Just Eat Takeaway.com N.V.
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the GrubHub Incorporated Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. Thank you. I will now turn the call over to Anan Kashyap, Head of Investor Relations. You may begin, sir.

[Anan Kashyap:]

Morning, everyone. Welcome to GrubHub's third 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 website at investors.grubhub.com. In addition, we'll be referencing our press release which is available on our investor relations website and is filed as an exhibit to a 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 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 factors section of annual report on 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 website at investors.grubhub.com or the SEC's website at www.SEC.gov. Also, I would 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 those 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.

[Matt Maloney:]

Thanks, Anan and thank you for joining our Q3 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 a more detailed look at the numbers in our 2015 outlook. We continue to make good progress in the third quarter. We ended the quarter with 6.4 million Active Diners and averaged over 211,000 orders per day. That's over $0.5 billion in sales in the third quarter for our local restaurant partners in over 900 cities. Recently, we processed our 300 millionth order across all of our brands. We're incredibly proud of this milestone. It's a testament to how GrubHub and Seamless have forever changed the way people order takeout. In terms of our financial results, we generated $85.7 million of net revenue and adjusted EBITDA of $21.5 million for the third quarter. Revenue growth remains robust. But, we did face some unusual headwinds this quarter that impacted our results. First, a few business interruptions and outages on the platform due to the transition to a shared technology stack. And second, a greater than anticipated investment in GrubHub delivery and finally, consistently unfavorable weather throughout the quarter. Last quarter, we discussed the migration off the legacy Seamless stack to a new shared technology platform between the two brands. We remain extremely excited about the migration which has freed up product and development resources to focus on improving conversion, retention and frequency. In fact, in just the past few months, we've made significant progress on the old Seamless platform -- I'm sorry, on the new Seamless platform with the new Seamless conversion now outperforming the old platform. The migration to a single technology stack has brought improved functionality to GrubHub and Seamless diners alike. Including, a fully responsive site optimized for desktop, tablet and mobile browsing. Personalized recommendations on the homepage based on your order history. Better relevance when searching for cuisines, dishes and restaurants. And, updated styling and design with more prevalence and professional food images. These are just some of the improvements we've made to the user experience and more are coming each week as a result of relieving the burden of maintaining two technology platforms. We have elevated takeout and remain committed to providing the best possible experience for our diners. Unfortunately, along with all the positives of the platform migration we had some hiccups which resulted in a few outages and service interruptions during the third quarter. These outages resulted in approximately $1 million lost revenue and 1% in year-over-year DAG growth in the third quarter. We take any type of business interruption very seriously and have invested a significant amount of time and resources diagnosing and addressing the core issues at the root of these problems. We're confident we've addressed the issues that caused these outages. Similar to our optimism on the product side, we're becoming more and more enthusiastic about our delivery efforts. On the last call, we talked about greatly expanding the markets where we or -- offer delivery and our depth of coverage in those markets. We're now delivering in 30 markets across the country, including all of our top-tier markets. As we expected, restaurants without delivery capabilities are excited to partner with GrubHub because of our unparalleled diner network and are singular focus on food. As a result, we're having a lot of success signing the best restaurants for takeout in all of these local markets and our delivery volume is ramping steadily. It is still early and delivery is still a very small percentage of our overall business. But, the diner metrics are encouraging. Our data indicates that new diner growth, diner retention order frequency and overall order growth are all trending better in secondary markets where we're doing delivery compared to markets where we don't deliver. We also see these trends in Chicago neighborhoods where we have been delivering the longest, giving us even more confidence that delivery can have a positive impact across all of our markets as we scale. As a result of this positive data, we slightly accelerated the pace of our delivery investment in the third quarter and plan on maintaining that acceleration in the fourth quarter. We're expanding into more markets and increasing our coverage in existing markets. By the end of the year, we expect to be delivering in over 40 markets across the country. We continue to believe GrubHub is uniquely positioned to be successful in delivery for a number of reasons. First, we're 100% focused on connecting diners and restaurants; only delivering meals from restaurants. Everything we do is optimized for this connection. Second, we're tightly integrated with our restaurant partners allowing us to easily handle customization, change orders, menu updates, specials; any other of the many one-off challenges facing our highly dynamic restaurants. Third, we know cost is important to diners. So, our goal is to bring the lowest cost of delivery to diners. Our diners pay a modest delivery fee. That's it. Service fees, no processing fees and no menu markups that can easily cause your bill to double artificially. We know from experience that diners notice the difference. Finally and most importantly, our unique scale allows us to maximize efficiency and bring substantial demand to our restaurant partners. Last quarter, we talked a little about how delivery increased our opportunity to work directly with restaurant chains. GrubHub appeals to chains because of our large diner network which can drive demand and our tight integration which enables the optimal customer experience and our growing delivery network. Along those lines, we have signed pilot programs with seven additional national chains that have an aggregate of roughly 2,500 locations across the country and include quick service restaurants, fast casual and casual dining brands. These pilots will be limited to a small number of stores as we work with these partners to ensure the best experience for our diners. As a reminder, when we talk about the market opportunity of $70 billion in takeout domestically, we're not including any volume form chains, only independent restaurants. Adding chains to the list of potential restaurant partners increases the market opportunity by over $100 billion. The more we build out our delivery network and the more conversations we have the chains, the more optimistic we become that this is a substantial area of growth in the future. With that, I hand it over to Adam, who will walk you through the financials and some highlights of the early successes we're seeing with GrubHub delivery.

[Adam DeWitt:]

Thanks, Matt. I'll start with our third quarter performance, provide some forward-looking color and then we'll open the call to questions. We ended the third quarter with Active Diners reaching 6.4 million, a 41% year-over-year increase. We processed 211,500 Daily Average Grubs and $554 million in Gross Food Sales during the third quarter. 22.5% and 31% year-over-year increases respectfully. The acquisitions we completed in the first quarter of this year contributed roughly 1% and 5% to these totals. While we were within our top-line expectations for this quarter, as Matt noted earlier, there were two generally nonrecurring factors that negatively impacted our growth in Q3. These were the migration-related outages and to a lesser extent, the unusually dry and mild weather. Typically, we don't say much about weather because it tends to average out to a negligible impact over the course of a quarter. But, this quarter was unusual. In that, we had unfavorable weather in each of the three months. The outages and weather combined had roughly a 1.5% drag on our DAGs growth for this quarter. If you exclude the impact from acquisitions and adjust back for the estimated impact of the outages and weather organic DAG growth would have been about 23% year-over-year. The growth in our key drivers led to a to 38% year-over-year increase in net revenue. We continue to see higher revenue capture rates driven by own delivery efforts, as well as, the acquisitions of Restaurants on the Run and DiningIn. Excluding the impact of these acquisitions and delivery, capture rates were roughly consistent with last quarter. As we have mentioned in the past, the revenue capture rates for meals that we deliver are roughly double the rates for restaurants that deliver for themselves. This additional revenue is mostly offset by higher delivery costs that are embedded in operations at support expenses. Third quarter revenues were $85.7 million. As I mentioned, 38% higher than the year-ago quarter of $61.9 million, if we exclude the two acquisitions, revenue growth would've been approximately 28%. Net revenue would've been closer to $87 million if you exclude the impacts from outages or weather. Turning to expenses, total sales and marketing expenses are $21.4 million this quarter. A 44% increase compared to $14.9 million in the same quarter last year. As expected, we began to spend more efficiently as we headed into the school year in cooler months. We attracted close to 500,000 net Active Diners to the platform at a very reasonable cost compared to lifetime value. We added 120,000 more Active Diners this quarter than we did in the third quarter of last year at only a slightly higher sales and marketing cost per diner. Additionally, we added 170,000 more diners than we did in the second quarter at a significantly lower sales and marketing cost per diner. It's important to note here that almost all of our advertising is geared towards acquiring new diners. Because the platform is so sticky, we spend very little on retention or reacquisition. Many of our new diners become GrubHub customers for years and actually increase the frequency of their orders over time as we continue to build out the restaurant networks around them. Reinforcing this point, well over 90% of our orders are placed by repeat diners as opposed to new diners with very little of our advertising going to retention efforts. For the fourth quarter, we expect sales and marking to be approximately 15% to 20% higher than the third quarter, as we enter our two strongest seasonal quarters for diner acquisition. Operations and support expenses were $27.6 million, an 85% increase compared to $14.9 million in the third quarter last year. This increase is a combination of growth related to our growth in orders, inclusion of delivery costs from our DiningIn and Restaurants on the Run acquisitions and our aggressive scaling of our delivery capacity as we discussed on this and previous calls. In the third quarter, we spent about $2 million more than we had originally planned because we intentionally brought in the breadth and depth of our delivery efforts due the positive early data points Matt highlighted. I will go into a little more detail about the delivery costs and our investment delivery overall after I finish walking through the remainder of our line items. Technology expenses, excluding amortization of web development, were $8.4 million for the quarter increasing 28% from the third quarter 2014. This increase is consistent with the investment we've been making our technology and product teams. Marketing is helpful in driving awareness, but our products will ultimately drive long-term growth. Depreciation and amortization was $6.3 million for the quarter, a sequential decrease of 29% from the second quarter due to the retirement of the legacy Seamless consumer platform in Q2. The write-down of that legacy Seamless platform was approximately $2 million. We expect depreciation and amortization expense in the fourth quarter to be consistent with the level in this quarter. D&A costs were $10.2 million, an increase of 25% from the third quarter of last year driven generally by miscellaneous costs related to the growth in the business. Adjusted EBITDA for the quarter was $21.5 million, an increase of 5% from $20.4 million for the same quarter last year. Our adjusted EBITDA margin was 25% this quarter. Net income was $6.9 million compared to the prior year of $6.5 million. Net income for fully diluted common share was $0.08 on approximately $86 million weighted average fully diluted shares. Non-GAAP net income was $11.5 million or $0.13 per fully diluted common share compared to the prior year of $10.1 million or $0.12 per fully diluted common share. Non-GAAP net income excludes amortization of acquired intangibles, acquisition and right restructuring costs and stock-based compensation expense, as well as the income tax effects of these non-GAAP adjustments. We ended the third quarter with $295 million in cash and short-term investments. A little bit more color on our delivery spend. As I mentioned earlier and Matt highlighted in his remarks, we invested $2 million more than we had originally forecast this quarter because we're seeing some encouraging trends in secondary markets where GrubHub delivery makes up a significant percentage of overall orders. These include, better frequency trends, better initial repeat rates and better overall DAG growth trends than we're seeing in secondary markets where we don't have delivery. We feel these metrics support our investment thesis in delivery and are excited about the long-term potential impact of scaling the product throughout our network. I would like to elaborate on what investing in delivery actually means. We receive a fair number of questions on how the economics of the delivery model work. With our business model at a modest level of throughput we can compensate drivers adequately and maintain the $3.00 of incremental profit per transaction we generate on orders we don't deliver. In other words, we believe we can generate the same cash per order on orders we deliver and orders restaurant deliver themselves. In order to pay for the driver expense, the restaurant typically pays some incremental commission and the diner pays some sort of delivery fee. To help you get an idea of what this look like we've provided a slide in the investor relations section of our website which outlines illustrative economics of a delivery transaction at a couple of illustrative pricing structures. Over the near term, we're investing in a significant overcapacity of drivers, such that market-wide throughput levels are suboptimal. We believe this is important to maintain high service levels to consumers as demand scales. Over time, as delivery volume per market increases, throughput will improve as the utilization of our driver partner network increases. As a result, we expect that the investment will decline and incremental profit generated on per order basis for orders that we deliver will gravitate to the roughly $3.00 level. We're already seeing these efficiency dynamics of scale in some of our markets. In the third quarter, we characterize roughly $4 million of the operations and support line as investment. This is the amount that was not completely offset by delivery-specific revenue from restaurants or diners. Further, we expect this to ramp up to $5 million to $7 million in the fourth quarter. It's important to note, that at any point time, we have enough leverage to force the delivery model to generate that roughly $3.00 in incremental cash per order. By changing delivery fees or adjusting our highly flexible driver capacity. However, we believe that the investment today will yield more orders, more incremental profit and more free cash flow for our shareholders in the long term. In terms of our outlook for the fourth quarter, we're estimating total revenue to be between $98 million and $100 million and adjusted EBITDA to be between $23 million and $25 million. Our Q4 guidance reflects the higher level of delivery investment which is a primary reason for our adjusted EBITDA target being lower than the applied figures baked into the full-year figures we give last quarter. We also wanted to share some very preliminary high-level thoughts on 2016. As we think about growth next year, we believe it is fair to think about Gross Food Sales growth as similar on a nominal basis as our organic growth in 2015 which will be in the neighborhood of $500 million. In addition, we currently believe the amount we will invest in delivery overcapacity will be somewhere between $10 million and $20 million total. With more spent in the beginning of the year than the end of the year, as we begin to grow in our capacity in the back half of the year. We plan on providing more detailed guidance next quarter. With that, I'll turn it over to the operator to take questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Dean Prissman of Morgan Stanley. Your line is open.

[Dean Prissman:]

So, recognizing the one-time revenue headwinds you called out. Is there any additional context you can share on the drivers of the deceleration seen in your organic DAG growth compared to last quarter? And then, given the financial community's continued concerns around competition. Can you discuss the trends you observed this quarter in New York and other key markets in terms of customer growth, retention and the stability of consumer purchasing behavior? Thank you.

[Adam DeWitt:]

Just to give you some context. I mean, the reason that we gave all the color around the outage impact and the weather impact was really to get you to the, kind of, DAG growth on an apples-to-apples basis which was closer to that 23% number. If you look last quarter, we were at 25% on an organic basis. So, in terms of the deceleration, we don't think it was a meaningful amount. We think it's very consistent with, kind of, this -- the law of large numbers concept. Where it's harder to grow in a larger base. So, overall, we feel pretty good about the, kind of, on a normalized basis, that 23%.

[Matt Maloney:]

And, Dean, this is Matt about the competition question. In terms of your specific question, retention and customer growth and customer growth, we were very pleased with the new diner additions this quarter. Especially, the modest CAC of when compared to lifetime value. And, this is a dynamic we see as sustainable going forward. Retention and especially in the key markets, we're not seeing issues with increased churn. Especially as result of competitive activity. We see the ordering behavior as extremely consistent across both Seamless and GrubHub. And, in general, for competitive questions, I think that the market's clearly growing and the industry, as a whole, has barely scratched the surface. So, there is an extremely long runway for us in terms of growth. And, to a certain extent, smaller competitors are increasing awareness and use cases for online delivery. So, they're really helping to grow the market. So, we're growing at a very healthy level at a scale that is many multiples larger than our nearest competitor. And, we believe that we have real advantages in driving this growth.

[Operator:]

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

[Mark May:]

Just wanted to clarify the commentary about delivering investment for next year, I think you said $10 million to $20 million. Could you just clarify if that's, kind of, incremental on top of what you're investing this year? Or, was it total number? And, just remind us again, kind of, what the full year number will end up being for this year? Thanks.

[Adam DeWitt:]

So, to clarify the 10 to 20 is a total investment. It's not incremental on top of, kind of, the $10 million that we guided to this year. With, kind of, the added investment that we talked about on the call about both third quarter and fourth quarter. You probably push that original $10 million to more, kind of, in the $12 millionish plus range for the full year 2015. And, like I mentioned, I think what's important about the guidance is, we expect this to, kind of, peak in the first, maybe second quarter and then grow into our capacity in the back half of the year. So, we expect the investment in the back half of the year to be less on a per quarter basis than the investment in the first half of the year.

[Mark May:]

And then, the $500 million nominal or incremental organic growth for next year that you mentioned is a good number. I think it's in line with where we're at right now. And, I think you talked about, kind of, marketing spend on a retention versus acquisition basis. How should we think about, kind of, how you get to that number next year from a sales and marketing standpoint? What sort of leverage or deleverage are you expecting to see from a marketing standpoint?

[Adam DeWitt:]

Yes, I don't to go into too much detail in terms of the line items and, kind of, where we think we'll see the next year. We're not currently, at this point, anticipating any significant outsize investment in sales and marketing. And, I would expect it to more look like the way that we've scaled in the past where we're investing up to the point of efficiency and happy to do so. I don't think we're -- we're certainly not talking about greatly expanding it to get to that $500 million.

[Operator:]

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

[Ralph Schackart:]

Two question, if I could. Matt, maybe, you could just start off giving us a little bit more color on the national chain comment on -- during the prepared remarks? Sort of, implications for 2016? Will that start rolling through or is this just a test phase? And then, Adam just wanted to clarify. I think you said it was about a 1.5% combined headwind from unfavorable weather and the technology platform transition. Can you, maybe, give us some color or context in terms of how those diners have behaved? Now that, hopefully, weather's a little better in Q3 and that the technology transition is behind. And maybe, most specifically, on how the DAGs metric has performed now that you have that behind you. Thank you.

[Matt Maloney:]

Sure, Ralph. Speaking to the chains, the last call we talked about how they are an important part of ecosystem. Obviously, they're a huge amount of TAM associated with them. They are aggressively reaching out to figure -- to try to understand how they can best leverage our diners to build their businesses. We're working with them very closely to make sure that we have the best possible experience we can because that's the way you build an integrated system. So, there's a bunch of chains in a pilot phase. And really, we want to make sure the partnership makes sense before rolling out broader programs and going extremely broad because, this has to make sense for us, the diners and the restaurants. But, I think you will see more chain activity being tested in Q4. And, assuming it works out, you'll see a lot more chain activity on the site starting early next year.

[Adam DeWitt:]

And, Ralph, in terms of your question in terms on the 1.5%, the weather, Q3, Q4. Overall, it's kind of tough to talk about Q4's impact in terms of weather on the results, just because it's so early in the quarter and a lot can change between now and December. In terms of the other part of your question, I think, post some of the outages or service interruptions. When we look at the data, those are really, kind of, what I consider spot events. And, we saw the loss of orders, kind of happen -- occur at those times. But, once the platform recovered, the behavior recovered as well. And, new diner acquisition and order activity doesn't look like it's been impacted at all by the -- on a long-term basis by those outages.

[Operator:]

Next question comes in line of Heath Terry from Goldman Sachs. Your line is open.

[Heath Terry:]

I was wondering, just first, can you give us a little bit of a sense of the changes that you're seeing in the cash flow dynamics of the business. This is second quarter in a row where we're seeing negative cash flow. Should we expect that to reverse in the fourth quarter? How should we try and, sort of, attempt to model this going forward? And then, as we look at, sort of, the metrics within the business and see what appears to be daily average orders per user declining. Is there any trends within that that you would point out? Is it happening more in bigger cities where you're seeing more competition? Is it happening more in cities where you're seeing worse whether? Is there a -- any sort of color that you can provide for thinking about that metric?

[Adam DeWitt:]

So, on the first side in the cash flow, what you're seeing, really, is a result of timing of the end of the quarter. So, to give you some background. We pay our restaurants at different times, at time intervals and a bunch of them are on a weekly basis. And, the timing of this quarter's end just occurred on a day when we had cleared out our payables for that, on that weekly basis. So, you can see the restaurant, food liability, dip quite a bit and that's what's driving the decline. But, on an operations basis, we're generating just as much cash as we were a quarter before and the quarter before that. So, on a net basis, kind of, if you thought about, kind of, unburdened or unencumbered liability, so to speak, where our cash is actually higher on a quarter-over-quarter basis. So, it's really a timing thing. To be honest, I haven't looked at the date that it ends, that the fourth quarter ends. But, you'll probably -- it's more likely that you'll see a return to where it was in the past. In terms of the frequency question or orders per diner. We saw a decline again this quarter, we looked at the trends within our markets. We looked at the trends within specific cohorts within those markets. And, what we're really seeing is still a mix issue and not a degradation of the cohorts at the individual market or timing level. In other words, our GrubHub diners that we acquired in 2012 in July, looked just as healthy in each market that we looked at this quarter as they did last quarter. And, this is really about us acquiring more diners in the secondary and tertiary markets, relative to our corporate business and relative to our Manhattan business.

[Operator:]

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

[Ron Josey:]

Just quickly, maybe, Adam, on delivery investments, definitely encouraged to hear better frequency, repeat rates, DAG growth rates, et cetera. But, why not ramp investments more so in 4Q and even into 2016? And then, sort of, secondly to that. Once you have the infrastructure for delivery, can you help us understand how you plan to generate the demand? So, that's one question. And then, quickly, it looks like take rates were flat quarter to quarter, despite the delivery ramp and the increase in ops and support. Any insight there would be awful. Thank you.

[Adam DeWitt:]

Sure. So, there is a bunch of things in there. So, if I don't get something, ask me again.

[Ron Josey:]

I'll go back in the queue, yes.

[Adam DeWitt:]

Yes. In terms of the delivery investment and why we're not ramping quicker. What I would say is, we're being really aggressive in terms of the delivery investment and, we're investing in as many markets as we possibly can as quickly as we can and also, at a depth in the markets as quickly as we can. In the second part of that question that you asked, kind of, hit on this. It takes time to build up the demand. And we have a unique advantage in the marketplace. In that, we have a base of demand of 6.4 million Active Diners. So, the reason we don't have to invest more is because we have that large base of demand and we're able to get the scale quickly. Remember, the investment is really just overcapacity. And so, in order for us to get to all the markets that we want to get to, I think Matt mentioned, we're going to be in over 40 markets by the end of the year which will represent a very large majority of our footprint. And I guess, by the shorter answer is, we're investing. We do have the pedal to the metal and we feel really good about the coverage and the depth that we're going to have in the marketplace in terms of delivery by the end of the year and into the first quarter of next year. In terms of the take rates and the color on the take rates, we said that if you strip out acquisitions and you strip out delivery, the take rates would've been flat. I think this is pretty consistent with the story that we've been telling over the past several quarters that, over time, there's a natural bias up. But we expect, kind of, small fluctuations quarter to quarter. This quarter it just happened to be flat. There is a little bit of seasonal impact. Typically, in the fourth and first quarter, as we have more colleges. But, that can be offset by, kind of, that natural upward pressure on the rates.

[Operator:]

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

[Aaron Kessler:]

A couple of questions, first, just on the delivery efficacy. I think you said 40 markets roughly, by the end of the year. What's your view longer term how many markets you'll be in? Also, just in terms of any more color, maybe, just on the New York growth rates versus -- I think you've had some Tier 2 market growth rates last quarter as well? Thanks.

[Matt Maloney:]

In terms of the markets, by the end of the year, we had planned to be in at approximately 50, actually, markets and then long term. The markets after, roughly the 50th, get smaller and I don't think it's -- I mean, we will definitely keep expanding. We see this is as a huge growth driver, especially in the longer tail markets. We have hundreds of campus communities. The delivery platform is ideally situated for the students in the campus housing. So, I think we're going to continue to roll it out. But, after the 50th that's going to be the critical mass. And so, that's our long term concept on growing our markets.

[Adam DeWitt:]

And then, Aaron in terms of the markets and the growth rates. Last year, last quarter, we gave the color on, sort of, the tier ones versus the tiers two. Our intention there was to give you guys a spot view. Our intention is not to give you that much detail going forward. I mean, what I would say is, that given, once you make the adjustments, the organic growth rate didn't decline that much that the growth rates in the individual markets didn't really change that much either and, there wasn't a big swing in one group versus the other.

[Aaron Kessler:]

And, just finally, in terms of the operations expense for Q4. It looks like the guidance implies at least a $5 million sequential increase in expense there. Is that, kind of, the right range to think about?

[Matt Maloney:]

Quarter over quarter I said that we would -- I said that we would be $5 million to $7 million in overcapacity. So, if you look at your model and you have -- where would be at capacity and add $5 million to $7 million, then, you'll probably be there.

[Operator:]

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

[Nat Schindler:]

Adam, you talked about the return rates and how you're spending virtually all of your marketing dollars on getting new diners which only resulted in about 10% of your orders in a given quarter. As you go forward and you're growing faster in tier 2 markets, are your ROIs on that marketing spend similar? Or, do they take longer to be realized? Or, in -- are the relative costs of acquiring those customers similar?

[Adam DeWitt:]

Okay, so, a couple things. One, so, I just want to point out, the -- so, just to clarify, it's actually a lot less than the 10%, our new diners. So, it's greater than 90% are repeat in terms of the question of the ROI. What I'd say is we've talked about this in the past and markets get better over time. And so, as markets get built out and there's more restaurant coverage and more density, the frequencies, the diner frequencies tend to go up over time. And so, the lifetime value of diners in a market that we've been in for 10 years are going to be better than the lifetime value of a diner that we've been in for -- a diner from a market that we've been in for five years. What we've seen, kind of, across the network in terms of acquisition rates, is that, generally, the rates that we pay in the different markets are pretty close to each other. The issue is that in the markets where we've been a lot longer and have more presence, that we're able to acquire a lot more diners at the cost. But, overall I'd say that the CPAs or the CAC or whatever, however you want to call it, are very similar across all the different markets. It's just that, the markets that where we haven't been for a long time, you very quickly reach the inflection point where marketing, additional marketing spend, becomes inefficient because you just don't have the coverage.

[Nat Schindler:]

And, just one other quick question, can you remind us on the rough relative split between your corporate business and your non-corporate?

[Adam DeWitt:]

Yes.

[Nat Schindler:]

And, the rough growth rate difference?

[Adam DeWitt:]

Yes. So, the corporate business, I think we've said in the low double-digits, just so, probably a little over 10% is the percentage of our business and its growth rate. We're happy if we can grow that business at 10% per year.

[Operator:]

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

[Michael Graham:]

A lot of the investor concern about competition seems to start in the San Francisco market. And, I was just wondering if you'd be willing to share any commentary around how you're seeing trends in that market, either repeat behavior or diner growth? Or, just anything you'd be willing to share? And then, related to that, you mentioned that for a few quarters in a row now, you've been adding more diners in the second-tier markets. And, is that the result of just the natural market penetrations in those markets? Or, are you targeting ad spend locally? And, just wondering if you could share any color around, is there -- you've got the top 10 which are, sort of, driving a lot of your businesses there. Another number down below that, maybe the next 20 or 30, that you're really targeting ad spend in those markets? Thanks.

[Matt Maloney:]

The San Francisco market is clearly unique in that you have a tremendous amount of small players trying to figure out a business model. But, the reality is, San Francisco's not a very large market in the scope of our business. And so, we believe we're outcompeting the smaller players and a lot of them are struggling with the unique economics and so we're betting very aggressively and because we believe the margin structure in the long term is clearly worth fighting for and different than what it looks like right now with the tremendous investment. As we look over the longer term, I see five distinct advantages that GrubHub has in this marketplace. And, the first and we've beat this home every call we've been on, but it's the scale. It allows us to run delivery profitably with an efficiency that no one else can. Second, is we have a clear product focus. We deal with one product. It's food. We understand it better than anyone else. This resonates with our restaurant partners who don't their food held up by the logistical challenges of delivering iPads, toothpaste and groceries. Third, we have the lowest consumer-facing fees. We know cost matters to the consumer. We've done our own tests. It's clear. We pride ourselves on the price transparency in delivering the best service for the lowest cost. Fourth, is technology, allows us to process our orders efficiently and deliver them to restaurants in a way they can easily process. And then, finally, is customer support. And, I've talked about this before. But, we try to fix everything through technology but you simply can't run a business of this scale without a very large workforce dedicated to fixing consumer and restaurant issues. And, we do all of this extremely well and we've been doing it for a long time at a scale that's unmatched. And, no one else is able to achieve this type of volume. And so, I think we're uniquely positioned to be extremely successful in this space, whether it's San Francisco or any other market in the country.

[Adam DeWitt:]

And then, Mike, in terms of the Tier 2 new diner growth relative to the rest of the network. In the past we've talked about this. It's critical in this business to have a balanced growth in terms of your diners and restaurants. And, what we know doesn't work is if you go into a market and spend tons and tons of money and don't have a restaurant network to back it up. And so, to answer your question more directly, it's as these Tier 2 markets grow for us, we're able to spend more and more money in each one of those markets effectively. And so, what you're seeing over time is a lot of steady growth in the tier twos and our ability to spend more money and acquire more new diners than we were before. As we build out the restaurant networks and the diner networks in those markets. So, it's really a question of opportunity. Of our being able to deploy spend effectively.

[Operator:]

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

[James Cakmak:]

I appreciate you guys providing the additional, kind of, investment color around the delivery efforts. I wanted to ask you, though, given the fact that you did accelerate investments this quarter because you saw the favorable trends across targeted metrics. I was wondering, how much of the economics the you're outlying right now and then, the $10 million to $20 million you talked about next year, is static? Versus, taking into account the evolution of the industry and the competitive environment where you have extremely well-resourced players willing to lose a lot of money to capture share in this market? So, how much of the outlook is static versus dynamic? And then, secondly, just because you touched upon weather. Does the fourth quarter take into account El Nino and the potentially warmer weathers that we could see in the West and the Midwest? Thank you.

[Matt Maloney:]

In terms of the static investment question, I'm going to talk about it. I'm going to assume that what you mean by that is recurring versus, kind of, one-time. And, from what we see in the marketplace and this is reflected in that 2016 guidance that we think that we're going to start shrinking the spend in the back half the year. We certainly view this as -- I would characterize it as nonrecurring or, kind of, one-time upfront investment in overcapacity that we fully believe will go away over time. We're not seeing anything in the markets that we're in right now that tells us that we can't get to a point of neutrality. We walk through and I think the slide that we put up on the site will help. But, we talked through, kind of, the different levers that we have to push to get to that kind of parity with the cash that we generate on a self-delivery order. So, we-- we're confident we can get there. And, we think that this, kind of, in aggregate, this $20 million to $30 million, if you combine the 2015 and 2016 spend, is, kind of, what we need to do this -- to make sure that we're taking advantage of being the first player. And, taking advantage of our scale in all these different markets, but, we think it's -- we feel confident that it's going away -- and then turn to your question on the--

[Matt Maloney:]

Sorry, in terms of your question on the weather in the fourth quarter, El Nino. Like I said before, it's really hard to comment and El Nino may cause some more mild weather which is a negative for us. But, it also could cause some more precipitation in certain markets which would be a big help for us, right? So, 50 degrees and rain is better for us, frankly, then 35 degrees and sunny. I don't know if that helps. But, I think it's way too early and I don't think we have enough information to talk about whether El Nino's and/or the fourth quarter's going to have a positive or negative impact on us.

[Operator:]

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

[Tom Forte:]

I had two questions, one on the chain restaurant delivery and one on competition. On the chain restaurant delivery front. Should we think of this as a white label effort or GrubHub advertised effort? For example, will your offering be on the app for the chain restaurant now offering delivery as well as on your app? And then, on the competition front, I recognize these might be -- not be some of your biggest markets. But, given the entrance of Amazon, can you talk at all about any change in restaurant sign-ups in either Seattle or Portland? Thanks.

[Adam DeWitt:]

I'll take both of them. In terms of the chains, I think that it really depends on the partnership we have with the chain. So, we're talking to some chains about a white label opportunity and we're -- others we're not. The main drive for chains to work with us, is frankly, the diner demand we're able to generate across our branded platforms. And so, to the degree that we would be powering ordering across other platforms, it would really be just to support their efficiency. But all the pilots, they have to be on GrubHub. So, every partner we're working with is primarily on GrubHub and any other efforts we do with the chain is just to be a good partner. In terms of Amazon, I think it's a great company. I mean, everyone knows that. But, we're solving a very unique problem. So, we're only doing takeout and only on-demand, sub-60 minute delivery including cook time from over 35,000 independently owned restaurants. So, we have a 6.5 million diner base and we're very comfortable in our current positioning and our strategy to capture the large TAM in front of us. And, where Amazon ends up going with this product, I really couldn't say.

[Matt Maloney:]

Just to add to that. In terms of the restaurant question. We haven't seen any impact at all in our ability to sign up restaurants in any market that we're in.

[Operator:]

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

[John Egbert:]

Given the increased investment in delivery, are you able to say if you're tracking ahead of the $175 million run rate in Gross Food Sales for delivery you talked about last quarter? I think you said you were planning on ending the year with that. And Matt, you mentioned being at a scale many time larger than your creditors. Do you have a sense for the scale of the delivery business alone relative to some of the more prominent RDS platforms out there?

[Adam DeWitt:]

So, in terms of the 175, what I'll say there is we still feel comfortable that we're on track for that target by the end of the year. Based on the build out and based on the momentum that we have in the markets where we're delivering, the 30-plus markets. And, once you add in the additional markets that we're talking about adding, we feel very comfortable that we'll be at that target by the end of the year. And then, I'll let Matt address the scale question.

[Matt Maloney:]

Sure John, it's an interesting question. Where, I would almost say that, given the nature of the two-sided marketplace that we're in, the question isn't quite the right question. And, what delivery transactions we're doing right now isn't really an apples-to-apples comparison. So, you have to break it down. You have the diners, the restaurants and the drivers. And, they all work together symbiotically. And, obviously, on the diner perspective, we're dramatically larger than anyone else. In fact, we have so many diners, that if we were to practice some of the tactics of some of these smaller companies and just start sending orders without asking, we'd actually swamp the operations of many restaurants in most of the big cities. From a restaurant perspective, again, dramatically larger than anyone else and, we always partner with the restaurants. We don't just surprise them with our orders because we strive for higher efficiency than that. And then in terms of drivers, this is exactly what we're talking about with this investment. So, we're overinvesting in capacity of drivers to make sure we have the supply for the demand when we bring it across. So, to get your question, I don't really know. Obviously, all of our competitors are smaller and private. I have the same credit card and traffic data that everyone else has. But, I would say that we have a much, much higher potential energy and we will have speed of growth as we're able to transition our diners, who faithfully and consistently use our applications and platforms, from the restaurants that are doing self delivery to the restaurants that are doing our delivery. That's obviously, assuming what we cover on the slide and that's that we're equivalent on the profit either way.

[Operator:]

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

[Jason Helfstein:]

Maybe if you keep talking, it seems to keep moving the stock up. So, just two questions. So, net-ads was up 52% quarter to quarter? Can you comment, was advertising spend consistent more or less than that quarter to quarter? And then, secondly, you've completed the tech consolidation on the consumer side. And we have noticed restaurants are still -- have access to both platforms to receive orders. Is that a future potential savings if you consolidate that as well? Thanks.

[Adam DeWitt:]

Yes. So, in terms of the net ads and the ad spend. If you notice the sales and marketing line is up just a little bit. What I'd say is that that increase is probably mostly reflective of the increase in advertising quarter over quarter and, kind of, the non-advertising expenses were relatively flat. So, a slight increase. But, obviously, as you pointed out and we talked about in the remarks, a significantly higher number of net Active Diner adds during the quarter. So, we feel pretty good about that. Especially, given July, August are typically, if not our worst, two of our worst months overall for the year. In terms of that tech spend, the -- okay, I'm going to let Matt answer the tech question.

[Matt Maloney:]

Yes. Sorry. That's some good detective work there, Jason. It's true that some of our restaurants are still using two different backend platforms. We have integrated the core functionality and we're currently piloting a common set of backend tool sets. As I've said, a couple of times, given our singular focus on restaurants and takeout food, we have and we're rolling out the most customized order fulfillment tool set for restaurants that will make them more efficient and it will process orders better and more effectively with much more communication between the driver, diner, restaurant and our customer service. And so, we've been working on this for a while. I think it's out in beta with at least a few hundred restaurants across the country currently. And, I think the rest of them will roll out as we continue to see success there.

[Jason Helfstein:]

Just a quick follow up there, some of these guys will say, hey, we like the Seamless platform better. This is the restaurants. How are you integrating that type of feedback in this beta. So, when it gets rolled out, that they're satisfied?

[Matt Maloney:]

Yes. Obviously, feedback is critical. As you saw what we did with the Seamless consumer-side transition. There is clearly some noise. People don't really like it when their tools are changed and their interface is. But, shortly thereafter, the consumer conversion across the Seamless consumer-ordering tool set actually increased and it was higher than it was ever. Historically, on the classic Seamless applications, so that's just a function of doing a better job with the tool set and the features and the interfaces. And so, I would expect to see the same situation with the restaurant tool sets. We've spent countless hours in research. We've spent countless hours with user feedback. Obviously, we're in beta testing. This will be a superior tool set than the previous and once the restaurants are trained on it and understand what the features are, I believe they will like it much more.

[Operator:]

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

[Rohit Kulkarni:]

On delivery services, when you talk about the footprint of 40, 50 markets by end of this year. What percentage of your existing Active Diners does this footprint overlap with? Or, is there an incremental bucket of Active Diners that you think would -- is partially responsible for how your growth of Active Diners has been this quarter and may be over the next few quarters? And, just one quick clarification on the plan and investments that were referenced, $10 million of incremental spend or cash burn, what have you, in 2015. Can you clarify whether that has increased by $5 million to $6 million since you talked about it in August? As in, the Q3 results were $2.5 million below guidance. The guidance is $6 million below the end of Q2 level. So, that is, I just wanted to reconcile. Have you increased the investment since when you thought about ramping those delivery spend and those $10 million cash burn plan? So, two quick questions there.

[Adam DeWitt:]

Yes, I'll take the second one first. So, absolutely we've absolutely increased relative to that $10 million. We tried to make that point during the prepared remarks. But, we're probably talking a couple million dollars extra in the third quarter and another few million dollars in the fourth quarter above, kind of, that $10 million figure in aggregate for 2015. And, that's why the EBITDA guidance for the fourth quarter -- that's why the EBITDA ended up lower than our guidance in the third quarter. And, we've guided, if you look at the implied guidance, it's actually not technically lower but it's at the low end of where the implied guidance is from our guidance from last quarter is where we guided to for the fourth quarter. But, it does embed that extra or higher level of investment, in that $10 million we talked about in August of last year.

[Matt Maloney:]

And, in terms of the markets, I'd say it's definitely a majority of our diners, the 40 to 50 markets at probably 75%, 80%, around there. And, these would not be incremental diners. This is a set of markets we already serve, that we're now setting up non-delivery restaurants, restaurants that we actually deliver for. So, the impact of the metrics on frequency, new diner conversion, repeat rate and all of the above, is really watching our existing diners who currently execute orders from self-delivery restaurants actually order more frequently and perform better on our platform with the restaurants that we actually deliver for and are able to manage the service quality and the speed.

[Rohit Kulkarni:]

Okay. And, if I could ask, are you getting a sense from the restaurants that you sign up for delivery services that there is a sense of quasi-exclusivity as you get deeper into the relationship. Not just doing takeout, but delivery. And, hence, probably your share of the restaurant's wallet is getting deeper and deeper and there is a quasi-exclusive relationship building ahead?

[Matt Maloney:]

I think that we don't ask for exclusivity. We prefer to compete for our business. The restaurants, would -- I would say, have a natural bias towards working with a single provider. You see this in their -- how they source their -- the food and their products for their restaurants. They tend to have one versus another. And so, I think the restaurants would prefer to only have to train their workers on one system. They'd prefer to only have to deal with one account manager and really be able to throttle their orders through a single funnel. Versus having multiple and be almost at the mercy of a bunch of externalities. So, what we see is the restaurants want to work with the partner that has the most diners available. And, since orders are fundamentally what we sell, we're significantly ahead of anyone else. And, now that we're essentially providing delivery everywhere there is delivery competition, we find that restaurants bias towards our platform and prefer to stay on it exclusively.

[Operator:]

Your next question comes from the line of Arvin Bhatia of Sterne Agee. Your line is open.

[Arvin Bhatia:]

I have a couple of questions. First one is, wondering Adam, what's implied in your diner growth number for your Q4 guidance? What are you thinking there? And then, how many drivers do you have? I know you're hiring thousands of these drivers. But, how many do you have right now? How many will we end up having by the end of the year? And then, my third question is on the growth rate in different market you talked about your corporate segment. That was helpful. If you could, maybe, talk about Manhattan? Because a lot of people are trying figure out that and also to figure out the rest of the country and how that's doing. So, maybe you can help us a little bit there to get more comfort.

[Adam DeWitt:]

Sure. So, in terms of the new diner adds for the fourth quarter. We don't typically give guidance on new diner adds for the quarter. We stick to, kind of, the high level revenue and EBITDA metrics. What I would say is the fourth quarter is typically a good quarter for us from a new diner acquisition. I don't think we're doing anything different than we typically do in the fourth quarter. We're going to be a little more aggressive on spend. But, nothing out of character for what we've done in the past in the fourth quarter, in terms of the number of drivers. Certainly, look, we're not planning on disclosing the number of drivers. As Matt said, there's a lot of things that go into the size and scope of our delivery footprint. Certainly, it's in the thousands. But, what's important is that we're getting traction in these 30 to 40 markets, hopefully 50, by the end of the year. And, we're seeing good availability and we have the -- we have enough drivers to deliver the demand. And, that's why we're spending more money than we would at equilibrium. Because, we want to ensure that, folks, especially in our secondary markets that are ordering from GrubHub delivery for the first time, and ordering from a restaurant we deliver for, actually have a good experience. And so, that's why we're investing ahead of the capacity. So, we have plenty of drivers across all those markets. Manhattan, specifically, in terms of the growth rates, I'll just go back to what I said before. We're not planning on giving a lot of color quarter to quarter or a lot of detail on individual markets and their individual growth rates. We wanted to give you guys, kind of, a viewpoint last quarter to understand relatively where the markets are performing. But again, if you think about, kind of, where we were last quarter and the 25% and then, when we look at the adjusted basis, 23%. We're not talking about that significant a decline and it's not coming from one market. It's not a situation where one market's really unhealthy and all the others are compensating for it. They all look very similar in, kind of, where they are this quarter versus last quarter. And then, I think if you follow that through to 2016 guidance, you'll see that we're not too dissimilar from where we're, kind of, exiting the year, for the year overall next year. So, that, kind of, gives you some insight into how we're thinking the markets are doing now and then also how they're going to do or how we think they're going to do in the future.

[Arvin Bhatia:]

If I can ask just one last one. On the chain restaurants, you talked about the ongoing pilots. In your negotiations or discussions and testing, what's ultimately contemplated as -- in terms of unit economics that you would hope to get? Obviously, a lot of noise from startups and then stuff like that. Just wondering, how you're thinking about that?

[Matt Maloney:]

Sure. Let me think. In general, this is a partnership. It's not a freebie. So, we're working with the chains. We're driving what will be meaningful demand for them. And, we're looking for integration with their fulfillment systems and they're looking for the same. And so, I would say, each conversation is different. But, this is not like some of the deals that you may have seen in the press where we're giving it away for free and there's zero integration with the chain. I would say that no pilot that we've talked about has bad economics from our perspective. We know exactly what we're trying to achieve and we're working diligently with these chain partners in order to make sure that this is a win-win for everyone.

[Operator:]

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

[Chris Merwin:]

So, first, for the delivery execution business, is there a scenario where you would lower the delivery take rate to the restaurants to grow adoption? Especially, given some of the competition out there giving it away for free. And then, would you consider also, maybe, increasing the diner fee to alleviate those costs to restaurants initially? And then, just a second question. Also, as it relates to delivery execution. You've been pretty clear in terms of how that's going to have a lower margin with a similar cash profit as the core business. But, can you help us think through what the long-term margin structure of GrubHub overall would look like after we get past, like, the cost of building this business and everything starts to normalize? Thanks.

[Matt Maloney:]

Sure, Chris. In terms of how flexible can we be with the take rate and the driver fee. I think there is a lot of flexibility in there. I think, Adam even mentioned in the prepared remarks that we have ability to throttle the drivers in market as well as another lever to manage the investment. And, we're making decisions currently, that best presents our product to be the leader in the long term for delivery in general. So, that would be shifting the cost of transportation as much as possible to the restaurant. And clearly, there are competitive dynamics at play. And, yes, there are some restaurants that are marquee in the local neighborhoods. And so, they're going to have more leverage and we're going to work with them just as we always have. That's why we have a flexible percentage commission plan. The delivery fee, this is just black and white. Higher fees equal less orders and so, you have as a very high fee product, you are going to have less orders over time. We want to reduce the fees as much as possible to drive the velocity of orders because that's fundamentally what we sell to restaurants. I can say that we haven't needed to be flexible with the take rates to date. But, never say never and we're going to continue to grow as aggressively as we can. And, I'll let Adam speak to the long-term margin of delivery.

[Adam DeWitt:]

Yes, Chris, I think if you download the sheet from the -- if you look at the sheet from our investor relations website, you'll get a clearer picture of what this can do to our margins. I think the easiest way to think about it is -- or let me take a step back. It really depends on what, at the end of the day, you think the mix is of GrubHub delivery versus restaurant self delivering their own, right? If you take it to -- at the extreme if we're not doing any delivery, we've talked about this as pretty easily getting to getting to, kind of, 50%. If what we're trying to do is maximize margins, we think it'd be pretty easy to get to a 50%-plus adjusted EBITDA business. If we're not doing any delivery, right? At the extreme other end, if we're doing 100% delivery. You look at, let's just take for example, 2015 numbers, right? And, if you say, these aren't the exact right numbers, I'm just doing this to make the math easy. But, let's say you're at 350 for the year on revenue and 110 or, whatever it is, on EBITDA. You're basically doubling that revenue number, right and getting at 600 and you're generating the same amount of EBITDA and then, that's how you get into the margins. So, it's anywhere along that spectrum from 100% restaurant self delivering versus 100% GrubHub delivering. At the end of the day, our shareholders, we think, benefit more with a higher percentage of GrubHub delivery because it means that we've been able to add more restaurants and we're doing more deliveries for restaurants they couldn't before which actually implies that we're growing more and driving more orders overall through the platform which should be a benefit in terms of cash.

[Operator:]

And that is all the time that we have for questions today. I would like to thank you in your participation in today's conference call. This does conclude today's call. You may now disconnect.