Just Eat Takeaway.com N.V.
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good morning. My name is Adam and I will be your conference operator today. At this time, I would like to turn the call over to David Zaragoza.

[Dave Zaragoza:]

Good morning, everyone, and welcome to Grubhub's third 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 Web site at investors.grubhub.com. In addition, we'll be referencing our press release, which has been attached as an exhibit to our current report on Form 8-K filed with the SEC today. I'd like to take this opportunity to remind you that during the course of this call, we'll 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 in these forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC, including the risk factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on February 28, 2017, and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, that will be filed with the SEC in early November. Our SEC filings are available electronically on our investor Web site at investors.grubhub.com, or the EDGAR portion of the SEC's Web site 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. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. And now I'd turn the call over to Matt Maloney, Grubhub's CEO.

[Matt Maloney:]

Good morning, everyone and thanks for joining the call. This was a milestone quarter for Grubhub. We have continued the aggressive expansion of our industry-leading restaurant network driving our highest rate of organic diner growth in the last 2.5. We also completed our acquisitions of Eat24, Foodler and OrderUp. Diners in every market have access to more options than ever before on Grubhub. Growing the opportunity for our restaurants and further enhancing the value we drive to our partners. Our restaurant network is now 60% larger than it was at this time last year, with a lot of that growth coming from high quality delivery restaurants in tier 2 and tier 3 markets. I want to talk about all the opportunities this covers or knocks for us, but first I would like to give a few financial and operational highlights from this record quarter we just finished. Grubhub generated a $163 million of net revenue in the third quarter. Growth of 32% compared to $123 million in the prior year. DAGs were up 14% year-over-year and down slightly from the second quarter as expected. We were impacted slightly by the hurricanes but it was a small overall impact to the business. Grubhub delivery continued its impressive growth driving total revenue up 3% from the second quarter despite a sequential decline in DAGs. There was also a small additional benefit from restaurants paying higher fees for more exposure on our platforms. GAAP net income was $13 million for the quarter, down approximately 1% from the prior year as a result of the approximately $5 million of deal related and legal cost. Adjusted EBITDA was $43 million, growing 21% year-over-year and up modestly from the second quarter. Adjusted EBITDA per order was $1.54, our highest level ever, up 7% from prior year's $1.44, driven in part by improved delivery efficiency as those orders approach economic parity with restaurant self delivery orders. Diner growth accelerated to 28% year-over-year growth in the quarter driven by a 33% growth in sales and marketing. We continue to push the limits of our advertising, investing in areas we find effective and testing new channels at the same time. Given our continued success here, we are ramping into the seasonal strength of the cold months and the school year. We have been pleased with the quality of the new diners coming through our platform and are seeing them grow into sticky cohorts, reinforcing the power of our network. Grubhub generated gross food sales of $867 million for our local restaurant partners in the quarter, an increase of 18% year-over-year. As consumer habits drive increasing amounts of online food ordering, more restaurants partnering with Grubhub to help them capitalize on this opportunity every day. With our network of almost 10 million active diners, best in class delivery logistics and world-class customer support, we are in the prime position to reap the benefits of this massive secular tailwind. We now have Grubhub delivery in around 80 markets and more than 800 cities which combined with our live customer support team numbering over 1000 people, makes us an invaluable partner to restaurants that want to drive them on enhancing their brand. As a results, national chains are turning to us more and more like the Cheesecake Factory this quarter, who has chosen us to drive customer frequency and new diner acquisition while delivering a world class experience. We have also been growing our relationships with existing chain partners at a steady clip. We now cover 150 locations for Red Robin Gourmet Burgers, a 100 locations for BJ's, 200 for Boston Market and 100 for Qdoba. We have proven our ability to scale delivery and this advantage will create more opportunities as we expand and deepen our coverage across the country. We closed the Eat24 acquisition and commenced our partnership with Yelp on October 10. The addition of Eat24 to our business further strengthens our position across tier 1 markets and notably doubles our business in a number of large tier 2 markets. We are now doing more than 1000 DAGs in 31 markets and with the complementary Eat24 restaurant network, we can acquire new diners even more effectively in markets like Miami, San Diego, Seattle, Las Vegas, Dallas and Houston. We see substantial opportunity in these markets and will accelerate our efforts their given the step function improvement in our restaurant density. In order to best capture these benefits, we will be adding the Eat24 restaurants to the Grubhub platform over the next few months. Not only will this improve our ability to attract new diners, but as we have seen in the past, when Grubhub diners have better selection their order frequency and retention increase. We are equally as excited about the opportunity to power online ordering for Yelp. Yelp has tremendous consumer awareness and diner traffic with high intent to order delivery which has made it an extremely successful channel for Eat24. As we go through the process of adding our 30,000 incremental restaurants to the Yelp platform, many of them high quality Grubhub delivery restaurants, we believe an increasing amount of Yelp's traffic will convert into online orders offering upside to the already impressive growth in this channel. Both the Yelp team and the Grubhub team are excited by this opportunity and are heads down focused on completing the integration quickly to offer a seamless experience to diners on Yelp. Nonetheless, there is some work to do and we expect this to take months not weeks, putting full integration likely by the third quarter of 2018. In addition, we ultimately expect to migrate the Eat24 brand off of Yelp's [text deck] [ph] on to the optimized platform currently powering Grubhub and Seamless. Once this happens, the Eat24 diners will have feature parity with Grubhub diners, the same high quality delivery restaurants, the same optimized store algorithm and the same ordering features and personalization which could yield benefits similar to those we saw back during the Seamless, Grubhub migration two years ago. This migration will also likely take place sometime in 2018. The migrations in Foodler and OrderUp have been a bit quicker. In fact they are both already complete. We closed our deal of Foodler on August 23 and cut over their diners just last week after lining up all of the Foodler restaurants in Grubhub. While setting down the Foodler site and apps had some attrition risk, it also had benefits. When these diners are redirected to the Grubhub site, they now see a significantly better selection of restaurants then they had on Foodler and a much improved ordering interface yielding higher levels of ordering and higher lifetime values. The speed and migration allows our team to eliminate the distractions of two different diners channels in Boston and instead focus on driving higher levels of diner acquisition and growth. The acquisition of 27 OrderUp markets closed on September 14 and we migrated the diners to Grubhub that same day. I couldn’t be more pleased by our team's speed of execution here as the quick migration has allowed us to ramp that business in the early days of the school year capturing the structural growth in those markets with minimal disruption. Both deals are easily on track to meet our expectation for orders and diner migration attrition. Our integration team has clearly been busy but our diner acquisition and marketing teams haven't slowed down either. We have continued to extend our brands directly to consumers on a bigger scale than ever before. We launched a new national television spot recently showcasing a day in the life of a delivery partner, bringing food to a wide variety of Grubhub diners. We also just launched an out-of-home campaign for Seamless in New York taking over Madison Square Garden and Time Out magazine in the process. This features hand drawn illustrations of 85 different characters this campaign celebrates New Yorkers and the food they love, highlighting the very unique diner base that Seamless represents for us. On another note, you may have noticed a few weeks ago that we were powering online order taking by some Facebook restaurant pages. We have always believe that there is value in partnering with any property that has diners who want to order, as long as we can do it in a way that creates long-term value both for our diners and our restaurants. Today we partner with a number of properties to drives orders to Grubhub including, Yelp, Groupon, Trip Advisor and Zomato. We have partnered with Facebook in a similar vain. We are of course excited to be working with one of the most innovative and largest platforms on the Internet. We believe there is opportunity to grow this channel. But it's very early in our relationship and we both need to figure out how to best turn hungry Facebook users into Grubhub diners. Overall, we have had a lot of work ahead of us as we look to accelerate growth, leveraging our Eat24, Foodler and OrderUp assets, as well as our partnerships, especially with Yelp. We see opportunities for quick and early wins and integrations but also the opportunity for longer term improvements to sustain growth for years. We are excited by this opportunity and look forward to giving an update on all of the great progress next quarter. With that I will hand it over to Adam.

[Adam DeWitt:]

Thanks, Matt, and good morning, everyone. On top of our record quarterly results, there are some moving parts related to our three acquisitions that would benefit from a little more detail. With that in mind, I will start with the OrderUp and Foodler integrations as that will be helpful context in understanding our results. Then following the quarterly review, I will go through our expectations for the fourth quarter including how our results will be impacted by Eat 24 which closed earlier this month. We closed Foodler on August 23 and OrderUp on September 14. Both of these transactions are somewhat different from other scale deals we have done in that our goal was to move off of the legacy platforms and operations as quickly as possible. We did this to minimize complexity and distractions and maximize the benefits to diners and restaurants by getting them on to the Grubhub platform quickly. In the case of OrderUp, we migrated the diners and shut off the legacy OrderUp platform on the same day as the close, September 14. That morning, diners coming to OrderUp in one of the 27 markets we acquired were redirected to the Grubhub platform with all their old favorites as well as many new great options. Today, all of those OrderUp diners are now Grubhub diners ordering through our app and site and benefitting from our robust ordering features we have built along with a more complete restaurant network. With this type of hard migration, we do expect some minor attrition, given with our speed over making a smooth transition for diners. And this was reflected in the prices we paid for this properties. However, we believe that this is more than made up for over time because of our team's ability to stay focused on Grubhub while maximizing the time OrderUp and Foodler diners can experience the more robust Grubhub platform. Since the diners are already interacting with Grubhub directly on the Grubhub branded platform, we have good but not perfect visibility into the individual diners and orders we are getting from OrderUp. But we have very good data in how those markets are performing pre and post migration. All of our data indicates that the hard migrations perform better than we had modeled. Conversion was high and attrition appears to be lower than expectations. Our acquisition of Foodler closed a few weeks earlier on August 23. We completed a similar hard migration of Foodler diners and restaurants turning off the Foodler platform completely on October 17. Very early data suggests that the Foodler migration is going as well as OrderUp, with high conversion rates and lower attrition than we anticipated. Similar to OrderUp, we will have good overall market data performance but not perfect information as to every diner and order Foodler is contributing over time. With that as a backdrop, some color on the quarter. We processed 304,500 daily average grubs in the third quarter, up 14% year-over-year. OrderUp and Foodler contributed roughly a point of the growth. Some context on the order growth this quarter. This was our hardest comp period of the year with a number of distinct headwinds. The recent hurricanes that disrupted southern markets, the timing of the Jewish holidays, the Olympics last summer, and mile weather in our bigger east coast markets, all worked against frequency for a collective 2% to 3% detriment. Active diner growth continued its strong trajectory in the quarter growing 28% year-over-year or 26% on an organic basis. I want to note here that while the diner count at the end of the quarter includes the full 12 month active diner count from Foodler, the DAGs figure only includes orders post close or less than half a quarter. Gross food sales for the third quarter were $867 million, up 18% year-over-year. Similar between 16% and 17% excluding the acquisitions. Average order size was up about 4% year-over-year. Given all three of our acquisitions are consumer facing and have similar order sizes as Grubhub, this growth in average order size is really a clean representative growth rate unaffected by the acquisitions. Third quarter net revenues were $163 million, 32% higher than the year ago quarter of $123 million or between 30% to 31% higher on an organic basis. Net revenue as a percentage of gross food sales was 18.8% during the first quarter, up 200 basis points from the prior year's 16.8%. this was driven by the mix shift within our business towards delivery orders which carry a higher capture rate per order and to a lesser extent continuing momentum on underlying commission rates resulting from restaurants paying for more exposure on our site. On the expense side. Operations and support expenses were $65.4 million, a 47% increase compared to the $44.3 million in the third quarter of last year and a sequential increase of 4% compared to the second quarter. While the outsized growth in this line item continues to be driven by a mix shift towards more Grubhub delivered orders, we have seen improved efficiency and better economics for our delivered orders in every quarter of the last two years. When we started investing in delivery in the second half of 2015, we said that with scale we will get to economic parity between Grubhub delivered orders and restaurant delivered orders. We also said late last year that we thought that we would get that scale by the end of this year 2017. We remain well on track to achieve this goal of generating similar cash flow on the delivery and self delivery orders by the end of this year. In 2018, we expect to be indifferent economically between orders that restaurants deliver and orders that we deliver. Sales and marketing expenses were $35.1 million in the third quarter, a 33% increase compared to the same quarter last year and a sequential increase of 1% compared to the second quarter. It's been a strong year for opportunities to acquire diners in all of our markets and we have invested behind that strength. Previously we guided to mid to high 20s year-over-year growth in this line item for 2017. Given our spend year-to-date and our expectation to ramp into our seasonally strong months, we expect total sales and marketing growth to land at the very high end of this range. Additional marketing expense to support OrderUp and Foodler markets will likely take sales and marketing growth above 30% for the year. Technology expenses excluding amortization of web development were $14.3 million for the quarter, increasing 30% from the third quarter of 2016. Depreciation and amortization was $12.6 million for the quarter, a sequential increase of 21% from the second quarter and 39% from a year ago. This quarter included a little more than a month of intangible amortization related to the Foodler acquisition or about $1.5 million and a few hundred thousand from a couple of weeks of OrderUp. We expect D&A to tick up again in the fourth quarter as we incorporate a full quarter of intangibles from Foodler, OrderUp and most significantly nearly a full quarter of the Eat24 acquisition. G&A costs were $18.2 million, a sequential increase of 26% from the $14.5 million in the second quarter. This includes approximately $4.5 million in fuel related and legal costs. Excluding these onetime costs, G&A was up slightly sequentially. Net income was $13 million compared to the prior year of $13.2 million. Net income per fully diluted common share was $0.15 on approximately 89 million weighted average fully diluted shares. Our tax rate for the second quarter was around 25%, lower than our statutory rate of approximately [40.5%] [ph] driven by benefits from excess stock based compensation. Non-GAAP net income was $24.5 million or $0.28 per fully diluted common share compared to the prior year of $19.9 million or $0.23 per fully diluted common share. As a reminder, the prior year net income figure does not include the tax benefits from stock based comp which were not included on the P&L until 2017. Non-GAAP net income excludes amortization of acquired intangibles, acquisition and restructuring costs, legal costs, and stock based compensation expense as well as the income tax effects on these non-GAAP adjustments. Adjusted EBITDA for the second quarter was $43.0 million, an increase of 21% from the $35.5 million in the same quarter of the prior year. This includes an immaterial benefit from the OrderUp and Foodler deals. While adjusted EBITDA margins of 26% were down slightly from the second quarter, adjusted EBITDA per order which we view as a better gauge of our profitability, was up meaningfully both year-over-year and sequentially. Adjusted EBITDA per order in the third quarter was $1.54, up 7% from the prior year's $1.44 per order. We achieved this record level of profit per order even while we continued to invest aggressively in new diner acquisition, delivery coverage, product improvements and restaurant sales. We ended the quarter with approximately $332 million in cash after having paid approximately $72 million in total for the acquisitions of Foodler and OrderUp. Subsequent to the close of the quarter, we closed the Eat24 transaction and refinanced our existing credit facility which did not have an outstanding balance. We used approximately $300 million in cash on the transaction and drew $200 million on the new debt facility, putting our pro forma cash at close to $230 million after factoring in Eat24 and the financing. The new debt facility has an additional $150 million in capacity, $350 million in total and is due in five years. At this point I would like to talk through our Q4 guidance and give some high level thoughts on how the acquisitions will impact us in 2018. It's important to note that this guidance includes Eat24 from the close date, October 10 onwards, as well as a full quarter of Foodler and OrderUp volume. For the fourth quarter we expect revenue in the range of $197 million to $205 million, with just under $20 million of this coming from our three acquisitions. This includes a number of assumptions around how Eat24 will perform post-close, our Foodler and OrderUp diners will continue to perform post cutover, and a somewhat higher level of [contra] [ph] revenue discount than is typical for us to help ensure we get the highest conversion of Foodler and OrderUp diners as possible. We expect adjusted EBITDA to be in the range of $51 million to $56 million. This guidance includes around $2 million of contribution from our three acquisitions. On packing this $2 million, we expect Eat24 to contribute a de minimus amount of adjusted EBITDA, meaning the combination of Foodler and OrderUp will be responsible for almost all of the acquired EBITDA in Q4. Since we have already retired the Foodler and OrderUp platforms, all that volume is running through the Grubhub platform. Those orders will have the exact same revenue and EBITDA contribution as incremental Grubhub orders. The only real expenses associated with these orders are customer care, credit card processing, driver pay where applicable, and some incremental marketing to support those markets. As a result the orders will flow through our P&L at a very healthy profit level, well above our total company average of about $1.50 an order. While Eat24 will contribute to the top line immediately, the timeline to significant proper contribution as well as revenue synergy opportunities is a bit longer. When all said and done, after full Eat24 platform migration and Grubhub integration with the Yelp transaction platform, we expect these orders to generate significantly more than $1.50 of the EBITDA per order and believe there is realistic potential to accelerate growth on both the Eat24 brand and the Yelp transaction platform. However, as Matt pointed out earlier, we have some work to do to get there. We are currently operating Eat24 platform exactly the same way it was operated pre-acquisition. Using the legacy back office and the number of critical process shared with Yelp. Due to the scale of the Eat24 business and power of the brand, we believe this is the best way to grow the diner base and maintain customer loyalty while we work on the integrations. There are really three major milestones to the Eat24 migration. The first will be adding all of the Eat24's additional 15,000 restaurants to the Grubhub platform, which we expect to be complete over the next couple of months. While we see incremental growth potential here, there will be little in the way of efficiency gains. Another milestone will be connecting the new 75,000 restaurant strong Grubhub restaurant network to Yelp, including all of Grubhub's high quality delivery restaurants. We see significant growth potential here as we increase the restaurants Yelp offers online ordering from by approximately 30,000 to a total of 75,000. Our hope is to achieve this by the third quarter of 2018. When we connect Grubhub to Yelp for referral orders, we should seen an increase in orders given the dramatic increase in restaurants and subsequent improvement in profitability as those orders will benefit from running through the more scaled Grubhub platform. The final milestone will be lifting the Eat24 product off of Yelp's text stack and migrating it onto Grubhub, which we also hope to complete by the third quarter of 2018. The big benefit here is that Eat24 diners will have a broader restaurant base to choose from including Grubhub delivery restaurants for the first time. They will also have the full features and functionality of the Grubhub platform which will position us well to drive stickiness and frequency. At this point, we will be able to improve marginal profitability to levels comparable to the Grubhub platform. Given this roadmap, we wouldn’t expect to improve on, let alone hit the current company average of $1.50 adjusted EBITDA per order on Eat24 and Yelp orders until late in 2018. That said, once we hit all three milestones, these orders should be accretive and should drive overall adjusted EBITDA even higher per order. We will go into more detail on our 2018 outlook following the fourth quarter but to give you a sense for how all three of these acquisitions should impact our growth next year, we believe that all three together will add at least an additional $800 million in gross food sales on top of our organic growth in 2018. Just to be clear, we expect our overall growth in 2018 to be significantly higher than that $800 million in GFS when you include the organic growth of the Grubhub and Seamless brands. We are excited to get to work on this important integration. The combined business of Grubhub and Eat24 will offer diners the most comprehensive network and product we have ever had and we are working hard to accelerate the inevitable shift from phone ordering to online. We look forward to updating you on our progress next quarter. With that, Matt and I will take your questions. Operator, please open up the lines.

[Operator:]

[Operator Instructions] And the first question comes from the line of Ralph Schackart from William Blair. Ralph, your line is open.

[Ralph Schackart:]

Two questions, if I could. First, maybe can you just drill down a little bit deeper in terms of what's driving the highest organic diner growth that you have seen in history of the company given the scale that you are at today. And then I think in the prepared remarks you talked about some benefits of some of the restaurants paying higher fees. Just curious, was that sort of one time in nature or part of the continual evolution of what you have seen on their organic take rates. And then the last one is, can you sort of provide the organic take rate in the core business. Thank you.

[Matt Maloney:]

Hey, Ralph, it's Matt. I will take the first one, Adam will take the second two. So we continue to spend aggressively on diner acquisition and engagement across all the major channels. We are continually testing. So there is ongoing testing. And we want to see where we can continue to spend more dollars, how we can scale our investments with healthy diner LTV. So, specifically, search continues to be a really strong channel for us. If you think about it, it makes sense that the benefits here grow as the restaurant network grows because there is more supply that we can bid on and the number of terms expand efficiently as you expand geographies. So as we bring the Cheesecake Factory on board, we are going to be able to push a lot more SEM in different geographies. And then we still see a lot of return in the national media and the broad distribution. Again, the growth in the restaurant network, both in depth and breadth allows us to really optimize that investment and we can also advertise more locally in tier two markets, similarly how we do in tier one markets. So we are able to leverage best practices that we have been refining over time in larger geographic areas.

[Adam DeWitt:]

Hey, Ralph, it's Adam. I will take the second question. In terms of the commission rates going higher, I think I would categorize it as being part of the steady march over time. We continue to, one, we continue to grow. So we get more eyeballs on the platform and we are more valuable to restaurants even if we are not changing the product. Two, we continue to find new ways to get restaurants additional exposure and so they are able to get even more views and they want to pay to get more exposure. So I think in past we have talked about opportunities for the restaurants on the home page, in email marketing, as a part of our menus. And so there is just a lot more opportunities and what you are seeing is just that spreading throughout the restaurant population and working those [grades] [ph] up over time. You asked the question, when you say organic take rate, what exactly did you mean?

[Ralph Schackart:]

Just the commission rates that you are seeing restaurants pay outside the overall take rate inflation due to the shift to delivery?

[Adam DeWitt:]

I got it. So in the past we have talked about, we haven't really broken it out specifically. I think what we have said is, most of the improvement in the rate is coming from the mix shift to delivery and a smaller amount of it is coming from that steady march up. But obviously, if that rate moves 10 to 20 basis points higher, the underlying ad fee rate, it all drops to the bottom line. So I don’t think there was, this quarter, a significant difference in the increase there. So I would say it's probably consistent with past quarters.

[Operator:]

And your next question comes from the line of Brian Nowak from Morgan Stanley. Brian, your line is open.

[Brian Nowak:]

I have two. So it sounds as the line on your plate over the next 18 months to the 24 and kind of all the integration. Can you just talk to some of the biggest risks that you see around integration and kind of executing on these opportunities? Any learnings you have from the past around Seamless and LAbite, you think they are going to help you navigate through this. And then the second one, just going back to the commission rates. They are up pretty nicely. You talked about the restaurants kind of paying for placement. Can you talk a little bit about the go to market on the sponsored listings business and steps you have to take to really drive faster growth in those potential high margin revenue streams. Thanks.

[Matt Maloney:]

Hey, Brian, this is Matt. I will take the first one. So kind of broadly, the way we think about Eat24 integration is kind of three parts and there is varying timelines. Immediately we are getting the Eat24 restaurants on the Grubhub platform. Our experience has taught us that when we give our diners more choices, they order more. So we are trying to aggregate all the restaurants in all the platforms as possible. Then we want to start pointing the Yelp APIs at Grubhub to really leverage the Yelp transaction platform. I am really excited about the Yelp transaction platform doubling the restaurants that they have given their volume of diners looking for restaurants should increase the conversion rate. And I think that we will see stronger growth with Grubhub's support versus standalone Eat24. And then finally we want to move the Eat24 platform itself to our technology platform which will allow us to leverage much more broader customer care tools, our full sales and marketing suite. And all the consumer optimizations we have been doing for the last two years. So we are pushing really aggressively now that that, the HSR is cleared. I mean if you think about, and it's a good point, we have done this six times in the past few years including a massive Seamless transition. So at this point we know exactly what we are doing. We know where the risks are and we are pushing aggressively with the teams that are managing the migration. I have a large team in San Francisco, literally today working with the Yelp organization, planning out milestones and goals and all that. So when you think about how you compare the Seamless transition a few years back with this one, the difference back then was, neither Grubhub nor Seamless could support the volume of the combined entity. Currently we have -- easily we have capacity for all of Eat24's scale. So we are not worried about the scalability, we are not worried about the reliability. The issues that we had back in 2015. We are very solid and we are moving aggressively to migrate all the diners, the Eat24 diners over to our platform as soon as possible.

[Adam DeWitt:]

And Brian, it's Adam. In terms of the commission rates and go to market, I think we helped to clarify it. So we have those listings on our sites that we label as sponsored but we really just treat that as part of the overall package that the restaurants get. So that’s really included in the impressions when we talk to restaurants about getting more impressions by paying more. That’s one of the opportunities. And so that’s really included as part of that. It's not a separate fee. It's all wrapped into the commission.

[Operator:]

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

[Ron Josey:]

Just two real quick on the acquisitions, just to understand a little bit better. And Matt, understood on, and Adam, understood on the three phase approach for Eat24 and Yelp, but I want to ask about the timeline specifically. On the Yelp transition, why this transition would be different than perhaps with your other existing distribution partners. Like you mentioned Facebook and Trip Advisor. In the sense that why wouldn’t they grow the API to be able to be incorporated relatively quickly versus by 3Q '18. And then secondly, just on the take rates. I mean based on our diligence in talking to Eat24 and Foodler and OrderUp restaurants, it seems they have a lower overall take rate. Can you just talk about perhaps those acquisitions reaching parity with that of Grubhub and/or will they be placed just from a process perspective, just in the overall sort of option for Grubhub. Thank you.

[Matt Maloney:]

Hey, Ron. It's a good question. I mean, honestly, until it closed, which was like very recently given the HSR review, we really couldn’t work with them to build out a core plan. So like I said, we have a team out there right now that is talking about this actively. As we have dug in deeper over the last couple of weeks, I think that Q3 is a very reasonable goal, that doesn’t mean it's the most aggressive timeline. This isn't the same as some of the other integrations that we have done because there is a lot more custom and unique features that we want to build with Yelp because given our experiences. We want this to be as productive as possible. So we are going to be pushing really hard to make sure the payment elements are integrated, everything we can do to maximize conversion across that platform for us, we want to do with Yelp and we are investing heavily in this. So I think Q3 of '18 is very achievable. I am obviously pushing the teams to get it done as soon as they can.

[Adam DeWitt:]

And Ron, this is Adam. On the take rates, it's a good question. I think last quarter when we talked about the acquisition, I think we noted that the Eat24 take rates were in general lower than the Grubhub take rates but a lot of it had to do with a couple of factors unrelated to just charging the restaurants more. One is, they tend to be in markets where we have lower take rates overall. Our highest take rates are in Chicago and New York and Eat24 is stronger in some different markets where our take rates are a little bit lower. The other is, their take rates are a little bit lower but not substantially. And then the third component to think about is that they do not have any delivery. So when you are looking at our 18.8% capture rate that we had last quarter, a lot of that or a lot of the increase over the past couple of years has been due to a shift in delivery. So the take rate at Eat24 is a fair amount lower from a headline perspective. So I think it's probably helpful to give some context. I think that in the fourth quarter, you are probably going to see our overall take rate go down a little less than 100 basis points, as a result of the Eat24 volume coming on the platform. But the important thing to highlight here is that over time, I think that becomes an opportunity. I don’t think it's going to be a step up necessarily in November, December. Matt talked about the different phases of the integration. I think that you will see that take rate move up over time as restaurants see more value in getting more impressions as Eat24 and Yelp order from delivery restaurants and we just have more value for the restaurants over time. So I think you will see that go up over time as an opportunity but I think you will see a little bit of a step down initially in the fourth quarter.

[Operator:]

And your next question comes from the line of Paul Bieber from Credit Suisse. Paul, your line is open.

[Paul Bieber:]

A quick follow up on Eat24. Perhaps you could just provide some color whether you plan to continue to invest in the Eat24 brand. They were spending a lot on marketing. Or are you going to reallocate some of those marketing dollars to Grubhub. And then just to follow up on some of the tier two and tier three cities. What are you seeing in terms of the cohort spending in those cities since you have really increased the investment, starting at the beginning of this year.

[Matt Maloney:]

Sure, Paul. So on the Eat24 brand. Based on everything we know today, we continue to see a brand with loyal diner base, strong voice. I believe that Eat24 has a lot of value and its worth investing in and growing. That said, obviously we are going to watch and see if there are opportunities to emphasize Grubhub or Eat24 or vice versa on a market by market basis. I think you might be referring to the Eat24 out of home campaign in New York currently where Grubhub is very strong and Seamless is even stronger. So it doesn’t make a ton of sense to push Eat24 in New York anymore. But for example in San Francisco, in LA, in Miami, in Seattle, where Eat24 has a much stronger presence. I see us investing more aggressively then they have in the past.

[Adam DeWitt:]

Paul, this is Adam. On the tier two and three cohorts. We have said this over time but the their two and three cohorts, they are improving. We obviously see lower frequency in all markets relative to New York and to some degree Chicago. Although the tier two and three markets look a lot more like Chicago than New York. And what we have seen as ramped up advertising is that those cohorts continue to be sticky and continue to generate the same kinds of frequencies, if not higher. So we see the cohorts improving over time, like we see with cohorts in all markets. But we also see as we get more restaurant density, particularly as we added the delivery restaurants in those markets, we have seen diners become stickier and order more over time.

[Operator:]

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

[Nat Schindler:]

Two questions. One on, you mentioned the high incremental margins from the Foodler and OrderUp acquisition, particularly Foodler as I am looking at it. You still are mentioning though that your cost will be incremental marketing per order. That makes sense. You will spend some money on marketing. But is that money that you will spend on marketing in Foodler equal to what you and Foodler spend combined in those markets before. What I am trying to get at is, is there any possibility for marketing synergies simply from not having to be competitively fighting with each other in those markets. And then I have another question just after that.

[Adam DeWitt:]

Nat, it's a great question. So if you are trying to get the same number of new diners, I think that you are probably right. There is probably an opportunity. Now let's remember these markets aren't our biggest markets so you are not talking about millions of dollar here. You are talking about a few hundred thousand. But the reality is, we see this as an opportunity, right. And so what we are going to try to do is redeploy that extra advertising and marketing spend so that we can accelerate the growth. And so hopefully we are spending the same amount for getting but getting more new diners. That’s the optimal. If we are talking about getting the same number of new diners that we were getting before, you are probably talking about a little less spend.

[Nat Schindler:]

Okay. And then somewhat related, as you just mentioned going in, accelerating in these new markets and geographies where you see opportunity. Where do you feel that you guys need to really move more aggressively? Where do you see a real opportunity outside of your core markets where you don’t have significant share where you think you can get significant business.

[Adam DeWitt:]

I mean what I would say Nat is, what we have said on past quarters, I think is still true. Which is, we want to be as aggressive as possible in all of our markets. So there is still lot of opportunity in New York, Chicago, San Francisco, LA, but there is also a lot of opportunity and potentially even more longer term opportunity in Houston, Dallas, Miami, Phoenix. I think the key is that it's always been that we have to balance the growth, right. And so we have to add the restaurant density and then follow up with marketing and then kind of wash, rinse and repeat. And so we are -- I would characterize this as being aggressive in all the markets. It just depends on kind of what stage they are at, right. And so at one end you have New York and Chicago where we are being aggressive in branding and we are spending a lot of time making sure that we have the highest quality restaurants, and the most popular restaurants. And we are focused more on the quality of the restaurant base than we are on the pure numbers. Then you go to more of a market, I mentioned Houston before, so I will just talk about Houston where it's earlier and we are still focused on getting restaurants and getting awareness, right. And it's a different challenge. And so when we think about marketing and we think about sales, we think about on a market by market level. And it's really about being as aggressive as possible because as we have shown with our proclivity in going after kind of scale deals, we believe that there is a lot of stickiness with these diners and so first mover advantage is really important.

[Nat Schindler:]

Adam, just a follow up on that. Are there any significant markets where you feel you are behind in restaurant density versus any local competitors or small and national ones.

[Matt Maloney:]

I don’t think there is any markets where we are significantly below in terms of restaurant density. I think there are perhaps more rural areas or more distant suburban areas away from the city centers where we haven't built out our delivery infrastructure yet. And that will be the only place and that’s in limited locations where we would be at a detriment in terms of restaurant density.

[Operator:]

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

[Heath Terry:]

Just to dig a little bit deeper into some of the frequency questions. Can you give us a sense in any sort of like to like qualification of what you are seeing in frequency in some of the tier three -- sorry, tier two and tier three markets where you have added delivery. I know you have sort of referenced how those markets have been developing in the past relative to the frequencies that you see in your tier one markets. Curious how that is trending?

[Adam DeWitt:]

Yes. So, Heath, the way to think about it is, so even without delivery , what we have seen historically is markets that are early have lower frequency and then over time as the market gets more and more dense, we see the frequency go up. We also see the frequency go up as cohorts age. So that’s even kind of regardless of whether or not there is delivery, right. And what I would say is by adding delivery, what we have done is accelerate that increase over time. I think when you are talking about the actually numbers and digging into the frequencies in the individual markets, it really depends on the market. I mean we see some tier twos and tier threes that are really close to the frequency in Chicago. And we see other -- and these are markets where you see sprawl, kind of like Denver or LA. And so things are spread out but we still see very similar frequencies and we see other markets that have gravitated towards slightly lower frequency. But it's not necessarily exactly what you would expect. But in all cases, what delivery it does to a market and adding those high quality restaurants is it accelerates that timeline for the improvement in frequency. And I think we talked about a couple of examples where that has taken place for us. I think Portland is a great one where kind of we had a steady [drumbeat] [ph] of growth in Portland for many years. We have been there for really long time. But we really saw it inflect over the last year as we added delivery and added a lot of high quality restaurants that folks wanted. And now the frequency that was significantly lower than a Chicago a year and half ago has made up a lot of ground in that time.

[Operator:]

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

[Michael Graham:]

Just two quick ones guys. One is, can you just comment on the M&A landscape. Is there still a lot of consolidation that you think you can do going forward. And then secondly, just can you talk about, you know Facebook had an initiative in your area recently. Just talk about how you may be working with them or what that looks like and the impression you have from that effort. Thanks.

[Matt Maloney:]

Sure, Michael. I can take both of those. In terms of M&A, we are opportunistic. We have been saying this for a couple of years. And when we see opportunity and the price is right, we move very quickly. We know what we are doing, we feel really comfortable. We know the players in the space. Is there future consolidation the size of this Eat24 deal, I don’t see it on the near-term horizon until something else shakes out. But there is a lot of things we are looking at but we are going to do it on our timeframe and we are going to make sure that whatever we do is going to be accretive to the shareholders. In terms of the Facebook partnership. We are early on a lot of partnerships. Facebook, Trip Advisor, Zomato, now Yelp and Groupon. It's too early to talk about any expectations especially on Facebook. I mean the thing is, like I said in the prepared remarks, we are still trying to figure out how to change hungry Facebook diners into Grubhub, or hungry Facebook users into Facebook diners. The transactional element is not very well established and Facebook and us, we are both trying to figure how to make this work as best as possible. So we didn’t go strong on the press when Facebook came out with that because, frankly, I don’t have any expectations to set. So we are going to see how that works. Obviously we are very excited to be working with them and I hope it works out great for our diners and our restaurants. But I frankly don’t know, it's way too early.

[Operator:]

And your next question comes from the line of Jason Helfstein from Oppenheimer. Jason, your line is open.

[Jason Helfstein:]

Two questions. One big picture, one more specific. So there has been overall narrative out there that UberEATS is growing fast, perhaps numbers that they leaked. If you to comment, would you say that they are taking share from smaller competitors or is the market accelerating as far as the shift to more ordering this way. And then second, Yelp disclosed some numbers on Eat24 on the expense side. When we think about that, obviously you would run the business without most of those expenses. Do you think, however, about keeping certain people that you would have otherwise hired in 2018 anyway, as far as just improving recruiting efficiency and just how to think about that? Thanks.

[Matt Maloney:]

Sure, Jason. Yes, the competition question, we have definitely over the past 8 or 9 quarters. So it's fair. I mean the reality is, we still haven't seen any competitor impact to our growth rate. And every meaningful competitor was in the market over a year ago. So we still believe we have a significant structural advantage and that we are only known for takeout ordering and we are going to succeed because of the singular focus on this specific transaction. I can't comment on Uber's numbers specifically or what they are doing. But what we have seen is that this is not a zero sum situation. I mean if you are looking at the last objective report I saw was something like $200 billion in annual domestic gross food sales. We are getting close to saying that we are going to do about $4 billion annually. So I mean there is significant room to grow for us as well as a lot of other people. I have seen that as competitors enter the marketplace, they are adding new restaurants and they are bringing awareness to more diners than we could have done alone and so that’s expanding for everyone. We are seeing a lot of people lose a lot of money. We are going to continue to be financially rational and continue to grow on a scalable sustainable way, which is not going to change. So as others are potentially expanding the market, I think we are in the long term in a great position to capture a lot of that -- ultimately that demand over time.

[Adam DeWitt:]

Hey, Jason, it's Adam. I will take the Eat24 question. So just to give some context. One, we have talked about a number of times now that we view the Eat24 acquisition as well as the other two that we just completed as really growth opportunities. Eat24 specifically has built a really good brand, a really strong brand and their operations to support that brand. So they have developed a lot of growth organically. We are really excited to have that team as part of the acquisition. In terms of costs and kind of how we see the profitability over time. I wouldn’t focus as much on kind of what you are seeing in Yelp's financial and kind of just think about how we are thinking about it on a go forward basis. I think that baked into the fourth quarter, I talked about the Eat24 volume is likely to be roughly breakeven and I think -- I also laid out that over time as we kind of finish the different milestones and migrate the traffic over to the Grubhub platform, we kind of grow into the level of infrastructure that we have right now. That those orders will be generating a fair amount higher EBITDA than our average company EBITDA. So they will be accretive. I think the question is, how do we get from kind of zero to significantly higher than a $1.50 in terms of timing and I think that it will be mostly related to those two big milestones of moving the Yelp transaction on to Grubhub as opposed to Eat24 and a lot of that is just going to be us being able to send a lot more volume through the existing infrastructure. And then the second milestone will be when we bring the Eat24 platform on to the Grubhub stack and then those orders are going to be getting Grubhub restaurant rates and we will be taking advantage of an infrastructure that we probably will not grow that much over the next 12 months. So you will see that. I think that there is also -- I talked earlier about opportunity in commission rates. So you will see a little bit of an improvement over time but I think the big step ups will be around those key milestones.

[Operator:]

And your next question comes from the line of Brad Erickson from KeyBanc Capital Markets. Brad, your line is open.

[Brad Erickson:]

First, can you just talk about any differences you have seen historically in loyalty patterns for, I guess, those users acquired off of, I guess we would call them traditional performance marketing channels versus those coming through affiliates. And maybe if you could just remind us how the customer acquisition cost profile compares between those channels.

[Adam DeWitt:]

So when you talk about affiliate partners, are you referring to the Yelp transaction platform or are you referring to kind of the...?

[Brad Erickson:]

Any of the ones that you called out. Trip advisor, obviously Facebook falls into that category, any of those.

[Adam DeWitt:]

Yes. I think they are all a little different. I think, look, the most significant, at least to date, like Matt says, I think we are still trying to figure out kind of how to turn the millions of users on folks like Trip Advisor and Facebook into a lot of orders. The use case on Yelp is really direct and obviously they are already generating a few hundred million dollars in gross food sales with Eat24 restaurants. So that’s a channel that’s really well developed. So I will talk about that channel a little bit. The way that we think about that channel is, it's really a pay for performance channel and so we are paying for every order, right, instead of paying for the diner upfront and then amortizing it off over the life of the diner. And kind of when we have done the match based on what we have seen in the order volume, we think that this comes out roughly the same. It's just a different way to pay. What we have seen in other channels, and I think this probably holds true for most ecommerce businesses, is at the high end of the food chain, you have customers that come in directly from referrals, probably have the highest loyalty and then customers that you are paying, especially, let's say you are buying keywords that aren't necessarily directly tied to a restaurant or something like that might have a little less loyalty. But we see good, what we have seen always is a really strong retention rate, especially after we get to kind of the second or third order. You are basically looking at a diner who is increasing their value over time as opposed to having a chance of leaving. Is that kind of helpful?

[Brad Erickson:]

Yes. No, that’s super helpful. And then just second. Maybe trying to get at the competitive question another way. Can you comment, I guess, on any differences in growth you are seeing at restaurants where the restaurants working with multiple aggregators such as yourself versus ones where you guys are the exclusive provider. Is that something you track?

[Matt Maloney:]

It's really hard. I mean we have anecdotal evidence but the reality is we have so many restaurants and so many more restaurants than anyone else, so that’s really hard to put an aggregate picture together. In some zip codes, we have the vast majority of orders and in others it's more shared and it goes by zip code, it goes by market. I think that generally restaurants will tell you, we bring the most volume across the board. We clearly have the most restaurants, we are in the most markets. We have outstanding logistics support and service and we are definitely seeing growth in some zip codes and in some zip codes that we historically haven't had a lot of growth. So that’s where we are focusing a lot of our time in terms of expanding our delivery network. I think we are in over 80 markets at this point. 80 market areas. And so I think there is not really an accurate specific answer to, is someone else growing bigger. We have the largest network. We are growing as aggressively as we possibly can. We are hitting all of our growth expectations. We don’t feel like anything is impinging our ability to grow and we are just going to continue being as aggressive as possible.

[Adam DeWitt:]

If I might just add one thing. I mean -- to Matt's point, the data, getting hard data on that is difficult. But when we go out and talk to our restaurant partners, and obviously we have restaurants that we have really close relationships with and have for many years. For those that are using multiple or have added services over time, it doesn’t matter who that service is. What we have been told is that that volume is incremental and it's not taking away from the volume that we are sending. Right. So we can't just look at our diners and see what they are doing, to answer your question. We need to know what's happening at the restaurant level and what we are hearing in every case is that when there are other folks in a restaurant, it's not eating into the volume that we are sending them.

[Operator:]

And your next question comes from the line of John Egbert from Stifel. John, your line is open.

[John Egbert:]

I was wondering what the market and user overlap look like between Grubhub and the acquired services, particularly Eat24. And could you give us a better idea of what the M&A related impact on active diners will look like in Q4. Are you able to like duplicate Eat24 users that are also on Grubhub already. Thanks.

[Adam DeWitt:]

Yes. I will take both of those. So overlap, we are in a number of markets together. I think the strongest markets, San Francisco, LA, Miami, Seattle, San Diego. But what's interesting is when we have started digging into the diner data, we don’t see a lot of overlap in the diner. So even though we are in the same markets, we think that this is incremental volume, incremental diners, and we also have incremental restaurants. And in terms of the active diners adds for the fourth quarter, I think we are still -- look, it's one of the things we are still working through. I think this quarter we added somewhere between 100,000 and 200,000 diners from Foodler but we will tell you next quarter when we release the numbers exactly what's baked in from Eat24. But we just don’t have -- we are still working through the kind of the de-duping process and picking through that.

[Operator:]

And your next question comes from the line of Mark May from Citi. Mark, your line is open.

[Mark May:]

I had two if I could. You have provided enough information in the past for people to back in to the [GFS] [ph] coming off the Yelp platform to Eat24 and you have plans to double the number of restaurants on the Yelp. Is there any reason why we can't think about the incremental revenue opportunity there being kind of 2x as well or are there some other factors that we should consider. And then second question, on Eat24's EBITDA contribution. We are fairly certain that prior to the acquisition that Eat24 was generating decent EBITDA. Can you just talk to us a little bit about why that’s not the case at least initially under Grub and how we should be thinking about the Eat24 EBITDA contribution in 2018? Thanks.

[Adam DeWitt:]

And so, Mark, in terms of the incremental revenue opportunity, I think in my prepared remarks I said that we are comfortable saying that we will add at least 800 million in gross food sales to the platform next year related to these acquisitions. There is certainly upside from there. We did not include kind of, as you pointed out, just the synergy assumptions that by adding an extra 35,000 restaurants to the Yelp platform, a lot of them high quality, mostly because we weren't 100% sure on the timing. But you are free to think about it, how you want to. But I would caution you as to assuming when that migration is going to take place. Basically the way to think about is the number of restaurants and due to the restaurants that we are adding to the platform, are they potentially in areas where there is a lot of Yelp traffic and are they high desirability restaurants. And the only color I will add there is that we are adding a lot of delivery restaurants of which Yelp had none previously. In terms of the Eat24 and kind of what it was doing at Yelp, it's hard for me to kind of put into context exactly what they are showing or what they are talking through. I think if you look at their pro forma that they released after the close of the deal, there is at least on an EBIT basis, before adjusting there was a fairly significant operating loss. What I would say is, we are operating the business exactly the same way that they were operating the business, that they did post close. So there is absolutely no additional costs that we are taking on. I think the only variable is marketing and I don’t think it's going to move one way or the other enough to make that much of a difference. So I can't tell you. I mean we see it as a breakeven business for next quarter and there is probably a little bit of upside in the first couple of quarters of next year and then when we have those migrations, I think you will see the big step up. One difference to think about that I am not sure when you work through with Yelp, kind of their Eat24 economics. What they were doing with the referral fee or affiliate partner fee, right. We have that fee that we pay out of pocket to Yelp and in their case when it was on their platform, it was all in one place. So that might be a difference.

[Operator:]

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