Just Eat Takeaway.com N.V.
Q4 2017 Earnings Call Transcript

Published: 8 Feb 2018

[Operator:]

Good morning. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the GrubHub Q4 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. David Zaragoza, Head of Investor Relations, you may begin your conference.

[David Zaragoza:]

Good morning, everyone, and welcome to GrubHub's fourth quarter of 2017 earnings call. I'm Dave Zaragoza, Head of Investor Relations; and joining me today to discuss GrubHub's results are CEO, Matt Maloney; and our President and CFO, Adam DeWitt. This conference call is available via webcast on the Investor Relations section of our website at investors.grubhub.com and in addition we'll be referencing our press release which has been attached as an exhibit to our current report on Form 8-K filed with the SEC today. I'd like to take this opportunity to remind you that during the course of this call we will make forward-looking statements including guidance as to our future performance. These forward-looking statements are made in reliance on the Safe Harbor provisions of the Securities and Exchange Act of 1934 as amended and are subject to substantial risks and uncertainties that may cause actual results to differ materially from those in these forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC including the Risk 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, our quarterly reports on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2017, that will be filed with the SEC. Our SEC filings are available electronically on our Investor website at investors.grubhub.com or the EDGAR portion of the SEC's website at www.sec.gov. Also, I'd like to remind you that during the course of 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'll turn the call over to Matt Maloney, GrubHub's CEO.

[Matthew M. Maloney:]

Thank you, Dave. I'm not sure about all of you on the call, but Adam, Dave and I are enjoying a platter of Breakfast Crunchwraps, Nashville Hot Chicken Littles and a Meat Lovers Original Stuffed Crust Pizza. Let's just say that we're having a great breakfast today. Restaurants across the country are making online delivery a top priority. Consumers are increasingly leaving the paper menu in the drawer. And with our scale, logistics expertise and singular focus on connecting restaurants and diners, GrubHub is uniquely positioned to help local restaurants address these shifting habits. Across all of our brands we connected hungry diners with their favorite local restaurants 36 million times last quarter. For perspective, that means we average 300 orders every minute of every day this quarter. We are adding even more great restaurant partners and new diners every day and as we begin 2018 we are keeping our foot on the gas. This morning we announced the new partnership with Yum! Brands, the parent company of Kentucky Fried Chicken, Taco Bell and Pizza Hut. GrubHub is now the only national U.S. ordering partner for Yum! Brands providing a comprehensive online ordering solution for KFC and Taco Bell franchisees. This initially includes welcoming KFC and Taco Bell to the GrubHub restaurant network, helping to power their KFC and Taco Bell branded channels for pickup and delivery orders, as well as fulfilling orders with our rapidly growing efficient delivery infrastructure. We couldn't be more excited about the opportunity to help thousands of local restaurants grow their business online by accessing our growing demand pool of 14.5 million diners. KFC and Taco Bell are some of the most iconic brands in the restaurant industry, and we are thrilled to have been chosen as their only online ordering partner in the United States. We also look forward to welcoming the expertise of Artie Starrs, the President of Pizza Hut U.S. to our Board. This partnership will drive more new diners and more orders from returning diners creating value for all of the restaurants on our network. I'll go into more detail on the Yum! partnership in a bit, as well as updates on our partnership with Yelp and the integration of Eat24, but first, I'll run through a few highlights from the quarter and the year. After that, I'll turn the call over to Adam who will walk you through the P&L and some thoughts on guidance. We generated 393,000 DAGs in the fourth quarter, up 34% year-over-year including the benefit of the acquisitions we completed during 2017. This translated to net revenue of $205 million, up 49% year-over-year. Net revenue for the full year came in at $683 million, up 38% year-over-year. We separately hit an important milestone in January surpassing $1 billion in annualized gross food sales for GrubHub Delivery. Two-and-a-half years ago this number was effectively zero, and I'm extremely proud of the work our team has done creating a new leg of growth for GrubHub supporting nearly 30,000 restaurants with more than 20,000 monthly active drivers. GAAP net income was $54 million for the quarter and $99 million for the year including some one-time tax benefits which Adam will explain later on the call. Adjusted EBITDA was $57 million, up 45% year-over-year and up significantly from the third quarter as our business ramped into seasonal strength. Adjusted EBITDA per order was $1.58, our highest level ever, and up 8% from the prior year's $1.46 even with the addition of lower margin Eat24 orders. As I noted, we ended 2017 with 14.5 million active diners including approximately 4 million diners acquired through the Eat24 and Yelp platforms. Excluding the acquisition, we maintained the strong diner growth we've seen all year. We continue to see strength in new diner acquisition throughout the fourth quarter and are pleased with the quality of new diners joining our network. Similar to the first three quarters of the year, we saw incremental opportunities to attract new diners efficiently in the fourth quarter and spent into the strength. We expect to cast an even wider advertising net in 2018 and to take advantage of the unparalleled diversity of choice across our more than 80,000 restaurants and our new partnership with Yum!. GrubHub generated gross food sales of $1.1 billion for our local restaurant partners in the quarter, an increase of 39% year-over-year. In total, we grew gross food sales by 26% in 2017, ending the year with $3.8 billion processed. While our results in 2017 were strong, the opportunity in front of us is even more exciting. We believe the market for takeout in the U.S. is greater than $200 billion in consumer spend. At $4 billion, we are just scratching the surface, but we see new partnerships like our agreements with Yelp and Yum! as catalysts to accelerate awareness and adoption. While GrubHub's brand as the largest and best platform for restaurant delivery appeals to millions and has a long history, people ultimately come to our products because of the restaurants. The love and trust consumers have for our restaurant partners makes our platform compelling to new diners and retains our repeat diners week after week. This is why our Yum! partnership announced separately this morning is so exciting for our business. KFC and Taco Bell are not only iconic restaurant brands, but they have a significant presence in markets where GrubHub has less awareness. GrubHub's best-in-class technology, our order management platform and delivery fulfillment will support Yum! orders originating from our marketplaces, our affiliates and from their own white label technology. We will proudly highlight Yum! Brands in our marketplace attracting attention from our 14 million active diners and driving high margin incremental orders for KFC and Taco Bell franchisees. Yum! in turn will drive adoption of GrubHub through their marketing channels in restaurant like signs and packaging, as well as mass media like co-branded TV or creative brand intersections. While GrubHub is the leading marketplace for takeout online, we have converted only a small portion of the U.S. population from the paper menu to online ordering. By leveraging a joint national go-to-market strategy, we believe that we will access new parts of the demand funnel that we have not been able to reach before. Neither KFC nor Taco Bell currently delivers on a broad scale in the U.S. and both are excited to realize the incremental sales that delivery brings to their franchisees. Incidentally, KFC was actually created to be a delivery product, that's why the Colonel invented the bucket, to keep his secret-recipe fried chicken warm all the way home. KFC and Taco Bell will both leverage our comprehensive online ordering solution, supporting orders through our marketplaces, as well as through their direct channels for pickup and delivery. All supported by our last mile logistics infrastructure. Pizza Hut on the other hand has been a leader in food delivery for years, we plan to work with Pizza Hut leveraging both our expertise and food delivery to find new ways to improve their quality of service and drive growth for their franchisees. With the incredible opportunity in front of us, we will aggressively expand our delivery footprint in support of this partnership. Throughout 2018, we'll be expanding the reach of every one of our current 80 delivery markets and we will launch over 100 new delivery markets. Given the time it takes to ramp volume in these expansion areas and the up-front investment and driver capacity required, this expansion will have a small impact on our 2018 profitability. We know how to maintain economic parity between our GrubHub delivery and self-delivery orders and we expect to achieve this in these new markets once we scale. This partnership with Yum! will benefit both sides of our network, all of our diners, and all of our restaurants by bringing more volume, more liquidity and more loyalty. Investing now will maximize the impacts of the partnership and Adam will discuss how this affects our guidance. The Yum! partnership is built to ensure long-term profitable growth for both sides. Not only will Yum! work with us to grow our diner reach benefiting local franchise operators while doing so, but they will be aligned with our long-term success as shareholders. Yum! will invest $200 million in GrubHub increasing our financial flexibility to grow organically and inorganically as opportunities present. We are also excited about adding Artie Starrs, President of Pizza Hut U.S. and our first restauranteur to GrubHub's Board of Directors. As we work with more and more national chains, this means navigating the nuanced world of franchisees working to ensure success both at the local and corporate levels. Few know this landscape as well as Yum! and these insights as well as Pizza Hut's direct experience managing thousands of delivery restaurants will prove invaluable as we continue to grow our marketplace across the country. Switching gears to Eat24, since closing the acquisition in early October, both GrubHub and Yelp engineers have been working hard to integrate our operations. As a reminder, we laid out three milestones for this project last quarter. The first milestone largely complete today, was to add the 15,000 incremental Eat24 restaurants to the GrubHub platform. Having achieved this, diners on GrubHub now have even more selection and we are driving more orders to Eat24 restaurant partners as a result. The second milestone is to migrate Eat24's product off of the Yelp technology where it resides today and onto the GrubHub platform. Once complete, Eat24 diners will have all the additional GrubHub and Seamless functionality, as well as nearly twice the restaurant selection. Lastly, the third milestone is integrating our restaurant network onto the Yelp platform where we will offer more than 80,000 restaurants to Yelp users. While these two milestones are significantly larger undertakings, we're pleased to say that the teams are progressing on the more optimistic of our potential timelines. We still have work to do, but we expect to begin testing these integrations within the next month and completion likely during the second quarter. With all the activity around business development and M&A, it's easy to lose track of the operational success we had in 2017, especially in delivery. When we pushed into this business in 2015, we made the deliberate choice to sacrifice near-term profitability in order to drive longer term growth. While we had early indicators that we could reach economic parity across all orders, we knew the road ahead of us would be challenging. Two-and-a-half years later, our scrappy team has built a large but nimble and efficient infrastructure achieving our goal of generating similar profit per order regardless of how it is fulfilled. Our achievement of economic parity has become a competitive advantage and we're exploring ways to use this to drive further incremental growth. We have always believed that offering consumers consistently low, fair and transparent pricing makes food delivery attractive to the greatest number of diners. It also engenders long-term trust and loyalty increasing order frequency as a result. Over the past few months increases in our delivery efficiency have given us the opportunity to reinvest in even lower levels of diner fees without meaningfully changing our financial profile. We have the lowest fees in our business and will continue to iterate on this framework of managing diner fees to optimize customer life-time value. I am extremely proud of the year we had at GrubHub. With a transformational 2017 behind us, we're now focused on what's ahead in 2018. We will be moving quickly to complete the integration of Eat24, rollout our partnership with Yum! Brands, and continue to accelerate the shift to online food ordering. We're excited by these opportunities and look forward to giving an update on our progress next quarter.

[Adam J. DeWitt:]

Thanks, Matt, and good morning, everyone. Our record fourth quarter results highlight our unique ability to continue improving profitability while generating robust growth. This strong execution is a valuable asset as we grow diners and restaurants across all of our markets and launch exciting new initiatives with Yum! Brands and Yelp, taking advantage of the great secular shift towards transacting online in general and ordering takeout online more specifically. In my remarks, I'll give some more detail on the fourth quarter and then discuss our expectations for 2018 including some thoughts on how we expect these efforts to affect our financials in 2018 and seasonal patterning for the year. We processed 392,500 daily average grubs in the fourth quarter, up 34% year-over-year, approximately 18% excluding the acquisition of Eat24 which closed on October 10. Growth excluding Eat24 accelerated even after normalizing for the inclusion of OrderUp and Foodler due to healthy diner engagement. Our marketing is also bearing more fruit as continuous iteration on channel mix and messaging drove higher new diner growth in December than either October or November. The growth in our business has been broad-based but we are particularly encouraged by our improving ability to scale demand in Tier 2 and Tier 3 markets. We are now generating more than 1,000 DAGs in close to 40 markets and we see incredible demand runway in these markets. With our ability to offer delivery and success with chains, our restaurant choice is more compelling than ever in all of our markets and we will push profitable growth in these markets as fast as we can. Our active diners grew 77% year-over-year to 14.5 million during the fourth quarter. The outsized growth in this metric is largely the result of a little more than 4 million diners we added as a result of the Eat24 transaction. Important context for the more than 4 million diners we acquired with Eat24, this group includes diners from the Eat24 branded platform, as well as a substantial number of diners from restaurant white label sites run by Eat24 and a substantial and growing number of diners ordering on the Yelp transaction platform. While direct Eat24 brand diners have similar order frequency as GrubHub branded diners, white label diners and Yelp platform diners have somewhat lower overall frequency. As a result, if you look at orders per active diner for the quarter, you will note a one-time more than typical decline as the metrics incorporate the impact of those white label and Yelp diners. If you exclude the impact from all Eat24 diners in that metric, the decline in frequency was actually in the mid-single digits, which is where we would expect it to be given the outsized relative growth in Tier 2 and Tier 3 markets. While the inclusion of Eat24 will have a negative impact on the year-over-year calculated frequency until we lap the acquisition, we believe the frequency from the acquired diners will improve with our superior restaurant selection and optimized ordering features once the technical integration is complete. Gross food sales for the quarter were $1.1 billion, growing 39% from the prior year and marking our first quarter north of $1 billion. Excluding the acquisition of Eat24, GFS was up approximately 22% with average order size up 4% during the quarter. The Eat24 orders had an immaterial impact on the order size given their similarity to GrubHub's orders. Fourth quarter net revenues were $205 million, 49% higher than the year-ago quarter of $137 million, and approximately 37% higher excluding Eat24. Net revenue as a percentage of gross food sales was 18.0% during the fourth quarter, up 120 basis points from the prior year but down 80 basis points sequentially driven by the inclusion of lower commission rate Eat24 orders which I will give more color on in a moment. Excluding Eat24, our calculated net capture rate increased modestly from the third quarter similar to recent trends. Now that Eat24 is consolidated into our metrics, we expect overall capture rate to continue its longer term upward trajectory with modest fluctuations quarter-to-quarter. Going back to the capture rate on Eat24 orders, it's worth noting that the Eat24 orders we incorporated into the P&L are almost all self-delivery, so they generate lower revenue per order, but incremental costs are limited to customer care and credit card processing. There is no revenue or cost from delivery. In addition, commission rates at Eat24 are slightly lower than at GrubHub on orders delivered by the restaurant. As a result of these factors, we saw the highlighted one-time degradation in overall capture rate. There is obviously some opportunity for us to increase the organic capture rate for Eat24 restaurants over time as they opt to pay for more exposure to GrubHub's larger diner base. The capture rate will also go up as Eat24 and Yelp diners opt for restaurants where GrubHub provides delivery. Both of these impacts are reflected in our 2018 guidance, but are small overall due to the relative size of Eat24's business. Operations and support expenses grew 58% year-over-year from $51.7 million to $81.7 million in the quarter driven by increased driver pay to support our delivery efforts, the underlying growth of our total order volume and the inclusion of Eat24. For clarification, the operating and support expenses included from the Eat24 orders are lower on a per order basis than GrubHub orders because there are no delivery expenses. As Matt noted, the growth and efficiency of our delivery services in 2017 was impressive. While quickly expanding our coverage from 0 to over $1 billion in annualized gross food sales, we also achieved our goal of exiting the year at similar economics on orders that restaurants deliver for themselves and orders that GrubHub delivers on their behalf. This is important because it allows us to offer the best restaurants to every diner while maximizing profitability. Sales and marketing expenses were $45.4 million in the fourth quarter, a 53% increase compared to the same quarter last year and a sequential increase of 29% compared to the third quarter. Eat24 advertising and partnership payments to Yelp drove part of this, but we also ramped organic spend meaningfully as planned due to the seasonal strength and the better than expected efficiency we had with our advertising all year. We ended the year just slightly above our original expectation of mid to high 20%s organic growth, but we've set the table for healthy future order growth as a result. Technology expenses excluding amortization of web development were $14.7 million for the quarter increasing 38% from the fourth quarter of 2016. Depreciation and amortization was $18.8 million for the quarter, up 49% from the third quarter and up 89% year-over-year. This quarter included intangibles amortization related to the Eat24 acquisition after the close on October 10, as well as the amortization from the Foodler and OrderUp acquisitions. G&A costs were $18.4 million, down slightly from $18.6 million in the third quarter. GAAP net income was $53.5 million compared to the prior year of $13.6 million. Net income per fully diluted common share was $0.60 on approximately 89.4 million weighted average fully diluted shares. Growth in net income was exaggerated mostly due to the reduction in our deferred tax liability resulting from lower corporate tax rates and to a lesser degree by excess tax benefit of stock-based compensation that we have discussed in the past. While the change in deferred tax liability impact that affected our P&L by about $34 million this quarter is a one-time benefit, we do expect our go-forward tax rate to decline significantly to approximately 28% from our previous rate of 40.5% excluding the tax impact of stock-based compensation expense. Non-GAAP net income was $33.3 million or $0.37 per fully diluted common share compared to the prior year of $19.8 million or $0.23 per fully diluted common share. Non-GAAP net income excludes amortization of acquired intangibles, acquisition, restructuring and certain legal costs and stock-based compensation, as well as the income tax effects of these non-GAAP adjustments and also the $34 million change in deferred tax liability I just talked about. Adjusted EBITDA for the fourth quarter was $57 million, an increase of 45% from the $39.2 million in the same quarter of the prior year. This includes the impact of Eat24 which contributed modestly to EBITDA for the quarter, slightly ahead of our expectation. Adjusted EBITDA per order which we view as the best gauge of our profitability was $1.58 in the fourth quarter, up both year-over-year and sequentially. We achieved this record level of profit per order despite the drag from less profitable Eat24 orders and broad investment in growth through new diner acquisition, delivery coverage, product improvements and restaurant sales. We ended the quarter with $258 million in cash and $174 million draw on our debt facility reflecting the acquisition of Eat24 and a $25 million pay down of our revolver. In terms of the Eat24 integration, the teams at Yelp and GrubHub are highly motivated to bring our total of 80,000 plus restaurants to Eat24 and Yelp diners and have progressed quickly over the past few months. While there are still work to do, we currently expect to complete both the migration of Eat24 onto GrubHub's platform and integration to the Yelp platform during the second quarter. There will be a fair amount of testing ahead of a wider rollout of these integrations so expect to start seeing more restaurants on Yelp and product updates on Eat24 ahead of this. Before I discuss guidance, a few words regarding our partnership with Yum!. As Matt mentioned, we are now the only national online ordering partner for Yum! Brands providing a comprehensive online ordering solution for KFC and Taco Bell franchises. GrubHub will work with these brands to add thousands of locations to our restaurant network, as well as power their KFC and Taco Bell branded channels for pickup and delivery. KFC and Taco Bell are iconic brands with tremendous embedded demand and awareness in our larger Tier 1 markets, but even more importantly in Tier 2 and Tier 3 markets where we have lower overall awareness. This partnership once scaled will add order liquidity to these less-mature markets quickly improving driver efficiency and allowing us to grow coverage far beyond our current footprint. We believe we would get all of these benefits just by putting KFC and Taco Bell restaurants on our platform, but the benefits will be accelerated and amplified by comarketing efforts with Yum! Brands featuring GrubHub as their delivery partner. We will work closely with Yum! to coordinate this comarketing which will ramp over time as we broaden our national coverage of their footprint. Building on our success rolling out delivery to 80 plus metro markets we plan on launching delivery in over 100 new markets from Maine to Hawaii this year. We are already in the process of spinning some of these markets up, building our driver network in anticipation of demand we will drive through Yum! and other great local restaurants. As a result, we expect to invest approximately $10 million in 2018 to ramp our capacity quickly, maximizing the multiyear impact of the partnership on growth in orders, diners and EBITDA. We believe this partnership with Yum! and our aggressive market expansion accelerate our mission of building the most comprehensive marketplace connecting restaurants and diners. We know that adding brands that consumers love like KFC and Taco Bell to our platform will attract more diners and more orders to GrubHub, ultimately driving more volume for all of our restaurant partners and strengthening the network effects of our business. We've seen this follow-on effect in every market that we've developed over time. As part of the partnership, contingent on HSR review, Yum! will make a $200 million purchase of new GrubHub common stock tightening our alignment and emphasizing both partners commitment to make this a success for all of our collective shareholders. We believe this investment is an endorsement of our leading market position, ability to execute and singular focus on connecting diners and restaurants. The proceeds will enhance our overall financial flexibility, allowing us to be aggressive when we find opportunities to expand our network, enhance the ordering experience for our diners or otherwise accelerate growth. At this point, I'll go through the first quarter and full-year guidance. This guidance contemplates a wide range of outcomes given all of the moving pieces in 2018. We expect the ramp of our partnership with Yum! and the integration of Eat24 and Yelp to carry both top and bottom-line impacts, though these impacts will be larger in the back half of the year than the first half. We expect $224 million to $232 million of revenue for the first quarter and $910 million to $960 million for the full year. We are working quickly to add Yum! coverage ahead of a larger joint marketing effort, but expansion in restaurant coverage will take time and any meaningful order benefit will likely not materialize until late 2018. Similarly, given our current expectation for integration of Eat24 and Yelp during the second quarter, we don't expect any incremental Eat24 related growth until after that point. As you're thinking about modeling our top line in 2018, I would still expect normal seasonal order trends with order patterning with some potential benefits as we work towards each of the above goals. We currently expect Q1 adjusted EBITDA to be in the range of $54 million to $60 million and the full year to be in the range of $225 million to $255 million. Included in this range is approximately $10 million of investment associated with the expansion of our delivery coverage in partnership with Yum!, and improved profit contribution from Eat24 following the completion of our integration efforts. One additional note for quarterly cadence in 2018, we are planning on more concentration of our advertising spend in the first and fourth quarters to more-closely align with seasonal strength than we did in 2017. We have found these quarters, when the weather is a bit colder and colleges are in session, to be the most effective for new diner acquisition. As such, we would expect a sequential decline in Q2 revenue to be offset by a decline in sales and marketing likely leading to sequential EBITDA growth. With that, Matt and I will take your questions. Operator, please open the lines.

[Operator:]

Your first question comes from Brian Nowak from Morgan Stanley. Your line is open.

[Brian Nowak:]

Thanks for taking my questions. I've put down my gordita. Two please. The first one on the Yum! deal, could you just talk a little bit about how we should think about the potential impact on EBITDA per order as Yum! grows in the mix? And do you see yourselves having to adjust your minimum order sizes as you push into the Yum! network? And then the second one is on Pizza Hut and kind of adding Artie Starrs to the Board. How do you think about potentially integrating your delivery network into Pizza Hut over time to even add more liquidity in some of these markets to your delivery network? Thanks.

[Adam J. DeWitt:]

Hey, Brian. How are you doing? In terms of the profitability of the deal, we spent a lot of time making sure that we got a deal that made a lot of sense for both parties. And it's – we're very confident it's going to generate EBITDA growth for both Yum! and GrubHub. In terms of EBITDA per order, I still think that over time, right, there's a lot of moving pieces in the EBITDA per order number, and we've generally been trending up as we've gotten more scale and more leverage in that number. I think generally for – if you look at it today and fast forward to several years from now, I don't see any reason for that not to continually trending up. We've obviously talked through kind of – there is a natural ceiling once you get to the gross margin of an order, and we're not really bumping up close to that yet. But there is a little bit of room up. The way that we structured the deal, we're going to generate a lot of new diners, and we're comfortable with the profitability that the orders are going to generate. And I'll let Matt take the Pizza Hut question.

[Matthew M. Maloney:]

Yes, hey, Brian. Adding Artie is a big win from our perspective. I mean, you got to think about it. They run something like 40,000 delivery restaurants in the U.S., and that's actually managing the delivery. Oh, that's globally, sorry. Regardless, they – I mean, they're one of the best operators of delivery out there, and so having a restaurateur with that experience is really exciting in terms of what it's going to bring to our Board. But in addition, like I said in the prepared remarks, the whole world of franchisees in making sure this is a win for the corporate, as well as the local is really important. And so having Artie, we're really excited about that. How we're going to integrate Pizza Hut? Frankly, I'm not really sure. It's way more straight forward with KFC and Taco Bell, because they're not doing delivery, and so we can really get in and support their technology. I mean, obviously, they're going to be in our marketplaces and across our affiliate network, but then we will be supporting their white label, both their apps and their websites for the transactions. And so it's – that's something we can address, we can attack it. We're going to be covering something like three quarters of their franchisees by the end of the year by adding 100 delivery markets. And that's really exciting. How we're going to support Pizza Hut specifically, I think we need to better understand how Pizza Hut has been as successful as they are. What they're doing right now with their delivery operations, and then how – that will in turn inform how we can better support them and make them more efficient and increase service levels. But I really can't tell you how that's going to play out for the remainder of the year, except for we're going to be talking a lot about it, and working closely with Artie's team, and really trying to figure out how to best support our partners.

[Adam J. DeWitt:]

And then, Brian, I'm sorry, it's Adam. I didn't answer the question about the minimums. What we've seen across the network is that the minimums – and whether we're talking about applied to kind of a more of a QSR model, or a more dine-in model. It doesn't have a lot of impact on the overall average. We find that a lot of times when folks are ordering for delivery, it's just naturally a higher price point anyway. And so in a lot of the markets that we've done, or that where we tested, we haven't seen a large impact on order size when we adjust minimums. I mean, that said, we're obviously just getting to this relationship, and so we need to figure out what's optimal from a diner lifetime value perspective. I mean, that's obviously going to dictate how we think about mins and fees going forward.

[Brian Nowak:]

Okay. Thanks.

[Operator:]

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

[Ralph Edward Schackart:]

Good morning. Adam, in the prepared remarks, I think ex-Eat24, you talked about accelerating growth due to healthier diner engagement. And then I think you called out specifically about the strong growth you saw in diners in December. Maybe you could just provide a little bit more color on that just in terms of the drivers there? And then a follow-up on the $10 million investments or incremental in 2018, I'm guessing most of that is for the driver network, but just any more perspective on where that $10 million is going? Thank you.

[Adam J. DeWitt:]

Yeah, Ralph. So I'll start with the second one first. So the answer there is pretty straightforward. Yeah. I mean, that's going to be an investment in capacity ahead of volume. You hit the nail on the head. I mean, we're going from 80 to 180 markets in delivery this year, but not only that, we're going to be expanding our coverage in every single one of those 80 existing markets. So an aggressive ramp. We feel really comfortable about the cost associated with that given that we've essentially done that over the last couple years. And so that $10 million is mostly going to hit in ops and support in terms of driver capacity. Your question about the accelerating growth, so yeah, if you strip out Eat24 and do as good a job as we can do at this point kind of normalizing for OrderUp and Foodler, we did see an acceleration in the fourth quarter of about a couple points, let's say. And I think the driver – I mean, the main driver, yes, new diners have been strong. But I'd like to highlight that in particular, the growth in the Tier 2s and Tier 3 markets has been really robust for us. In fact, both of those kind of categories had stronger growth quarters than they have in more than a year. And so we feel really good about the breadth of the growth. And like I mentioned in the prepared remarks, we see a lot of additional runway in those markets.

[Ralph Edward Schackart:]

Great. Thanks, Adam.

[Operator:]

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

[Ronald V. Josey:]

Great. Thanks for taking the question. And congrats on the Yum! partnership. Just a few more there if possible. Just I think, Adam, you talked about it goes live maybe by the end of 2018, can you help – but yet marketing might be ahead of that. Can you help us just understand the marketing agreement between the both companies? I think, you talked about a joint comarketing national partnership there. And then does this partnership preclude you from doing any other fast food or chain partnerships? And then lastly, when you think about we've been seeing and thinking about the point of sale integrations that Grub has done over the past several months and really throughout 2017, just how important was that to signing up Yum! and can we expect that to be a big deal to sign up more larger chains going forward? Thank you.

[Adam J. DeWitt:]

Okay. So, Ron, I'm going to start out with the marketing. I think, look, the key to the marketing working is to have sufficient coverage that it makes sense to really get aggressive, right? And so that is, you know, one of the reasons that we are being so aggressive in our market coverage expansion throughout the course of 2018 is to get to a point where both parties feel good about using national marketing, right? And so I think it's going to be that expansion gets us to two-thirds plus coverage of Taco Bells and KFC in the U.S. And so that's when I would probably expect to see kind of more aggressive activity on the comarketing. But we obviously both want it to be successful. And then I'll answer the second question and I'll turn it over to Matt to talk a little bit more about the POS. So just to clarify, we are the only partner for Taco Bell and KFC in the U.S., but there's no exclusions for other restaurant brands to be on our platform as part of the agreement.

[Matthew M. Maloney:]

Yeah. And, Ron, in terms of POS, we've been saying for a while we want to invest significantly in POS integration capabilities. It's really important to restaurant partners. I think we've said a few earnings calls now that as we're working with larger chains and franchised organizations, making sure that we have the highest efficiency possible is an absolute requirement. So we've been investing significantly. You guys have seen press releases on NCR integrations and MICROS integrations. There's a number of smaller POS organizations that have integrated into our in-bound APIs that they actually did the work to code to us. We're trying to get as broad coverage as possible to support restaurant partners and it was absolutely critical to this deal. If we didn't have the POS integration capabilities, we would not have been selected by Yum! to be their only national partner.

[Ronald V. Josey:]

Congrats again. Thanks.

[Matthew M. Maloney:]

Thank you.

[Operator:]

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

[Jason Helfstein:]

Thanks. I guess I'll ask two also Yum! related, and also earlier comments. So, Matt, you mentioned inorganic growth in your prepared remarks. Are you implying more M&A in the RDS market, and does this mean you would consider international to support Yum!? And then Yum! on their call said there could be additional liquidity opportunities into GRUB. Maybe expand upon what they meant by that? Thank you.

[Matthew M. Maloney:]

I'll take the first one. So inorganic growth M&A in RDS, I think, over a year and a half ago, I think we acquired the five leading RDS companies in the U.S. I don't think there's a lot left out there. And in the past two years, we've increased our delivered foods from zero effectively to over a billion run rate like I said in January. So that's pretty material. There's no one else out there who's going to meaningfully augment our network through acquisition in the RDS space at least. So I think inorganic growth, we're just opportunistic. We've always been opportunistic. We'll continue to be opportunistic. We have a lot of dollars on our balance sheet. We now have $200 million more, and I think that we're going to be very strategic as you've seen us in the past. As for international, this deal's scope is just domestic. As I've said, many times there is so much greenfield in the U.S. that I'm less interested in the international opportunities. And frankly we don't have a lot of assets to leverage internationally, and there's a fair amount of competition already. We have a leading spot in the U.S. We have the best technology. We have the best processes. We have the best partners. And we're going to accelerate as fast as we can here. Just kind of for context, when we went public in 2014, I think we quoted $75 billion as the addressable market domestically for pickup and delivery and now we're saying that we believe it's over $200 billion. So I mean, that's a tremendous amount of market growth in four years, and I think it's still growing really fast. So there's – we did nearly $4 billion in food sales last year out of $200 billion, I mean, I see crazy opportunity ahead of us just staying in the U.S. In terms of liquidity, I'm not really sure what they were implying there. But I think that as we think about how the relationship and the partnership will grow, obviously we're in KFC and Taco Bell in the near term, we're going to be working really hard to have as much coverage as we can this year and then potentially they're talking about Taco Bell in the future as we figure out how to better work with them – I'm sorry, Pizza Hut in the future as we figure out how best to support them.

[Jason Helfstein:]

And then just to follow-up on that first part. So, I mean, just parsing it, that would imply you might look at scaled players for M&A given if there's really nobody left in RDS? Is that fair?

[Matthew M. Maloney:]

I think, we will look at any proposals. That is absolutely not committing anything. And unless prices are changed dramatically, I don't think we're very interested.

[Jason Helfstein:]

Okay. Thank you very much.

[Operator:]

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

[Heath Terry:]

Great. Thanks. I know you touched a little bit on the profitability of Eat24's restaurant-delivered orders and so maybe that's largely the driver here, but it looked like operations and support costs increased less as a percentage of revenues or as a percentage of GFS this quarter. Curious if there are any specific drivers behind that, that you would want to call out just relative to what we had seen in the last few quarters as you've ramped delivery. And particularly as it relates to the tighter labor market, if you're starting to see any impact from that in your ability to hire or pay drivers.

[Adam J. DeWitt:]

Hey, Heath. It's Adam. In terms of the ops and support line, so I think you're seeing two impacts. You called out the kind of the one-time impact of adding those Eat24 orders. You're completely right. They look more, from a unit economic standpoint, they look more like GrubHub orders did before we started delivering orders as well. And so that's having kind of a mitigating impact on the growth in that line. I think the kind of longer-term more macro story, for GrubHub at least, is you're going to see that outsized growth in ops and support generally, I'd say, come down a little bit over time as the growth in delivery orders isn't as far ahead of the total growth in orders. Right? If you're going from a place where none of your orders are delivery and all of a sudden you add a bunch of restaurants that do delivery, there's going to be a lot of substitution, right? And so as we get to a more, kind of, status quo mix between delivery and non-delivery, you're going to see that outsized growth in ops and support kind of go – slowly go away over time. So you're seeing both of those impacts in that line.

[Heath Terry:]

Okay. Great. Thank you.

[Adam J. DeWitt:]

And then on labor costs – in terms of the labor costs, we haven't, to be honest, our – if you look at our operations from a whole, and Matt talked a little bit about it, and I talked a little bit about it in our remarks, but we've seen good momentum overall in driver costs, right? And so some of that's not – it's not all related to pay, right? It's not just that we're paying – or our drivers are getting less money. It's that we're getting more efficient also. But we certainly haven't seen offsetting pressure in terms of the – in terms of the driver wages, or how are we – the amount of money that we need to give the drivers to have them take up our orders.

[Heath Terry:]

Great. No, thank you. That's really helpful. And then just on the acceleration that you saw net of Eat24 and Foodler and all in daily active orders, is there a distinction there in the rate of engagement or the rate of orders that you're seeing in Tier 1 versus Tier 2 markets, Tier 3 markets? You guys have talked about the goal of getting Tier 2 and Tier 3 frequency up closer to Tier 1. Is that what we're seeing in that acceleration?

[Adam J. DeWitt:]

I mean, we're seeing a little bit. It's definitely a combination between the overall quality of those markets, with the diners improving frequency, and also an acceleration in new diner growth. I think that we touched on it in our prepared remarks a little bit, but it's just that – there's a lot of momentum with the quality of the restaurant network in terms of delivery or non-delivery, well-known brands and independents, and the better coverage. And as a result, kind of, the national media tends to be more effective or more efficient over time. And so we're definitely seeing that on the new diner side. But because of that, the quality of the restaurant network in those Tier 2 and Tier 3 markets and the ability to add brands and the Yum! partnership is a great example of a future impact here, but it's easier to ratchet up the frequency of diners in those secondary and kind of third-level markets when you have a better restaurant network. So we're seeing that too.

[Heath Terry:]

Great. Thanks very much.

[Operator:]

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

[Mark A. May:]

Thank you. Somewhat similar to an earlier question but from a different angle. From a business development standpoint, does the – is the Yum! deal an indication of, kind of, a bigger push by the company to expand your partnerships with national brands? Or is this more of a situation where it was opportunistic and you'll be pretty heads-down focused on making sure this gets off to a good start over the next year? And then secondly, in terms of active diners in the quarter, I know you provided a general something like greater than 4 million of the diners came from Eat24. I don't know if you could provide a little more specificity to that, and – but more importantly the contribution that you got from Foodler and OrderUp from diners as well in the quarter? Thanks.

[Matthew M. Maloney:]

Sure, Mark. I'll take the first one. I mean, yeah, we've been saying for a while that we want to partner with chains. We want to support chains. And we want to build our supply, especially in outer markets that we're – we don't have as much awareness in. So it's really no secret that we are seeking out these relationships. We're having a lot of conversations. We're doing a lot of pilot testing. It's really an exciting time to be in this space because all of the major restaurants are looking at online delivery as one of the biggest opportunities they have in front of them. And that opportunity is kind of what I was saying before. We believe it's more than $200 billion annual market in the U.S. for consumer spend in online, pickup and delivery. And we processed $4 billion last year and we're clearly the leader in the space. So there's massive opportunity, and we're just getting really creative about how do we address that. How can we do different things to address the demand and better facilitate growth for our restaurant partners? And so we're going to continue doing deals like this, create innovative partnerships with restaurants, and we're going to continue growing and supporting them as fast as we can.

[Adam J. DeWitt:]

Hey, Mark. On the active diners, so you – so the 4.1 million, it was a little bit – just a little bit over 4 million in terms of the diners that we brought over from Eat24. The Foodler and OrderUp diners were included in the third quarter numbers. What I'd say is if you're looking for the organic growth of new diners, I'd characterize it as slightly higher on a year-over-year percentage basis than the third quarter. So we had, in addition to an acceleration in DAGs, we also had a little bit of an acceleration in active diners. Is that what you were looking for?

[Mark A. May:]

Perfect. Thanks.

[Operator:]

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

[Jeremy Scott:]

Hi. Good morning. And congrats on the deal. Just want to talk maybe about the strategic advantages that you have in managing the franchise model. I know you already deliver for franchisees, but this is clearly your biggest yet. I think it was one that was trialing other (51

[Matthew M. Maloney:]

Sure, Jeremy. Let me address a few points of that. Why did they choose us? I think that you're asking me to discount the scale, but I don't think I can. We're the clear leader in the U.S. and so they want to work with the largest national partner. They're looking at what are the incremental – what are the incremental orders that they can drive through which partner. And obviously, with over 14 million diners we can provide more orders than anyone else. So it's that. It's our proven commitment to restaurant or market expansion. We're already in 80 markets. I believe we – I believe that we deliver in more cities, over 900, than anyone else. And we have committed to going in additional 100 markets. So that's more than doubling our coverage currently. Obviously they have a very wide-spread restaurant base geographically, and they want a partner that can support as much of that as possible. One of the elements that kind of get direct to your question is our technical expertise. It's not only our POS integrations. It's our level of logistics capability. We have average of under 40-minute click-to-deliver time, so we can absolutely support their scale, especially in the markets where we have – we don't have as high velocity, we can still execute delivery very efficiently and support them. But with the POS integrations, I mean, like I said earlier, that is – that was a absolute mandatory table stakes, and they looked at the integrations we have and we looked at their systems and we committed to them to make sure to drive as efficient process as possible. And then what you mentioned and what the other – what lots of restaurant operators are talking about is the singular focus, and we don't deliver power cables or deodorant. We only deliver food. We specialize in dinner. We do lunch. We do catering. We make sure that we're connecting the restaurants with hungry diners and that's all we think about. That's all that our tools are built on. That's all our drivers deliver. And that's why we're the best at it. And so I think that all of those together is why Yum! is very confident in us. And I was talking to Greg Creed, the CEO of Yum! yesterday afternoon after we were kind of working on some of these plans, and he said that he actually did some undercover boss work in some of his restaurants. And the buzz is incredible. These restaurants are really excited. They're getting way more orders than they thought they were getting already. So the value of our marketplace is already being proven out in these pilot restaurants, and I'd suggest you guys give him a call and he'll tell you the same story.

[Jeremy Scott:]

Got it. And then maybe just a quick follow-up. I was surprised about the pickup component for Taco Bell. Is there plans to integrate with some of their mobile apps to – I know you said you're going to power their white label for delivery, but what about the pickup component?

[Matthew M. Maloney:]

Well, I mean, let's be clear, we're powering their white label for everything, all transactions.

[Jeremy Scott:]

Okay.

[Matthew M. Maloney:]

...and their websites. This partnership is extremely close. We are not only supporting their restaurants on our marketplaces and across our affiliate network, but we are also supporting them on all of their white label properties. We're providing order management, including pickup and delivery, for KFC and Taco Bell obviously. Pizza Hut already has its own system, and that's where it gets a bit more fuzzy. We definitely want to augment their efficiency over time, but for KFC and Taco Bell, all their orders will run through us. It's a very close, it's a unique partnership in the space because we're extremely aligned. And both parties are agnostic to what channel the order comes in on, which is why the co-marketing is going to be so effective. As we support more of their restaurants and we start to kick in some of the national stuff, it's going to be really exciting because they're going to push GrubHub, we're going to push KFC, and I think it's a novel partnership between the two largest players in the space, and I think it's going to be extremely successful. We have been calling it finger lickin' good lately.

[Jeremy Scott:]

I'm sure they'll love that. Thanks.

[Operator:]

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

[Thomas Champion:]

Good morning. Congrats on the results and the deal. I was just curious if you could talk a little bit about the result and EBITDA per order in the quarter. That was impressive and stronger than we thought. Just curious if you were surprised with the result and maybe you could highlight any of the drivers there? And second, apologies if I missed this, but in the fourth quarter, just curious how the breakdown between acquired property revenue and core revenue turned out? I think the thinking was maybe $20 million in revenue would come from the acquired properties. Just curious how that ended up? Thank you.

[Adam J. DeWitt:]

Well, hey, Tom. It's Adam. In terms of the EBITDA per order, yeah, there was a number of drivers there. Obviously it was at the very high end or maybe even slightly higher than our guidance, but really we just saw a nice tailwind in terms of, first of all, the scale of delivery and the efficiencies that we're gaining. We talked about it. I know Matt mentioned it in his remarks. I think I mentioned it in my remarks. But we've gotten to that point now where we're largely indifferent from an economic perspective, and it's just between delivery orders and orders that the restaurant delivers, and it's just a testament to the efficiency that we've built into that operation in a very short period of time. I think there was also a little bit of a tailwind from rate improvements. We've had consistently over the last couple of years a little bit of a tailwind in terms of the organic marketplace rate going up as restaurants see more and more value from impressions on the platform and we generate more impressions. And so it makes sense for them to increase the rates that they are paying. And then finally, I think a little bit of that – I think we had originally talked about the orders from Eat24 prior to integration really being more like a breakeven, and instead we've generated a little bit of profit on those orders by creating a little bit of operational efficiency. In terms of the revenue, I'm not sure if you're looking on – if you're trying to strip out all the Foodler, OrderUp, and Eat24, or just Eat24. Ballpark, I don't think you're exactly right but you're close. I think you can back into it if you want to think through kind of we talked about the organic growth on the orders. And I think we were more specific last quarter when we had more visibility into OrderUp and Foodler in terms of what kind of revenue – the amount of orders that they're doing and kind of what revenue per order they generate. But I'd say you're definitely in the ballpark without giving you the exact number.

[Thomas Champion:]

Great. Thank you.

[Operator:]

Our next question comes from Paul Bieber from Credit Suisse. Your line is open. Paul Bieber - Credit Suisse Securities (USA) LLC Good morning. Thanks for taking my question and congratulations on the partnership. I was just wondering if the deal with Yum! offers Yum! any exclusives on the GrubHub marketplace. For example, does it not allow GRUB to pursue partnerships with certain Yum! competitors or does it better position Yum! Brands on the app or things like that? Are there any exclusives just how they'll appear or prevent their competitors to appear on the GRUB marketplace?

[Adam J. DeWitt:]

There's not any explicit – we talked about this earlier. There's no explicit preclusions. Look, we are really excited about this partnership, and we're going to – part of the reason that we're excited about it is because it's going to generate and engender credibility and generate awareness for us in second tier and third tier markets. So it's obviously something – the Yum! Brands are something that we're excited to lead with in those markets. But there's no preclusion from us adding any restaurants on the platform. Paul Bieber - Credit Suisse Securities (USA) LLC Okay. And then just one quick follow up. Can you give us an update on some of the cohort spending trends in Tier 2 and Tier 3 cities since you started investing in marketing in those cities? I think it's almost a year since you increased the marketing investments. I think you almost have a year of data now in some of the cohorts. So just some color on that will be really helpful.

[Adam J. DeWitt:]

Yeah. The cohorts have been incredibly stable in all markets even as we ramped up advertising. And to be candid, I don't think we would have been as aggressive with the advertising spend. I mentioned in my remarks that sales and marketing costs for the year probably accelerated a little bit or grew a little bit more than we had originally anticipated. But it was all from our perspective a really great story, and we invested behind what we saw were higher-quality diners, and it goes back to what I was talking about during Mark's question about the quality of the restaurant network driving better diner behavior, right. And so the more restaurants you have, the more complete network you have and the higher quality restaurants, all drives diner loyalty and frequency. Paul Bieber - Credit Suisse Securities (USA) LLC Okay. Thanks a lot.

[Operator:]

Our last question comes from Brad Erickson from KeyBanc Capital Markets. Your line is open.

[Brad Erickson:]

Thanks. Just two follow-ups. On Yum!'s call earlier this morning, they definitely called out that this was as much about online ordering as it was delivery. Do you have any sort of an expectation of what you expect in terms of mix? Is it fairly even or more weighted towards delivery? Just any color there.

[Adam J. DeWitt:]

Yeah. So I'll take that. I'm glad you asked the question. Obviously, we've been talking about for a long time that our business is heavily skewed towards delivery, probably mid-to-high single-digits in terms of pickup and that pickup, which I think is what you're talking about in terms of online ordering, is a massive opportunity for us that we haven't really attacked yet because we've seen so much green space on the delivery side. This is definitely an opportunity for us to break into that pickup space and pickup mindset. We think it's a really strong use case for diners to be able to five minutes out from a restaurant, order, have it ready, and be able to pick it up. It's probably the most efficient way for someone to get takeout. In our model, I think we've been more conservative and skewed more towards the delivery. I do think that the opportunity, we agree with Greg and David, that the opportunity for pickup, particularly with these brands, is really high.

[Brad Erickson:]

Got it. That's great. And then just on the EBITDA margin front I guess longer term. Obviously, as delivery becomes bigger part of the model, it's fine on a profit per order but brings margins down a little bit. Is that something we should ever expect to stabilize or return to expansion given the growth you're seeing and the scale that that inevitably drives longer-term?

[Adam J. DeWitt:]

You're talking about the EBITDA margin?

[Brad Erickson:]

Correct.

[Adam J. DeWitt:]

Yeah. We really focus on the EBITDA per order metric. And the reason is that depending on which way our diners' tastes go in terms of delivery restaurants versus restaurants that deliver for themselves, you're going to see margin fluctuations, even though – their EBITDA margin fluctuate, even though it's not reflective of any change in either

[Brad Erickson:]

Got it. And then one last one I'll slip one in if I could. Just given all the new diners you've brought on with Eat24 and everything, maybe just qualitatively if you could just talk about what's baked into the guide in terms of being able to extract more wallet from those new users? Historically, obviously when you brought you've had periods where you bring on a bunch of new users, initially they're kind of dilutive relative to your mix, but of course the hope is that you over time start to engage them more and extract more wallet. Maybe just describe what you feel like you've baked into your 2018 guide relative to greater wallet extraction with the new cohort of diners that have recently come into the model? Thanks.

[Adam J. DeWitt:]

Yeah. So I'll answer the question specifically related to the Eat24 diners, which is the bulk of that number. So most of those diners comprise of diners that come directly through the Eat24 brand platform, and then also diners that come through the Yelp Transaction Platform. One of the reasons that we've been so focused on talking about the integration timeline is that we really won't see a ton of acceleration or improvement in those diners until we hit those integration milestones. And the reason is that the big benefit for those diners, or in Yelp's case the visitors, is that they have essentially almost double the number of restaurant choices. And in a lot of cases, really high-quality restaurants, really popular restaurants that don't have their own delivery services but that GrubHub provides delivery for. And so what we've seen historically in markets when we dramatically improve the restaurant network is we see an improvement in the diners. And so we have baked in some improvement in those diners following the integration timeline, which we talked about at the second quarter of this year. It's hard to quantify. I think that if you think about the order frequency of those diners versus the GrubHub diners in similar markets, I don't think that we've baked in 100% of the gap going away, but we've certainly taken those diners a little bit closer to where the GrubHub diners are in those markets.

[Brad Erickson:]

That's great. Thank you.

[Operator:]

Thank you for joining us today. This does conclude our conference call. You may now disconnect.