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OpenTable, Inc. (NASDAQ:OPEN)

Morgan Stanley Technology, Media & Telecom Conference

February 28, 2013 14:25 ET

Executives

Duncan Robertson - Chief Financial Officer

Analysts

Andrew Ruud - Morgan Stanley

Andrew Ruud - Morgan Stanley

Hi. Thank you all for coming today. My name is Andrew Ruud, small-cap e-commerce analyst at Morgan Stanley. I am pleased to be joined by Duncan Robertson CFO of OpenTable. Before we get started, I just need to read the disclosure statement. Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appeared on the Morgan Stanley website at morganstanley.com/researchdisclosures or at the registration desk.

With that I would like to get started. So Duncan there is a lot of things going on at OpenTable a lot of initiatives. In 2013 it seems like you’re going to be pretty focused on and trying to drive better conversion and accelerating seated diner growth. Just give an overview of the business and kind of against that.

Duncan Robertson - Chief Financial Officer

Sure. So quickly thanks for the opportunity to be here. I hope most consumers are in the room are familiar with OpenTable but just for those few of you that aren’t we’re the largest, the world’s largest source of online restaurant reservations. We connect about 27.5 thousand restaurants in the world with a vibrant community of diners which resulted in Q4 but we seated about 30 million diners that’s across our business in North America and then we’ve been replicating more recently the business that we have in North America in three other countries are in the U.K, Germany and Japan.

And we do that really by focusing on two parts two core parts to our business model. One is obviously the restaurants themselves and that’s where we are most focused on providing them with hospitality some of the services that can help them add and provide hospitality services and solutions to their diners. The core product that we’ve offered to restaurants for some years now we’ve referred to as the ERB which stands for electronic reservation book and that essentially replaces what historically restaurants have run their business on which is a piece of pen and paper.

On the diner side we’ve been very busy developing a platform across a number of formats now that originated on the desktop and has grown to become much more than that in terms of mobile devices are an important part of our business these days. In Q4 a third of our reservations originated on a mobile device which for us is a smarphone and a tablet. And so as and as Andrew referenced we are very busy this year focusing around the consumer experience not forgetting the desktop but because mobile is becoming an increasingly large part of our share of reservations very, very thoughtful around what are the kinds of user interfaces and products we’re providing to consumers through the smartphone and tablet platform.

Andrew Ruud - Morgan Stanley

Thanks for the introduction. Could you touch a little bit upon what your strategy is around acquisition of Foodspotting also earlier this morning you announced the Facebook App Places I've Eaten how that is going to help drive see the diner conversion?

Duncan Robertson - Chief Financial Officer

Sure. So it really all Foodspotting and then more recently this morning we announced a new Facebook Canvas App which we’ve called Places I've Eaten really broadly is think of it as I talk about how we are mindful about improving the consumer experience as users of the OpenTable l platform and each of those two pieces that Foodspotting and Places I've Eaten is focused on a couple of areas. One is around experiences. How do we get and provide a better experience to users of OpenTable not just at the time that they are making a reservation which is the we’re certainly and that’s an important element of the lifecycle of a reservation or a dining experience because that’s ultimately what monetizes for us. But how do we think about broadening what OpenTable is instead of just a transactional reservation tool to become a much broader dining experience. And so as people think about what dining means it’s about the discovery and thought process that goes around where do I want to use them, what do I want to use them, what kind of experience do I want to have. And we’ve recognized over the past few months is that images have become an increasingly important card of the diners exploring and deciding and the ultimate selection of where somebody wants to dine and have a meal.

And so Foodspotting was a company that we would actually partner with prior to the acquisition, which closed in earlier this quarter. And in our earlier partnership with them, we had essentially licensed, some we’re using and having access to some of their image content that they generate through a very, very vibrant network of uses of the Foodspotting app, which over a period of time has accumulated more than 3 million images. Certainly of course a large number of restaurants not all of them are obviously OpenTable restaurants, but many of them are. And so our initial concept was make good use of that image content that Foodspotting had aggregated and was continuing to build through the app.

Then and I would say more importantly we got to know the Foodspotting team and it was a team of 10 highly talented people with skill sets that are so important for us as we think about our mobile platform. Foodspotting had some tremendously talented mobile engineers as well as design UX people on the team, all of those people are now working with us not only on continuing to think about what the Foodspotting product is, but more importantly what the OpenTable product is.

So Foodspotting was about content and experience. The Places I've Eaten Facebook Canvas App touches on again on the experienced side of what OpenTable is to consumers, but in a slightly different way and it’s associated with how does OpenTable really leverage the concept of social. And clearly when people think about social Facebook is an important part of that equation. And in October, late October last year, we launched the Facebook Connect Login across our platform, but really hadn’t provided until today, hadn’t provided or diners with any reason to login through Facebook other than the perhaps the better – the better more convenient way to access our platform.

But with Places I've Eaten it’s now been – we are now able to start to enable consumers to share the content of their dining history. So if you login and start to use the Places I’ve Eaten app it will automatically download your dining history from OpenTable. And then consumers can use that as they – as they choose. Its fun to be able to share places you’ve eaten with your friends, its fun to be able to look where you’re friends have dined and think about going there, you can now look at the images that are obviously coming through Foodspotting. So both of them tie very closely into our heavy focus on what is the experience for diners around OpenTable.

Andrew Ruud - Morgan Stanley

So is there an opportunity to throw our consolidated reviews, you’ve got a partnership with Yelp in order to have them drive traffic to the website, you’ve got reviews of your own, is there a way to somehow make that a little bit more robust?

Duncan Robertson - Chief Financial Officer

The reviews – so it is back to the experiences part of our consumer products, reviews is probably the most important and certainly the longest standing rich content element that we’ve had an OpenTable. I think we launched our reviews program back in late 2008. And by August or September of last year, we announced that we had passed the more than 15 million reviews on the OpenTable platform. And we love the reviews program we have.

You know you look at a restaurant like Boulevard, I think just as obvious, but they had something like 670 reviews on OpenTable for the restaurant. And the important thing about our reviews is that we call them verified and that the only people who are writing reviews on OpenTable about our restaurants are people who have actually been seated and dined at those restaurants. So it’s certainly, you are more qualified than anybody who can write a review about anything.

And then secondly, we refresh our reviews on the platform every 120 days. So the risk of reading a review that’s six months old and is no longer applicable to that restaurant is significantly diminished. So, we think that, images reviews in the third part of our current view of what is rich content mean to uses on OpenTable that’s main use. There are plenty of people that are interested to learn about what they’re going to eat in this specific restaurant and what the cuisine is and what the experience around the food will be so that’s the third part of our rich content that we started to surface across the platform in the recent months.

Andrew Ruud - Morgan Stanley

So, I definitely agree with you on reviews is a very important content it helps dinners make decisions is there an opportunity for you to somehow reward dinners for writing more reviews with points perhaps again to drive better content?

Duncan Robertson - Chief Financial Officer

That’s an interesting idea. I think for us it’s over the balance between the quantity of reviews and clearly we’ve taken a conscious decision to limit the quantity to those reviews and clearly we’ve taken a conscious discussion to limit the quantity to, those reviews that have been written in the most recent 120 days. We could have elected to have reviews from T zero for particular restaurants but we recognize that it’s qualitative. The other part of the equation is quality.

And we think that the mechanisms we’ve in place at the moment solicit a good volume of reviews by more than$ 5 million now and they are qualified through seated dinners and that they refresh we think that we’re getting on the important aspect of quality. I don’t know whether paying dinners – essentially paying dinners to write reviews undermines the – whether it undermines the impartial – the impartiality of a review program. I don’t know at the moment we haven’t considered that and haven’t been, too early (actually) need to pay dinners to offer up reviews because they are coming at a significant pace.

Andrew Ruud - Morgan Stanley

So, moving over to restaurants and yield management is there an opportunity for OpenTable to essentially allow restaurants to reward dinners with the – whatever amount of points that they would like to do and essentially the restaurant would pay you for the points but also just offering a flat 1000 point reservation?

Duncan Robertson - Chief Financial Officer

There is certainly an opportunity for that. I mean, I think, our pricing structure today has worked and works very well with the basic $1 per seated dinner from dinners, where reservation originates on the OpenTable platform. The yield management tool that you are referring to just so that everybody is familiar with that it’s our 1000 point program, where restaurants, who are anxious to fill seats that would almost certainly otherwise be empty. We instead of the standard $1 per dinner, we’ll pay $7.50 per dinner and those tables get featured more prominently on the OpenTable platform.

And we have a large number of restaurants participate in that program because it’s a, it’s for them, the restaurant is going to figure it out that it’s certainly worthwhile paying $7.50 since that the (value of) the contribution margin of an incremental dinner easily covers two or three-fold covers the $7.50 that programs works well whether we need to move into a kind of it’s a longer conversation as to whether we need to move into a different pricing structure, which would offer restaurants something in between the $1 and $7.50. I think that the simplicity and the scalability of a simplified pricing structure has worked very well for us to-date and continues to resonate well with restaurants that’s not to say that certainly not the most scientific or algorithmic pricing model but we cut it off. But at the moment it works quite well for both us and for restaurants.

Andrew Ruud - Morgan Stanley

Do you speak with your ERB customers is there an incremental needs that they could turn to OpenTable to fulfill?

Duncan Robertson - Chief Financial Officer

I think that originally and at the core of our relationship with our restaurants, we’re helping restaurants leverage what is a very, very vibrant dinner community that’s visiting the OpenTable platform to make restaurant reservations and apart from the benefits that restaurants get simply by operating their business on our ERB product in terms of their late stuff and then table management product in the restaurant and benefiting from dinners that come through OpenTable.

I think the increasing that there is an increasing interest from restaurants to think about how working with OpenTable they can elevate the level of hospitality because at the end of the day, if you talk to a restaurant person we do all the time. They are in the hospitality business and the smart stewed (indiscernible) have recognized that like every other industry if there is data available that can be used to provide an elevated level of service or in restaurant cases hospitality they would like to use that. And they look at OpenTable and recognize that with a history with a diner essentially as a diner’s entire dining history that resides within OpenTable and then as we start to explore that more social element with things like Facebook and being able to access social graph data through Facebook. There is a lot of interesting information that resides in our platform that restaurants field they could use to provide diners with a great level of service or a greater level of customized service or hospitality.

And so I think as we continue to develop hospitality solutions for restaurants a lot of the new products and features that will be providing to restaurants are continued on was by helping them fill their restaurants and but a lot of it will be associated with how do we provide better information and better datas so that they can personalize and provide diners with a better experience to people that come through the OpenTable platform when somebody who walks in without a reservation or somebody makes a telephone reservation.

Andrew Ruud - Morgan Stanley

So do you have a pipeline of projects that are centered around increasing the hospitality service you’re providing?

Duncan Robertson - Chief Financial Officer

Yes, we always, we always have a pipeline of projects. The, on the restaurant side you probably know that the electronic reservation book which in February of last year we launched version 10 of that product. We are currently underway with testing a product that will essentially takes the functionality that restaurants use and we, it’s kind of, it’s developed the name on ERB in the cloud. So what we’re part of the technical work that we’re doing is, is re-architecting the way ERB data restores so that that’s no longer resident on 20 that we have approximately 20,000 ERB customers worldwide and if you think about it the lot of the data of those restaurants both walk-in, telephone and online reservations resides on the distributed database of 20,000 computers. And we’re now working on the system that will aggregate that data into the cloud.

And so that will enable us to start to provide restaurants with easier, more efficient, more personalized access to information and data. So I would say that, if you, if you talk to our technology team in our specifically are restaurants focused technology team that’s what’s consuming a lot of their work right now because that platform will enable us to help provide better hospitality solution to restaurants.

Andrew Ruud - Morgan Stanley

We can move over to the international piece of the business and it seems as though the UK is now already in prime for pretty good growth. Whether can you compare as and contrast some of the differences in new strategy that you’ve deployed in the UK versus U.S may be also touch on your offline marketing campaign there?

Duncan Robertson - Chief Financial Officer

So in the UK we, the brand that we that is that we promote to diners is TopTable and in May of last year there was an important milestone where we’ve relaunched the TopTable product essentially using the OpenTable platform that we developed in North America over the past years. And at that time the important factor that that meant was we were providing diners and consumers in the UK with access to real-time restaurant availability, because if you think about the core asset that OpenTable has, it has we have aggregated we, we have the law just a aggregation of real time availability at the based restaurants.

And what we wanted to be able to do in the UK is has offered that to consumers just because that’s a highly valuable asset that consumers in North America have grown to know and love and we wanted to provide that same access to consumers in the UK. So that was the launch of the relaunch of the TopTable product in May, late May of last year.

Since then we’ve continued with to focus on a few things one is, we always need the access to the best restaurants, the best tables at the best restaurants. And so our sales team in the UK has been busy adding to the restaurant base that we have in the UK so that we do have the best restaurants that we can offer to diners and so there are few metrics around that we have more than 80% of the Michelin-starred restaurants in London on TopTable and as we, so that’s kind of touches on the quality piece if you think about the quantity of restaurants it was interesting that we have more restaurants now in London than we do in New York and clearly New York’s our largest marketing in North America. So, we think that we feel happy that we've built out not only the quantity of restaurants but also the quality of restaurants in London.

The second part is to make sure that we have the right products in the hands of consumers and that's not only the desktop platform but also the mobile platform and so in December of last year we re-launched the iPhone app that TopTable users had been using previously and just a kind of a side note on that to think about the work that we do to improve conversion on our products we were really pleased to see that when we re-launched iPhone app in December in the UK conversion doubled compared with the older iPhone app to the new iPhone app. So technology can really make a difference when you give the right product to consumers in a market.

So we have consumers using the right product we have the best availability at the best restaurants in London. The third piece was to really think about how consumers are aware of TopTable in the UK. It is the leading brand for dining in the UK and that's essentially why we acquired the business back in 2010. But there is a subtle difference there in that dinners were aware of TopTable in being a site that was well known for offers and promotions. And the real value that we think OpenTable provides in North America and TopTable should provide in the UK is access to real time availability at the best restaurants. And so you mentioned our – in Q4 of last year we started to spend more significantly on online marketing.

Since we knew that we have the right products and the right restaurants we wanted to bring traffic to the TopTable site and platform so that people can understand what we have to offer. And we showed some positive results from that our Q4 seated diners in Q4 in our international segment which is more than just the UK was up 35% and we were – we lost a $106,000 at the EBITDA level it increased our revenue and that increased, lowered our losses and that was all good. So, we’ll continue to spend online in throughout 2013 as we like what we saw in Q4.

The other thing that we did in mid February is because we felt like we had everything in place in the UK but really needed to essentially refine or broaden the awareness of what consumers have around TopTable as we launched our first ever outdoor campaign. And so that's running for a month four weeks in London and it’s really all centered around what happens at a restaurant table, how consumer experiences and wonderful things can happen around the restaurant table, clearly reminding consumers that TopTable has a highly beneficial mobile app so it has a mobile element to it and a real time availability element to it. So it’s running in underground stations and bus stations in London making sure that people understand that there are 1000s and 10s of 1000s of restaurant tables within 100 meters of them of Piccadilly service in London that they can reserve online right now.

Andrew Ruud - Morgan Stanley

So your TopTable definitely was a great accelerant for your position in the UK. You’re also active in a couple of other large markets internationally. Do you think that it makes sense to consider acquisitions there as well just given the fact that they may not have been growing as fast as you’d like?

Duncan Robertson - Chief Financial Officer

I think the – as I said the reason that TopTable was a fantastic acquisition for us in the UK is that had, it had the traffic and it had the consumer awareness of dinners in the UK. As we look at the two other markets that we’re in Germany and its really just Tokyo its not Japan there isn’t any you might say unfortunately there isn’t the consumer brand that exist in either of those markets that that is getting the traffic that TopTable was getting in the UK.

So there just isn’t that opportunity to accelerate our growth in those markets by buying a leading brand and so what we’re doing in those markets is really following exactly the same playbook that we followed in North America as we built out the network which is once you added a metro level you have to start by adding the best available at the best restaurants because that's what’s valuable to consumers and once you’ve aggregated a sufficient quantity of restaurants in a particular metro the awareness of the OpenTable brand will start to accelerate because people are visiting OpenTable to get access to those restaurants and so that's really the playbook we’re following and we have just under 2000 restaurants in six cities in Germany now and just under 1700 restaurants in Tokyo.

Andrew Ruud - Morgan Stanley

Great, like to pull the identity if there are any questions. Hold the line a second please, I’ll get a microphone.

Question-and-Answer Session

Unidentified Analyst

Do you have any plans to segment your – because your user base, the people going to restaurants in the higher spending or lower spending and use that, maybe like a frequent flyer program to try to get better access to higher spending customers?

Duncan Robertson

We’ve - historically we’ve the data that we have at the moment is largely dining history data in terms of where you’ve dined and how frequently you’ve dined. The access to the actual spend data is available to restaurants by an integration product that we provide to restaurants if they want to make use of it, which essentially pulls the spend data that will reside in the point of sales system.

Interestingly we found that not a lot of restaurants historically have chosen to combine dining history information with spend history information. So the proxy that we’ve used historically for that rather than, because I agree with you spend information is a valuable thing to know about a diner. But historically we’ve been able to use frequency in dining as somebody who dines out more frequently is largely or likely to be a valuable diner to a restaurant than somebody who dines out once a year. And so we pass that information to restaurants.

So if you make a reservation at a restaurant online the concept of being an OpenTable VIP diner is passed along to the restaurant, so that hopefully they treat you slightly better than they treat somebody else. But at the moment its not providing the fact that you might spend $85 on a bottle of wine versus somebody else who might spend 25.

Unidentified Analyst

Hi, so I think you did an excellent job explaining the experience from the consumer point of view, wondering if you could describe a little bit more of the experience that the restaurant has with your product?

Duncan Robertson

Sure, so that’s a great question. The product that our restaurants – the product that our restaurants uses really it has two aspects to it and let me mention the first and then I’ll plough more on the second. The first is obviously that it’s bringing diners to their restaurants through the OpenTable platform. And that’s something that – that’s largely consumer driven and shows up in online reservations, which is of huge value to restaurants. But more – the other part of what our products provide restaurants is table management, guest solutions, email marketing and going back to some of my discussions around how restaurants can improve the hospitality service for diners.

And so I would aggregate all of those aspects into that, everything other than it brings diners to a restaurant. And it crosses and tries, our product tries to address the requirements of multiple constituents in a restaurant business from the owner who will have interest in financial metrics and data or about performance of the business. And potentially who is coming to visit the restaurant. So if the owner wants to provide extra special hospitality to repeat diners or special guests and that’s included and we have – we launched last year an remote access to the ERB data for people like owners who want to login and see how many diners are coming in, how many were made, how many reservations were made through the OpenTable network, how many reservations were made through our partner network, how many reservations were made of the restaurants own website, what’s the trend between Monday to Friday, lunch and dinner those kinds of things.

Then it moves to the restaurant manager, the restaurant manager is more interested and the efficiency of the wait staff how long what measuring and having an accurate assessment of the waitlist. So that people arrived, they can accurately quote that its 17 minutes till the next two topics comes available rather than trying to guess that from a sheet of paper. All the way down to the host or hostess and the wait staff people knowing which table they have been assigned to, statusing the table so that they’ve been seated there, in the middle of the meal they are ready for their check.

So those aspects really help restaurants run a highly efficient operation without which they would be largely guessing and relying on their experience through looking at a sheet of paper. And then there is the email marketing and guest marketing services. So that restaurants can reach out to and contact their diners specifically if they want to promote something or bring you know bringing diners back. We provide them with that information and that data so that restaurants feel that they will not feel they do own that information about their diners and they can use that.

I think what we’ve found is that there are certainly highly sophisticated restaurants those who run fantastic businesses that touch on all those aspects but there are many restaurants that are opened by fantastically gifted chefs and don’t think through all of the aspects about how do we use information data to provide a better level of hospitality and so we are helping restaurants with that aspect of their business.

Andrew Ruud - Morgan Stanley

We’ll take one last one. Right here.

Unidentified Analyst

Can you talk about mobile a little bit as a tailwind I think on your mobile platform you are getting the dollar per booking and on desktop you are getting dollar and then someone uses or restaurants uses your API someone goes direct to the restaurant website to get you get $0.25 per booking. So I sort of though that mobile would have been a bit more of a tailwind for the business. And I think you went from 32% to 33% of bookings for mobile in the last quarter. Is that the case why are we seen ARPU accelerate over time. ARPU is kind of been so much stagnant and what I thought that if more people are booking on mobile and you are getting that dollar for booking versus the $0.25 they go direct to the restaurant website would see a lift in ARPUs that because on mobile more folks are going directly to the restaurant website and booking to the APIs plus using the mobile app?

Duncan Robertson

Hey, George. Just that everyone the average revenue per seated diner for the last three quarters has been $0.70. And I think quarter before that it was $0.69. So it’s been quarter flat and at the same time that we’ve seen mobile reservations touch 33% in Q4 and even as those mobile reservation that shift has happened our yield has stayed flat at $0.69 or $0.70. The reason for that is mobile reservations are largely operating as a share shift between people that have been making reservations on the desktop platform. OpenTable desktop platform which monetizes the dollar per diner for us and they’re now making reservations on a mobile a smartphone or a tablet which also monetizes at a dollar for us.

There is less of a fact because of the functionality that we have the better function and we have on the mobile side and the app. We don’t we are not seeing the people are moving to a mobile device and then starting to book on restaurants websites in a larger proportion and so it’s having a negative impact. So at the end of the day we recognized that it’s largely it was a dollar on the desktop and it’s converting to a dollar on a mobile device and we are not seeing if you look at the data or a four quarters we are just not we are not seeing an impact on yield up or down.

Andrew Ruud - Morgan Stanley

Duncan, thank you very much for spending the time with us today.

Duncan Robertson - Chief Financial Officer

Sure.

Andrew Ruud - Morgan Stanley

We appreciate it.

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