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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

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

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

Blake T. Harper - Wunderlich Securities Inc., Research Division

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

Kaizad Gotla - JP Morgan Chase & Co, Research Division

Nathaniel Garcia Brogadir - Citigroup Inc, Research Division

A. Justin Post - BofA Merrill Lynch, Research Division

Dean Prissman - Crédit Suisse AG, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

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

OpenTable (OPEN) Q3 2013 Earnings Call November 5, 2013 5:00 PM ET

Operator

Good afternoon, everyone, and welcome to the OpenTable Third Quarter Earnings Results Conference Call. At this time, 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 third quarter 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 measures 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 website.

And now I'll turn it over to Matt.

Matthew J. Roberts

Great. Thank you, Tiffany, and welcome to our conference call.

This afternoon, I'll provide you with a high-level overview of our Q3 performance, and then I'll turn it over to Duncan to walk you through the detailed financials.

OpenTable had a strong third quarter. Revenue for the quarter totaled $46.7 million, an 18% increase over last year. And in the third quarter, our adjusted EBITDA profit margin was 43% on a consolidated basis and 50% 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 35 million in the third quarter, a 28% increase over last year. Or if you exclude the recent acquisition of Rezbook, a 25% increase.

It's also worth noting that approximately 41% of our North America seated diners originated on a mobile device. To add some additional context to our seated diner growth, during the third quarter, North America industry diner counts were flat year-over-year.

Turning to our installed base of restaurants in North America. We exited the quarter with 23,287 restaurants, representing a 23% year-over-year increase. This total includes: 18,373 restaurants using our core Electronic Reservation Book product, or ERB; 2,516 restaurants using our Connect product, which is designed primarily for walk-in restaurants that accept reservations; and 2,398 restaurants using our recently acquired Rezbook technology.

In our International segment, which includes the U.K., Germany and Japan, seated diners grew to 3.4 million in the third quarter, a 46% increase over last year.

Looking at our installed base of International restaurants, we exited the quarter with 7,677 installed restaurants. This total includes 3,660 ERB restaurants and 4,017 Connect restaurants.

Now I'd like to provide you with some updates on the business. Let's start with the consumer side of the business. Strong positive word-of-mouth continues to be the foundation of our seated diner growth. As we discussed last quarter, we're excited about building upon this strong foundation by increasing our investments to introduce more diners to the benefits of OpenTable. To achieve this, we are focusing on the areas of customer acquisition, engagement and mobile marketing.

We've begun aggressively testing a variety of online and mobile marketing campaigns in both our North America and our International markets. We're encouraged by the early results and plan to continue our investments in this area. We're eager to fully understand the value of these efforts by watching how the diners we've acquired perform over time and looking to see how the programs scale.

Now I'd like to update you on 2 key product development efforts. We're making great progress on the next generation of our products for restaurants. Together, our development and design teams have created an elegant and nimble cloud-based hospitality solution that our restaurant customers are going to love, and we're excited to begin the commercial rollout early next year.

We're also excited about the work we're doing in the area of mobile payments. Just as we removed the pain point of calling restaurants for reservations, we aimed to remove the pain point of settling the check.

The team we have dedicated to this project has been working closely with a handful of restaurant partners to develop and test an app-based payment solution that is integrated within the OpenTable experience. The team is making great progress and we're on track to launch a pilot in San Francisco before the end of the year.

The enthusiasm for the solution among restaurants and diners have been great, and we're eager as they are to make it generally available in San Francisco and, ultimately, in other markets.

Lastly, during the quarter, we marked a pretty special milestone for the company. We seated our half a billion cumulative diner. And I want to thank our restaurant customers, dining community and especially our OpenTable team for helping make this a reality. Now over to Duncan.

I. Duncan Robertson

Thank you, Matt. Good afternoon, everyone, and thanks for joining us. Before I address the third 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 to these adjustments.

Now let's turn to the results. In the third quarter, the performance of our core operating metrics once again delivered strong financial results. Total Q3 revenues grew 18% to $46.7 million and adjusted EBITDA grew 14% to $20 million. GAAP net income was $7.6 million or $0.32 per share. Non-GAAP net income was $12.1 million or $0.50 per share, which includes the tax related benefit of $0.05 per share.

To provide further insight into our key financial results and metrics, it's important to segment the 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 18% to $40.6 million, which is made up of 3 main components. North America reservation revenue grew 24% to $23.8 million, which represents 59% of total North America revenue.

The primary driver of reservation revenue is the total number of seated diners, which increased to 28%. Related to reservation revenue, the revenue per seated diner was $0.68 in Q3.

During the quarter, Rezbook contributed 773,000 seated diners and $94,000 in reservation revenue.

Moving on to the next component. Subscription revenue in North America grew 11% to $13.9 million. The main driver of subscription revenue is the number of installed ERB restaurants, which grew 10% 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 $247.

During the quarter, Rezbook contributed subscription revenue of $427,000 through the addition of installed Rezbook restaurants, which totaled 2,398 at September 30.

And lastly, the smallest component of revenue, disclosed as other revenue, increased 5% to $2.9 million.

Turning to our North America expenses. Non-GAAP operating expenses totaled $22.8 million, a 24% increase over the prior year. The main drivers were higher technology-related headcount expenses associated with a 39% increase in technology headcount and increased marketing investments.

On a sequential basis, our North America non-GAAP operating expenses increased 9% from Q2, primarily driven by increased marketing investments and an increase in headcount related to expenses associated with the 6% increase in North America headcount.

Our resulting third quarter North America non-GAAP operating income totaled $17.8 million or 44% of revenue. North America adjusted EBITDA totaled $20.4 million or 50% of revenue.

Now let's review the results from our International operations. International revenue for the third quarter increased 16% to $6.1 million, which represented 13% of the company's total revenue.

International reservation revenue increased 50% to $4.1 million. Subscription revenue grew 8% to $1.9 million, and other revenue declined 87% to $102,000.

As we discussed last quarter, our reclassification of U.K. promotional products from other revenue into reservation revenue contributed to this change in other revenue. Related to reservation revenue, the revenue per seated diner was $1.21 in Q3.

Turning to expenses. Our International non-GAAP operating expenses totaled $7.2 million, an 18% increase over the prior year, primarily associated with increased marketing investments. On a sequential basis, there was a 4% increase, which was also primarily driven by increased marketing investments.

Our result in Q3 International non-GAAP operating loss totaled $1.1 million. International adjusted EBITDA was a loss of $405,000.

Wrapping up our consolidated Q3 results, cash and short-term investments totaled $102.8 million at the end of Q3.

On a non-GAAP basis, taxes were $4.6 million, which is an effective rate of 28%, which was impacted by a couple of favorable discrete Q3 items. The impact of these discrete items was a reduction in the Q3 non-GAAP effective tax rate of approximately 700 basis points, which translates to a non-GAAP EPS benefit of $0.05.

Finally, our quarterly stock-based compensation expense was $4.7 million.

Now turning to guidance for the fourth quarter and full year of 2013. Starting with North America guidance, we estimate Q4 revenue to be in the range of $43.1 million to $44.1 million and non-GAAP adjusted EBITDA to be in the range of $22.1 million to $23.1 million.

For the full year 2013, we estimate North America revenue to be in the range of $162.9 million to $163.9 million and non-GAAP adjusted EBITDA to be in the range of $83.5 million to $84.5 million.

North America guidance takes into account the following factors: first, related to reservation revenue, it's important to remember that we forecast seated diner growth on an economically neutral basis.

Moving on to the subscription side. We expect the average ERB subscription rate to be $245 in Q4. Related to other revenue, we estimate North America other revenue will be approximately $3.1 million in Q4.

Turning to guidance for our International operations. We estimate Q4 revenue to be in the range of $7.6 million to $8 million and non-GAAP adjusted EBITDA to be in the range of a loss of $0.2 million to a profit of $0.2 million.

For the full year 2013, we estimate International revenue to be in the range of $25.6 million to $26 million and non-GAAP adjusted EBITDA loss to be in the range of $2.3 million to $2.7 million.

Related to International reservation revenue, we expect the seated diner yield to be approximately $1.28 for Q4.

On a consolidated basis, we estimate Q4 non-GAAP EPS to be in the range of $0.49 to $0.53, and for the full year 2013, we estimate non-GAAP EPS to be in the range of $1.94 to $1.98.

Turning to a few housekeeping items. On a consolidated basis, we estimate that our diluted weighted average shares outstanding will be approximately 24.2 million shares for Q4 and 24 million shares for the full year. We estimate stock-based compensation expense will be approximately $4.4 million in Q4 and $16.9 million for the full year. We estimate amortization of acquired intangibles will be approximately $1.3 million in Q4 and $4.9 million for the full year, which now reflects the amortization of acquired intangibles associated with the acquisition of Rezbook. And finally, our non-GAAP effective tax rate will be approximately 35% for Q4.

To sum up the quarter, we're very pleased with the solid growth in our core operating and financial metrics. Including the strongest seated diner growth rates over the past 4 quarters in both our North America and International segments.

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

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Heath Terry of Goldman Sachs.

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

Duncan, when you look at the acceleration in seated diner growth, how much of that would you attribute to Rezbook versus what you're seeing in mobile versus industry overall? How should we think about this 300 basis points or so of acceleration this quarter?

I. Duncan Robertson

Are you talking about Q3, Heath?

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

Yes, Q3.

I. Duncan Robertson

So Rezbook, specifically, contributed 773,000 seated diners in Q3. So on a consolidated basis, North America seated diner growth was 28%. But if you exclude those Rezbook seat diners, it was just over 25%.

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

Got you. And when we look at what's driving seated diner growth, even on a neutral basis, this is now third quarter on a row where you've been able to do roughly 25% seated diner growth, even as restaurant growth has slowed. Can you give us a sense of what the makeup of where that 25% growth is coming from, whether it's seeing an additional lift from mobile, especially as you've gotten the mobile websites for the restaurants rolled out or if it's -- if there's sort of any other distinction that you can draw there?

Matthew J. Roberts

Sure. Heath, it's Matt. I'll take this one. It's nice to see -- if you look back each quarter, we've actually had accelerating growth rate from Q1 then again in Q2. And even excluding Rezbook, we had another up quarter in Q3 in terms of growth rate, both in North America and then International, which, of course, isn't impacted by Rezbook also had acceleration each quarter. To your question around sort of primary driver, really, that is a function of the growth rate -- or the seated diner growth is a function of the visitors, how many people are using or just coming initially to experience the service and then the conversion on those visits into reservations. And the broad-based characterization I'd share with you is that most of the change has actually been visit-driven, so it's been around more people coming and experiencing the site. And that's a combination of a number of things, I think, better experiences with mobile that you talked about. Some of the marketing things that we're putting in place right now are, obviously, contributors. And just across the board, just trying to get a better overall content on the site, whether or not it's images or highlighting our excellent-review product in a better way, has drawn more visits and visit growth and so that's -- I think that's the primary driver. What we still have available to us and we're working to influence is really the conversion side of the equation. So we've had sort of stabilized conversion rates in our different experiences and we've -- some are obviously growing pretty stronger like our mobile. But we think there's still some opportunity there, obviously, to improve that pull-through on people that -- where their intent in their visit is to transact. And we have a number of ideas to help move the needle on the conversion side. So the summary is really, it's traffic or visit-generated growth and it's from a number of areas, not one in particular.

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

Great. And then just any update on timing or plans for the cloud product?

Matthew J. Roberts

We still expect to start commercial rollout basically selling it to our base in the start of -- first part of this coming year. It's looking amazing. We just continue to get demos of the latest version and it's really looking fantastic. I think people will be very impressed with it.

Operator

And the next question is from Aaron Kessler of Raymond James.

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

My first question is in terms of the -- thanks for the Rezbook classification. Where should we think about those restaurants spending longer-term [indiscernible] more as ERB, Open Connect or is it going to be a hybrid? And should we think about that as that anniversaries?

Matthew J. Roberts

I think you should think about it as its own category, and that's why we tried to give a ton of clarity about what exactly it contributed both in terms of the statistical information, as well as the financial impact, which, as you can see, on the big picture it's fairly immaterial on its impact. The reason I say think of it as it's own character is that as we've been very clear on is that Rezbook customers have the -- that have chosen to use that technology are more than free to continue to use that technology, and there's really no concerted effort on our part to move them away from that. We hope, over time, that we can entice them to try some of our latest technology, like our new cloud-based service and, at which point, if they choose to, they would move onto that. But I think for the time being, we'll just continue to provide you with a clarity relative to the metrics and so you can just kind of keep it at its own bucket for the time being.

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

Great. And is the reason the Rezbook reservation revenues are a lot smaller, just because a lot of restaurants are having booking on their own site, which is typically free or it's just they weren't charging for that piece?

Matthew J. Roberts

Yes. The -- it really is an economic thing about what they were -- not necessarily what they were charging from their own site but, just in general, there wasn't a lot of different pricing model, I guess is the punch line.

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

Got it. And finally, it looks like this quarter, just from a user space, you've been sending a lot more e-mails. Has that been a key driver of increased traffic you're seeing?

Matthew J. Roberts

It's a component. I wouldn't say a key driver, but definitely a component. We really did some multi-faceted approach here and we have -- we're excited because we have a number of levers that we can pull. Certainly, just broad-based new customer acquisition initiatives and, in particular, mobile marketing initiatives. But there's a lot of things that we can do and are looking to improve on just -- what I'm calling engagement marketing, really working on increasing the frequency of use among our existing diner base.

Operator

The next question is from Blake Harper of Wunderlich Securities.

Blake T. Harper - Wunderlich Securities Inc., Research Division

I wanted to ask, how much room do you see to grow reservations within your existing restaurant customers? And how does that kind of compare to what you expect, I guess, from new restaurants?

Matthew J. Roberts

If we step all the way up a level, if you look at just the overall target market, we're still really early in our penetration of online reservations versus the phone. And so what we've seen through year in and year out is a share shift from online -- from phone, rather, to online, it's the easier, better, more convenient way to make a restaurant reservation. So we would expect that we will continue to see that share shift occur, not only as we add new customers but, just as importantly, within our existing customer base.

Blake T. Harper - Wunderlich Securities Inc., Research Division

Okay. And then just one more. Duncan, do you have any numbers there on operating cash flow or CapEx for the quarter? I'm just kind of wondering what you think about that CapEx number going forward with the kind of the mobile stuff and the cloud rollouts that you're doing. What that looks like and how are you thinking of that going forward?

I. Duncan Robertson

Sure. So specifically for Q3, CapEx was $6.4 million and depreciation and amortization was $3.3 million. In terms of going forward on the cloud-based product, I mean, as we've said before, we're not trying to use that product to optimize cost savings or reduce CapEx or reduce depreciation, it's really focused on a better experience for our restaurant customers. But as you know, the current ERB has an install cost per restaurant of about $1,000 and we don't anticipate that, that would continue in the cloud-based product solution when we start -- when we launch that next year. So by definition, there will be some lower cash CapEx associated with that product, but it's not the reason. It's clearly not the reason we're launching the product.

Operator

And the next question is from Jason Helfstein of Oppenheimer & Co.

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

I think people will probably note that on the sales and marketing in the quarter, spending is probably lower than we would have thought. It does sound perhaps like you're continuing test marketing versus aggressively spending. And then part of that is you're looking on how to continue to improve conversion rates. Can you maybe talk about that balance? If you start -- if you're seeing ways to improve conversion rates, do you delay a meaningful acceleration in marketing perhaps the back half of next year? And then can you also talk about if you guys are seeing any benefits from the partnership with Urbanspoon?

Matthew J. Roberts

Sure. Jason, I'll address that marketing spend, I think it's a really good question. So first, let's talk about what we did in the quarter. We basically spent right on our expectation for North America. We presented it as a Q3 -- or, sorry, back half of the year range of spending in our last conference call, which is sort of $2.5 million to $3 million we said we'd spend on the back half of the year. Internally, we had our Q3, Q4 allocation of that and the Q3 piece for North America, we basically spent right on what we thought we would spend and we were slightly behind on our spending in International markets. That sort of pace of spending is really not dictated by, "Let's wait till we also make improvements on the conversion side." Clearly, that's a big positive for the efficacy of the marketing spend or just the cost efficiency of the marketing spend. But we're taking a "Let's see what we can do with the current state of conversion and how we can drive incremental use of the service with that construct." And so we're not waiting till conversion improves from where it is to spend. Some of the underspend relative to our own thinking, relative to International is relatively minor, I think it was $200,000, is really around just getting programs set up. And in our International market, it was really getting the specific technology in place, the tracking in place when we needed to be assistants of other folks to facilitate their marketing spend. Just getting those relationships set up. And, overall, we are absolutely in a learn phase, still. We are -- we're not trying -- we're not really at any kind of scale at this point. We're trying to figure out which programs do have a good return to them and are the most impactful for the business. And we're learning some really good things. We found some programs that we're pretty encouraged by and we found some other things that just flat out didn't work at all and so we stopped doing them. So I think we're just taking a reasonably aggressive but thoughtful approach to going after this opportunity.

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

And then on Urbanspoon?

Matthew J. Roberts

The Urbanspoon partnership is a great partnership. We just -- we added some nice -- if you ask me just look at overall, the Rezbook agreement, coupled with our Urbanspoon partnership, was a real positive. I think, for the business, Urbanspoon is a great partner, they're among 600 total partners that we have and all of them are still in that sort of 5% to 10% range of our business. So that -- happy to have them on the list of partners that we work with.

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

Let me ask one more quick one. So given -- you said in the past if you can get more consumers to download mobile apps, that drives usage conversion. Kind of with the kind of explosion of available mobile inventory and exchanges by mobile app downloaded, could you envision that as an area to focus on as we head into next year, whether that could kind of meaningfully lift the number of users downloading your app?

Matthew J. Roberts

We're experimenting right now, starting last quarter, with various tactics to encourage people to download the app, so that has already started, that process has already started. I mean, once again, we were featured as one of the folks for the -- to launch IOS 7, and that obviously is a nice benefit as well for us in terms of visibility, and the team did a great job looking under pretty tight deadlines to participate in that. So we will continue to be aggressive on mobile and getting people to have our app. It is clear to us that there's a big benefit, in terms of frequency, when people have our app versus just use our different sites, whether that's desktop or the MDOP.

Operator

And the next question is from Kaizad Gotla of JPMorgan.

Kaizad Gotla - JP Morgan Chase & Co, Research Division

First one for Matt. You mentioned you're seeing increased word-of-mouth for the product. And clearly, OpenTable has been a brand that's been around for some time, so wondering what's really changed in the business over the last couple of quarters that's driving that? And I have a follow-up after that.

Matthew J. Roberts

Sure. The comment actually was more that word-of-mouth, really positive strong word-of-mouth, has been and continues to be the foundation of our growth. It's really a big way, a predominant way of how people find out about us. And it was more of just a statement that, that is really our foundation, continues to be our foundation for seated diner growth. But we had decided and we started to talk about it last quarter to invest on top of that strong foundation to drive either -- even sort of more adoption and more awareness of OpenTable. So it's really more just to state, this has been and continues to be a foundational element of our overall marketing.

Kaizad Gotla - JP Morgan Chase & Co, Research Division

And how many restaurants in your network today have a mobile optimized site? Can you just update us on that number?

I. Duncan Robertson

Approximately 25% of the restaurants in the mobile -- the countries that we have mobile-optimized sites, which is the U.S., Canada and the U.K., 25% of those restaurants have mobile-optimized sites.

Matthew J. Roberts

And this is really pretty impressive progress from the time that we actually launched our concerted effort to get health restaurants adopt more of the mobile-friendly presence, because when we first launched our product to help restaurants with this, our free product, to help restaurants with this, their penetration was sub 10%. So we've had some really nice meaningful movement and improvement over time.

Operator

And the next question is from Mark May of Citigroup.

Nathaniel Garcia Brogadir - Citigroup Inc, Research Division

This is Nath Brogadir in for Mark. Two, if I may. First -- I guess, I'll ask them in order. For fourth quarter guidance, how much should we think about Rezbook contributing to the guidance?

I. Duncan Robertson

Nath, what I would say is you should just remember that in Q3 we owned Rezbook for 2 months because the acquisition closed at the end of July, so not giving any -- we're not going to break out Rezbook for guidance specifically, but you have -- but it contributed -- in 2 months it contributed $94,000 of subscription revenue in Q3 -- sorry, reservation revenue and $427,000 of subscription revenue. And so it's safe to say that you could essentially turn that into 3 months and you got a good starting place. Obviously, Q4 is slightly more seasonal than Q3 on the reservation side than -- but subscription is directly associated with the number of restaurants.

Matthew J. Roberts

The reservation was relatively $94,000.

I. Duncan Robertson

Yes, $94,000 each.

Nathaniel Garcia Brogadir - Citigroup Inc, Research Division

Okay. And then just secondly on the North American restaurant count. If I back out Rezbook, I'm getting like 1.5% sequential growth, which is one of the lower levels I've seen out of you guys. I mean is that in line with your expectations internally or are you guys happy with the organic sequential growth number?

I. Duncan Robertson

I think -- I mean, as we've been talking for a while now, the real focus of the additions to the network in North America have been around the quality of restaurant rather than the quantity. On a sequential basis, I think on the ERB side, we added 349 restaurants in Q3. I think that number was 474 in Q2, and I think it was 344 in Q1. So it's been, on absolute basis, it's been reasonably consistent over the last couple of quarters, during the period that we've been focused on quality rather than absolute adds of restaurants.

Operator

And the next question is from Justin Post of Merrill Lynch.

A. Justin Post - BofA Merrill Lynch, Research Division

A few questions. First, we look at the marketing results, about $1 million more spent quarter-over-quarter, we've already referenced that on the call. How are you measuring that? Should we look at the seated diner acceleration as part of that or just look at the total seats you're adding year-over-year to kind of measure that? Or is it more building a long-term customer kind of as an app download that you'll show up for years and years? How are we -- how should you think about it and how are you measuring it?

Matthew J. Roberts

So if you think about -- it's -- well, there's couple parts. One of it is -- one is we're just trying things that we don't even know whether or not they'll work or not. I mean, we're literally just trying to figure out, by trying multiple avenues, what are the levers that are going to really work well for us. So there's some things that we tried last quarter that just flat out didn't work at all, and so -- but we need to try those things in order to understand that, that's the case. So we have some level of general experimentation so that we can make sure that we uncover any and all opportunities available to us for driving growth. But the -- most of the framework is on a customer acquisition focus, which really would take into consideration more lifetime value versus the first transaction that, that customer would do with us. Because if you think about it just that way, we -- $1 per seat billed average reservation is sort of $3 in revenue. So it is hard to make any customer acquisition vehicle work and certainly get any kind of scale at $3 per customer. So we do take more of a long-term view on it, that these customers are ones that we are going to be working with for and helping over a longer period of time. Which is why when we look at the results, some of the sequential acceleration that you saw is related to the spend, but a big part of that, as well, it has to do with just a number of other facets within the business that we've been focusing on to make our experience better for customers and, therefore, overall visits have improved as well. In particular, on the mobile side of the equation, there you definitely were looking at the value and the differentiated value of a mobile user, mobile app user, in particular, versus a desktop user. And that's what we're doing, we're looking at, basically, every cohort of new diners that are acquired through the marketing program and looking towards different sort of hurdle rates of pay back on the marketing that we spend and looking for good returns on that. Just as you would expect, I guess, with it.

A. Justin Post - BofA Merrill Lynch, Research Division

Okay, great. And, Matt, you've been running the International business, kind of slight loss for a few years now. Maybe give us a little update on where that is and why not invest more or try to run it as slightly profitable? Kind of just the state of the International business right now, that would be great.

Matthew J. Roberts

Sure. The International business is growing really well. There is -- continues to be a strong and growing network. The -- it's really a different answer by geography. If you look at the U.K., we will continue to grow the business both -- in particular, in the seated diner category, we've continued to enjoy strong seated diner growth in the U.K. and have a great selection of high-quality restaurants there that are helping, obviously, the foundation to drive that. We've done marketing in the U.K. We did some brand advertising in the U.K. at the start of the year and we then shifted most of our incremental marketing spend in the U.K. to really focus on the same vehicles that we're experimenting with here, in North America, namely, online marketing approaches. So we are absolutely investing behind marketing and investing in the U.K. Some of the sort of the byproduct of close to breakeven is we've also -- the expenses, they clearly also gone up but the revenue has gone up as well, which has sort of kept us in that range. We're looking for opportunities in Germany and in Japan as well, to make incremental investments. And we are absolutely focused on growth in our International segment in totality, versus profitability. It's not a primary objective at all for us, to be profitable in the International and in short-term basis in our International segment. It is a high priority for us to realize the opportunity in each and every one of those markets, which we still view as very, very substantial. I think we've talked about it before. U.K. is really only 3% penetrated against the seated diner market. So we are investing, we'll continue to invest behind each of those countries and feel like that's the right longer-term approach to take with that market versus optimizing for the near-term profitability.

A. Justin Post - BofA Merrill Lynch, Research Division

That's helpful. And one for Duncan. Could you just remind us, I think there was a weather impact in Q4 of last year, how much that affected and is the comp kind of affecting your guidance at all for this year's Q4?

I. Duncan Robertson

So, yes. Just to remind you of what happened last year, we think Superstorm Sandy impacted us by about $400,000 of reservation revenue, which is about 0.5 million seated diners. And specifically, in Q4 of this year, we think that lapping Sandy will add about 200 basis points to seated diner growth in Q4.

Operator

And the next question is from Stephen Ju of Crédit Suisse.

Dean Prissman - Crédit Suisse AG, Research Division

This is Dean Prissman for Stephen. So 2 questions, when you think about the mobile use case, how meaningful is the contribution from the last-minute reservation seeker and what are your thoughts in evolving the user experience to better capture that user? And then, secondly, is there any color you can provide on what mobile marketing channels within your tests are working particularly well for driving engagement versus apps installs?

Matthew J. Roberts

Sure. So on just the last-minute nature of mobile reservations versus desktop reservations, and we talked about, on a number of different conference calls, we absolutely see it skew towards more sort of same day reservations than on the desktop. Though it actually has leveled out a little bit, I mean, it smoothed out a little bit versus the original view that we had on it. And I think that there's more and more people that are actually using our app, whether just sitting at their computer and really have just switched over to just using the app all the time versus desktop and the app. So we see a little bit of smoothing out of that distribution of when the reservation is made versus when the actual dining event occurs. But as far as taking advantage or working -- doing something unique to try to encourage that, there's a number of ideas that we have in that category, but we haven't really acted upon any one in particular. We do know that there's probably some opportunities there relative to messaging or notifications or just looking at sort of capacity situations that occur sort of last-minute availability at a hot restaurant, those type of things. But we haven't really ruled any of that into the market yet, but we're thinking that there's clearly an opportunity for us to play around with that in the coming year. And then, was there another?

Dean Prissman - Crédit Suisse AG, Research Division

Yes. The second question was just on what mobile marketing channels within your tests are working particularly well for driving engagement versus driving up installs?

Matthew J. Roberts

Well, I mean, so -- I don't think I'll go into that level of granularity on the call. I think there's some of the programs that we tried and were -- look like winners and some of them that look like, "Oh, we're not going to do that again." But we didn't -- are not automatically saying that the ones that look like it delivered poor results are just purely a function of the channel, versus maybe there's an opportunity for us to get smarter on how to utilize the channel. So I think it's just really too early for us to sort of talk with authority on which channels are really going to be effective for us on the mobile marketing side. And we look forward to getting to a higher level of authority, a higher level of confidence on that as we continue to spend and learn in Q4.

Operator

The next question is from Mike Olson of Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

There's been a lot of discussion on the new marketing tactics. It sounds like you're in the first inning or innings of those initiatives. And if the marketing tactics ramp up, is there a potential that you'll allow margins to be negatively impacted in the coming quarters kind of for the sake of driving growth at the user base? Or, I guess which do you see as more critical: margin preservation or growing seated diners? And do you believe if implemented kind of in a more significant way that the new consumer-facing tactics would have the potential to drive accelerating seated diner growth or is it more your expectation that it would be put in place to enable you to kind of more maintain this kind of mid-20 seated diner growth?

Matthew J. Roberts

So I'll take the question around sort of growth versus profit or margin preservation. Hopefully, we've been pretty clear about this, as a management team, that we're really about growth, we're driving revenue growth, we're looking at a, still, a relatively early penetration in a very large market, not only in North America but International. And then you start to layer on other opportunities that we have to participate in the overall dining experience. We're really all about driving for growth and so that will be, and continue to be, our focus. And to the extent that we have marketing spend, that we can do that we feel have a good return on that spend, then we're very excited to do that spending. And so that's what we would come out on, on that equation. The other part of the equation, the other question? Sorry, can you repeat the other question?

Michael J. Olson - Piper Jaffray Companies, Research Division

Just basically do you believe kind of if these tactics are implemented significantly? Is it accelerating diner growth or is it more done to kind of maintain like a mid-20 seated diner growth rate?

Matthew J. Roberts

I think the easiest way to handle that is to really just kind of go back to -- we'll have a pretty clear view and share with you what our 2014 guidance will be. And that will be the easiest and probably best time for us to discuss holistically what we think is going to happen with our key metrics. So why don't we wait on that one until the next conference call when we share our 2014 guidance with you?

Operator

[Operator Instructions] And the next question is from George Askew of Stifel.

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

Two broad questions, I guess. What are the -- your expectations regarding the productivity of Rezbook over time in terms of diners per restaurant? For example, can it ever approach the core OpenTable level?

Matthew J. Roberts

We're not trying to optimize -- I mean, again, just from a materiality perspective, George, if you look at -- we're talking sort of 2,300, 2,400 restaurants in total, there's really no intent to grow that base of restaurants. In total, contributed $94,000 of reservation revenue. So it's not an area of focus in how we would optimize Rezbook going forward. We're happy to have the customers continue -- that chose to use it, to continue to use it. But it's not really an area of focus for us to optimize it.

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

Got it. Now, I guess what I'm really kind of getting at, it looks to me like the average restaurant did somewhere around 5 to 6 diners per day within Rezbook. Are those restaurants -- do they have the capacity to do the same level of OpenTable if they had the ERB, for example, and some time to mature? Or they're just different restaurants?

Matthew J. Roberts

Yes. One, they're a different restaurant. Yes, they're -- it's sort of apples-to-oranges because those Rezbook customers are not also on the OpenTable network. And the OpenTable network is a major driver of seated diners for restaurants. So it's kind of -- it's not a fair comparison between the 2 because of that fact.

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

Okay. Okay. Fair enough. And then, secondly, on International, you kind of addressed some of this in a prior question, but what metrics are you watching most closely to measure success against the opportunity in International? Is it diners per restaurant, total revenue share of the seated diner market, which you referenced in the U.K. or something else?

Matthew J. Roberts

It's seated diner growth. It's pretty straightforward. Seated diner growth is really sort of a key sort of business model metric that would indicate the fulfillment of the larger opportunity. If you look at our International markets, in each case, we're so early in the game. And the markets -- we view the market as substantial -- each market as very substantial so the #1 thing we can do -- well, there's many supporting things that we'll do, but probably the clearest way that it will manifest itself for you from a financial perspective is seated diner growth.

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

Is that -- I mean, is it more important to have seated diner growth per restaurant per day, for example, organic growth inside of a restaurant? Or is it more important to have that through additional restaurants?

Matthew J. Roberts

It will be a blend of the 2, but I think -- so it's going to be just like it was for the U.S., it's a blend of the 2. We both add restaurants and the new selection will add value to the diners and there will be more diners that will be attracted to this solution, and that will help us attract even more restaurants. So that sort of classic network effects that we've created here in the U.S. is what we're intending to, and are in progress of doing in our U.K., Germany and Japan businesses.

Operator

There are no further questions in queue at this time. I'd like to turn the call back over for closing remarks.

Matthew J. Roberts

Well, great. Thank you, everyone, for joining us for the call and look forward to catching up with you next time.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.

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