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OpenTable (NASDAQ:OPEN)

Q4 2012 Earnings Call

February 07, 2013 5:00 pm ET

Executives

Tiffany Fox - Communications Director

Matthew J. Roberts - Chief Executive Officer, President, Director and Member of Equity Incentive Committee

I. Duncan Robertson - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

Stephen Ju - Crédit Suisse AG, Research Division

Andrew Ruud - Morgan Stanley, Research Division

Andrew D. Connor - Piper Jaffray Companies, Research Division

Kaizad Gotla - JP Morgan Chase & Co, Research Division

James Cakmak - Telsey Advisory Group LLC

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Paul Judd Bieber - BofA Merrill Lynch, Research Division

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon, everyone, and welcome to the OpenTable Fourth Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Matt Roberts; Chief Financial Officer, Duncan Robertson; and the Senior Director of Corporate Communications, Tiffany Fox.

At this time, I would like to turn the call over to Tiffany. Please go ahead.

Tiffany Fox

Good afternoon. Thank you, and welcome to the OpenTable earnings conference call. Joining me today to talk about our fourth quarter and full year 2012 results are Matt Roberts, our President and CEO; and Duncan Robertson, our CFO.

Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, management may make forward-looking statements, including guidance regarding our expectation of future financial performance, which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations. A discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, and we refer you to these filings.

Also, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures in talking about the company's performance. Reconciliations to the most directly comparable GAAP financial measure are provided in the tables in the press release. This conference call is also being broadcast on the Internet and is available through the Investor Relations section of the OpenTable website.

And now, I'll turn it over to Matt.

Matthew J. Roberts

Thank you, Tiffany, and welcome, everyone, to our conference call. This afternoon, I'll provide you with a high-level overview of Q4 and full year 2012 performance, and then I'll turn it over to Duncan to walk you through the detailed financials.

OpenTable had a strong fourth quarter. Revenue for the quarter totaled $43 million, a 16% increase over last year. And in the fourth quarter, our adjusted EBITDA profit margin was 44% on a consolidated basis and 52% in our North America business.

Now let's take a look at our key metrics by geography. In North America, which includes the U.S., Canada and Mexico, seated diners grew to 30 million in the fourth quarter, a 21% increase over last year. And worth noting, in the fourth quarter, approximately 33% of seated diners in North America originated on a mobile device. To add some additional context to our seated diner growth, during the fourth quarter, North America industry diner counts were down 0.5% year-over-year. As anticipated, Hurricane Sandy contributed to this decline.

Turning to our installed base of restaurants in North America, we exited the quarter with 19,801 restaurants, representing a 15% year-over-year increase. This total includes 17,206 restaurants using our core Electronic Reservation Book product or ERB and 2,595 restaurants using our Connect product, which is designed primarily for walk-in restaurants that accept reservations.

In our International segment, which includes the U.K., Germany and Japan, seated diners grew to 3 million in the fourth quarter, a 35% increase over last year. Looking at our installed base of international restaurants, we exited the fourth quarter with 7,716 installed restaurants. This total includes 3,287 ERB restaurants and 4,429 Connect restaurants.

Looking back at 2012, we made strong progress expanding our network of both restaurants and diners as evidenced by our North American market penetration. As a reminder, we estimate that our North America addressable market for ERB is 35,000 restaurants. Based on this addressable market, our ERB penetration grew from 44% at the end of 2011 to 49% at the end of 2012.

In addition, we believe that there are approximately 20,000 potential customers in North America for our Connect product, which was introduced in May of 2010. Based on this addressable market, our Connect penetration grew from 9% at the end of 2011 to 13% at the end of 2012. Based on this total addressable market of 55,000 reservation-taking restaurants, our penetration was 36% at the end of 2012.

Now let's turn to our seated diner penetration. For 2012, we estimate that the total number of diners seated through reservations in North America in both ERB and Connect target restaurants was approximately 740 million. Based on this addressable market, our seated diner penetration grew from 12% in 2011 to 15% in 2012.

In addition to providing our annual update on North America, for the first time, we're providing estimates of our addressable market and penetration for the U.K. We estimate that our U.K. addressable market for ERB is approximately 10,000 restaurants. And for Connect, we estimate that our U.K. addressable market is approximately 5,000 restaurants. Based on this addressable market of 15,000 reservation-taking restaurants, our penetration was 27% at the end of 2012.

Looking at seated diner penetration in the U.K., for 2012, we estimate that the total number of diners seated through reservations in ERB and Connect target restaurants in the U.K. was approximately 200 million. Based on this addressable market, our seated diner penetration was 3% in 2012.

Now I'd like to provide you with a few updates on the business. Mobile now accounts for a full 1/3 of our seated diners, and we expect that to grow over time, which we view as a long-term positive for a couple of reasons. First, our primary and fastest-growing source of revenue is reservation transactions that monetized well on mobile devices. And second, mobile devices put the OpenTable solution in the hands of diners, wherever and whenever they're thinking about dining out.

To capitalize on the shift, we need to optimize our products and consumer experience for smartphones and tablets. By accelerating our pace of development and continuously iterating the consumer experience, we believe we can increase our mobile conversion rates and grow our user base. We saw a recent example of this in December when we launched a new toptable iPhone app in the U.K. This new app doubled the conversion rate of the old app. In addition to optimizing our mobile products for diners, we're also helping our restaurant customers market to smartphone users.

In October, we launched a new free service which provides our restaurant customers in the U.S., the U.K. and Canada with customizable, mobile-friendly sites. This service is designed to help restaurants benefit from the growth of mobile by making it easy for diners to navigate and book restaurants -- excuse me, book reservations on restaurant websites using their smartphones. Although we just launched this service in the fourth quarter, already more than 2,000 customers have taken advantage of it, and we look forward to broader adoption over time.

Along with mobile, another key area of focus for us is enhancing the restaurant discovery experience for diners. We have a unique opportunity to help diners discover the perfect table through a blend of rich content and personalization. We already have the best review product for reservation-taking restaurants in terms of breadth and depth of reviews by verified diners. We believe images are also an important part of the discovery process, and our recent acquisition of Foodspotting enables us to display dish images throughout the OpenTable diner experience.

We are also hard at work developing our next-generation products for our restaurant customers on a new cloud-based architecture. We successfully launched a pilot based on the new platform in December, and the development effort is moving along well. Key benefits of this cloud platform include the opportunity to consolidate the current distributed data in one place and deliver new features faster to our restaurant customers. This will enable us to provide greater insights to help our restaurant customers optimize their business and provide more personalized hospitality for diners.

Now let's turn to an update on the U.K. We're more excited than ever about our position in the U.K. We are steadily widening our competitive moat, and we started seeing accelerated diner growth. We stepped up our marketing spend in Q4 and liked the momentum we saw. So we plan to continue to invest in this area during the first quarter and throughout the year. For example, yesterday, we launched our first ever outdoor brand advertising campaign in London.

In summary, we entered the year energized by the multiple opportunities in front of us to deliver on long-term growth of the business.

And now over to Duncan.

I. Duncan Robertson

Thank you, Matt. Good afternoon, everyone, and thanks for joining us. Before I address the fourth quarter results, I want to remind you that throughout this call, my comments on growth rates will refer to year-over-year changes, unless I indicate otherwise. Also, all non-GAAP financial measures exclude stock-based compensation expense, amortization of acquired intangibles expense, acquisition-related expenses and the tax-related impact of these adjustments.

Now let's turn to the results. In the fourth quarter, the performance of our core operating metrics once again delivered strong financial results. Total Q4 revenues grew 16% to $43 million, and adjusted EBITDA grew 19% to $18.8 million. GAAP net income was $7.5 million or $0.32 per share. Non-GAAP net income was $10.7 million or $0.46 per share.

To provide further insight into our key financial results and metrics, it's important to segment statistics by geography since we are at different stages of development in our North America and International operations. First, let's look at North America. North America total revenues grew 16% to $36.7 million, which is made up of 3 main components. North America reservation revenue grew 22% to $20.8 million, which represents 57% of total North America revenue. The primary driver of reservation revenue is the total number of seated diners, which increased 21%.

Hurricane Sandy's impact on Q4 reservation revenue was approximately $400,000. Without this adverse impact of Sandy, the Q4 seated diner growth would have been approximately 23%. Related to reservation revenue, the revenue per seated diner was $0.70 in Q4.

Moving on to the next component. Subscription revenue in North America grew 9% to $12.7 million. The main driver of subscription revenue is the number of installed ERB restaurants, which grew 12% over the prior year. The ERB monthly attrition on a unit basis remained near its historical level of approximately 1%. Also related to our ERB subscription revenue, the average subscription price was $250. And lastly, the smallest component of revenue, disclosed as other revenue, increased 11% to $3.2 million.

Turning to our North America expenses. Non-GAAP operating expenses totaled $19.5 million, a 16% increase over the prior year. The main drivers were higher expenses associated with a 6% increase in headcount, as well as higher professional services expenses associated with simplifying the structure of our international legal entities. On a sequential basis, our North America non-GAAP operating expenses increased 6% from Q3. Our resulting fourth quarter North America non-GAAP operating income totaled $17.1 million or 47% of revenue. North America adjusted EBITDA totaled $19 million or 52% of revenue.

Now let's review the results from our International operations. International revenue for the fourth quarter increased 13% to $6.3 million, which represented 15% of the company's total revenue. International reservation revenue increased 14% to $3.7 million, subscription revenue grew 16% to $1.8 million and other revenue increased 2% to $804,000. Related to reservation revenue, the revenue per seated diner was $1.24 in Q4.

Turning to expenses. Our international non-GAAP operating expenses totaled $7.1 million, a 5% increase over the prior year, associated with higher headcount-related costs, as well as an increase in marketing expenses. On a sequential basis, there was a 16% increase, primarily driven by higher marketing expenses. Our resulting Q4 international non-GAAP operating loss totaled $737,000. International adjusted EBITDA was a loss of $106,000.

Wrapping up our consolidated Q4 results, cash and short-term investments totaled $104 million at the end of Q4. On a non-GAAP basis, taxes were $5.7 million, which is an effective rate of 35%, and our quarterly stock-based compensation expense was $4.6 million.

Now turning to guidance for the first quarter and full year 2013. Starting with North America, we estimate Q1 revenue to be in the range of $38.6 million to $39.6 million and non-GAAP adjusted EBITDA to be in the range of $19.3 million to $20.4 million. For the full year 2013, we estimate North America revenue to be in the range of $158.8 million to $164.2 million and non-GAAP adjusted EBITDA to be in the range of $82.6 million to $87.2 million.

North America guidance takes into account the following factors: First, related to reservation revenue in Q1, through the first 3 weeks of January, the industry diner counts decreased approximately 1.5% year-over-year. Also related to reservation revenue, we expect the seated diner yield to be approximately $0.70 throughout 2013.

Moving onto the subscription side. We expect the average subscription rate to be $249 in Q1. Related to other revenue, we estimate North America other revenue will be approximately $3 million in Q1.

Turning to guidance for our International operations. We estimate Q1 revenue to be in the range of $6.1 million to $6.5 million and non-GAAP adjusted EBITDA loss to be in the range of $1.8 million to $2.4 million. The sequential increase in international non-GAAP operating expenses in Q1 is primarily associated with the U.K. marketing activities, which Matt has mentioned, as well as the seasonal increase in payroll expenses which typically impact Q1. For the full year 2013, we estimate International revenue to be in the range of $27.3 million to $28.9 million and non-GAAP adjusted EBITDA loss in the range of $0.7 million to $2.9 million.

Related to international reservation revenue, we expect the seated diner yield to be approximately $1.20 for 2013. On a consolidated basis, we estimate Q1 non-GAAP EPS to be in the range of $0.39 to $0.44. And for the full year 2013, we estimate non-GAAP EPS to be in the range of $1.79 to $1.96.

Turning to a few housekeeping items. On a consolidated basis, we estimate that our diluted weighted average shares outstanding will be approximately 23.7 million shares in Q1 and 24 million shares for the full year 2013. We estimate stock-based compensation expense will be approximately $4.7 million in Q1 and $17.4 million for the full year of 2013. We estimate amortization of acquired intangibles will be approximately $600,000 in Q1 and $2 million for the full year of 2013, neither of which reflect the amortization of acquired intangibles associated with the recent acquisition of Foodspotting, the accounting for which will be finalized during Q1.

And finally, our non-GAAP effective tax rate will be approximately 35% in Q1 and 37% for the full year of 2013. To sum up the quarter, we're very pleased with the solid growth in our core operating and financial metrics. The business continues to deliver solid operating margins and cash flows even as we invest for the future.

And with that, thanks for your time, and we'll now take questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Aaron Kessler from Raymond James.

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

Yes, I got a couple of questions. First, you alluded to, it seems, some successful traction with marketing in the U.K. market. Curious, I mean I think we have asked this before, but if you're seeing success there, you think you could see incremental success in the U.S. market? Additionally, just on the technology side and maybe with the acquisition front, where do you -- you've made a couple of acquisitions recently. Can you just remind us of your acquisition strategy, primarily, in the restaurant category, are you looking to go outside, maybe the core market but still within the dining category? Just maybe help us understand where you view future acquisitions.

Matthew J. Roberts

Sure. The marketing side, definitely be open to doing some more marketing in North America markets as well. In fact, we do have plans to do and step up some level of direct marketing spend in North America in the current year and sort of test and learn a way into what's successful there. No real planned broad-based brand campaigns in North America like we're testing out in the U.K., but certainly, an increased spending on sort of direct marketing spend in North America, again, in the test-and-learn methodology just to make sure that we like the economics and the return of it. If you look at the acquisition strategy question, it really is around anything that we can do to help the diners have an unbelievable night out. Really, it's supporting our overall vision to help our restaurant customers provide great hospitality. So to that end, it definitely is in the reservation-taking restaurant field, but that's probably the only limitation I put on it. If you -- just to look back, we acquired Treatful, and that's a gift card, online gift card technology for reservation-taking restaurants and solving a pain point typically for diners there. And then most recently, we acquired Foodspotting, and that allows us to really broaden and deepen the content that we have on our site that helps and aids in the discovery and it lets our restaurant customer showcase dishes that they're very proud of. So I would say it's focused on anything that can improve and increase the experience of our diners at reservation-taking restaurants.

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

And just a quick follow-up, on the nonmobile growth, was down about 2.5% in North America. I guess was that in line with expectations? And how should we think about that? Is mobile still incremental or overall you think at this point?

Matthew J. Roberts

There's a seasonal element, if you're talking about just the general mix was 32% of all of our bookings were mobile in the third quarter and then it went to 33% in the fourth quarter. We saw the same thing, sequential change in the fourth -- third to fourth quarter in 2011 around really seasonal, more holiday dining is more of a planned and mobile has more of a last-minute nature to it. So it's not something that we've seen as anything more than sort of seasonal. There's a major, major shift to mobile taking place, and we would expect that to continue going forward.

Operator

The next question comes from Stephen Ju from Crédit Suisse.

Stephen Ju - Crédit Suisse AG, Research Division

So I'm presently surprised to see the I guess the addressable market for the U.K. in terms of restaurants be double what I thought it might have been. And I guess in terms of seated diners, be quadruple at the higher end. So can you give us some more details in terms of how you got to those numbers? And anything else you can share in terms of the specifics of the market. Are the restaurants smaller? Is the velocity of the seated diners faster? Any sort of incremental color would be great.

Matthew J. Roberts

Yes. So what we did is the same process, Stephen, that we did in North America, which is based on our own data, we developed a view of -- let's start with the total addressable market. That's a combination of the restaurants that we have, and again, between Connect and ERB in the U.K., we have roughly 27% penetration at this point. And then looking at the rest of the available market was an exercise of literally going through by the sales team and the account management team and understanding the market, and then accumulating all of that in our sales force database, and that's really a sum of the parts exercise. So much more of a bottoms-up exercise than anything else. And again, that's very similar to the push that we take in North America. Relative to the diner count, there again, we used and based the estimate on the data that we know. And again, we had 27% of the restaurants, so we know roughly the average size of a restaurant in terms of how many seats are filled through reservations each month, and therefore, year. And we imply a certain level of consistency to that for the rest of it, the restaurants that are in the market. We do factor it down actually slightly for the remaining restaurants that we don't have, probably just some level of conservatism there. But in general, that's how you get to it. We look at our own data at times, the bottoms-up exercise of how many restaurants we think are left in the market, and then it's just sum of the parts.

Operator

The next question comes from Andrew Ruud from Morgan Stanley.

Andrew Ruud - Morgan Stanley, Research Division

I'm just wondering if you could give some qualitative color on the mix of seated diner from mobile versus desktop? For example, are you guys seeing more organic usage on mobile or are you seeing more referrals? Just trying to...

Matthew J. Roberts

Do you mean the mix between the sort of a network, an OpenTable network versus coming through a restaurant's own website?

Andrew Ruud - Morgan Stanley, Research Division

Yes. Well, more so, I'm just trying to figure out if there's a difference in the monetization.

Matthew J. Roberts

There's really no difference in the monetization. I think the mix shift is less about the monetization than it is the implementation of the ability to take restaurant reservations through a mobile device. And in our restaurant customers, again, if you look back to the reason that we set up and had launched the free service for our restaurant customers is that many of our restaurant customers don't have a mobile-friendly experience on the smartphone. So we created a free service for customizable, mobile-friendly sites to help increase that penetration. So less than 10% of our reservation-taking restaurants really had a mobile-friendly site when we first launched the service. And now we personally have added 2,000 incremental sites, mobile-friendly sites since we launched the program in the fourth quarter. And then at the same time, many of our customers are also just getting their own mobile-friendly sites. So we see that the adoption of a better consumer experience is happening, and we're excited to continue to move it forward. So that's really more a function of when our restaurant customers have a appropriate consumer experience for smartphones. We think that it will monetize the same as it does on the website.

Andrew Ruud - Morgan Stanley, Research Division

Okay. And I just also wanted to clarify, you said previously that the U.K., specifically London, was more or less similar in size to the New York City market or New York area, is that correct?

Matthew J. Roberts

No. What we said is that we had -- it was actually our largest -- London is now our largest concentration of restaurants anywhere in the world.

So it's larger than New York. New York was historically our largest, and London surpassed that for us in terms of the selection, the breadth of selection in any given geography.

Andrew Ruud - Morgan Stanley, Research Division

And is that by like an order of magnitude of like 15% to 20%?

Matthew J. Roberts

It doesn't -- I don’t have the exact percentage. It's not a double, it's probably roughly in that range.

Operator

The next question comes from Michael Olson from Piper Jaffray.

Andrew D. Connor - Piper Jaffray Companies, Research Division

This is Andrew Connor in for Mike. My question was really on dynamic pricing and where you are in implementing dynamic pricing. I'm just really curious if the biggest hurdle to dynamic pricing is the data that you have available? Do you not have enough data to really implement dynamic pricing? Or is it because you're in still the early innings of restaurant adoption and you feel like dynamic pricing would be a difficult marketing message?

Matthew J. Roberts

Well, I think there's an element. The last point that you made certainly held true for a long period of time for us, where there's value and there's simplicity. It's $1 if it's through our website; it's $0.25 through your website. I think that that's probably -- that will change over time, no question about that. I can see us looking at other pricing alternatives in the future. We've said that before. Whether or not it's sort of a full dynamic pricing or many other models that exist out there, and you can be assured we'd look at a number of them. I'm not sure where we'll settle out. I think that there is a -- it is almost certainly going to be a system that has some level of complexity to it. If there's a change, there will certainly be something that's more complex than $1 and $0.25, and we'll have to just really think through that relative to how that's understood and endorsed by our restaurant customers and prospects as we move forward. So I do like what we're doing on the technology front quite a bit to provide flexibility for us to do a number of things going forward. I touched on the cloud-based architecture a little bit in my comments, but having a consolidated view of all of what's currently distributed data up in the cloud certainly helps to get more sophisticated on things like pricing and capacity utilization. So I think that there's some really unique opportunities that will become more available to us as we have a cloud-based architecture. But that's not stipulating a particular time period with which we'd move out to a different structure.

Operator

The next question comes from Kaizad Gotla from JPMorgan.

Kaizad Gotla - JP Morgan Chase & Co, Research Division

A couple of ones here. First, can you just give us your expectations for industry diner growth and your 2013 guidance? And second, can you compare the traffic and conversion rates that you're seeing from desktop, mobile Web and your mobile apps?

I. Duncan Robertson

So Kaizad, I can give you an answer to the first one. We essentially assume neutral economic industry conditions when we look at the business going forward. The only other insight that we did provide is we took a quick look at January. And for the first 3 weeks, we have seen 1.5% industry decline year-over-year. But for the full year, we're assuming that it's flat.

Matthew J. Roberts

And then relative to conversion differentials by platform, there naturally will be. I think in many cases, people make the mistake of assuming that everything will function the same, that certain platforms should convert exactly the same and there's different use cases, and that would logically lead you to maybe different conversion numbers per platform. We had mentioned that our desktop, historical desktop experiences converting stronger than our mobile, and we have opportunity to improve our mobile conversion. We think that the reason we think we have opportunity to increase our mobile conversion is simply we have a long list of ideas of where we think our product can get better over time. Just a recent example of that is the one that I shared in my comments about, we launched a new iPhone app in the U.K., and we actually had a doubling of conversion with the new iPhone app versus the old iPhone app. And those aren't things that -- you pray for a double, it's really actually a game of inches in many cases in terms of iterating the product and learning and then trying something else. So we look forward to continue to modify our products and enhance our products. And the full expectation though is that will lead to improved conversion on our mobile devices and our desktop as well.

Kaizad Gotla - JP Morgan Chase & Co, Research Division

And one more, if I may. Can you just give us an update on Connect? You're seeing some pretty good restaurant adds here, but can you just give us a sense for their contribution in terms of seated diners and maybe the level of investment that you're making in the product?

Matthew J. Roberts

Sure. Connect, just to remind folks, Connect is really primarily more of a walk-in restaurant that will take reservations. So just definitionally, they're not big contributors to the reservation target or addressable market. I think we provided it historically. But in last year, if it was 740 million seats filled through reservations, Connect was probably...

I. Duncan Robertson

Well, I mean in the 740 million, I think we said that it would be 50 -- we think 55 million or so in Connect.

Matthew J. Roberts

55 million, 60 million. So you can see that the Connect is not a huge contributor to the overall reservation volume. But I think it's a really important product for us to help -- to have both internationally and domestically, and it's a nice way to just broaden out our consumer experience for our diners. But they're not -- as a strategy, it's not a big investment area for us. So internally, we'll have sales resources dedicated to selling Connect. There isn't a huge amount of our development dollars that go towards Connect. The new cloud-based architecture that we have for our core product that we're going to be rolling out here over the coming year, that structure will also lend itself well to Connect customers as we move forward. So hopefully, that answers your question.

Operator

The next question comes from James Cakmak from Telsey Advisory.

James Cakmak - Telsey Advisory Group LLC

First of all, and just following up on your comments on the cloud-based architecture, can you just give us a little bit more detail on the time line that you do have planned for that? And the fact that you do have a more centralized view of activity, do you see opportunities there to deepen the monetization potential on a per restaurant basis by other services that you could possibly roll out? And then secondly, can you just help us understand on your international marketing plan the level of investments that are baked into your guidance for 2013?

Matthew J. Roberts

Sure. So James, relative to the level of investment that's baked in, I'll start with the last one first, which is the level of investment for marketing. That's embedded within our guidance. We're looking to, from a direct marketing spend, keep up the level that we had in the fourth quarter. Certainly, it's roughly that level throughout the year in sort of direct marketing dollars. We're testing a more broad-based outdoor brand campaign, and we're going to learn how that works. And obviously, to the extent that it's successful, it will leverage itself in incremental revenue growth, et cetera, and we're happy to spend behind that as well. Next question was...

James Cakmak - Telsey Advisory Group LLC

The first question was around the account-based ERB product.

Matthew J. Roberts

Yes, timing side. So the timing, we launched the pilot in December and the development effort is going on well. Let me put it in 2 buckets. There's the time that the pace of play relative to getting the product ready from a development perspective and then there's the sort of adoption by the restaurant base. So the timing of getting the development, the product ready, it's going to be an evolving product. It was nice but it's sort of probably the first incarnation of it will roll out here in sort of probably towards -- we have a pilot out right now but really kind of baking it out a little bit more in sort of the first half, third quarter, that time frame when we think we'll have one that's sort of checked the box, has a lot of the same features that are in our core reservation book product. What's also really important to understand is the actual rollout and how will this be adopted by our restaurant customer base. It's a critical -- our solutions are critical operating systems for our restaurant customers, which obviously is great from a relationship perspective. But as a result, they are going to take due care in evaluating any major technology shift as they should. And so just like -- this is our largest upgrade we'll have ever done. And so I would expect that it will be adopted gradually over time. What's exciting about this is that once we have the cloud-based architecture in place, we're able to put new features out to our restaurant customers on a much more frequent basis. So we can move to a development roadmap that looks a lot more like our consumer development roadmap, which used to be once a month, and now it's once every 2 weeks. So I don't know where we'll land on the taste of play relative to new features and new interfaces and experiences for our restaurant customers. But it will certainly enable us to move at a much, much faster pace. Talking about opportunities for monetization on that, our main focus is really less about trying to drive the subscription revenue or monetize that the new cloud architecture in an incremental way. Though clearly, there may be opportunities that present themselves to us as we move forward in that regard. It's more around we can provide unbelievably great hospitality solutions for our restaurants that are able to be iterated at a faster pace based on learnings that we can gain from actually watching the usage of our product. And that's the real exciting thing because it will allow our customers to just get much better insights and again, provide better hospitalities for their diners.

Operator

The next question comes from Jason Helfstein from Oppenheimer.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

Two questions. So just a little more on the cloud ERB. So initially, it sounds like we'll call the initial rollout in the third quarter where it goes more commercially. That will be focused on features based as opposed to let's say a lower priced entry point, is that fair? And then with that, if you're agreeing with that, I think some of the concern out there has been you have some competitors with lower priced products. Are you seeing them having any impact in the market? And again, do you think the commercial rollout of the ERB addresses that or again, it's more functionality to the existing clients and to penetrate other restaurants out there? And then second question, have you seen any benefit from the maps integration, particularly with the iOS before the Google Maps rolled out and kind of took that real estate back over. I'm just curious if you've seen any benefit from that as well as any pickup, let's say, from your partnership with Yelp.

Matthew J. Roberts

Sure. Well, I'll take the last one first again here. We're pleased to have both of those partnerships that you mentioned, both Apple and Yelp. But we don't talk to any specific performance metrics on a partner-by-partner basis, so can't get into any details for you on that, nothing to share with you today in that regard. If you look at the overall question about what we're trying to accomplish with the cloud-based architecture, we haven't settled on pricing, but we're not setting out to design or launch a light product or something that has a skinny-down functionality. This is really an architecture to enable a richer and a deeper hospitality solution for our restaurant. And so we wouldn't see there's any reason why we'd have a different price point relative to that. So it's really about having a much more robust and exciting product in the hands of our consumer, which will then translate to better experiences for diners.

Operator

The next question comes from George Askew from Stifel, Nicolaus.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Two questions with perhaps a follow-up, please. It appears to us that based on your International guidance for the first quarter and full year, that International may turn adjusted EBITDA positive towards the end of the year. Is that the current expectation?

I. Duncan Robertson

So -- I mean, if you look at the guidance, you're absolutely right. It does contemplate that there is the ability to see profitability during the year internationally.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Okay. As a follow-up, how important is it to remain adjusted EBITDA positive in International? Specifically, once your profitable in International, is it your intent to remain profitable or for example, will you invest in marketing opportunistically and allow adjusted EBITDA to move between a profit and loss? I mean, is there sort of a target there?

Matthew J. Roberts

Yes. There isn't a target -- I mean, obviously there's a long-term target for International to generate profitability and a strong belief that we can be successful in international markets and that they will be able to demonstrate the leverage and the characteristics that our unbelievable business model does in North America. But we're not -- we don't feel constrained to, if we hit a profitability quarter, to stay profitable. What we're all about right now is building out these markets and driving for growth. We think we're still so early in a massive growth opportunity. If you look at the numbers that I shared, there were only 3% of all of the U.K. diners last year. And we think that at least the majority of the people will book online. So anything we can do to accelerate that opportunity, we're happy to do. And you can see evidence of that as we stepped up our marketing spend in the fourth quarter. We're telling you we're going to continue to do that. We're testing a brand campaign, launched yesterday. So we're more than happy to spend behind that growth.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Okay, good. What is -- just -- what is the mobile reservation mix in the U.K. specifically?

Matthew J. Roberts

I'm sure, the mobile U.K. -- it also had a significant shift towards mobile just like in North America. We hadn't called out that specific percentage, but it also has the same characteristics, meaning, how many people start on a smartphone or a tablet, is large percentage and it's growing in the U.K., but just hadn't called out that specific percentage yet.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And a bonus question here, for those restaurants that have a mobile-friendly website, what is the percentage mix of mobile reservations to desktop?

Matthew J. Roberts

Don't call out. It's better than the ones that have, say, a Flash on their website that doesn't even show up on iPhone or tablet. But we haven't called out that specific mix shift for restaurants.

Operator

The next question comes from Justin Post from Bank of America Merrill Lynch.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Matt and Duncan, this is Paul Bieber in for Justin. The headcount was down both in the U.S. and internationally. Do you guys feel that headcount is at the appropriate level so you can invest in mobile, cloud, Foodspotting and your other strategic initiatives for the year? And then secondly, I think you briefly touched on it, but the international seated diners accelerated in the quarter. How much of that is from traffic versus higher conversion rates?

I. Duncan Robertson

So I mean, in terms of headcount, I think it was down in Q4, really most of that it seems associated with the kind of the seasonality of typical attrition that carries on through the business and yet, really, really -- we saw really strong new hires in January. We added around 20 people in January alone. So I wouldn't look at it as a specific issue around Q4. It was more just people hanging on in to join the company in January.

Matthew J. Roberts

And we have healthy incremental investment, particularly in technology and somewhat in sort of the marketing team and it contemplated in the guidance that we provided you for 2013. So we don't think we're sort of done or have the level of the team that we ultimately will need to capitalize on all this opportunity in front of us. And as Duncan mentioned, we hired 20 people in just January alone, so that's a nice jump start to our efforts. And we're obviously -- have added a team of roughly 10 people from Foodspotting as well. So we are making the investments, and we'll continue to make the investments there. The other question again?

Paul Judd Bieber - BofA Merrill Lynch, Research Division

The other question was, you briefly touched on it, but the international seated diners accelerated. How much of that was from just more traffic versus high conversion rates?

Matthew J. Roberts

Right. A good chunk was certainly related to a step-up of direct marketing spend versus conversion improvements in the quarter. We believe that much of the conversion improvement that we will be able to achieve is in front of us on the toptable experience. As we talked about last call too, we think the conversion is going to be a combination of 2 things. One is just making the product better, witness the iPhone app in the U.K.; the other is really a broadening of the consumer base and sort of redefining what our experience means and moving away from sort of a historical deals and promotions focus to a more, this is the convenience and the benefit of discovery of great restaurants, the best restaurants with the best availability, which is kind of our core value proposition in the market. And that will be something that will just evolve over time, but we're supplementing that and naturally encouraging that awareness through the brand advertising campaign that launched yesterday.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

And one quick follow-up. Can you remind us why the subscription revenue per restaurant is trending down?

I. Duncan Robertson

Paul, I think it declined $4 in Q4. And really, it's associated with mix. You know that we've got 4 price points. It ranges from $199 to $449. And so when it moved, it's really just a movement associated with some of the new adds or even the install base moving between those 4 price points. So it's entirely associated with the mix that we see in the installed base. But you did note that we said that we think it will be approximately $249 in Q1?

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Right. I did get that.

Operator

The next question comes from Mitch Bartlett from Craig-Hallum Capital.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

This is George on for Mitch. Just a quick question on -- actually a couple of questions. First on restaurant additions in the quarter. It seemed very strong in the United States and a bit slower internationally. I'm wondering if you could talk at all to your expectations for 2013 in each market.

Matthew J. Roberts

Well, we don't provide specific growth estimates of installed base other than we provide subscription revenue and an average subscription rate. So you can kind of get a sense of what we think the base will change to over time. But the changes in both North America, as you pointed out, a good strong sequential change in North America. We have made mention that you should expect that during our last quarter's comments. In our international market, not as strong sequential change, but particularly in the category of our Connect customers. If you actually look through the details and that's entirely associated with our sales team, our Connect sales team focusing their efforts more on this notion of getting our restaurant customers to have more of a functional site relative to restaurant reservations. So you go back and have conversations with them now that we're past the integration and make sure that all of them have great implementations for allowing their guest to make reservations on their site.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay. And then secondly, it seems like there's a lot of focus in the U.K. I'm just wondering about the other international markets. Are you still investing a lot of resources in Germany and Japan? And what's the competitive dynamic like in those markets?

Matthew J. Roberts

Sure, happy to go through those with you. Germany, we are absolutely -- so the high-level answer is yes, we're continuing to invest considerably behind Germany and Japan and remain excited about the prospects from both countries. If you look at Germany, really, Germany is sort of the tale of roughly 7 main cities that we're focusing on and each city has -- we're at sort of different stages of development and sort of relative to kind of a competitive landscape and stronger positions in one versus the other. But overall, I really like our competitive position in Germany. We currently have roughly 2x the number of bookable restaurants in Germany as the nearest competitor on our destination site and through our partnerships. And we're focusing on the same basic playbook, which is put fantastic technology in the hands of our restaurant customers and then make and develop the great consumer diner experiences and invest behind both of those. So one area that we'll probably look to step up investment in the current year is around our consumer direct products, particularly mobile, both for Germany and for Japan. I think we have a good, not great, consumer product right now in both of those countries, particularly on mobile. And we're looking forward to bringing those both into the great land. Relative to Japan, we have -- that's a predominantly a Tokyo focus. We have some unbelievably great quality restaurants there. The dynamics there of the market is also competitive. Catalog is probably the largest competitor for us. They're also a partner of ours, but they just put out a -- recently launched a competitive product in market. And we'll just sort of see how that plays out over time. We love that our focus on aggregating all the best availability at the best restaurants still seems to be the winning formula when you're trying to provide the level of service and solution for diners. So we're continuing to invest behind both countries, continuing to be optimistic behind both countries.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay. And then just one last one. I think on the call you quantified the Sandy impact. I missed that. Could you say that one more time?

I. Duncan Robertson

Yes. We said we thought it had approximately a $400,000 impact on reservation revenue in Q4. And as a result, we said that seated diners was 21%, and without Sandy, it would have been 23%.

Operator

The next question comes from Heath Terry from Goldman Sachs.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

I was curious if you could give us a little bit more detail on sort of your product development priorities for the year ahead now that you've got a new CTO in place and toptable is sort of taken care of as a need for outsized investment relative to last year. How do things sort of break down between the focus on sort of the enterprise restaurant level customer product development side of things versus what you're doing in Web and mobile? And really, I think more than anything, sort of curious how urgent you feel the need is for investment in product.

Matthew J. Roberts

We think there's always an urgent need for investment behind product. We have a list of ideas and initiatives that's too long for our current development resources, which is why we're adding development resources. But I think even once we add the development resources, we've got no shortage of ideas. So we'll always be ahead of the curve relative to too long of a list of great ideas and not enough people to do it. So we always feel like a sense of urgency on getting new and better products into market. Area of focus would be certainly mobile, a really -- a heavy, heavy focus on mobile given the significant shift that we've seen on traffic and visitors to a mobile platform and just a tremendous opportunity that we have on the mobile platform. Our product is so perfect for the shift, and we look to capitalize on it with better and better mobile products, so sort of as a broad-based category mobile. As we mentioned before, there's an opportunity for us, a unique opportunity for us to play an important role in the entire dining experience. And that includes not just the part about securing the reservation, but what happens before the reservations in the discovery process. And there you see, we'll focus on personalization. We launched the Facebook Connect as a means to log in to our site, and that allows us to have and take advantage of social graph information to provide a more compelling and personalized consumer experience. And you couple that with the rich content, and Foodspotting is as an example of us identifying an opportunity to quickly add images to our site, dish images that also have a social layer to it into your dining experience. And we'll add other rich imagery. We're building out an entire design team. We have never had a sort of a dedicated design team, it's always been embedded within our overall product management group. But now we have a dedicated design team that we've started and we're going to build on -- we'll have a data scientist team. So we see a number of places that we can continue to invest, but it's part of this broader, we can be a part of the overall experience about what happens before the dining experience -- before and during and even after the dining experience. So a lot of focus on the consumer side, mobile as a primary kind of lead -- I would say leading priority, personalization, socials or rich content are all in the kind of the umbrella of a better diner experience, would be the next level. When you think about our restaurant products or restaurant technology side of the equation, this cloud-based architecture is absolutely a game-changer for our restaurants going forward. And it will allow them to have so much more insight into their customer base and into metrics around their business that allow them to provide better hospitality for diners. So what we're doing on the restaurant side of the equation, technology-wise, is really a support structure as well for the diner experience. The 2 are going to become much more blended over time on different aspects of our product offering.

Operator

At this time, I'm showing no further questions. I would now like to turn the call back over to the presenters.

Matthew J. Roberts

Great. Well, thanks, everyone, for participating in the call. We look forward to talking to you next time.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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