Just Eat Takeaway.com N.V.
Q3 2016 Earnings Call Transcript

Published: 26 Oct 2016

[Operator:]

Good morning my name is Jodie and I will be your conference Operator today. At this time, I would like to welcome everyone to the Grubhub Inc. Q3 2016 Earnings Call. David Zaragoza. You may begin your conference.

[David Zaragoza:]

Thank you. Good morning, everyone. Welcome to Grubhub's Third Quarter 2016 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 IR section of our website at investors.grubhub.com. In addition, we'll be referencing our press release, which has been filed as an Exhibit to a Current Report on Form 8-K filed with the SEC. I'd like to take this opportunity to remind you that during the course of this call we will 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, 2015 filed with the SEC on February 26, 2016 and our Quarterly Reports on Form 10-Q including for the quarter ended September 30, 2016 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 will discuss non-GAAP financial measures in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. And now, I'll turn the call over to Matt Maloney, Grubhub's CEO.

[Matthew M. Maloney:]

Thank you for joining us on our third quarter Earnings Call. I would just like to say that like our National League Champion Chicago Cubs, Grubhub had an outstanding third quarter. Further as the Cubs have reinvigorated their storied franchise through long-term strategic investments and an aggressive offense, our strategic investments and ongoing product optimization, improved marketing and growing our delivery network are definitely paying off with continuing our reacceleration. I'm particularly encouraged by what our new technology has enabled us to do with our product through conversion optimization, the Diner Personalization and new feature testing. With all these efforts yielding tangible near benefits for the company, we are continuing to keep the accelerator down to sustain our growth momentum. I'll discuss what our forward strategy and plans are in more detail, as well as give updates on our delivery and chain initiatives later in the call. First a few highlights from the quarter. Grubhub generated $123 million of net revenue in Q3, up 44% year-over-year. While we typically expect to see a sequential decline in revenue from the second quarter to the third, better-than-expected order growth allowed us to grow through normal seasonality with net revenue up 3% from Q2. Net income was $13.2 million for the quarter, an increase of 92% from the prior year. Adjusted EBITDA was $35 million for the quarter growing over 65% year-over-year. While our investment and delivery continues to weigh on margin percentages, the growth in our business along with the strong unit level economics and increasing efficiency on a per delivery basis, have allowed us to grow our profitability at a quick pace. We ended Q3 with nearly 7.7 million Active Diners and generated Gross Food Sales of $735 million for our local restaurant partners, increases of 19% and 33% from the prior year respectively. These results put us on track to greatly exceed our initial organic GFS growth target of $500 million for 2016. In Q3, we averaged about 267,000 orders per day and our diners ordered almost 25 million times. We spoke in the past few quarters about many product changes we have tested and implemented as a result of our consolidated tech platform. The exchanges have driven a majority of the improvement we've seen in our growth rates over the past couple of quarters, and we continue to make incremental improvements based on what has become a continuous optimization process at Grubhub. Constant iteration and thorough AB testing to maximize diner lifetime values. We've also recently talked about leveraging our vast and hyperlocal store of transactional order data to create a more personalized, better experience for diners. Many of you, in addition to our diners, have noticed and positively responded to some of our recent efforts and personalization including restaurant and even dish-level recommendations. Releasing these features has generated substantially more data on our diner's preferences as well as insight on what drives diner engagement and conversion higher. If you use the platform often, you may have noticed that we've made some adjustments to our default search results. These changes are a direct result of the learnings from our massive troves of customer data and are designed to maximize customer engagement and conversion. At the same time, we are preserving restaurant's ability to pay higher commission rates for more exposure and more orders. Based on our tests, we believe these changes will be revenue neutral in the short-term, but give us a strong platform from which we can generate incremental revenue per order growth, and drive higher diner lifetime value. During the Grubhub delivery, our network continues to scale rapidly as we are now active in over 60 markets nationwide. Not only have we doubled the number of markets we are delivering in and increased our organic delivered Gross Food Sales by 7x since this time last year but we've been able to do so while holding our investment in that operation relatively flat at $4 million per quarter. This is a testament to our delivery team, which continues to find more and more efficiency in the business each quarter while providing excellent and improving levels of service. We are now closing in on half a billion dollars annualized total delivered GFS and we see no signs of slowing down. While still small relative to our overall business, we have many smaller markets where over 25% of our orders are being fulfilled through Grubhub delivery and even a few north of 50%. The growth benefits of offering delivery continue to be greater than we initially expected. The markets where we deliver a high percentage of orders are outperforming markets with low relative Grubhub delivery volume. We are still executing our market roll out plan with the goal of being in 70 plus markets by the end of the year, and are encouraged by the success we have seen so far. We have also talked about our traction with chains as the breadth and depth of our delivery operations grow. We are excited to announce that this quarter we signed agreements with Subway, P.F. Changs and a franchisee group of over 300 locations for Little Caesars. In addition to these great fast casual names we inked the deal with the Starr Group of restaurants well-known for more fine dining concepts like Alma de Cuba and Buddakan. We look forward to supporting these outstanding partners as they push into delivery as a new source of growth. Not to be outdone by our product improvements and delivery growth, our marketing team has been hard at work finding unique ways to engage our diners during meal time. As over 80 million viewers settled in and watched the first Presidential Debate on September 26, Grubhub engaged with our diners for the perfect viewing meal by asking a very simple question, are you with him, or are you with her. The response rate to this promotion was phenomenal as not only were we able to gain insights on dining habits and political affiliations by geography, but we were able to harness that data for curated content afterwards, amplifying the initial awareness of the promotion, and engaging meaningfully with diners during a key cultural moment. Following our Grubhub rebrand which launched earlier this year, Seamless launched an updated award-winning campaign over the summer called, How New York Eats. Targeting a specifically New York audience base, this campaign aims to appeal to the no nonsense nature of New Yorkers while also calling back to the classic restaurant signage every New Yorker identifies with. Both the consumer and industry response has been great and we are thrilled that Seamless continues to innovate for their very unique audience. I'm excited by the position Grubhub is in right now. At the center of a massive and growing TAM with proven and effective ways to drive growth across operations, technology and marketing, the hard work we have done over the past few years has set us up to compete for the lion's share of our market over the coming years, and we will work tirelessly to do so. And with that, I'll hand it over to Adam who will walk you through the financials and the guidance.

[Adam J. DeWitt:]

Thanks, Matt. I'll start with our third quarter performance, provide some forward-looking guidance, and then we'll open up the call to questions. As Matt noted, our performance was strong in the third quarter. Our third quarter is typically our weakest for the year due to seasonality because of warmer weather and summer vacations. This year, however, it ended up being roughly flat with the second quarter due to the factors Matt highlighted, and some one-time benefits including beneficial weather trends. We ended the quarter with almost 7.7 million Active Diners, a 19.5% year-over-year increase. We processed 267,500 Daily Average Grubs and 735 million in Gross Food Sales during the third quarter, 26% and 33% year-over-year increases, respectively. Excluding acquisitions, DAG growth would have been approximately 24.5% and Gross Food Sales growth would have been 27.5%. While weather patterns in Q3 were not extreme, they did provide us with a consistent benefit for all three months in the quarter. Weather in 2015 was unfavorable for our business, both dry and mild, in big markets. This past quarter, on the other hand, these markets had some significant heat waves and rainfall, both of which drive takeout volume. We also saw smaller one time benefits from calendar timing, the outages we experienced last year following our platform migration and a mild bump in ordering around the Olympics. Overall these one-time benefits added about 2.5% to our year-over-year DAG growth rate. As a result, year-over-year DAG growth, net of acquisitions and these combined impacts, was approximately 22%, very similar to our underlying growth rate from the second quarter. Third quarter net revenues were $123.5 million, 44% higher than the year-ago quarter of $85.7 million. If we exclude acquisitions, revenue growth would have been approximately 35%. Net revenue as a percentage of Gross Food Sales was 16.8% during the third quarter. This compares to 15.5% during the third quarter of last year. The increase in revenue capture rate is driven by the growth in our delivery efforts, including the restaurant delivery acquisitions we have made to date. Capture rates, excluding the impact from Grubhub Delivery and our acquisitions were up slightly sequentially and year-over-year, and generally in line with typical seasonal trends. On the expense side, total sales and marketing expenses were $26.5 million this quarter. 24% increase compared to the same quarter last year and sequential increase of 5% as compared to Q2. In line with our previously stated focus on higher quality diner acquisition in 2016, 30-day orders for any active diner actually increased 6% year-on-year, first year-over-year increase in that metric since we have been public. Our product and marketing teams have done a good job finding ways to increase diner conversion and engagement, and the metrics show it. That being said, while we expect frequency to continue to be stronger than it has been in the past, it was exceptionally strong this quarter due to those one-time volume benefits I highlighted earlier. Operations and support expenses in the third quarter were $44.3 million, a 60% increase compared to the $27.6 million in the third quarter of last year, and sequential increase of 9% as compared to the second-quarter. This increase is from the aggressive scaling of our delivery infrastructure, inclusion of Delivered Dish and LAbite and the organic growth in overall orders. In the third quarter, our organic delivery investment, or the amount we spent on delivery in excess of incremental delivery revenue, was approximately $4 million as Matt noted, consistent with both our expectations and the level investment in Q2. It's important to note that this is a significant decrease in the investment on a per order basis. This investment per order has decreased by approximately 80% from the fourth quarter of last year. We expect our organic delivery investment in Q4 to be similar to Q3, and continue to believe that our total 2017 organic investment will be lower than that of 2016 and become de minimis by the end of next year. Throughout 2016, we've also been working to combine the operations of our acquired RDS' and our organic delivery efforts into one large efficient delivery operation. The more we do so, breaking out our investment in organic delivery becomes less and less meaningful. We have also passed the anniversary of our initial step up in investment so year-over-year trends are more comparable than they have been over the past few quarters. As such, while we are confident we are on track to meet our prior stated targets for investment levels in Q4 and 2017, we will no longer be disclosing organic Grubhub delivery investment on a quarterly basis. Technology expenses, excluding amortization of web development, were $11 million for quarter, increasing 31% from Q3 of 2015 and 4% from the prior quarter. This increase is consistent with the investment we will make in our technology and product teams, and we will continue to hire as we find talented people who will contribute to our product innovation. Depreciation and amortization was $9.1 million for the quarter, a sequential increase of 2% from the second quarter. G&A costs were $11.8 million, a sequential decrease of 3% from $12.2 million in the second quarter. Net income was $13.2 million for the quarter compared to the prior year of $6.9 million. Net income for fully diluted common share was $0.15 on approximately 86 million weighted average fully diluted shares. Our tax rate for the third quarter on GAAP pre-tax income was around 37% and we expect the full-year go-forward rate of approximately 40.5%. This is a decline from our previous expected rate of approximately 43% because we have qualified for some deductions that were unavailable to us before. Non-GAAP net income was $19.9 million or $0.23 per fully diluted common share compared to the prior year of $11.5 million or $0.13 per fully diluted common share. Non-GAAP net income excludes amortization of acquired intangibles, acquisition and restructuring costs, and stock-based compensation expense, as well as the income tax effects on these non-GAAP adjustments. Adjusted EBITDA for the third quarter was $35.5 million, an increase of 65% from $21.5 million in the same quarter of the prior year. Adjusted EBITDA margin was 29% this quarter, an improvement of 370 basis points compared to last year in the third quarter. EBITDA per order was $1.44 in Q3, up 31% from $1.10 in Q3 of 2015. We really believe this is the best way to measure our progress on improving our profitability of our orders overall and our progress on scaling our delivery operations. Our year-over-year improvement in this metric clearly shows the power of scale and leverage in our business as well as our ability to increase profitability for shareholders, even with Grubhub delivery capturing an increasing percentage of our overall orders. Our balance sheet remained strong even with our acquisition of LAbite, share buyback and some CapEx directed towards our office build-out. You'll notice CapEx was a little higher in Q3 than in the prior quarters as a result of our office build-outs in New York and Chicago. We expect most of this work to wrap up by year-end. Finally, I'd like to share thoughts on Q4 guidance. The third quarter had a number of one-time benefits which I've already discussed. While we do expect underlying order growth to remain strong, we obviously can't assume these benefits to continue in Q4. In terms of outlook for Q4, we are raising revenue guidance from the implied $132 million to $136 million that we gave last quarter to be between $136 million and $138 million, a $3 million increase at the midpoint. We also expect fourth quarter adjusted EBITDA to be in the range of $38 million to $40 million. This guidance reflects all the items related to weather, calendar, timing, outages and Olympics as well as our ongoing investment delivery. With that, Matt and I will take your questions. Operator, please open up the lines.

[Operator:]

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

[Ralph E. Schackart:]

Good morning. Couple of questions. Matt, you've had a series of product changes ranging from better on-boarding, faster load times, amongst some other optimizations. Can you sort of talk about the opportunity to build on those changes going forward, especially as you begin to leverage order data going forward? And then I have a follow-up.

[Matthew M. Maloney:]

Sure, Ralph. Yes, those are all – let me put it this way. We've been really focusing on optimization on a lot of low-hanging fruit and to kind of continue the baseball talk of singles and doubles. I think that there was a lot of opportunity coming into this year, a lot of that we have been addressing. Right now the main focus is leveraging our data. The transactional information we've been recording for years to personalize the site and make it far more relevant for everyone. The short-order changes that you can see online now is taking the data, your personal history, your neighbor's personal history, aggregating it in a way so that we can best predict conversion, and really attempting to drive conversion through the funnel as high as possible, and that's really where the focus of our efforts are right now.

[Ralph E. Schackart:]

Great. And one more, if I could, for Adam. Adam, the Q4 guide for margin shows some mild compression for Q4 in what is normally a seasonally strong quarter. Is that due just to continued mix shift of delivery? And just maybe anymore sort of color you could add there would be great? Thanks.

[Adam J. DeWitt:]

Yeah. I mean it's partly due to that. I think if you look at that metric that we've been talking about, that EBITDA per order, I think you end up pretty close at the midpoint, and typically we'd see an uptick. I think what we have baked into the guidance is just that look, we had a bunch of one-time items in the third quarter that took us from that 22% underlying growth rate to 26.5%, and there's a large flow-through on those incremental orders. So, if you think underlying the EBITDA per order in the third quarter would have been a little bit lower, we do get that bump up in the fourth-quarter. I think, just seasonally, we'll obviously see the typical bump up in sales and marketing that we usually see, but everything else should be pretty similar to where we've seen it in the past.

[Ralph E. Schackart:]

Okay. Thank you.

[Operator:]

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

[Mark A. May:]

Thanks. I think you've addressed a lot of the questions around revenue, but maybe on the expenses. I think you pulled back if I remember, last Q4 on your marketing because of the rebranding efforts. How do you think about marketing investments in Q4 of this year and maybe going forward? And then also on operations and support, I think that reached an all-time high as a percent of revenue in Q3? What would you attribute this to? Is that delivery, or what's sort of driving that? And when, or if, do you expect to see leverage in that line? Thanks.

[Adam J. DeWitt:]

So, Mark, the ops and support is really straightforward. That's the delivery. And so as long as we are increasing Grubhub delivery as a percentage of our overall orders, you're going to see that that line item is going to grow at a quicker pace than revenue. So, you're not going to see the traditional leverage. I think, again I keep pointing back to you, but where you want to look to for leverage on the delivery is really in that EBITDA per order basis. So overtime, it's not going to be a necessarily steady step up because of seasonality and what have you, but you should see that metric go up and that will show you that we're getting some leverage out of the delivery orders and the orders overall. In terms of marketing, look, we – as I mentioned to Ralph in the last question, we definitely anticipate a little bit of a tick up in the fourth quarter, we feel better about our ability to market our brands specifically. And so some of the non-direct response stuff, I think you'll see us doing more, and I think you'll also see us a little stronger out of the gate in the first quarter, perhaps than last year where we really didn't get going until the back half or the end of the first quarter.

[Mark A. May:]

Thanks.

[Operator:]

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

[Nat H. Schindler:]

Yeah. Hi, guys. Can you help us out on remembering the cadence of Q4 last year, a little bit if you could provide some detail? If I remember correctly, the weather comp particularly in New York and Chicago was – you had particularly great weather, so bad for you guys in November and December, but actually bad weather in October, so, a tough comp for the October. Is that where you built your guidance from? And then I have a follow-up on something else.

[Adam J. DeWitt:]

Yeah, absolutely. I think, look, we announced – when we announced fourth quarter earnings last year, we talked about a 1% overall headwind last year. So I think you had the patterning right. I think in October it hurt us a little bit. November and December it helped us a little bit. As we look forward to guidance in the fourth quarter this year, to be honest, we've had a little bit of a headwind so far in October. So, that plus a little bit of an impact from the Internet outage that we had last week, it's almost like a wash on a weather basis.

[Nat H. Schindler:]

Great. And also so any more detail you can give on how you are deciding to do, and how you are managing the process of your engineers as you've now reapplied them after the replatforming of Seamless to these conversion rate improvements that really came to our attention in Q2? Are you in any way picking the easiest things to do, or the biggest impact things to do first? Or is it simply just stuff that's been on the list?

[Matthew M. Maloney:]

I mean, clearly we are prioritizing the efforts and product. I can give you a little bit more color around it. We have dedicated staff, multiple teams, weekly meetings to discuss what's the highest priority, like I said earlier to Ralph. There's an element of just low-hanging fruit early in the year, so it was obvious things that we knew were going to help. As we clear through those, we think about the sort order and how can we engage and frankly reengage diners better than we have before. And so how do we get diners to – a higher percentage of diners to order on the platform, once they are there, it makes our marketing more effective, it makes everything more effective. And so really focusing on what's going to be best for the diner has been a large amount of our efforts. There are teams looking around more kind of random stuff that just potentially could be better in the model of something like how bookings.com has looked at their product for a long time. But it's a concerted, organized effort that we have been investing in for nearly, or just over a year, at this point. And it's obviously really bearing fruit.

[Nat H. Schindler:]

Great. Thank you.

[Operator:]

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

[Brian Nowak:]

Thanks for taking my questions. I have two. The first one, the orders per diner was particularly strong in the quarter. You've been backing out the one-time items. I was thinking if you help us to better understand the orders per diner in some of the more mature delivery markets versus some of the markets without delivery? And then, secondly, kind of a little bit of a bigger picture question on active diner growth. Just talk about kind of philosophically how you balance incremental margins over time versus really investing for faster Active Diner growth? Thanks.

[Adam J. DeWitt:]

Yeah. So orders per diner, certainly delivery is helping us. We've talked about it for a number of quarters in a row. We see the restaurants that we deliver for with slightly higher activity and certainly generating more new diners, and so that's having an impact. I think overall, it's not just about the delivery though that's driving that number, especially in this quarter. I mean, overall we saw a benefit. We talked earlier in the year, at the very beginning of the year, that we are going to focus this year on higher quality diner. So we expected the Active Diner number, or Active Diner growth, to more approximate order growth, and we're seeing that, and we're seeing the product improvements that we had in the second quarter and beyond, basically drive frequency up and offset the mix impact. We still get a little bit of a hurt from the mix impact of growing disproportionately in markets outside of New York and Corporate. But the frequency improvements overall are outweighing it. In terms of Active Diner growth and how we think about it, it's really what I just mentioned, that we're really focused on investing as much as we can to acquire as many higher quality diners as we can. There's not a lot of benefit for us to go out and acquire the incremental diner from where we are right now. The cost is high. It drives the cost of acquiring all of the current diners a lot higher. And we find very little benefit. We're experimenting every quarter. Underneath the $20 plus million a quarter that we're spending within there, we're certainly experimenting on pushing the envelope. And so we're constantly trying to push where can we flex more in terms of acquiring more quality Active Diners. And so, we really think that at the current rate we're at the right investment level.

[Brian Nowak:]

Thanks.

[Operator:]

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

[Ronald V. Josey:]

Great. Thanks for taking the question. Maybe a two-part question to Matt, it relates to your commentary around the search results changes. And I'm wondering on the first part given the significant growth you've seen in a number of ratings and data you all are generating, I want to know how that's being used more in the search results, and you mentioned neighborhood level recommendations. But then also we're seeing a lot of sponsored listings show up in our search results across both desktop and the app. I'm just wondering if this new sort order is taking into account like a quality score of the restaurant given the ratings that are generated. And maybe that's similar to what you've all done with new diner sorts highlighting higher-quality restaurants. And if so, is that why you said the revenue would be neutral? The change, the search, the sort order would lead to a neutral revenue outcome in the short term? Thanks.

[Matthew M. Maloney:]

Sure. I mean clearly we have been collecting a dramatic amount of ratings and detailed faceted ratings on our, not only our restaurants, but on the dishes themselves. And our diners have been fantastic giving feedback, and all of that is incorporated when we think about relevancy for the next diner that comes along. So in terms of sort order, I'd say broadly we're continuously testing new ways to put the exact right restaurant in front of our diners at any time. So the goals of our sort as we see it are the same as the goals have always been. It's first show the diner the best restaurant for them at that time. Second, allow the restaurants to pay more to access more hungry diners. Third, achieve all of this while maintaining at least near-term revenue neutrality. And then fourth, drive lifetime value. So I'm not going to go too deep into the details because we're always changing this, and the sort orders that you see now are probably going to be out of date in 30 or 60 days. But, I can tell you that this presentation that's live right now does the best job of accomplishing all of those goals versus any other sort we have ever displayed. And we're going to continue testing new diner experiences indefinitely. So maximizing LTV is a continuous process for us, and we are very pleased with where we are today but there's just a lot more to test. And just to clarify. Prior to the sponsored ads showing up, the sort was never 100% based on commission rate anyway. And so this is definitely the best variation we have ever tested.

[Ronald V. Josey:]

That's great. Thank you.

[Operator:]

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

[Heath Terry:]

Great. Thanks. Just a couple of questions. One, I'd appreciate your thoughts on the current competitive environment. We've obviously seen some fluctuation both on the venture funded side as well as some of the public companies or even near public companies that are trying to build into the space. And then to the extent that you called out the benefits to growth that you saw in the quarter from revenue – or from weather and some of the other one time, can you give us a sense of how much of those or how much of that growth was reflected in your original guidance versus something that was incremental to and developed over the course of the quarter?

[Matthew M. Maloney:]

I'll take the first part.

[Adam J. DeWitt:]

Yeah. I'll take the second.

[Matthew M. Maloney:]

All right. Thanks, Heath. So it's kind of funny, I got this question at the last earnings call and three months ago, I was able to say we just posted our best quarterly order growth in over a year. And this quarter I'm again able to say that we just posted our best quarterly growth in well over a year. And remember that all the material competition was already in market a year ago as well. So there's a lot of people trying out a lot of different things, but I can say that we definitely believe that we have a significant structural advantage in that we are known for one thing only, and that's takeout ordering, and we back it up with world-class customer support. We believe this will succeed because of the singular focus on our ability to engineer our entire product and experience around this one purpose. So industry-wide, we still have a huge advantage because we have the most comprehensive selection of restaurants and the lowest diner-facing fees. In fact, we just calculated recently that we offer diners something no one else does, which is over 10,000 restaurants that have zero delivery fee and no menu markup. That's pretty incredible in the competitive dynamic as what we have. And finally, we have just the best product experience for connecting diners and restaurants, and like I said, backed up with our unparalleled customer support. So, I think we're just going to continue to invest and execute to build the absolute best product that connects diners and restaurants. And if other groups want to try to play around in our space, we welcome the competition.

[Adam J. DeWitt:]

And Heath, in terms of the guidance, can you give me a little bit more color? I'm not 100% clear on what the question was.

[Heath Terry:]

Sure. I mean you called out weather; you called out a couple of other things that contributed, I think you said 2 to 3 points of growth in the quarter. And, I was just curious if that was 2 to 3 points that you considered incremental to the guidance that you gave, meaning you were expecting worst weather over the course of the quarter or that that was what was implied by your guidance or if there's some other way to think about sort of how the quarter shaped up relative to what you – or the impact of things like that on the quarter relative to what you expected at the beginning.

[Adam J. DeWitt:]

I got it. So you're talking about third quarter.

[Heath Terry:]

Yeah.

[Adam J. DeWitt:]

So the weather that we saw – obviously, when we gave guidance in July, we had the benefit of the beginning of the quarter. We didn't have a lot baked in at that point from weather and we didn't really anticipate the Olympics so much. We did have a little bit of benefit from the calendar, but I would say most of that kind of that 2.5%came post guidance. So it was unexpected. We obviously also had baked in some. We raised guidance in the third quarter just like we are raising now. We saw that that product, those product improvements or the growth in product improvements flowing through in July. And so we anticipated some of that – baked some of that into the guidance just like we are doing now. We have seen the flow-through into the fourth quarter and so we are raising fourth quarter as well.

[Heath Terry:]

Great. Thanks, guys.

[Operator:]

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

[Aaron M. Kessler:]

Great. Thanks. Couple of questions. First on the conversion initiatives you have been working on for a couple of quarters. Would it be possible to quantify any impact in the quarter in terms of growth, taking you to that last quarter? And to that effect, Apple Pay are you seeing any nice conversion list from that yet? And finally, the UK market I noticed is kind of in the 25%, 30% penetration rates versus likely kind of sub-10% for the U.S. market. Any thoughts on the delta between UK market relative to the U.S.? Thank you.

[Adam J. DeWitt:]

I'll take the conversion question and then Matt will talk about the penetration. So, in terms of the conversion, the benefits there, what I'd say is, last quarter we talked about the growth rate, the sequential growth rate going from 16% year-over-year kind of normalized, apples-to-apples. We talked about the year-over-year growth rate going from 16% to 21%, so about 5% and we said most of that, or a lot of it, was related to product. What I'd say is we got in the third quarter, we basically saw all of that remain and potentially a little bit more. So, maybe another 50 basis points to 100 basis points lift from the product. So, we see that in the third quarter and again, that's why we have pushed the fourth quarter higher from where we had it at the end of the second quarter.

[Matthew M. Maloney:]

In terms of UK we don't have a lot of good data on that. Our London operations are minimal and really supporting a few corporate clients. So, any answer I give is really going to be speculation. But I have had a few conversations about this with players in the space and the consensus is really that it's a smaller country and the marketing really amplifies around the cities more strongly than it does in the U.S. Whereas an L.A. push for us really has no impact on our Boston business. I think a Manchester push in the UK has more impacts on other local markets. But that is about as...

[Aaron M. Kessler:]

Does that give you confidence longer term we could see – overall market penetration kind of 30%, 40% or any thoughts on that?

[Matthew M. Maloney:]

I think that over time, it's obvious that people want to manage their life through digital means. And so I think that even higher penetration is very reasonable. I think that as you look at our growth rate and the amount we are investing in product and marketing, I think that the adoption curve is not as steep as you might think it is. It's really hard to put $100 million to work and dramatically inflect the growth rate, especially at our scale. And so, we just continue to fight the fight of trying to drive consumers that are ordering offline on the telephone to online channels. And given our products and our markets and now our delivery, I think we are in the best position possible to capture the majority of that migration.

[Aaron M. Kessler:]

Got it. Great. Thank you.

[Operator:]

Your next question comes from the line of Neil Doshi from Mizuho Securities. Your line is open.

[Neil A. Doshi:]

Great. Thanks, guys. Seems like a lot of the delivery investments this year is focused really around lighting up new markets. What type of investments will you be making in delivery for next year? Is it just going deeper within those markets or is there something else? And then Matt, just to keep with your baseball analogy, what inning do you think you guys are in as it relates to taking order data and providing more data and insights to restaurants to help them better manage their businesses? And how big of an opportunity can that be for you guys over time?

[Matthew M. Maloney:]

Well done, Neil. In terms of delivery, I think the majority of our investment this year wasn't actually in laying out new markets, it was really going deeper and then leveraging that infrastructure and expanding to new markets where we can see rapid growth. I think next year, I can't predict if – I don't think we'll open up as many new markets as we did this year, for sure which means the majority of our spend and our investments will be in driving efficiency and increasing the network and availability of our drivers in the markets we are already in. Now on the baseball. You know, we are definitely in the early innings. We have been playing around a lot with aggregating the data and feeding it back to restaurants, and they love it. And it really helps them drive their business and anything that makes restaurants more effective or better is better for our diners and better for our business. Part of the – part of what we are working on in terms of the new sort order is how do we allow the restaurants to in some way, manage their organic or their placement in the sort order? And one of the key signals we are looking to leverage is the direct feedback through the faceted reviews from our diners. So we really want to create an ecosystem where if restaurants are doing better for our diners, they will be disproportionately rewarded through exposure and ultimately orders and building in a positive feedback loop where diners get a better experience on Grubhub as a result of the scale that we are seeing across the country. And that's the way we are thinking about it. So, I think it's very early. There's a lot of work to do, both in aggregating data and presenting the data and then capturing the output of those actions. But to the tail end of your question, I think that it is going to be hugely valuable for restaurants and then our business in line.

[Operator:]

Your next question comes from the line of Chris Merwin from Barclays. Your line is open.

[Christopher David Merwin:]

All right. Thank you. So I guess you talked about room for growth and penetration rates, but how do you think about room to grow LTV at your existing diners? Certainly, I think we have seen improving frequency which I think speaks to growing LTVs, but how much more room is there do you think for that metric to go higher? And then just a second question I think recently we saw that some of the Facebook's restaurant pages are now integrated with a couple of different platforms. It doesn't look like you are one of the partners there. However, for Google maps it does appear that you are a partner with them. So, just, I guess, how do you think about partnering with larger platforms? Is this a source of customer acquisition for you? I am just trying to get a sense of your strategy there. Thank you.

[Adam J. DeWitt:]

Thanks, Chris. I'll take the LTV question. I will let Matt talk about the Facebook and Google. So in terms of LTV, look over the long term we certainly see more room for growth on diner LTV. We are certainly not getting 100% of stomach share to make up a terrible term. And that's what our teams are focused on, right, and that's what some of these product improvements are about. We are seeing – we've seen frequency improvements across all markets. And that obviously translates into higher LTV. When we are doing a lot of the continuous optimization testing that Matt's talked about, we are focused on diner LTV as a metric and kind of value over the life of the diner as opposed to just conversion. And so, we see room and we've started to capture some of that improvement, but we think there is more room from where we are today. I think it's just we are not going to see, we're not expecting big steps up, but we do hope to see some room for improvement over time.

[Matthew M. Maloney:]

And thanks Chris. So thinking about affiliates and partners broadly. We have by far the most comprehensive network of restaurant relationships in the space and we are open to exploring any partnership that we find interesting to diners and restaurants. However, you have to remember that we haven't found any affiliate relationship very meaningful in the past, and compared to investments in product and marketing, we really don't think that any partnership is going to be very fruitful in the future. So Facebook, I mean, clearly it's an incredible consumer brand, huge reach and it is reshaping the way a lot of consumers are interacting with the Internet. And if it turns out to be a channel that makes sense for us, we'll definitely be there. And then in terms of Google, it makes sense when diners are searching locally for food, it makes sense for us to be there as an option. But that availability has already been available on the desktop, or that feature has been available on the desktop for a while now and recently they just expanded it to mobile and it really wasn't – it hasn't really turned any major dials for us yet. So we're cautiously optimistic but we're not going to engage and invest our resources, take time and attention away from our in-house product improvements or our marketing in order to support a partnership that may not be as effective.

[Christopher David Merwin:]

All right. Thank you.

[Operator:]

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

[Tom Forte:]

Great. Thank you for taking my question. So the first one is, I wanted an update on the relative economics of the chain restaurants versus the independents. And historically you've talked about how they've been comparable; it's about yield management. And I just want to get an update there. And then earlier, I think you talked about the competitive set. But was wondering if there's any change in M&A opportunities, given that some of these startups are having a harder time raising money. Thank you.

[Matthew M. Maloney:]

Sure. Sorry. I'm getting over a little cold here. So the economics between chains and independents really hasn't changed. They're very similar. But as you – so they're not impacting the numbers and remember, the chains in total, it's a small percentage still, even though these are very exciting and great partnerships for us and allow us to scale our delivery specifically. I think that overall, you're not going to see any surprises in terms of commission rate from chains either through volume or through different economics. But today, we've been able to sign up all of our chain partnerships on a standard rate card to allow them to compete with independent restaurants effectively. And then in terms of M&A, we've always been very opportunistic. We're looking at any deal that's available. We believe that all diners have value, and I think that frankly, there hasn't been any massive collapse in expectations, even though I would argue that one is duly deserved, but we haven't done anything, and I think we'll be very rational with our capital and make accretive decisions in the interest of our shareholders when they present themselves.

[Tom Forte:]

Thank you.

[Operator:]

Your next question comes from the line of James Cakmak from Monness, Crespi, Hardt. Your line is open.

[James Cakmak:]

Hi. Thanks. Just looking at the Daily Average Grubs, even with the – I guess the – on a net-net basis, you still saw I think a point of acceleration quarter-over-quarter and implying kind of in the low 20s for the fourth quarter with your guidance. I guess as we look forward, how sustainable do you think that rate is in DAGs growth? And then secondly, looking at this on an EBITDA per order basis like you guys discussed, it was up dramatically this quarter, flattish quarter-over-quarter, I guess maybe because of seasonality. But, I guess, as we look forward, how do you guys think about how high this can actually go? I mean, how much more room is there in expanding the EBITDA per order? Thanks a lot.

[Adam J. DeWitt:]

Yeah. So James, in terms of the DAGs and how sustainable, as you mentioned, underlying the second quarter about 21% and a little up from there in the third quarter and kind of around there for the fourth quarter guide. I mean, look, the market opportunity is certainly large enough for us to stay there for a long time. But at the same time, we have to balance that with as we get bigger, it's harder to grow on a percentage basis. But I mean, look, we think the opportunity is there. We are working hard on the product side and the marketing side to counteract the impact from having a larger base. But we're optimistic, and we think the opportunity's definitely there. We clearly see that it's – in the short-term at least, we feel really good about staying at that same level. In terms of EBITDA per order and where it can go. Look, I don't think we've set any specific target. What we said in the past prior to starting delivery, we talked about how in incremental order had roughly somewhere between 70% and 80% flow through. So incremental costs of kind of in that 20% to 30% range. And so, the incremental margin from that order – you think about what average revenue is, with the average order size, you get to a revenue of about a little over $4 in order, and kind of look at that 70% to 80%. And that would be your very, very high end, right? And so, there is certainly room between where we are now in that number. I stop short of giving you an actual target, but there is certainly some room above where we are today based on both the benefits of scale from just overall orders, and then more specifically from delivery as we get the benefit of being at critical mass or at scale in that part of the business.

[James Cakmak:]

That's helpful. Thank you.

[Operator:]

Your next questions and from the line of Jason Helfstein from Oppenheimer. Your line is open.

[Jason Helfstein:]

Thanks. Just wanted to dig a bit more into diner growth. We are kind of seeing numbers here that do suggest somewhat of a maturing – and you talked about being efficient with marketing, like what is it worth to acquire that next diner. Just maybe help us think about how you think about diner growth going forward for the next 12 to 18 months just in the scope of our modeling? Thanks.

[Adam J. DeWitt:]

Yeah. So, I think the easiest way to think about it is how we have been talking about the goal, which is higher quality diners so that the active diner growth should be a lot closer to the growth in orders. And so, if you're forecasting for next quarter, for example, at the midpoint of our guidance, and you're thinking about 20% order growth on an underlying basis then you're going to think about active diner growth plus or minus that a little bit. And then in the longer-term, I think it is going to be continued to be around that number, right? We are not going to get – we think there is opportunity on the frequency side. But we're not going to get all of our growth from frequency. At the end of the day, we have to grow the active diner base, and so I think that is the best way to think about it when you're going through your modeling exercise.

[Jason Helfstein:]

Thank you.

[Operator:]

Your next question comes from the line of Kevin Kopelman from Cohen and Company. Your line is open.

[Kevin Kopelman:]

Hi, thanks. So I have two questions. The first one is on the delivery, and I apologize if I missed it. But can you share with us what percentage of food sales or orders approximately that you're delivering yourself now? And then the second question is on the corporate business. It seems like it's still in the old tech platform. Do you have any plans to move that over to the new tech platform and can you share the timeline? Thanks.

[Adam J. DeWitt:]

Yes. So I'll take the delivery question. So Matt, I think in his prepared remarks said that we are quickly approaching an annualized rate of close to a half billion in Gross Food Sales. So, if you want to take that and kind of multiply out where we are from a total Gross Food Sales basis, you can get a gauge, it's going be in the teens or so to speak. That includes all of our delivery whether it is coming through one of the old brands or the Grubhub delivery.

[Matthew M. Maloney:]

Hi, Kevin and then in terms of the corporate. Yeah. We are definitely extending our feature set and our consolidated tech platform to the corporate orders. It's a trickier feature set and so it's taken a little bit longer in addition to the Corporate. And so the consumer marketplace is definitely our priority as we wanted to migrate as many diners as possible given the growth rates there. So the Corporate I'd say in addition to the Seamless platform, we acquired three or four RDS' in the past year and so we are looking to migrate those platforms as well. So there are Seamless Corporate clients that have already migrated to the new platform. If the feature set requirements are minimal and we already have implemented them on the new platform. Over the course of 2017, we'll see a lot more of our corporate clients migrate across and we'll be reaching out to clients individually to assist them if your group wants to play on the new system, reach out to your rep and we'll definitely facilitate that faster.

[Kevin Kopelman:]

Okay. Great. Thanks for the color.

[Matthew M. Maloney:]

This will be the last question, Jodie

[Operator:]

Your final question comes from the line of Blake Harper from Loop Capital. Your line is open.

[Blake Harper:]

Thanks. Good morning, guys. I had a question. Adam, you had mentioned that the delivery investment levels would be de minimis by 2017, at the end of 2017. I just wanted to clarify will that be de minimis on the Q4 2017 basis, or for the year? And then just thinking ahead to 2018 if that was the case you are getting to breakeven there what type of profitability level would you think about for 2018 and beyond that you can do with the delivery business?

[Adam J. DeWitt:]

Yeah. Sure. So, the comments and the comment about de minimis is really towards the end of the year. So you're talking about Q4 of 2017 is when it becomes de minimis and it's a combination of being de minimis in absolute dollars but then also as a percentage of the delivery business. I think long term, the way that we are thinking about profitability in the delivery business is still the way that we have been talking about it since the beginning, which is we want a delivery order to generate the same amount of cash to shareholders as a non-delivery order. And so, it's really going to be in that EBITDA per order metric where you're going to see it. So when you're thinking about your modeling, it's really saying okay, by 2018 we are really talking about being in different – between having an order delivered, from an economic perspective at least, being indifferent between an order that we deliver versus an order that the restaurant delivers.

[Blake Harper:]

Got it, thanks. And then just one more follow up, if I could? Have you guys thought about or looked in any way about automated delivery or any other types of way to use the technology besides the optimization or scaling up to improve that business? Or is that still just kind of too early or too far out in the timeframe yet?

[Matthew M. Maloney:]

Well, I could tell you that we are near completion of a drone program but that would not be true. Here is the deal. When you think about automated delivery, think about how it applies even each to your situation. And if you live in a high rise in a major metro where a lot of our diners do, drone delivery is a little more challenging. Automated or self-driving cars, who is going to get the food? I guess you're assuming that the restaurant takes it to the car and then the diner comes and gets it. So even if there is huge progress in self-driving automobiles and potentially even the ride share world, I think that – and this goes back to the competitive question. The requirements for food delivery are just more intense. It takes a lot more work to execute one of these transactions than it does to give someone a lift in a car. And so I think that in our world, automated delivery, specifically of food that is ordered and consumed within an hour, I think that automated delivery is just still science fiction.

[David Zaragoza:]

All right. (59

[Operator:]

This concludes today conference call. You may now disconnect.