Just Eat Takeaway.com N.V.
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good morning. My name is Liana and I’ll be your conference operator today. At this time, I would like to welcome everyone to the GrubHub Inc. Second Quarter 2015 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, [Operator Instructions] Thank you. Anan Kashyap, you may begin your conference.

[Anan Kashyap:]

Good morning, everyone. Welcome to GrubHub's second quarter of 2015 earnings call. I am Anan Kashyap, Head of Investor Relations. Joining me today to discuss GrubHub's results are CEO, Matt Maloney and CFO, Adam DeWitt. This conference call is available via webcast on Investor Relations section of our Web site at investors.grubhub.com. In addition, we'll be referencing our press release, which is available on our Investor Relations Web site. 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 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 the Form 10-K filed with the SEC on May 5, 2015, and our quarterly report on Form 10-Q that will be filed with the SEC. Our SEC filings are available electronically on our Investor Web site at investors.grubhub.com or 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, which is available on our Investor Web site and has been filed as an exhibit to Form 8-K filed with the SEC. And now, I'll turn the call over to Matt Maloney, GrubHub's Founder and CEO.

[Matt Maloney:]

Thank you for joining us in the Q2 earnings call. I'll begin by providing some highlights from this quarter and giving you a general business update before turning the call over to Adam, who will give us some more detailed look at the numbers and our 2015 outlook. We ended the quarter with 5.9 million active diners and averaged over 220,000 orders per day for our restaurant partners. Our diners ordered more than 20 million times during the quarter driving more than $568 million in sales to local restaurants in cities all across the country. In terms of our financial results it is translated to $88 million of net revenue for the quarter up 47% from the second quarter in 2014. Adjusted EBITDA was $28.4 million for the second quarter or 68% increase for the quarter compared to the second quarter of 2014. We are pleased with these results and remain very excited about the opportunity in front of us in our core business as well as in delivery. We had an extremely productive quarter in terms of product evolution and achieve milestones that will release historical constraints and accelerate our future growth. This is a very exciting time in our company as we close the chapter on old systems and rapidly expand with GrubHub means to restaurants and diners across the country. Loyal Seamless users have probably noticed a new user experience across all of our platforms including the Web site and mobile applications. As we mentioned in our last earnings call, we have been using our labs environment to test a completely new diner experience. We've been migrating Seamless traffic to this new platform over the last couple of months and fully migrated users in late June. In addition to what we believe is a better user experience for seamless diners both our Seamless in GrubHub brands are now in a single technology stack. Over a year ago we initiated the process of merging the Seamless and GrubHub platforms on to the same backend technology. This past quarter, we completed the transition which will allow us to share data systems and services across the brands. After many months we have achieved this goal as well as augment and cutting edge business analytics, bolstered flexibility and create a new search engine. The new platform has already shown improvements in conversion and velocity of future releases. Building a new platform allowed us to re-engineer the Seamless interface based on diner analytics data. We believe the new system is superior in many ways, in particular it's proving to be better at converting new diners who find us on mobile browsers or organic search queries, both key channels and accelerating the conversion of offline diners online. As with any successful platform that changes you have users that want to keep it the same. This transition was no different, but the data tells us that our new platform is superior not only from a diner perspective but from a technology capability and extensibility perspective as well. By focusing on rapid application development and creating responsive mobile Web site we are already seeing increased conversion rates for our new diner traffic, more and more new traffic is coming to seamless.com on mobile devices and this traffic has significantly higher conversion rates on our new platform. We've also rolled out the corresponding changes on the GrubHub brand and we are seeing higher conversion for the new dinning mobile traffic there. We believe the new site will help us capture greater share of new diners across both brands. In the redesign we've also focused on the search and recommendation engine of the site and mobile applications. Our objective is the surface improved results and recommendation in order to help diners find great food faster from our industry leading restaurant network. The first innovation is presenting popular restaurants and trending menu items in your neighborhood. This is now live in the redesign. As we continue to process hundreds of thousands or orders per day our algorithms will get smarter about the most popular dishes in every neighborhood in each of the 900 plus cities in which we operate. There is no other company of our scale in the U.S. that has dish level transactional data. We intend to expose this data and trends in comparative metrics to give our diners valuable information about their local restaurants in a way the qualitative reviews just can't. The common environment for both brands will also allow us to be more agile with our development and decrease time to market for new functionality. In the short time since our backend migration we've already launched and extended new features around recommendations and the dish level search capabilities. We extend to continue expanding our feature capabilities much more rapidly than we have in the past. If for no other reason than we’ve freed up the significant percentage of our team for innovation and optimization. We plan to continue our aggressive investments in the best diner tool set as well as advance delivery systems. Next I would like to focus on the existing progress we've made in building out our delivery network. We believe we have reached critical mass in our delivery business in some important markets and are seeing the fulfillment of its promise to support and accelerate our core business. Aided by our acquisitions of DiningIn and Restaurants on the Run we are achieving operational metrics in some pockets that give us confidence we will make delivery scalable and sustainable across the country. Just to give you an idea of how quickly we are ramping delivery. We offer delivery in 15 markets after we announced the acquisitions and we will double that number by next week. In total we expect to go from basically zero in delivery at the beginning of this year to a run rate of over 175 million in gross food sales by the end of 2015. We will continue to invest aggressively and have a significant delivery presence in markets covering over 135 million people or roughly two-thirds of our active diners by the end of this year. Our strategy is simple and grounded invest behind our core strength, our un-matched scale in this two side of marketplace. We plan to leverage our 5.9 million active diners and more than 35,000 restaurants partners to create paralleled scale and delivery, brining incredible food, world class efficiency and low delivery fees to diners. Our primary objective is providing diners and restaurant with an experience that is second to none. With more than 220,000 orders per day we believe that we have enough liquidity in this market today to support a far larger delivery network than anyone else. Scale is the primary competitive advantage in any logistics network and we believe GrubHub has a clear advantage. The delivery Tam is huge and attractive due to strong network effects so it's no surprise that this business attracts competition. However we believe that our scale liquidity and first mover advantage in this extensive two sided network position us extremely well in this adjacent market. In the short term, we plan to continue aggressively expanding our delivery network by adding markets, great restaurants and independent delivery partners while marketing aggressive delivery times and low diner's fees. As we have mentioned in the past that our delivery business is not capital intensive however we are investing in an over capacity of delivery partners in the near term. As order volume grows in this market utilization and economic of each order will improve, we've already seen this in markets like Chicago were scale has allowed us to dramatically improved our throughput per driver and lower overall cost. In addition to adding Girish Lakshman to our board we have hired Stanczyk another former senior Amazon Executive to lead our delivery program. Dan brings a long history of operational logistical and general management experience. In the medium term we believe independent restaurant take-out as opposed to GrubHub delivery remains a significant opportunity at over 70 billion in market spend and at 75 plus incremental margin. In fact, we believe this opportunity will continue to grow with our investment in delivery. We think that delivery is a great tactic to convert offline diner online because it entices them with their favorable non-delivery restaurants and enables us to guarantee a high level of service at low fees. As a result our delivery network should help us rapidly capture our current Tam and position us very well for the large incremental delivery Tam. Longer term we believe that delivery cost will be subsidize by a combination of restaurant and diner fees. As we have discussed a number of times we still believe that while our margin will go down as an overall percentage of revenue, due to incremental growth free cash flow will go up along with our importance in local restaurants marketplaces across the country. Strategically and economically we believe the investment in delivery will create meaningful shareholder value. Switching to restaurants, we continue to make significant strides adding new options to our platform, with signings of non-delivery, our non-GrubHub delivery restaurants remaining very strong. As we have mentioned in the past the markets outside of our Tier 1 markets are important to us and we have added approximately 1,700 net restaurants in almost 9000 DAGS in last 12 months. This means we've added $100 million gross food sales business in non-Tier 1 markets alone. We think this shows strong continued momentum in what is the key objective for a long-term growth and a continued opportunity for first mover advantage. Finishing up I want to touch on the value that we create for us restaurant partners. We take particular pride in helping our restaurants grow more quickly than they would without GrubHub. We recently commissioned a study to help us understand economic impact that GrubHub has on our restaurants and then findings are resounding, in that GrubHub is helping our restaurants grow. According to the study, restaurants that join GrubHub increase their takeout revenue by an average of 25% in the first year. In fact after joining GrubHub one in five restaurants more than doubled their takeout business. What is even more compelling is that compared to other online ordering platforms, GrubHub provides 5x more takeout revenue lift. While we have always heard this results anecdotally, we believe the study proves GrubHub has been a significant driver of growth for our restaurant partners. With that I will hand it over to Adam to walk you through the financials.

[Adam DeWitt:]

Thanks, Matt. I'll start with our second quarter performance, provide some forward-looking color, and then we'll open the call to questions. As Matt alluded, we typically expect less activity in the second quarter due to warmer average temperatures and school schedules and we see that in our DAG volume. We ended the second quarter with active diners reaching 5.9 million, a 42% year-over-year increase. These growths in diners enable us to achieve significant growth in orders, we process 220,000 daily average Grubs and $560 million in gross food sales during the second quarter, 26% and 34% year-over-year increases respectively. Excluding the impact of the DiningIn and Restaurants on the Run acquisitions those growth rate would have been approximately 25% and 30% respectively. It’s important to remember that both DiningIn and Restaurants on the Run have significantly higher average order sizes than GrubHub, since the higher percentage of their orders were corporate or catering orders. In the past we have discussed our traction in Tier 2 cities such as Denver, Miami, Baltimore, Atlanta and Phoenix. Everyone in this market is growing well over 50% in 2015 and new diner growth is also impressive each market is generating at least 50% more new diners in 2015 than they did in 2014. And cohort dynamic look strong for our Tier 2 market on two key front. Each cohort is generating more revenue overtime and 2015 cohorts are more valuable than cohorts from prior year at the same point in the lifecycle. Our Tier 1 consumer markets also remain strong. These markets which include New York grew DAGS at a robust 25% compare to the second quarter last year. New York is easily our largest market, but it's easy to forget how large New York is. There are roughly 20 million people in the Metro New York area and New York City itself is a lot larger than Manhattan. Brooklyn would be one of the largest and fastest growing markets if we looked at it on the standalone basis. And even in Manhattan where we've been for a decade, the growth opportunity remains robust. The growth in our key drivers combined with our acquisitions in the first quarter and a significant increase in our revenue capture rate led to a 47% year-over-year increase in net revenue. The primary factor driving our capture rate higher was the significantly higher revenue capture rates of DiningIn and Restaurants on the Run. Since both companies receive extra revenue from restaurants and diners to provide delivery service, the capture rates from meals they deliver are roughly double the rate GrubHub receive for restaurants that deliver themselves. This additional revenue is mostly offset by higher operations and support expense which include driver cost. If we exclude the impact of orders that we deliver on behalf of the restaurant the capture rate would have been approximately 14.7%, which is only slightly higher than the third quarter of last year. For the third quarter this year we expect the capture rate to return to small natural fluctuations both up and down on a quarter-to-quarter basis, with a small bias upwards as the number of orders that we deliver grows as percentage of all of our orders. Second quarter revenues were 88 million compare to the year ago quarter of 60 million. If we exclude the two acquisition revenue growth would have been approximately 35% instead of the 47% I mentioned before. Turning to expenses sales and marketing was 20.7 million this quarter, a 28% increase compare to the 16.2 million in the same quarter last year. As we noted on our first quarter call we decreased our level of advertising in the second quarter from the first quarter due to seasonally lower demand. In spite of the lower spending and seasonality we attracted 330,000 new diners to the platform at a very reasonable cost relative to lifetime value. As our two sided network grows we can deploy more advertising dollars effectively and we expect to increase our advertising investment in the back half of 2015 as a result. For the third quarter specifically we expect sales and marketing to be a little higher than the second quarter as we spend more in late August and September at summer vacation and college kids return to campus and the weather starts to turning colder. Operations and support expenses were 24.6 million, a 67% increase compares to the 14.7 million in the second quarter last year. Historically, this line item was comprised primarily of variable cost scaled with volume like credit card processing, customer care and menu operations. However with our acquisitions closing at first quarter, the line item now also includes a full quarter of delivery expense and we expect this to continue to ramp as we expand into more markets and get deeper in others. Excluding the impact from the delivery expense growth in option support would have been very similar to the growth in gross food sales. As Matt discussed we’re planning to continue to scale capacity in many markets aggressively over the back half of the year. As a result we should see our size growth of option support expenses through the back half of 2015. Technology expenses excluding amortization of web development were $7.9 million for the quarter increasing 30% from the second quarter of last year. We continue to invest an engineers and product experts to help with diner facing and restaurant facing products. Depreciation and amortization was $8.8 million for the quarter a sequential increase of 41% due to the retirement of the legacy Seamless consumer platform once we migrated traffic to the new platform and to a lesser degree a fourth quarter of amortization of intangible assets from the recent acquisitions. The write down of the legacy Seamless platform was approximately $2 million and we expect the run rate going forward to be similar to the amount of this quarter less than $2 million. G&A costs were 9.7 million, an increase of 13% from the second quarter last year and 7% from the first quarter of 2015. Increasing from the first quarter of 2015 was mostly driven by a fourth quarter of G&A from DiningIn and Restaurant on the Run being incorporated in the results and other expenses related to our investment in delivery. Adjusted EBITDA for the quarter was $28.4 million, an increase of 68% from $16.9 million in the same quarter in the prior year. Our adjusted EBITDA margin was 32% this quarter. Net income was $9.4 million compared to the prior year of $2.7 million. Net income per fully diluted common share was $0.11 on approximately $86 million weighted average fully diluted shares. Non-GAAP net income was $15 million or $0.17 per fully diluted common share compared to the prior year of $6.1 million or $0.07 per fully diluted common share. Non-GAAP net income excludes amortization required intangibles, acquisition and restructuring costs, stock based compensation expense and other onetime cost as well as the income tax effects of these non-GAAP adjustments. We ended the second quarter with $307 million in cash and short term investments on the balance sheet. In terms the forward guidance, we are estimating total revenue for the third quarter of 2015 to be approximately $85 million to $87 million and for the full year we are revising our revenue guidance range up to $358 million to $364 million. We currently expect third quarter adjusted EBITDA to be approximately $23 million to $25 million. For the full year, we are increasing our adjusted EBITDA range to $104 million to $112 million. We are not bringing adjusted EBITDA up as much as revenue because the potential variability in delivery investment and some small incremental opportunities we see in marketing in the back half of the year. With that, I’ll turn it over to the operator to take questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mark May from Citi. Your line is open.

[Mark May:]

Hi, guys. Good morning. Just I think Adam your last comments there around the second half investments, maybe if you could double click into this a little bit more and talk about -- I think you mentioned delivery and marketing on the delivery side to the extent that you may step up a little bit, your investment that you talked about earlier, $10 million in incremental. What’s sort of driving that and where would you -- why would you -- what would cause you to step up slightly your investment there? What are you seeing? And maybe along those lines, I think you guys are looking to add more non-delivery, even national chains to the network, what sort of traction are you seeing in that regard?

[Adam DeWitt:]

Hi, Mark. How you are doing. I'll take the first half of the question and then I'll Matt talk about the chain questions. So, in terms of the guidance in the back half of the year in the delivery, what I want to say is that we're really increasing or planning to increase our investment in delivery. If you might remember from past calls, the way that we talked about investment is really just building capacity ahead of the demand and so if we're seeing demand meet the capacity in certain markets we’re going to be spending less. If the demand doesn’t ratchet as fast as we think than we're going to be spending a little bit more. As a result of not actually spending as much in the second quarter because we actually had demand meeting capacity. We think that it is possible that the capacity could be a little bit greater in the second half compared to where it was. But were talking -- we’re not talking about much. We’re talking about maybe 10%. In terms of the comments on marketing, we see some potential opportunities, we’ve had some what I'd say -- we’re constantly running experiments on different types of marketing, different ways to bring in new diners, we've seen some things work kind of in April, May, June and we see some potentially some opportunities to invest a little bit more in the back half but again it's small amounts. I really didn’t we didn’t really bring down EBITDA guidance, just we didn’t bring it up as much.

[Matt Maloney:]

Hi, Mark. This is Matt. About your chain question, so, I think we've said many times that, over time chains are going to come in and seek access to our millions of active diners and now that we are actually executing delivery chains or even more, more eager to have conversation. So I think from a chains perspective GrubHub brings significantly more diners and geography than any other option and then from our perspective, logistics, they actually benefit from the increase order flow because we are leveraging our existing assets better. So we're always looking to odd man there. I think when you talk about chains, what we bring to the restaurant in terms of efficiency and volume through a deep integration is really what resonates the most and they're very willing to engage in a partnership with us. So the conversations are continuing.

[Operator:]

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

[Aaron Kessler:]

Couple of questions first on active diner growth. It looks like that -- you started about 400 basis points versus Q1 is anything that kind of one time or just as to refer to connect seasonality impact in that lower growth. Then there is any thoughts from you guys on the competitive dynamic, obviously there has been a lot of talk about some of the recent investments in the food tax base and competitions. Any thoughts on if anything has changed in your mind around competition and if you are seeing more, does it make sense to even accelerate your ad spend, given your leadership position? Thank you.

[Adam DeWitt:]

I'll take the diners questions and Matt will jump in on that competition. So in terms of the active diner, we do -- there is a bit of one time item in the comp for the active diners versus last year. So in the second quarter of last year there was two things going on that probably cropped up new diner ads a little bit more than we would typically see. One is IPO and a bunch of the free publicity that we got around the IPO and then the second was, if you recall we spent an extra $2 million in the second quarter last year. So if you look at last year's first quarter and second quarter you'll see sequentially it was pretty flat in sales and marketing and in this year we see the drop off. We basically experiment with some TV on the national basis and we generated some new diners but because they -- a lots of them were in areas where we didn’t have a lot of coverage, they ended up not being as quality. I think the same thing we saw with the IPO so we go extra new diners but they weren’t necessarily as good as our average diners. So you're seeing that kind of in two ways, right because you're seeing the higher number of ads in the second quarter last year. And then you're seeing some of those diners that were kind of one and done falling off this quarter. So that should fall away as we head into the third quarter.

[Matt Maloney:]

So in terms of competition there is definitely been lot of cycles spend on this. Let me just -- first we continue to add thousands of orders to our platform every day from restaurants that do their own delivery and now those that we also service. The Tam is huge for us to address which is why we're seeing now the new entrance and we believe we can win, like I said in the prepared remarks because of our scale. Our liquidity in the daily orders and our relationships both with restaurants and diners across the country. So GrubHub is synonymous with takeout, no one does what we do is scale, we don’t focus on dry goods or pantry products we specialized in great foods that’s made to order from your favorite restaurants. We're significantly bigger than anyone else trying to access this market and we've frankly been solving these problems for 10 years. So while this is a very exciting time will be innovating in our space, our scale with diners and restaurants allowed us to run delivery with an efficiency that no one else can. We understand the restaurant partnership better than most and we focus very much on high quality partners and so that’s really the way we're looking at this and we're just continue to execute to this rapidly as we can and this is what we see is tremendous opportunity.

[Operator:]

Our next question comes from line of Dean Prissman from Morgan Stanley. Your line is open.

[Dean Prissman:]

The first one some of your competitors seems to offering free food or aggressive promotions to encourage first time usage. I'm assuming you’ve tested similar tactics like this before, if so is there any color you could share in terms of the quality of customer acquired from such tactics. And then I have a follow up.

[Matt Maloney:]

Obviously, we've tested giving away free foods. It's one of the most obvious tactics especially when you have a tremendous amount of money to play with. I can tell you that what diners really respond to is the quality of restaurants and the amount of restaurant and the platform, that actual tool set you’re providing. From our perspective it's always been around the products, it's been around what value do we bring diners. And not so much about what the new gimmick is today.

[Dean Prissman:]

Got it, and then looking at the recent order up and even the Eat24 acquisitions it seems as though there is a long tail of smaller competitors. Can you discuss your framework in terms of why you haven’t shown an interest in other smaller players? Thank you.

[Matt Maloney:]

So the way we look at the deals is, we understand the fundamental value behind these companies. We understand what it would cost for us to replicate the relationship in the restaurant and diner side. And then we value that accordingly I would say that in a market such as this one you have to stay rational and continue to grow your business the best way you can. But I wouldn’t say that we haven’t had interest, I wouldn’t say that we haven’t had interest, I’d say we’re definitely opportunistic on any deals that come our way. But these potentially -- I would say clearly we didn’t do anything with them and there's a reason for that, and also think about the fact that in all of these markets we already have a first move advantage and in many cases in their core markets we are already bigger than they are.

[Operator:]

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

[Ron Josey:]

Matt I wanted to dive a little bit deeper into delivery. I think you talked about adding 15 new cities and reaching 135 million people by the end of the year. Just, so can you provide us or give us some more understanding on you are rolling this out and specifically what tech upgrades around mobile or location that you've done within rotor and DiningIn to make these businesses more efficient? And then following up maybe on a prior question around larger chain restaurants, is this increased footprint on delivery? Is that something that a lot of these chains are looking for or is that just a nice to have? Thank you.

[Matt Maloney:]

Sure Ron. In terms of our rollout strategy we've already launched in many of our largest target markets this year including New York, Chicago, LA, Philly, the Bay area, a number of Tier 2 markets as well. We will be in 30 markets by next week, like I said. We plan to offer delivery to over two-thirds of our active diners by the end of the year. That's going to be in our estimation over a 175 million gross retail business. And that's obviously all reflected in this recent guidance. I think scale here is really the most important competitive advantage that you can look to. It's not really about tech upgrades or platforms, it's about fundamental logistics and having the scale and liquidity in orders and honestly the relationships to position us very well in this huge adjacent market. In terms of chains, absolutely there are a lots of chains out there that are looking at the 70 billion that we keep talking about wondering how they can get a piece of that and they don’t have a delivery infrastructure rolled out. So I think that chains are interested in leveraging what we're building in order to better service their own customers and that's exactly what we're looking to help them with is to have a better service to their diners and do that in a very intelligent way.

[Ron Josey:]

Great. Thank you very much.

[Operator:]

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

[Heath Terry:]

Great. Thanks. Adam, with the higher conversion rates on the new platform and the planned increase ad spend in the second half, are there any specific offsets that you can call out that kept you from raising revenue guidance by more? And then on the growth and delivery offerings, are you seeing disproportionate adoption for those in restaurants in Tier 2 cities meaning -- is having that offering driving faster growth in the Tier 2 cities and what you were seeing before you started to offer that with the acquisitions?

[Adam DeWitt:]

In terms of the conversion your point on the new platform, so I think the most important thing to remember when thinking about the conversion comments that we talked about, this is just related to new diners and something like well higher than 90% of our volume is repeat business. So not necessarily affected by a higher conversion. So and then secondly, we're seeing improvement on mobile web and also kind of SCO, certain SCO queries kind of more generic queries that are getting to us and we are really excited about it and it certainly validates the new platform. Both of those channels are a small fraction of our new diners. So you are talking about new diners overall which is a small fraction of our traffic and orders if you do the math on the 330,000 new diners that we added last quarter and divide that up in today's you get to, you see we’re at a small percentage of our volume that is, but then you are talking about a small fraction of the new diners. So it will be a while I mean we're really encouraged and excited about it, but it's going to be a while before it has a significant impact on the bottom line. In terms of delivery and the restaurant adoption, we're seeing good success in all types of markets frankly. In markets -- the Tier 2 markets that we are already in, the Tier 2 markets that we're going to, but also our Tier 1s. As Matt mentioned we've been doing delivery in Chicago for a while and seen some pretty good operational metrics and the restaurants here that don’t have delivery are just as excited about joining the platform and getting access to our diners, the restaurants in some of those other Tier 2 markets where we are just starting to grow our presence

[Heath Terry:]

Got you. Great. Thank you very much.

[Operator:]

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

[Ralph Schackart:]

Good morning. Matt you talked about the Seamless upgrade has been positive in terms of driving better conversion rates for new traffic and diners as well as for the GrubHub mobile traffic. Can you maybe be give us some color on how that upgrade affected your existing customers base, was there any sort of change in behavior or any engagement with them? And then I have one follow up.

[Matt Maloney:]

Hey Ralph, I think that any time you would change the UI that consumers have been used to for a long time, there is an adjustment phase. So far we’ve not seen material challenges to the new platform. The data shows us that the new platform is at least as good and in many ways better than the older one and the new features we will introduce will improve the experience from what it was and I think that's the most important part to remember, is the key benefit as the speed that which we can launch new features for both diners and Restaurants going forward.

[Ralph Schackart:]

Great. And then I think also in the prepared remarks you talked about the potential for future accelerating growth can you maybe give us little more color around that comment? Was that sort of directed at your core business or just maybe ad delivery that might be driven this in the future?

[Matt Maloney:]

I think what that was about is really about the potential of the addressable market for delivery, it's huge and it's attractive and there are network effects. So as we continue to invest and build out our capabilities there I think they were opening up the opportunity for longer term -- for definitely longer term growth.

[Ralph Schackart:]

Okay. Thank you.

[Operator:]

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

[Nat Schindler:]

Yes. Hi, guys. There was particularly good weather in April and May in Chicago and the New York these year versus last year. How much of an effect does that have on your business in the given year?

[Adam DeWitt:]

Hi, Nat. So, like to say I mean you are right generally about April and May, but generally over a quarter the impacts of the weather end up balancing each other out. I think we had some -- maybe in June we had a little of little bit of a benefit. So overall we didn’t think it was enough of an impact to highlight for the second quarter.

[Nat Schindler:]

Okay. And just the second question on competition is with Eat24 been acquired by Yelp have you seen any impact particularly in the markets where they are strongest in California on your ability to compete there, have they been more aggressive and has that affected you?

[Matt Maloney:]

Hi, Nat. This is Matt. From our perspective nothing has changed from before or after the deal. They had a partnerships for over a year before the acquisition and we haven’t seen anything specific and our growth continues to be very robust in all the markets that we compete in. So, to the whole concept that no one is doing what we’re doing at our scale, we are significantly larger than everyone else and we’re connecting over 35,000 restaurants with 6 million diners and so we are really focused on managing those orders and managing those orders at scale which is a complicated relationship and that's a unique transaction and we are able to do this very well.

[Nat Schindler:]

Great. Thanks guys.

[Operator:]

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

[Chris Merwin:]

It looks like to been pretty nicely on take rate in the quarter. Can you just maybe shed some light on what was driving that? Was it growth in delivery execution? And in terms of the revenue guidance for the year which you took up can you also maybe talk a bit about and what was the main driver behind that? Was it a more positive outlook for diners take rate delivery execution or maybe some combination? And just one last question in terms of the business model for delivery execution, I think you talked about diner fees as a revenue opportunity, so if don’t mind just kind of refreshing us on what combination of the diner fees you might use as take rate and then what the unit economics might look like for that business? Thanks.

[Matt Maloney:]

Right. So, in terms of the take rate as you pointed out delivery definitely had some impact, in particular some of the GrubHub delivery. As you noted and as I noted in the script on orders that we deliver we get a slightly higher take rate from the restaurants and there is potentially some diner fees which I'll answer later -- talk about later in the answer, so it was a lot of that and also we had forecasted frankly a slight small decline based on the mix of where we thought the orders were going to come from and then different rates in those areas and then we ended up having higher rates in some of those areas than we had forecast. In terms of revenue guidance picking up, it’s a good segue there, I think we right sized little bit on the take rate for the back half of the year both because of mix and what we saw in the second quarter and then also some of the delivery as well I think we also took it up, the implied guidance for the second quarter. Actually the metrics implied in our guidance for the second quarter probably had a slightly lower growth rate in terms of orders and so we are right sizing the forecast for that. In terms of the business model and on the delivery side in the diner fees we've always talked about one of our unique advantages given our scale is to eventually bring lower diner fees -- lower delivery fees to the diners because of our ability to have a more efficient operation because of the scale. Traditionally in delivery, if the diner is -- if the diner is picking up somewhere between $5 and $10 of freight, maybe more to help offset the cost of the drivers and the drivers make money as a combination being paid by the company and being paid in tips. And so the more throughputs that you can get the more deliveries that you can get to the drivers the less that the company has to pay. And so we are -- our goal to make those delivery fees for the dinners as low as possible. But even if there are $1 or $2 there is some revenue there on each order and it adds up overtime. So when we're talking about dinners fees, we're trying to keep as well as possible we're certainly targeting rates at the point in every market where the dinners don’t care. So in other words dinners are indifferent at a dollar, we'll try to target our dinner's fees at a dollar. So that gives you a little bit insight. We also generate a higher capture rate from the restaurant themselves because they're willing to pay more to off load the logistics and cost of maintaining a driver network.

[Operator:]

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

[Jason Helfstein:]

A competition question and then question about orders and growth. First on orders can you give out the pro forma growth rate for orders in the quarter, was it meaningfully different than the published order number?

[Adam DeWitt:]

I'm not sure I understand the question.

[Jason Helfstein:]

It's about the acquisition.

[Adam DeWitt:]

I think in the prepared remarks we said it was 25% versus 26%.

[Jason Helfstein:]

Secondly, if we look at the implied organic growth in the back half it’s pulled roughly 25%. Do you expect that to reaccelerate next year given the initiatives or it’s just too early to tell? And then one more follow up.

[Adam DeWitt:]

We obviously have our expectations baked into the guidance. I think a lot of the commentary that we've had today has been around the opportunity that we see in the markets that we're in still. So both in the Tier 1 -- as I mention on the consumer side we're growing at 25% in those Tier 1, it’s important to remember when you look at that 25% on a company wide basis that it include our corporate business which is growing a lot closer to 10% and is a great business. But is more of a 10% a year growth business and so we think there is lot of opportunity in the Tier 1 and we talked about the Tier 2 generally growing over 50%. And we were focused on DAGS, but it’s good to point out that we also have a pretty dependable increase in our average order size every year on a consumer basis, that’s been pretty consistently at 3% to 4% a year that we’re able to monetize as well. So we think that there is a lot of opportunity, certainly we think the re-platforming on the Seamless side and frankly the GrubHub side is going to speed our time-to-market our new product and help us capture more that opportunity as well as the comments Matt had about the delivery which we also think can help potentially capture more that opportunity quicker.

[Jason Helfstein:]

So on the delivery side just to go into a little bit more detail. Our experience kind of testing our competitor services is really not algorithmic driven, it's really more in terms of, hey here’s an order, who’s the first person to kind of raise their hand. When as a result you end up with a let’s say subpar consumer experience. Do you talk about kind of where you guys are, to the extent obviously competitive, but then you are willing to talk about the technology under pinning delivery and kind of where you think the competition is and it really -- they’re largely just effectively subsidizing people on their network when there really isn’t technology behind it to effectively make it the most efficient and the best customer experience.

[Matt Maloney:]

I get where you’re coming from, but I'd say even if logistic -- the reality is logistic isn’t not going to be a competitive differentiate in the space because everyone is going to have PhD's and data scientist and everyone is going to building logistic to try to take advantage of their operations. The only thing that really matters here is scale because if you can average a thousand orders over the same delivery fleet you're going to have a lot of higher throughput, you're going to have a lot better unit economics on the execution. And the way you get a thousand orders on a network is you have a whole lot of restaurant relationships and a whole lot of dinner relationship. And so as we're executing rapidly in this space, we keep looking to our asset which is the absolute largest two sided network in this space. There is not another network that compares and so we're going to continue to execute aggressively and expand on our assets into this what we believe is huge new Tam opportunity because clearly we have the assets and the execution that should win here.

[Operator:]

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

[John Egbert:]

Thanks. There's been some discussion in the market about lower quality restaurants being able to gain prominence on GrubHub by simply bidding higher commissions. Have you thought about the pros and cons implementing a more Google like quality score as you improve your restaurant rating system? Thanks.

[Matt Maloney:]

Sure. Absolutely we're always looking to provide the best possible experience for the restaurant and diners. One thing that people don’t give a lot of credibility to is the fact that restaurants who want business will typically serve their customers better. And so historically what we have seen and why we have biased in this direction is the fact that restaurants who are really trying hard for their customers are typically willing to pay more. On top of that part of the new feature functionality we released with the re-platform is a recommendation and trending engine on a dish level. So you can look around and see what are the most popular dishes and restaurants near you regardless of what they pay us right now. And so clearly we are trying to balance multiple inputs on the algorithm which defines where your next favorite meal would be and I wouldn’t say that we’ve figured it out yet. But with the new re-platform we are a lot closer and we are going to continue testing and iterating very rapidly until we get there.

[Operator:]

Your next question comes from the line of Tom Forte from Brean Capital. Your line is open.

[Tom Forte:]

Great thanks. Three questions, I will be pretty quick. First one was, can you talk about if you're seeing anything different on the development of your take rates in your Tier 1 markets outside of Chicago, New York and your Tier 2 markets historically suggest that as time advances the take rates increases overtime, whereas you're kind of seeing a blend and that’s what's affecting the overall take rate independent of delivery. And then second can you talk about, I think you indicated two-thirds coverage of your dining market for a delivery first party capacity by year end. Is there a big difference though in offering delivery for some of your larger markets say Chicago versus your smaller markets suburban Chicago? And then lastly, are you seeing -- on the competition should we anticipate that there may be a short period of time where restaurants will work with multiple competitors so GrubHub, Eat24 perhaps and others. And then overtime that will just whirl down to GrubHub. How should we think about multiple competitors and restaurants working with them at the same time? Thanks.

[Adam DeWitt:]

So in terms of the take rates, we are seeing -- what we're seeing now over the last several quarters is very similar to what we've seen over the past several years which is within markets and even in more granular level in neighborhoods where there is -- as we get more and more restaurant density we see the take rates go up and we see them going up in Tier 2s and we see them going up in the Tier 1s still and that is balanced out by us, the Tier 2s are at a level lower than the Tier 1s because we've frankly been growing the Tier 1s for a longer period of time and we have more restaurant competition. But, and even in the Tier 1s themselves like Chicago for example, Chicago is not -- we talk about Chicago as a market or New York as a market but the reality is that Chicago is 100s of small markets right. And so the take rate in kind of the areas that we've been for very long time like Lincoln Park, Lakeview, we're seeing rates consistently go up. But we're also adding capacity around the city center and areas like Evanston and Schaumburg, et cetera, that have lower rates. So it's all, the growth in the rates is offset by the growth by the mix shift towards the areas where we have less competition.

[Matt Maloney:]

Yes then on the larger markets versus the smaller markets, the model we use really it works wherever you have more than one restaurant where you can pull the logistics, they're going to have a better utilization of resources when you have multiple restaurants, whether it's a downtown or it's a suburban market. And so while you definitely have to put more drivers in a place to have the higher diner density than you do in lower diner density, it's really about how do you pull the resources accurately. And the $175 million in gross food sales that we're projecting as a run rate for the end of this year this is both -- this is not just the Tier 1 market, there is a lot of growth in Tier 2 markets and Tier 3 markets because that is so strategically important to us to continue to accelerate our first move advantage. To your point on competition, I think you kind of hit the nail on the head. It's a lot of brain damage for a restaurant to have two or three tablets sitting at their front desk and so ultimately the restaurants want to work with the services that provide them the most value, meaning the most orders at the highest possible service. And I think that the study that we just came out with, I mean it shows that restaurant drive five times the volumes through GrubHub than in any other online ordering platform. So I mean right there the results speak for themselves, as long as we maintain our or we continue to accelerate and leverage our scale and delivery appropriately we’ll be able to bring those types of benefit to the non-delivery restaurants also which is why you see the tremendous Tam in the future.

[Operator:]

Our next question comes from the line of Rohit Kulkarni from RBC. Your line is open.

[Rohit Kulkarni:]

Great, thanks. Two questions please. One is on delivery services, as in when you look at scaling it over the next whatever foreseeable future, what is the ideal mix as far as completely owning and controlling the consumer experience and hence the related functions of the delivery services versus partnering with third party independent delivery services providers? What would be the ideal mix in your opinion? And secondly on the competition and private companies, are you seeing a lot of irrational behavior by private companies in the market place are you seeing any evidence of that and if so what are your thoughts on that?

[Matt Maloney:]

In terms of delivery scaling, so the mix that is ideal for us right now is owning all of it and that's because no one else can actually do this, the right way. So moving food from a restaurant to a consumer in a timely manner is a very unique challenge, it is not the same as moving people around, it’s not the same as moving packages around and we want to provide significant menu depth, meaning that we believe the diners should be able to order whatever they want from their favorite local restaurants. And there is a lot of artificial constraints on the market place currently from tangential [ph] competitors they are looking at the massive Tam that we’re chasing and trying to get a piece of it. So if someone else is able to execute food delivery at scale for a cost lower than we do, I think that that's a great conversation to have because ultimately were trying to satisfy our restaurant partners and our diners more than we’re trying to be a logistics power house. However currently we need to be very good at logistics and execution in order to address the needs of our many constituents. I'd say in terms of the competition and irrational behavior, I think we've all seen boom and bust cycles and we know what happen when you are at the top and so whether it ends up being irrational in hindsight or not, and a lot of tactics that I’ve seen fail before that are being resurrected and so we’ll just have to see what happens.

[Operator:]

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

[James Cakmak:]

Hi, thanks. Just two on the delivery please. Matt you mentioned that you want to reach $175 million gross food sales run rate by the end of the year, on the delivery that's more than double, I guess, the run rate. So what gives you that confidence that the 15 new markets will be able to ramp that quickly in the second half? And then secondly there is been a lot of buzz in the on demand economy about independent contractors versus W2 employees. Can you just talk about kind of when you [indiscernible] delivery network and your drivers and how you guys think about that? Best of luck.

[Matt Maloney:]

Hi, James. In terms of the $175 million I wouldn’t say that's I'm counting on the new markets that we’re launching to support the majority of that, we are in all of our leading markets right now and we’re growing very aggressively in all of those markets. We’re also at adding new markets and will continue to support that but in general when you bring on an outstanding local restaurant that has never done delivery before under a transactional platform that is executing thousands of DAGS in the neighborhood, then you expect that new restaurant to get a disproportionate number of those orders and that's why we are seeing such rapid acceleration in our delivery business. In terms of the IC's, I would say there are lot of questions around the IC model right now and the businesses we acquired and the number of restaurant delivery services have run with independent contractors for many years and we believe we can continue to do this as long as a regulations remains status quo and if we decide to use W2, than we are very well positioned to do that.

[Operator:]

And your next question comes from the line of Kevin Kopelman from Cowen & Company. Your line is open.

[Kevin Kopelman:]

Hi, thanks. First question is could you talk about there just year-over-year order growth you are seeing in July and how is that compared to Q2? And then I have a follow up. Thanks.

[Matt Maloney:]

We don’t typically talk about inter-quarter results. We have I mean -- basically you have what we think is going to happen embedded in our guidance for the third quarter and you know where we were in the second quarter, so I think that's probably the best way for you to go.

[Kevin Kopelman:]

Okay, thanks. And just questions on the network can you give us any color on how many courier partners you have on board today and what you expect that to look like year-end given the other metrics you’ve noted. And then in Chicago when you talked about the Chicago operating metrics can you give us any color there? What you saw on Chicago after having the delivery services deployed for as long as you’ve had it there. Did you see growth reaccelerate or would you saw that made you optimistic. Thanks.

[Matt Maloney:]

So we haven’t released any stats on the courier network and how large it is or where we are. I'd say the number I just gave which is 175 million gross food sales, you kind of back into that average order size, number of orders and you can kind of work backwards to understand kind of the scale at which we're operating. I'm not going to give a ton of details on the specific courier because it's going to fluctuate, especially given the fact that they are independent delivery partners of ours and we will always provide a very high quality service and our goal is extremely speedy. In terms of operating metrics I'd say it was Chicago, it’s not that we saw a reemergence of growth we've seen extraordinarily rapid growth in our deliver restaurants since we started. And we continue to aggressively invest in Chicago where we've been doing this for a while, adding restaurants, adding the delivery partners, adding more dinners and it just continues to accelerate. And we find that as you add more restaurants it increases the pull. So you see incremental growth as you add more restaurants overtime. So that’s why we're so confident in delivery supporting our core business.

[Operator:]

And this concludes today's GrubHub's second quarter 2015 conference call. You may now disconnect.