this a little bit earlier. The real benefit is coming from or is going to come from adding the additional restaurants and giving folks more to choose from. So it's going to increase conversion. I think what it will end up doing is allow us to spend more and hopefully grow quicker and make that offline to online transition move more quickly. But I don't think it's necessarily going to drive CPAs down, but it may enable us to spend more money effectively.

[Heath Terry:]

Great. Thank you.

[Operator:]

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

[Nat Schindler:]

Yeah. Hi, guys. So could you characterize what happens to DAGs and GFS of new customers versus older customers? And how has that changed? A little over a year ago you went on to this quality versus quantity customer acquisition track, took your new acquisitions down. You've lapped that now you're going up quite a bit again. But is there a change from before that shift to quality to what we're seeing now with this new ramp of fairly large amount of new customers on how they trend through the system?

[Adam J. DeWitt:]

Yeah, so, Nat, it's a good point. I mean when we brought our marketing spend I wouldn't say down, but we didn't increase it aggressively last year, it was because we were, and when we were pushing the outer limits of our spend, because of where our restaurant network was at the time, the incremental diners that we were getting, first of all, they were expensive, and second of all, they weren't high quality. And what we've done over the past year-and-a-half and I think we've been talking about it pretty consistently over the last few quarters, is adding a lot of, what we think are, high quality restaurants that we deliver for. And that has enabled us to spend more efficiently and more effectively in those second and third tiers. We can fairly accurately predict what a diner is going to do over its life after watching it for 30 days or so. And we've been adjusting our spending given what we're seeing. I think if you're asking specifically about the model and how you see that decline, I think it's in frequency, I think it's two components. One is that mix shift away from New York and the other is I think is where you're going, being a little bit more aggressive on the new diner ads. Those diners are, obviously, around for only on average for half a quarter, and so they're not impacting orders. I mean, and if you think further, even if they're very high quality, remember that 95%-plus of our orders are coming from repeat customers. So it takes several quarters of incremental new diner growth to actually start making a meaningful difference.

[Nat Schindler:]

Okay. And then on my second question, if I look at this deal, you're buying this for a little less than half of their GFS. And there you're trading for a good bit more than one time your GFS. And so, obviously, there's a scale advantage as you have gotten bigger. And this is probably playing through in the EBITDA per order that they're seeing versus what you can see on your business. So where specifically is that coming? Are you just better able to do operations of support and service a larger network of restaurants with a more scalable group, or where is the advantage that is driving this?

[Adam J. DeWitt:]

Well, I'll take it a different direction. I mean, I'm not going to comment exactly on this deal or the valuation of how we got there and why this is the right price. But in broader terms, right, we've always talked about the economics of a transaction. If you strip out delivery, right, the incremental and assume that you're just going to make whole on delivery in terms of the revenue and the cost, you're dropping something around 75% to the bottom line. And even at scale, we're obviously not generating close to that because of overhead and the costs of development and all the infrastructure that you have to. But as you get bigger, there is quite a bottom line contribution from the incremental transactions. And so over time, that's why we've always talked about EBITDA and I haven't gotten a question yet about EBITDA per order. If you strip out the increase in marketing investment, which sales and marketing on a per order basis was almost $0.19 higher this quarter than it was last year this quarter, and if you strip that out or normalize for that, you're at a much higher profitability or EBITDA per order. And so it's one of the great things about this business model, if you push more volume through the system, you're going to drive cash flow per OrderUp.

[Nat Schindler:]

Great. Thank you.

[Operator:]

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

[Thomas Champion:]

Hi. Congrats on the transactions. I'm curious if you could just elaborate on the record restaurant adds and what are the key drivers there, whether it's your rising active user scale, your delivery capabilities, or whether delivery is becoming maybe more strategic on the restaurant side. Thank you.

[Matthew M. Maloney:]

Yes. Sure, Tom. I mean absolutely delivery is strategic on the restaurant side. There's thousands more restaurants that don't have delivery and so we're clearly going after the best ones, the ones we think will drive the most demand in each marketplace. With the POS augmentations and partnerships that we've been talking about, I think that's a big deal, also. The scale itself is a big deal, but the number one reason restaurants come on GrubHub is because they want more orders. So as we announce acquisitions like this, for example, it just compounds. It just keeps getting bigger and more valuable to restaurants. I think we'll keep seeing very aggressive new restaurant adds in the quarters to come. And an interesting part of the partnership that I'm not sure was highlighted, but we're going to be the preferred provider on Yelp. So whenever we have a restaurant, it's going to be through our platform which is even better for the restaurant because more orders will come through our pipes through the same order infrastructure which will drive even greater insights from our technology to the restaurant to help them be more competitive. And so the scale is just very good in this industry. It makes us more efficient but it also increases our value proposition to the individual restaurants. And as we not only grow quarter-to-quarter, but also as we add these acquisitions and we continue to expand our scale, it just continues to get more valuable for the restaurants themselves.

[Thomas Champion:]

Great. Thank you.

[Operator:]

This concludes today's conference call. Thank you for joining. You may now disconnect.