Just Eat Takeaway.com N.V.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to GrubHub Inc. Q4 2014 earnings conference call. [Operator Instructions] I will now turn the call over to Mr. Anan Kashyap, Head of Investor Relations. Please go ahead.

[Anan Kashyap:]

Good morning, everyone. Welcome to GrubHub's fourth quarter of 2014 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 the Investor Relation 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. 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 prospectus filed with the SEC on September 05, 2014, our quarterly reports on From 10-Q and our Annual Report on Form 10-K that will be filed with the SEC. Our SEC filings are available electronically on our Investor website 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 website and has been filed as an exhibit to Form 8-K filed with the SEC. As a quick reminder to everyone, the metrics and financial results we are using throughout this call are pro forma for the combined Seamless and GrubHub platform regardless of whether the period discussed took place before or after the merger. And now, I'll turn the call over to Matt Maloney, GrubHub's Founder and CEO.

[Matthew Maloney:]

Thanks, Anan, and thanks to everyone on the call for joining us this morning. I'll start by giving you some color on our yearend results and on our two acquisitions, before turning the call over to Adam DeWitt, our CFO, who will give us some more detailed look at the numbers and our outlook for 2015. So with that, let's talk about the quarter. As we've said in the past, the fourth quarter is typically strong for GrubHub due to colder temperatures and fuller school calendars. This quarter was no exception, and in fact we broke records across all of our key metrics as well as having record breaking financial results. More specifically for the quarter, we had a record 5 million active diners and on average approximately 203,000 orders per day for our restaurant partners, a 17% increase over the third quarter. To put in perspective, our diners purchased more than 18.5 million meals during the quarter, driving over $0.5 billion in sales to local restaurants and cities all across the country. For the full year 2014, we handled 183,000 daily average grubs, 35% higher compared to 2013. Our gross food sales were almost $1.8 billion for the year, which represents 39% growth over 2013. This translated into $73.3 million of net revenue for the quarter, up 50% from the fourth quarter of 2013. And we ended 2014 with $254 million of revenue, up 49% from 2013 on a pro-forma basis. Adjusted EBITDA was $25 million for the fourth quarter and $79 million for 2014, a 92% increase for the quarter compared to the fourth quarter of 2013 and a 98% increase for the year compared to 2013. It was a good quarter and a good year for GrubHub. Our two-sided network continues to get bigger and stronger in our most established markets like New York, Chicago and Los Angeles, and is growing rapidly in our less developed markets like Denver, Miami, Dallas and Houston. These earlier markets are all exhibiting similar characteristics as our larger markets just an earlier stage growth. While platform adoption has been great, we believe we are still in the very early stages in moving takeout ordering online with the vast majority of orders being placed with paper menus and over the telephone. As we mentioned on our last call, we began to ramp our marketing spin in the fourth quarter to take advantage of the more favorable seasonal conditions. The new creative that we launched last year continues to see positive results by communicating the pinpoints of traditional takeout ordering. TV remains highly effective for us as part of our broader multi-channel strategy, allowing us to reach a very broad audience, since so much of the takeout market is still offline, particularly in the newer markets. This quarter we even experimented with a little Super Bowl advertising in some of our younger markets, supporting it with online marketing and a special offer. We clearly saw an increase in activity in these markets as a result. We found that over time the best marketing strategy for this business is one that touches diners multiple times in multiple places. We are constantly experimenting with new ways to reach diners and think that this type of approach will be critical for our long-term success. On top of the strong quarter and very strong momentum in the business overall, we are also acquiring what we believe are the two largest restaurant delivery services in United States, DiningIn and Restaurants on the Run. DiningIn was founded in 1988 and has a strong presence in Boston, Philadelphia, Chicago, Dallas and Minneapolis. Through our close partnership, our diners have been able to order from DiningIn restaurants through GrubHub for many years. We closed the acquisition of DiningIn yesterday. Restaurants on the Run was founded in 1993 and has a strong presence in the western half of the country, including San Diego, Los Angeles, Orange County, San Francisco, Seattle and Las Vegas. We expect this to close shortly. The new established restaurant delivery services would be great partners, because of their existing driver networks, relationships with restaurants and experience delivering food. When we looked at the restaurant deliveries service landscape, we thought that the breadth of coverage, the quality of diner experience and the tenure of these two companies was unmatched, and they complement each other perfectly with DiningIn strong in some of the larger eastern markets and Restaurants on the Run strong in the west and southwest. Together, these acquisitions give a significant and immediate scale in delivery. With a total reach of more than 3,000 restaurants in 15 markets in over 45 years of combined experience, we are confident that these acquisitions give us the largest, broadest and most experienced delivery network for independent restaurants in United States. We are making this investment, because we see the opportunity to continue shaping best-in-class takeout ordering experience. By owning the delivery, we have more control over the experience and we can provide more transparency, consistency and reliability to our diners. We can also provide plug-and-play delivery service to restaurants that don't offer delivery on their own, giving them the chance to capture profitable incremental orders without any of the logistics hassle and overhead. What we've found is that most independent restaurants want to focus on making great food, not on operating a logistics company. Restaurant delivery is a model that realizes dramatic efficiency to scale, where delivering from multiple restaurants at the same time makes a lot more sense than just for one. With our scale of 5 million diners placing over 200,000 orders per day, we are positioned to provide delivery at the lowest possible cost. And offering delivery for additional restaurants that diners can't currently find on GrubHub will generate more orders from more diners and more stickiness for these restaurants, enhancing the already powerful effects of our two-sided network. From a technology perspective, delivery is a natural extension of our existing suite of restaurant products, including the OrderHub, a tablet device that allows restaurants to manage the orders to get to GrubHub; and our DeliveryHub app, which is a driver tracking and order assignment system. We are excited about the delivery opportunity, because it can help us grow in two distinct ways. First, they can help accelerate our capture of the existing $70 billion takeout market by providing a better diner experience leading to higher frequency and more referrals. And second, it will allow us to grow the $70 billion opportunity by bringing delivery to restaurants that don't currently offer. While the current takeout market is $70 billion, the total amount American spend at restaurants annually is over $600 billion. As excited as we are about delivery and the value it will bring to diners and restaurants, we processed over 200,000 orders a day in 2014 without delivery. That represents growth of nearly 50,000 orders a day. As a result, we see and we'll continue to see a vast majority of our growth coming from orders that restaurants deliver themselves. GrubHub delivery is an incremental opportunity that will grow overtime. But as we've said, there is a lot of runway left for restaurants that provide their own delivery service. Online takeout is a massive market opportunity and it is extremely complex. With the food ordered, cooked, delivered and hopefully consumed all in under an hour. We processed more than 18 million orders this quarter. No one is operating at this scale or magnitude. As a result, no one is in a better position to be the one indispensable takeout platform connecting diners and restaurants across the country. With that, I'll hand it over to Adam, who will walk you thorough the financials.

[Adam DeWitt:]

Thanks, Matt. I'll review our fourth quarter performance in more detail, provide some forward-looking color, and then we'll open the call to questions. Before I start, I want to clarify that all comparisons to full year 2013 are for the combined business as though the merger between Seamless and GrubHub occurred prior to January 1, 2013, even though the merger occurred on August 8, 2013. This is different from the GAAP presentation, which for the full year 2013 only includes the results from both businesses after the date of the merger and only legacy Seamless results prior to August 8. As Matt noted, the fourth quarter is typically strong for us due to seasonality, and that tailwind combined with our underlying growth momentum led to robust performance across all of our key metrics. We ended the quarter with active diners reaching 5.0 million, a 47% year-over-year increase. We attracted 1.6 million new active diners to the platform in 2014 and 458,000 in the fourth quarter alone, but there is still a lot of room for us to grow. We believe at least 95% of the takeout transactions for independent restaurants are still taking place offline. Word of mouth remains our single largest source in new diners, but we are constantly looking for ways to reach the 95%, who are not yet looking for takeout online. TV advertising became an important vehicle for us in 2014, but continues to be just one tool in our multi-channel strategy that aims to reach offline diners multiple times in order to raise awareness and then ultimately triggering order on our platform. As a result of this growth in diners, we processed 202,700 daily average grubs and 508 million gross food sales during the fourth quarter, a 33% and 37% year-over-year increase, respectively. Both of these metrics maintain high year-over-year growth rates throughout 2014. With activities rates up due to seasonality, both DAGs and gross food sales had strong growth sequentially as well, 17% and 20%, respectively. While gross food sales grew 37% year-over-year, revenue increased 50% over the same period, due mostly to the improvement in revenue capture rates that we saw in the second and third quarters, when rolling out dynamic pricing on Seamless drove average capture rate from 13.5% in the first quarter to 14.6% in the third quarter. As we explained, it may happen, on last quarter's call, our net revenues as a percentage of gross food sales decreased slightly to 14.4% in the fourth quarter. The initial impact from converting Seamless to the restaurant-driven pricing model is behind us, and we expect rates to go up or down slightly each quarter at this point. The underlying commission rates that restaurants paid us actually remained flat this quarter, and the slight decline was driven by a small mix impact we typically see this time of year, and a marketing program that was accounted for us contra revenue rather than sales and marketing expense. Going forward, we still expect the capture rate will return to more natural fluctuations, both up and down on a quarter-to-quarter basis. While capture rates are trending up in individual markets, we are growing disproportionately in newer less developed markets, where there are currently fewer restaurants, and therefore a less competition to drive commission rates higher. Gross food sales and net capture rate drove record fourth quarter revenues of $73.3 million, 50% growth from the year-ago quarter of $49 million and 18% growth from the third quarter. Turning to expense, total sales and marketing expenses were $19 million this quarter, a 54% increase compared to $12.4 million in the same quarter last year. As a percentage of revenue, sales and marketing increased only slightly from 25% to 26%. As noted on the last call, we increased our level of advertising in the fourth quarter from the third quarter due to seasonality. As a result, we were able to grow diners at a healthy rate and increased active diners by 458,000, which compares to 380,000 in the third quarter. As our two-sided network grows, we can deploy more advertising dollars effectively and we will continue to increase our investment during in 2015. For the first quarter, we expect sales marketing to be approximately 20% to 25% higher than it was this past quarter, which is a similar increase as we saw in the first quarter of last year. Operations and support expenses were $17.8 million, a 38% increase compared to $12.9 million in the fourth quarter of last year. As a reminder, this line item is comprised of largely variable cost, such as credit card processing, customer care and menu operations. And as a result, has generally scaled the gross food sales. Technology expenses, excluding amortization, were $7.2 million for the quarter, increasing 30% from fourth quarter of 2013 and 10% from the third quarter. Much of the increase compared to the prior quarter was due to increased hiring in our technology and product teams. We will continue to hire good engineers and product experts opportunistically. Depreciation and amortization was $5.8 million for the quarter, relatively consistent with last year and the sequential quarter. G&A costs were $7.2 million, a decrease of 1% from the fourth quarter last year and an 11% decline from the third quarter. The decline from the third quarter was mostly driven by an almost $1 million reversal on our vacation accrual due to a change in our vacation policy. Absent additional large negative one-time items, we expect future quarters to be close to the $9 million-plus or minus. Adjusted EBITDA for the quarter was $25.0 million, an increase of 92% from $13 million in the same quarter in the prior year. Our adjusted EBITDA margin was 34% this quarter compared to 26.5% last year during the same quarter, demonstrating our operating leverage. We grew revenues by 50% and expenses by only 29%, despite significant investments in advertising in our technology and product teams. Net income was $10.8 million compared to the prior year of $2.2 million. GAAP net income for fully diluted common share was $0.13 on approximately 84.3 million weighted average fully diluted shares compared to $0.03 from the fourth quarter in the prior year. We believe the fully diluted share count will be around $85 million in the first quarter 2015, which include shares issued in conjunction with the DiningIn acquisition. Our tax expense this quarter included a couple of one-time benefits related to a simplification of our tax structure. As a result of this simplification, we are projecting our effective rates go down from 46% to 47% in 2014 to 42% to 43% in 2015 and thereafter. We ended the fourth quarter with $313 million in cash and short-term investments. Before I move on to guidance, I would like to spend a couple of minutes to discuss the two acquisitions Matt highlighted. The total consideration for both deals is approximately $74 million with approximately three quarter of the proceeds paid in cash. We closed the DiningIn acquisition yesterday and expect Restaurants on the Run to close in either the first or second quarter. While the number of orders GrubHub will deliver, even with the two acquisitions, is a small fraction of our total business. Our goal with delivering, in general, is to generate at least as much cash from each order, as we generate without providing delivery. In other words, our cost of deliver will be offset by incremental revenue from the restaurant in the form of higher commission rates and any delivery fees paid by the diner. RDSs have proven that restaurants are willing to pay higher rates to take delivery off their hands and we don't plan on changing that. So seeing net cash to us on each order just with a much better level of service and transparency. We believe that providing the extraordinary experience combined with offering more restaurant choices will drive orders higher, ultimately leading to an increase in cash generated by the platform. That said, echoing Matt's comments, as excited as we are about delivery, the reality is that due to the significant scale and high growth rate of orders that are delivered by restaurants themselves in our platform, it will be a long time before our nation's delivery efforts can have a meaningful impact on our financials. In terms of forward guidance, we are estimating total revenue for the first quarter of 2015 to be approximately $83 million to $85 million. For the full year, we expect revenue to be $335 million to $350 million. For the first quarter in particular, the higher activity rates that we expect due to seasonality, because of colder temperatures will be slightly mitigated by Juno, which closed most New York and Boston restaurants for about a day-and-a-half. In addition, the comparable first quarter in 2014 had exceptionally cold weather across much of the country, making it a difficult comparison. In terms of profit, we expect first quarter adjusted EBITDA to be approximately $24 million to $26 million. For the full year, we expect adjusted EBITDA to be between $100 million and $108 million. Whereas in 2014, we saw significant positive impact in adjusted EBITDA margin rates, due merger efficiencies and operating leverage. We are expecting 2015 margin rates to be more similar to 2014, due to investments across the business, including some cost relating your ramp in delivery efforts across the country. Of note, DiningIn is included in our guidance and is adding roughly $1 million a month to our revenue guidance starting in February. Restaurants on the Run will be added to our guidance once we close the transaction. Our growth opportunity is significant and GrubHub is well-positioned to take advantage of that. With that I will turn it over to the operator to take questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Ralph Schackart with William Blair.

[Ralph Schackart:]

First question, just on diner additions. It was stronger than we had modeled, I think the street. Just curious if there is anything you'd sort of call out given the strength. Matt, I know you talked about TV in the prepared remarks, and we noticed the step-up in recent spend in some channels such as Pandora, but just give us some perspective on the recent strength please?

[Adam DeWitt:]

I think you hit the nail on the head. I think what we saw on the fourth quarter was that our advertising channels were working really efficiently. And so we increased the amount of spend and it was effective. So at the end of the day we added more new diners in the fourth quarter than we had in any of the other quarters during the year, so combination of the seasonal upswing, the seasonal tailwind and then the added marketing spend helped as well.

[Ralph Schackart:]

One more just on the commission rate, Adam, just to make sure I understood. So should we think about the commission rate going forward, at least historically? Seamless has transitioned at this point, and this maybe is sort of a new baseline that the commission rate will sort of bounce perhaps slightly up or down going forward?

[Adam DeWitt:]

I think that's right. I almost think of last quarter is the baseline and this is kind of the beginning of the bouncing around. I mean, obviously, overtime, we believe that the model where by allowing restaurants to choose their own pricing has driven prices higher in every market that we've been in. So we think over the long haul, there is certainly a bias up on commission rates. But in kind of the short-to-medium term, you will see it fluctuate around a little bit.

[Operator:]

The next question comes from the line of Heath Terry with Goldman Sachs.

[Heath Terry:]

Can you give us a sense of the relative active diner growth or spend in your mature markets versus the newer markets, particularly those where you've focused marketing dollars? And then as you think about sort of how broad your owned or in-house delivery could essentially go, do you see existing restaurants opting for using your delivery services versus their own over time. For a given restaurant that's looking at how they should allocate their own efforts, how do the economics of this work for them?

[Matthew Maloney:]

In terms of penetration in markets, we continue to see great growth across all of our markets. Our Tier-1 markets are still adding the majority of these diners, but emerging markets are growing faster in terms of percentage of growth. And we have great traction in our second tier markets like Denver, Atlanta, Miami, they're growing a lot quicker than our more developed markets, and we have continued diversification across the 800 cities. In terms of penetration, our largest market, which is the New York Metro, we have slightly more than 10% of the market and we've been in the market for more than 10 years and we have low single-digit penetration in nearly all of our other market. So we still believe that we're in the early stages of adoption even in our most mature markets. And we have a long way to go in the newer markets. In terms of the delivery strategy and how that impacts the existing restaurants, our goal here is really to make takeout better and it provides an increased level of service to both, the diners and the restaurants. And for the diners, we believe this will impact increased new diner ads. We believe it will increase frequency. For the restaurants, we're proving a service to them that they really don't want to do. So when you talk to restaurants, and for years we've had restaurants ask us to takeover the delivery function for them, and historically, we've said no, until now. I wouldn't be shocked if restaurants start to convert over onto our platform. In terms of the economics, it's exactly what Adam was saying and we're going to make sure we make our continued margin, but all of this is way out in the future. The orders that we're delivering now, including the acquisitions, are still a tiny fraction of our numbers and it will be for a while. But as we integrate these companies, as we continue to rollout a more robust service offering to our diners, then I wouldn't be shocked that over time restaurants find themselves relying more upon GrubHub, not just for demand generation, but also for a delivery fulfillment.

[Operator:]

The next question comes from the line of Mark May with Citi.

[Mark May:]

Couple of questions. First on the delivery service. I'm trying to parse out the impact of these two acquisitions, or at least the one that you're including in guidance, as well as just your own organic investment and delivery this year, the impact on EBITDA. So if there is any guidance you could provide there, that would be great? And then gross food sales accelerated in the quarter, but you've maintained your sales and marketing ratio? And then just a question, I know you talked about Q1, but as you look into 2015, how should we be thinking about the sales and marketing expense ratio trending this year?

[Adam DeWitt:]

In terms of the guidance, we talked about, so the DiningIn is modeled in at approximately $1 million a month. The EBITDA is close to immaterial, but it's between $1 million and $2 million total of the EBITDA. In terms of the investment that we're making over the next year, I don't think you'll necessarily going to see it in a significant way, in any given quarter or in any given line item. But we are anticipating ramping up through by investing, both in Restaurants on the Run, once they're on the platform, and then also DiningIn, and then also GrubHub's own delivery over the course of the year. So I think that our margins are pretty flat, that we've forecasted in guidance compared to the year before. So we're not actually thinking at this point that it's going to weigh on our margin for 2015.

[Mark May:]

And how we should be thinking about kind of marketing spend and some branding activities and how that might impact sales and marketing leverage?

[Adam DeWitt:]

I'm sorry, I forgot about the second part. So in terms of the sales and marketing for 2015, I think it's going to be along the same lines, in terms of ratio of spend of revenue, maybe a tick up. We'll probably play around with it depending on the quarters and kind of what we're seeing. So again, kind of last year in 2014, we did some experimentation in the second quarter. So it's a little bit higher than run rate. We may do that at some point this year, but overall I'd expect it to be in the same neighborhood as 2014.

[Operator:]

The next question comes from the line of Ron Josey with JMP Securities.

[Ron Josey:]

So just more questions on the delivery service. I guess, Matt, you mentioned that both of these services have been around for about 45 years collectively. I'm just wondering how you think that Grub can help improve the service, the adoption, maybe how technology impacts these guys, potentially lowering the delivery fees charged to restaurants and consumers from these services? And then as a follow-on to that, I'm wondering how these services compared to the tests you all had run, I believe in the past year maybe in Chicago, parts of L.A and San Francisco?

[Matthew Maloney:]

So in terms of the first thing, DiningIn and Restaurants on the Run, they've given a significant scale with their 3,000 restaurants, their 15 markets. I think as we said earlier combined they're going to add more than $25 million in topline, and both businesses, they are already profitable. So it would be a hard to be in business for over 20 years, each, and not to be profitable. So what we're looking at is they're already growing. They're doing a good job and we're going to come in and we're going to bring our scale. So in delivery, there is tremendous efficiencies of scale as you can think about delivering for multiple restaurants versus just one. And so now we're coming with even larger marketplace. We already have a good business relationship with DiningIn, where the company itself is making a profit sitting on top of our network. So obviously we can strip out some costs there. And our goal in the economics of this is to have the incremental commission rate and the delivery fee pay for the cost of the delivery. So we've seen in the delivery service industry, that restaurants are willing to pay the freight. That's what they do now. They will still be interested in doing that in the future, because we will be relieving a significant burden from them. So when we think about it, we're going to attempt to leverage our scale, leverage our technology, reduce the cost per order for the delivery execution as much as possible, and pass those savings on to the diner. And that's our goal in all of this. In terms of how we've seen that work, we have absolutely seen the economies of scale in our tests. That's part of the reason that we have decided to aggressively invest in this space. And because there is such economies of scale, we looked around and said, how do we grow as fast as possible? And we canvassed the industry, we looked for the best partners in this, and then we really wanted to be deeply aligned with them, which is why we ultimately acquired the businesses.

[Operator:]

Your next question comes from the line of Nat Schindler with Bank of America.

[Nat Schindler:]

A couple of questions. One, can you give us a little bit about how active diners behave as they mature on the system? If you add 50% now, do those new diners use it less frequently, I would assume, and then they use it more frequently over time? And have you seen where they hit maturity yet. And the second question, a little bit on the Super Bowl advertising. I know you said it was market-specific, but wanted to know if this is incremental cost in your Q1 marketing spend or was that just basically normal marketing that you shifted from other places to do this? And how much roughly did you spent?

[Adam DeWitt:]

In terms of active diners and the maturity and frequency and so forth, really what we see typically is that right around the second or third month is a really good baseline in terms of activity. And then what we've seen over time is that diners that stay with us, there is a slight increase over time in their activity, after that second or third moth. So there is kind of the ramping up, kind of feeling out period, but once the second or third month hits, it's kind of flat-to-up over time. And we've seen that going back to our cohorts, all the way far back as 2005, 2006. In terms of the Super Bowl marketing, I think it's just part of our marketing plan. We are definitely feeling out in those kind of Tier 2 markets, how do we accelerate awareness. And as I said in my script, it's not just the awareness, but getting people over the hump to place in order, and that we felt that it was worth trying out. What I'll say is that the total amount that we spent was significantly less than the cost of a 30 second national ad, a fraction, if you will. We were only live in like four or five markets.

[Operator:]

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

[Aaron Kessler:]

Couple of questions on the delivery service, any initial thoughts on the impact to your TAM from adding the delivery component, especially from restaurants that don't traditionally offer takeout? And do you view it as, that may have potential branding opportunity? If yes, obviously a fleet of cars out there potentially with the GrubHub logo as well?

[Matthew Maloney:]

So obviously we're strong believers in our original thesis of TAM, the $70 billion in independent growth. We believe the deliveries are way to accelerate the growth or capture that TAM as well as grow that to closer to -- well, just grow that generally with the $600 billion spent, there is a lot out there and by adding these restaurants we're increasing the options for delivery. A big part of this though, it's not really about TAM, it's about increasing the service level to our customers. It's about making delivery better, making takeout better. From a diner perspective, we're controlling the quality of the food. We're actually able to make it a better experience for them and we're able to increase the delivery speeds. These are things we've learned through our testing and it only gets better as you add scale. And from a restaurant perspective like I've said, restaurants don't really want to be doing delivery. That is what they have clearly told us. So we are providing the opportunity for restaurants that don't do delivery to participate in this very profitable incremental marketplace as well as relieving many of them from the burden of doing it themselves. So I believe it absolutely will positively impact our $70 billion in potential addressable spend. And with branding, you're exactly right, instead of just the interaction with the diners being through the products and through that transaction, we are going to be able to close the loop and extend our extremely high quality service element to the front door. And how we're going to do that, we're not sure yet, but we are absolutely looking at that. However, I want to be clear that the volume of orders that we are delivering is still, I'm going to say it again, a tiny fraction of our overall numbers and they will for a while. So as we are excited in growing this opportunity, it's going to be a long time before the majority of our diners are seeing a GrubHub delivery person.

[Aaron Kessler:]

And it looks like the two acquisitions are the one that's completed are focused on the corporate delivery market today mostly, is that true? And then what's the time table for maybe bringing that to more residential as well?

[Matthew Maloney:]

They are both addressing the corporate markets for sure. They are both also addressing the consumer market. Through our Seamless products, we have a extremely strong foothold in the corporate market as well. So it all kind of ties in together, but the service elements, it impacts both consumers and the corporate markets.

[Operator:]

Your next question comes from the line of Michael Graham with Canaccord.

[Michael Graham:]

I was hoping you could give us an update on what the pace of restaurant ads looks like? What that effort looks like in terms of reaching out and trying to get new restaurants on the network, maybe a thought on the mix of the new restaurants coming from big cities versus second tier. And then second question is just longer-term, as we look at the operations and support line, just wondering if you any have updated thoughts on should we see leverage there over time or should it really scale with revenue as I think is laid out in most of the models right now.

[Adam DeWitt:]

In terms of the pace of restaurant growth, as we talked about before, we're really focused on bringing quality restaurants on to the platform and the best restaurants. We're certainly adding hundreds, if not into the thousands of restaurants a quarter at this point. And in terms of where they are, it's a mix. I'd say they're biased towards markets where we have less penetration. So we're still adding restaurants in Chicago and New York, but we're certainly adding them in Houston and Dallas and Baltimore and Atlanta at a higher percentage rate. And to that end, we've actually invested a fair amount in our sales organization on the restaurant side for 2015. And we're going to continue to push, not just in Chicago and New York, so we can continue to push the 10% penetration that we have significantly higher, but also the other markets in an effort to get more concentration and more depth of choice for our diners there. In terms of the ops and support line, those are really variable costs. I think over time we maybe able to eke out some leverage here or there. It may at some point be offset by delivery, right, which will then be offset by an increase in revenue. But in general, I think kind of flattish is a good way to think about it.

[Michael Graham:]

And just quickly back on the restaurants. The 3,000 that already have relationships with the companies you are buying, do you have any sense of what the overlap is with your existing base of restaurants?

[Matthew Maloney:]

Yes. There is not a lot of overlap, because these are restaurants that generally don't provide their own delivery. So in that sense there is not a lot of overlap. So these are new restaurants. And to the earlier question about corporate and the focus on corporate, one of the things that we can do very quickly is light up all the restaurants on the RDSs on GrubHub and expose them to the 5 million active diners that we have. And so we can bring them a more consumer-focused diner very quickly.

[Operator:]

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

[John Egbert:]

New York was noticeably absent from DiningIn East Coast's footprint. Obviously, New York is a unique delivery market. I'm just wondering if you think this market is a lot more challenging. It seems like there is a number of start-ups chasing the opportunity here? And one other question, pickup is, I think, viewed by some investors as maybe a less compelling used case on GrubHub today. I know it makes up a huge amount of the market opportunity, I was wondering how that type of activity is trended relative to delivery?

[Matthew Maloney:]

Yes. New York is noticeably absent on DiningIn. I can't really speak to the decisions made years ago by that company. I think that New York, I've said before it's the greatest delivery market in the world. And I think that there is absolutely opportunity to increase the service level from what we provide currently, through our current products to the GrubHub and Seamless brands. And so in terms of where we're going I think that we need to consolidate what we've acquired, integrated, and make sure we're scaling it out intelligently and then absolutely address all opportunity that's in front of us. In terms of pickup, let me just say that with these acquisitions, the DiningIn that's done and the potential one, the Restaurants on the Run, we will be the leader in both online ordering and restaurant delivery in the country. So we're already way out there. And pickup you're right is a big opportunity, the value proposition is the same as delivery. And so we think that given our position we're going to be in the prime place to capture what is also another winner take most market. And when we're addressing that, I can't give you insight into that, but it's absolutely out there and ready for us to execute.

[Operator:]

Your next question comes from the line of Edward Williams with BMO Capital Markets.

[Edward Williams:]

Just a couple of questions. First of all, congrats on the acquisitions, but looking at your cash balance, you don't have quite a bit of cash left after these purchases. What are your thoughts on, what you will do with that cash at this point?

[Adam DeWitt:]

In terms of the cash, we ended the quarter with $313 million, once you that kind of net out the working capital liabilities to the restaurants that we have. It's probably about $250 million. Like we said, we'll probably use about $50 million on the acquisition, so we'll have $200 million left. But I think we view it as dry powder. We've said in the past, when we went on the road for the IPO and the follow-on offering, we talked about using the cash opportunistically. I think that we've proven that with these two acquisitions that we are willing to put that capital to use, if there is a way that we think, we can either accelerate our growth or increase the TAM. We happen to think that these deals actually do both. And if there is other opportunities out there, we'll certainly take a look, otherwise if there is things on the product side that we feel like we need, we may make an investment there as well.

[Edward Williams:]

And then just looking at the two acquisitions, with the Restaurants on the Run possibly closing in the second quarter, can you give us a sense as to how this $75 million splits between the two of them. Is it roughly evenly, just so we can kind of incorporate that into the model?

[Adam DeWitt:]

Yes. It's roughly equal.

[Edward Williams:]

And then the last question is, if we're looking at Tier 2 cities, can you give us a sense as to the performance of the cohorts, kind of in a Tier 2 city, in terms of frequency on the platform versus the Tier 1? Is it comparable to that overall metric you were talking about earlier in terms of once you get through that second and third month, kind of getting there and then rising? So can you give us some color on that?

[Adam DeWitt:]

Yes. The life cycles are very similar. I think we've said in the past that, Matt just alluded to, New York being the greatest delivery market in the world. And the New York diner is kind of an outlier, but the diners in all of the other cities have kind of followed a very similar growth path. And certainly, we're in a market with less coverage, the activity rates are lower. And as we get more density both on the restaurant side and on the diner side, it increases over time both the existing diners and the new diners that you bring on. So in Denver, for example, the diners that we're bringing on today are going to have a higher activity rate than the diners that we brought on three year ago at that time. But the diners that we brought on three years ago have increased their activity and are now kind of at the similar level as the new ones that we bring in. So a lot of it, that was a long-winded way of saying, that it really has to do with how developed the network is and how long we've been in a market, but they do follow very similar paths.

[Operator:]

The next question comes from the line of Jason Helfstein with Oppenheimer.

[Jason Helfstein:]

Two questions. So thinking about, call it, additional services that you're providing, i.e. taking over delivery, and kind of the value you add versus, let's say, doing more external things like accepting orders from external platforms. Can you just talk about how you think about that? I mean, obviously, the more you add, it makes you that much more important to the whole ecosystem. And just when you think about what you add on an internal basis versus what you could effectively add externally, multiplying the network effect, what stops you from partnering more? Is it economics? Is it control of the consumer experience? Is it that you want to have everything in place before you do more with external partners? And then secondly, can you give us an update on any mobile metrics you want to share relative to a year ago or last quarter as far as any kind of conversion rates or mobile app downloads or anything like that?

[Matthew Maloney:]

In terms of our decision to execute within the transaction versus external platforms, what we're really focused on is how can we make the consumer experience as positive as we can. We believe that the way to drive more orders is to really make delivery specifically a much better product, that is higher quality, that is faster, the food is hotter, you can get it from all the restaurants you want to order from, and so when we're trying to address that challenge, external partners really are irrelevant. What we're trying to do is really increase the service, so that we make diners happier. And in doing so we're also making our restaurant partners happier. And so we see this as a tremendous growth opportunity over the long-term. Any conversations about external partners or platforms are really more short-term conversations. And we are really trying to leverage our position, our scale, and our resources to dramatically build this market over the long-term. In terms of mobile, I think we said in our last earnings call, we're over 50% mobile now. We continue to see very aggressive growth on all of our mobile platforms we have. We were consistently releasing new mobile applications and tablet applications. With our new CTO, the team has invigorated and they are innovating very rapidly, and it's really exciting to see.

[Operator:]

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

[Tom Forte:]

So few questions. First is, now that you're adding the capability on delivery, how should we think about expanding your total adjustable market into chain restaurants, California Pizza Kitchen, P. F. Chang's, and probably the [ph] Genova's? And then what are your thoughts today on international expansion?

[Adam DeWitt:]

So in terms of expanding the TAM, I think there is two ways. And I know you asked specifically about change, that $600 billion that Matt mentioned in terms of sales from restaurants, I think it's roughly $220 billion in independent restaurants in total, and off that the $70 billion is a subset. So we think that without even addressing the change that delivery can help us access that additional $150 billion, as restaurants that don't deliver are brought on to the platform. And then change, I think there is another roughly $250 billion opportunity, but it will be incremental, right. And the decision makers that we are dealing with are not generally at the corporate level, and they're more generally at the local level. And so I mean, anyway you cut it, it's a massive opportunity, given that we're at roughly $2 billion run rate on gross food sales. And the market is $70 billion plus something for the independents that aren't delivering now and something for the chain. So it's obviously a huge opportunity. We're still very focused on the original premise, which is the independent restaurants. We're not even close to reaching full density on the restaurants or the order volume that can go through there, so a lot of different avenues and large avenues for us to pursue.

[Operator:]

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

[Rohit Kulkarni:]

Couple of questions. On the new acquisitions, Matt, you mentioned they had a long history and were profitable businesses. Are there any obvious steps to you that you think you could take or invest in those businesses, which otherwise they couldn't do as a standalone subscale business. For instance, go into more cities or improve the diner or restaurant experience with some combination of your incremental technology or customer service spend? And a quick follow-up on the Q1 guide kind of the phasing and the cadence question for you Adam implies kind of 24% to 25% of annual revenues, past 3 years there's been declining in Q1 as a percentage of total. Anything you would highlight that might lead to this change in cadence of revenues this year?

[Matthew Maloney:]

Yes. I mean, you're exactly right. These are good successful longstanding businesses that have been executing delivery in a lot of markets. What GrubHub brings to the table and what's really exciting about this is we have industry-leading product. We have the best discovery tools. We have the best transitional tools. We have the tracking. We have the technology in the restaurants to pass real-time massages between the line and the diner. We have the best service in the entire industry with hundreds of people that are proactively watching our order flow, making sure that our orders are going through in an aggressive pace and that diners are getting their food as fast as possible. These are all assets that neither of the restaurant delivery services separately have or are able to build, because they don't have the scale to justify it. So when we start talking to these restaurants or these businesses, and specifically DiningIn, which we've had a great relationship with for over five years, the conversation was, look at what we can bring to the table, if you are a part of the GrubHub network. And when you start thinking about, the dramatic step-up in terms of service and functionality that diners would be able to access with DiningIn as part of GrubHub network and delivering under GrubHub with a very tightly deeply integrated system, that's very exciting. And I think that the customers and the diners who are using DiningIn and Restaurants on the Run now will see a dramatic step-up in terms of service level and that's exactly why we're doing this.

[Adam DeWitt:]

Can you repeat the question? I didn't really understand that question about the 1Q guidance, what you thought was going down? Let's just move up to the next. And if he joins again, we can queue him back up.

[Operator:]

Your next question comes from the line of Kevin Kopelman with Cowen & Company.

[Kevin Kopelman:]

Sorry, if I missed it, but could you guys give the number of restaurants on the platform at the end of the year? And then my other question is on the polar vortex comp that boosted food sales a little bit last year. How are you seeing that play out as you look at Q1 growth?

[Matthew Maloney:]

So in terms of restaurants, intentionally it's a number that we don't disclose as a key metric, because at the end of the day the diners are going to drive our growth and not the number of restaurants, and it's more about the quality of the restaurants as well as the number. I think at the end of the year we had over 33,000 restaurants on the platform. And then your second question, in terms of the Polar Vortex, the impact is baked into our guidance. The thing about the polar vortex last year is it wasn't that disruptive, so we didn't have, as you know, a snow storm for example that basically shut down New York and Boston for all intents and purposes for a day and half. On the polar vortex, it's just really cold. In Chicago we had one day were there some disruption, but disruption actually is worse with the major snow storms. So we're seeing that impact, plus the polar vortex, which drove demand obviously pretty high. I think it's baked into our guidance. So you can kind of imply, but let's call it 1 percentage points to 2 percentage points of growth, probably as where we're at right now in terms of the impact.

[Operator:]

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

[Rohit Kulkarni:]

Just to follow-up. I think, Adam, you answered my question on the phasing of Q1 according to the context of 2015 guidance.

[Adam DeWitt:]

Perfect.

[Operator:]

Your next question comes from the line of Jeff Houston with Barrington Research.

[Jeff Houston:]

So following-up on the opportunity with restaurants that don't currently deliver through your plug-and-play solution. What are the characteristics of the restaurants that you think will be the early adopters of the lowest hanging fruit versus the ones that will maybe more the late adopters that are maybe unlikely to find it is attractive? And then along those lines, how much are you planning to invest in the program in 2015?

[Matthew Maloney:]

So in terms of who is going to be early adopter versus late adopters, what we've seen from our experiments in L.A., San Francisco and Chicago is that the restaurants that are most excited about this opportunity are those that are producing exceptional food. The local favorites are the ones that really take a lot of care in their product, and they focus so much on their product that they really don't have time or energy to execute on a logistics platform to deliver that food. And so when we're able to go to them and say, not only will we bring you incremental demand, but we will also execute the delivery for you, they get very excited. And frankly from a restaurant's perspective, there is a real cost to owning and operating a delivery function, and we are allowing them to offload that to us in way where we can execute it at a higher and more consistent level of quality. And so I would say that, in general, this is attractive to any restaurant, because we are going to allow them to sell more food, sell more incremental food, but specifically the highest quality restaurants have been the earliest adopters.

[Adam DeWitt:]

The second half of your question about the investment over the next year. The way that I think about it is if we weren't investing as much, the margin percentage probably would expand a few points more than we have it baked into our 2015 guidance. But we're investing in IT developers and product folks, we're investing in sales and marketing, and the other thing that we're investing in is delivery. So at this quarter we're at 34% margin rate, which is obviously a record for us, and instead of seeing significant expansion on that next year you're likely to see it around the same level, due to all the investments that we're making. So we're still generating a lot of profit and on a really good base growth.

[Operator:]

Your next question comes from the line of James Cakmak with Monness, Crespi, Hardt & Co.

[James Cakmak:]

Adam, I believe you mentioned that the relative size of the deals between DiningIn and Restaurants on the Run was similar. So just to the be clear, I guess the relative contribution we can expect once the deal closes, I guess, will be similar as well to DiningIn? And then secondly, you guys have touched on the frequency of percentages of orders of bunch, but just wanted to kind of think and see how we should think about that going forward? Obviously, it will trend lower, as you get into the secondary markets. But as those secondary markets have been maturing, some of the ones that you called out, do you think that we will be able to see improvements in the rate of decline and a possible inflection point or when you think that could possibly happen?

[Adam DeWitt:]

In terms of the deal sizes, the deal size and then the size of the companies, they're not exactly the same, but they are very close on both account. So the consideration and the size of the company and what you'll see baked into our guidance once we close Restaurants on the Run, you'll see it will be very similar to what we're doing on the DiningIn side. In terms of the frequency and orders question, its interesting question, we've seen the decline this year, because we were diversifying away. But the activity rates within the cohorts at individual markets are still very stable to even up. Over the last couple of quarters, we've been at a pretty stable rate. So we had 11% decline activity year-over-year in the second and third quarters, and then we had 10% decline activity in the fourth quarter. So what you're seeing there is it's similar to the commission rates, where you go into the new markets, and even though the trend is very stable to even up, because the absolute number is lower, right. As you pointed out, when we go into the new markets it drags the average down, even though the activity rate is very stable. When it's going to even out and potentially go higher is tough to tell. But obviously, we saw some drop at the beginning of last year, but it's been fairly steady since then. So over time, we'd expect it to be kind of flattish-to-up, but it may go down some more, as we grow more in markets, even our Tier 3 markets, beyond our Tier 3 markets, where we have even less density. So you may see some more decline, but it's not because of the individual cohorts are declining, they're all stable-to-up. End of Q&A

[Operator:]

Ladies and gentlemen, thank you for your participation today. This concludes today's conference call. You may now disconnect.