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OpenTable, Inc. (NASDAQ:OPEN)

Q4 2013 Earnings Conference Call

February 4, 2014; 05:00 p.m. ET

Executives

Matt Roberts - President & Chief Executive Officer

Duncan Robertson - Chief Financial Officer

Tiffany Fox - Senior Director of Corporate Communications

Analysts

Neha Hebbar - Credit Suisse

Chris Merwin - Barclays

George Sutton - Craig Hallum

James Cakmak - Telsey Advisory Group

Shawn Milne - Janney Capital

Jason Helfstein - Oppenheimer & Co.

Kaizad Gotla - JPMorgan

Michael Olson - Piper Jaffray

Paul Bieber - Bank of America/Merrill Lynch

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 2013 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 expectation. 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 OpenTable website.

And now I'll turn it over to Matt.

Matt Roberts

Thank you Tiffany and welcome to our conference call. This afternoon I'll provide you with a view of our Q4 results and then I’ll outline our strategic focus for 2014.

OpenTable had a strong fourth quarter. Revenue for the quarter totaled $52.3 million, a 22% increase over last year and our adjusted EBITDA profit margin was 43% on a consolidated basis and 51% 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 40 million in the fourth quarter, a 33% increase over last year or if you exclude the acquisition of Rezbook, a 29% increase. Also worth noting, approximately 40% of our North America seated diners originated on a mobile device.

To add some additional context to our seated diner growth, during the fourth quarter, North America’s industry diner counts experienced a modest lift of just over 1% year-over-year.

Turning to our installed base of restaurants in North America, we exited the quarter with 23,824 restaurants, representing a 20% year-over-year increase. This total includes 19,015 restaurants using our core Electronic Reservation Book product or ERB; 2,528 restaurants using our Connect product, which is designed primarily for walk-in restaurants that accept reservations; and 2,281 restaurants using the Rezbook technology.

In our international segment, which includes the U.K., Germany and Japan, seated diners grew to 4.2 million in the fourth quarter, a 43% increase over last year. Looking at our installed base of international restaurants, we exited the fourth quarter with 7,729 installed restaurants. This total will include 3,871 ERB restaurants and 3,858 Connect restaurants.

Now I'd like to provide you with our high-level perspective on our strategic focus for the year ahead. Over the last 15 years we’ve built a fantastic business. Restaurants around the global have entrusted us to power their central reservation book and make their businesses more successful. In fact more than 40% of all reservations taking restaurants in North America use our technology, and to-date we’ve seated more than half of billing diners who love our service, and there remains a huge growth opportunity in front of us.

Diner penetration in the San Francisco bay area reached 39% in 2013, compared with 19% in all of North America. Closing just that diner penetration differential, would generate in access of $100 million of reservation revenue on an annual basis, which essentially drops the bottom line. In fact we believe the majority of all reservations will move online over time. Our focus is to accelerate this penetration, as well as address new opportunities.

We believe we have a unique and exciting opportunity to fundamentally transform the dining experience at every touch point, much as we transform the process of booking a reservation. We think of this as the strategic expansion of OpenTable, from a transaction company to an experiences company.

This strategy has four key economic benefits. First, it will strengthen our ability to attract new diners with an even more compelling value proposition. Second it will help deepen our engagement with diners who are already familiar with OpenTable by exposing them to new ways to enjoy our service.

Third, it will help strengthen our relationships with restaurant owners as we layer on new features and insights to enhance the hospitality they deliver to their guests; and finally, it will allow us to explore new ways to leverage the power of the network such as our new payment solution.

As a company focused on the reservation transaction, we have built a powerful backbone that connects restaurants and diners. We believe the convenience and benefits that our diners and restaurant customers enjoy today are just the beginning of the value we can deliver as a company focused more broadly on the experience of dining out.

For example, we want the host to recognize you as you walk in the door and welcome you by name. We want you to know just what to order, because you can see dish photos with notes from the chef and other diners, and we want you to be able to get up and leave whenever you want, because you’ve already paid using the OpenTable App.

Last year we began this evolution from transaction company to experienced company. We rearchitected our service to enable us to add new features and functionality more quickly.

We built a design team to make our products more delightful to use. We acquired Foodspotting and integrated photos to help diners select restaurants and dishes; and we invested in data science to enable us to personalize our offerings according to the user and to deliver rich insights to our restaurant customers.

Lets look at our specific 2014 objectives for diners and restaurants. Lets start with diners. Our strategic aimed at consumers is to help to become the global dining destination that delivers a great experience at every step based on who you are. To support this we have four key objectives for 2014.

First, we will increase our visibility to diners, primary online through our continued efforts and search engine optimization and direct response marketing. Second, we will increase the frequency with which diners use our service through investments in product enhancing, as well as engage in marketing.

Third, we will provide a more personalized experience to diners by mining our wealth of data, to offer things like customized restaurant suggestions and guest profiles, which can be shared with the restaurants. And four, we will launch our payment solution to begin solving the pain of settling the check in the same way we solve the pain of booking a reservation.

For restaurants, our strategy is to be the foundation they rely on to build diner relationships and deliver great guest experiences. In 2014 we’ll support this goal in two primary ways; first, we’ll begin selling our next generation cloud based hospitality solutions to restaurant owners. Second, we will begin distributing certificated business insights to restaurant owners and managers, based on activity within their own restaurant as well as local industry trends.

We are already making great progress in a number of areas. During the last quarter we saw encouraging results from our increased marketing investment to accelerate new diner acquisitions, so we’ll continue to expand and optimize this throughout the year.

With the acquisition of Ness, we are accelerating our investment behind personalization and insight, by adding to our team more data scientists and designers who share our deep knowledge and passion for the restaurant industry. And today we began piloting our payment solutions in San Francisco, and this month we being to selling to new restaurant customers our next generation cloud based hospitality solutions, which we’ll call as Guest Center.

This is an exciting time at OpenTable around the globe. We have created the world’s largest reservation network, which provides us with the opportunity to evolve from a transaction company to an experience company. To achieve this, we are investing behind the development resources required to deliver a great dining experience at every step and we are investing behind marketing resources to elevate our visibility in every market we service and engage users in new ways that create active, loyal customers for life. We are confident that this strategy and its related investments will allow us to accelerate into the huge growth opportunity in front of us.

Finally, as we reflect on last year and look forward to the year ahead, I’d like to extend a special thank you to our team for the dedication and our customers for their support.

And now over to Duncan.

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 to 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 22% to $52.3 million and adjusted EBITDA grew 20% to $22.5 million. GAAP net income was $10.3 million or $0.43 per share. Non-GAAP net income was $14.3 million or $0.59 per share, which includes a tax related benefit of $0.07 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 22% to $44.7 million, which is made up of three main components. North America reservation revenue grew 30% to $27.1 million, which represents 61% of total North America revenues. The primary driver of reservation revenue is the total number of seated diners, which increased to 33%. Related to reservation revenue, the revenue per seated diner was $0.68 in Q4. During the quarter, Rezbook contributed 1.1 million seated diners and $135,000 in reservation revenue.

Moving on to the next component, subscription revenue in North America grew 12% to $14.3 million. The main driver of subscription revenue is the number of installed ERB restaurants, which grew 11% 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 $246. Rezbook restaurants, which totaled 2,281 at December 31, contributed subscription revenue of $506,000 in Q4. And lastly, the smallest component of revenue disclosed as other revenue, increased 5% to $3.3 million.

Turning to our North America expenses, non-GAAP operating expenses totaled $24.9 million, a 27% increase over the prior year. The primary driver was a 41% increase in sales and marking expenses are narrowly associated with the increased marketing investment outlined on previous calls. Separate from these marketing investments, our recent success with hiring led to headcount expenses that were ahead of our forecast in Q4. We are pleased with our ability to attract new talent to the team, especially in the light of the competitive labor market in San Francisco.

Technology headcount alone increased 57% over the prior year and includes the team from our acquisition of Quickcue in December. On a sequential basis, our North America non-GAAP operating expenses increased 9% from Q3, primary driven by increased marketing investments and an increase in headcount related expenses associated with a 5% increase in total North America headcount, and more specifically a 13% increase in technology headcount.

Our resulting fourth quarter North America non-GAAP operating income totaled $19.8 million or 44% of revenue. North America adjusted EBITDA totaled $22.6 million or 51% of revenue.

Now let's review the results from our International operations. International revenue for the fourth quarter increased 21% to $7.6 million, which represented 15% of the company's total revenue. International reservation revenue increased 47% to $5.4 million; subscription revenue grew 10% to $2 million, and other revenue decreased 78% to $174,000. Related to reservation revenue, the revenue per seated diner was $1.28 in Q4.

Turning to expenses, our international non-GAAP operating expenses totaled $8.4 million, a 19% increase over the prior year. The main driver is associated with increased marketing investments. On a sequential basis, there was an 18% increase, which was also primarily driven by increased marketing investments and an increase in performance-based compensation associated with the strong sales of our ERB.

Our result in Q4 international non-GAAP operating loss totaled $870,000. International adjusted EBITDA was a loss of $94,000. On a non-GAAP basis taxes were $4.8 million, which is an effective rate of 25%, and which was impacted by a couple of favorable non-recurring tax items. The impact of these items was a reduction in the Q4 non-GAAP effective tax rate of approximately 900 basis points, which translates to a non-GAAP EPS benefit of $0.07 per share.

Our quarterly stock-based compensation expense was $4.2 million in Q4, wrapping up our consolidated Q4 results. Cash and short-term investments totaled $114.5 million at the end of Q4.

Before turning to guidance for the first quarter and full year 2014, its worthwhile to provide the context in which we are modeling the upcoming year. In line with the strategic objectives, which Matt has outlined, in 2014 we will continue to proactively invest in the resources and activities to accelerate the company’s achievement of the significant growth opportunity ahead of us.

Starting with the North America guidance, we estimate Q1 revenue to be in the range of $45.8 million to $47 million and non-GAAP adjusted EBITDA to be in the range of $20.5 million to $21.7 million. For the full year 2014, we estimate North America revenue to be in the range of $189 million to $195 million and non-GAAP adjusted EBITDA to be in the range of $88 million to $93.8 million.

North America guidance takes into account the following factors: 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 $244 in Q1. Related to other revenue, we estimate North America other revenue will be approximately $2.5 million in Q1.

Non-GAAP operating expenses will increase in 2014, primarily as a result of two factors; first, our headcount expenses. These will be impacted by the overall growth in headcount that took place throughout 2013, whereby the full year impact of 2013 hirers will increase headcount expense in 2014 by approximately $8 million over the prior year. Additionally we expect to continue to add to our team here in 2014, where the focus will remain in technology and marketing. We are off to a good start by welcoming the 11 employees who joined by the acquisition of Ness.

Second, the marketing expenses. We are pleased with the early results we’ve measured from investments in 2013 and we plan to increase the rate of spend this year to approximately $9 million in 2014.

Turning to guidance for our international operations, I will reiterate that its growth and market leadership versus near term profitability that are driving our investments. We estimate Q1 revenue to be in the range of $7.5 million to $7.9 million and non-GAAP adjusted EBITDA loss to be in the range of $1.5 million to $1.8 million.

For the full year 2014 we estimate international revenue to be in the range of $32 million to $34 million and non-GAAP adjusted EBITDA loss to be in the range of $3.4 million to $5.3 million. Related to international reservation revenue, we expect the seated diner yield to be approximately $1.30 in Q1.

Non-GAAP operating expenses will increase in 2014, primarily as a result of an increase in direct marketing activates primarily online, where we expect to spend approximately $9 million in 2014. Additionally our plans to increase headcounts to aggressively pursue the restaurant and diner network for the UK, Germany and Japan will increase headcount expense in this segment.

On a consolidated basis, we estimate Q1 non-GAAP EPS to be in the range of $0.39 to $0.43, and for the full year 2014 we estimate non-GAAP EPS to be in the range of $1.71 to $1.92.

Turning to a few housekeeping items. On a consolidated basis, we estimate that our diluted weighted average shares outstanding will be approximately 24.4 million shares in Q1 and 24.5 million shares for the full year 2014. We estimate stock-based compensation expense will be approximately $4.3 million in Q1 and $18.7 million for the full year 2014.

We estimate amortization of acquired intangibles will be approximately $1.4 million in Q1 and $6.1 million for the full year 2014, which now reflects the amortization of acquired intangibles associated with the acquisition of Quickcue. The purchase price allocation associated with the Ness acquisition will be determined during Q1 and then updates of the amortization of acquired intangibles will be provided in our Q1 earnings call. Finally we estimate our non-GAAP effective tax rate will be approximately 37% for Q1 and the full year 2014.

To sum up the quarter, with North America’s seated diner growth rate accelerating for the fourth sequential quarter, it’s gratifying to see early returns on the investments made in 2013. Continued investments position the company well for growth in 2014 and beyond.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Steven Dwek from Credit Suisse. Your line is open.

Neha Hebbar - Credit Suisse

Hi, this is Neha Hebbar on for Steven. So a couple of questions; first, you made a couple of acquisitions in the last 12 months, which seemed targeted to the more quick turn restaurants. Do you guys have any view in terms of when we’ll get an integrate product offerings catered to those restaurants and its been a little bit outside your normal client base and then I have a follow-up.

Matt Roberts

I think your referring to Quickcue, which was the acquisition that we did. So Quickcue is really about bringing a group of very talented engineers and designers onboard to help us continue to focus on really the reservation-taking segment. They do have experience and have picked up some really interesting learning’s with a more casual segment and we may end up being able to leverage that at some point, but the near term focus is definitely about continuing to accelerate into the opportunity that we have against their target markets that we articulated.

Neha Hebbar - Credit Suisse

Okay thanks, and then recommendations is something we’ve been waiting for from a product perspective for a while now. So how quickly do you think you guys can integrate Ness to drive recommendations on the platform?

Matt Roberts

So, I think there’s two parts about it. When can we start to see recommendations and show up in the products, again more of a integration component. So, the first one is very, very, very soon. You will be seeing it will show up in our consumer spreads likely starting with the mobile and our apps and then spreading from there. We’ve already been in process on that and as we mentioned we’ve been putting some effort against that for a while now and we’re excited about some of the earlier things that we’ve done. In fact it’s starting to show up from out of this personalization and better at email communication that are going out to our diners.

The integration, the deal just closed yesterday with Ness. We have a great relationship with that whole team and part of the process is just getting to know them. They’ve already started to trade ideas and they are really eager to hit the ground running and I feel very good that that effort will start to show up in our products, basically as soon as they get in the building.

Neha Hebbar - Credit Suisse

Thank you.

Matt Roberts

Sure.

Operator

Thank you. Our next question comes from the line of Chris Merwin from Barclays. Your line is open and you may proceed.

Chris Merwin - Barclays

Yes, thanks for taking my question. So I know seated diner obviously has been a focus and I was wondering if you could just talk a bit about how that’s seen by our customers. I think that, certainly if someone were to book a reservation on OpenTable at a high demand time, that’s going to cost the restaurant a dollar, whereas on the phone that could be free. But on the flip side of course OpenTable can get that restaurant a very high ROI by driving incremental reservations. Just curious how you know, in speaking with your customers how they view the effort to increase seated diners.

Matt Roberts

Yes, I think we mentioned that. The return on investment is fantastic relative to our ability to fill seats that would otherwise be empty and if you just look at the economics, I mean it’s a $1 against $43 in revenue and its probably one of lowest marketing fee that you could quote out there, and it really is only on a successful effort, just under 2% and most people that are delivering leads or marketing value are sort of in the 5%, 10%, maybe up to 15% rate. So it’s a remarkably effective, the most effective vehicle for restaurants to help them market and sell seats where they would otherwise be empty and that really is understood and appreciated by our customer base.

So our focus is about doing two things; one, making the experience for diners more compelling and we’ve outlined how we’re going to be doing that, but also on the restaurant side, really understanding how to take advantage of all the information that we know about dining behaviors and dining trends to allow them to get insights into their business. That actually helps them drive business beyond just marketing, but actually increase the engagement and loyalty that their diners have with them and enhance their ability to have repeat business. So it’s really about continuing these efforts to put value added services in our restaurants and we have a great roadmap ahead of us to do that.

Chris Merwin - Barclays

Thanks and if I could just ask one more, on marketing spend, I mean. In 2014 to the extent that that spend is very successful obviously and further accelerating seated diner growth, I mean how should we think about marketing spend for 2015? Do you think you can get to the point where you benefit more from organic increases in seated diner through networking effects? Just curious where you see marketing spend going longer term after investment this year? Thanks.

Matt Roberts

Yes, that’s a great question. I mean if you just kind of look all the way back and the accounting is $9 million in North America and a $9 million spend in International. So in absolute dollars if you look across any, something that’s $225 million-ish in revenue, that’s a remarkably low number and that’s a testament to the great business that we built.

I mean the affinity people have for our service is already the dominant driver of our growth. The $9 million in marketing spend is a way for us to figure out, okay are there other avenues that we can also layer in to help drive growth.

That’s not all marketing spend that is being driven against in particular the international, sort of say page search advertising, is also related to learning about how we can get mobile adoption, mobile app adoption and we fell is pretty clearly as when somebody has our mobile app, they have a much, much higher frequency than without it.

So you can think about the stand in a couple of different categories; one of which should certainly be around engagements and maybe should let people have our app to support non-paid for increases in convergence, sort of frequency going forward and there’s many other elements of the spend that are aimed at as you call it, organic growth. We are going to make sure that we get the best that we can be at search engine optimization for example.

Chris Merwin - Barclays

Thank you.

Matt Roberts

Sure.

Operator

Thank you. Our next question comes from the line of Mitch Bartlett from Craig Hallum. Your line is open and you may proceed.

George Sutton - Craig Hallum

Hi guys, this is George on for Mitch. A couple of questions; first you talked about the payment solution. I believe you said that you are going to start selling it in San Francisco shortly and wondering if you could remind me of the revenue model there.

Matt Roberts

Sure. Well importantly we’re not selling yet. It’s actually a free service for a restaurant and it’s a free service for our diners as well. Its part of our opportunity to expand from a transactional company to an experience company and really address the paid for, instead of writing a check just like we did with online bookings, so its not a pay-for-service, so its really about first and foremost nailing the experience.

Getting and taking advantage of the unique position we’re in, because we already have the technology in hand for the consumer and we already have the technology in the hand for the restaurant. So providing, that’s really keen with elegant solution is really the key to the game. So all of our focus right now is on the pilot, learning from the feedback that we get from that and then figuring out where and how we scale from there. We’re incredibly excited as a team around this opportunity, to really transform the way people think about an experience what they pay for.

George Sutton - Craig Hallum

Okay, okay and then secondly in your 2014 consumer objectives you mentioned increasing seated diner frequency through the product enhancements and can you talk about what this product enhancements look like and how you expect to drive that frequency?

Matt Roberts

Well, there is certainly a number of them. I’ll give you some flavor for it, which is – if you think about personalization, which is one of the first questions, as the service really adopts the personalization its going to become much more relevant and rich for individuals.

And so an example of personalization would be when I get on my app and I see the list of restaurants and how the availability is Saturday night at 7 O’clock, the first ones I’ll see are the ones that my friends have said are great restaurants and so that – we believe that that level of personalization will encourage diners to view the service more frequently and we have a couple of data points that give us confidence in that, but that’s really the main part.

And mobile in general, the adoption, when people adopt our mobile app, they are much, much more likely to book more frequently. They have a much higher frequency level than people do not have our app yet. So, a lot of focus on the communication and to adding incremental features, getting people to adopt the mobile app.

George Sutton - Craig Hallum

Okay, and then last question from me. You mentioned San Francisco’s penetration; can you remind us what that was last year?

Matt Roberts

It was 35%.

George Sutton - Craig Hallum

Okay, thank you.

Matt Roberts

You’re welcome.

Operator

Thank you. Our next question comes from the line of James Cakmak from Telsey Advisory Group. Your line is open and you may proceed.

James Cakmak - Telsey Advisory Group

All right thanks. I want to follow-up on the comments on the mobile payment initiatives. So I guess when we think about the broader roll out, can you walk us through the learning curve for restaurants that actually implement this and how seamless and quickly you think you can ramp, and then I guess further to that, are you planning to drive awareness for consumers with the app.

And then on the direct margin front you talked about driving frequency. I was wondering, are there any insights you can share on the behavior of new diners that you’ve attracted as a result of these investments and their percent of these repeat engagements. Any differences between these marketing related diners versus more organic ones you’ve attracted in the past. Thanks.

Matt Roberts

Sure. So lets take the payment integration question and what has been our early learning, and I emphasize early learning. The actual external pilot launched today, but the team has been using our own beta version for a little while now and I mean we’ve learnt a tone in terms of things that need to be tweaked, things that need to be in a way that its about communication.

It really comes to the root of it is communication and making sure that there is a really abundant flow of communication going on, so that everybody that’s a part of the experience, the diner, the host, the server, all are really well aware that this individual may pay with OpenTable and at the end of the meal, at the conclusion of the meal be able to get up and walk out and we figured out a couple of – a few very cleaver ways I think of actually making that communication flow, both to obviously we take advantage of having our system in the restaurant, their path in the hands of the diner and the integration to the point of sale systems, and that flow has actually really involved nicely over the course of the data.

So there’s still some work to do for sure; that’s why its a pilot and that’s why we’re still not trying to scale it at this particular moment, but trying to still learn about the tweaks, but the restaurants, I think the most telling part will be when we send enough volume through a particular restaurant, so that servers are able to see it on our frequency that makes it start to become more comfortable for them.

That we’re paying very close attention to how comfortable we can make this for the server, because even though we feel pretty confident that the people would take you out of a restaurant communicated enough that this is what’s going on, we also don’t want it to feel weird for the server, because if it feels weird for the server, then they are going to give that vibe to the diners here. So we’re really I think over investing in this area, because we think its such an important part of overall adoption, both at diners and at restaurants.

The awareness from a scale perspective, there is a tone of built up demand and interest and excitement for this product already from our diner base, a tone. So I don’t think we’ll have to do a lot of aggressive consumer marketing on this. I think this is a product that again is already fitting here and people are excited and interested in settling the check in a much more elegant way and easier way than they’ve done in the past.

On the restaurant side we have a number of strategies that we’ll be employing to make sure that restaurants understand the benefits to them and will collect what’s typical intended and playback to them those value propositions that we really clearly understand the way and as part of our marketing dollars will be allocated into that effort.

And then you asked about frequency and whether or not there was any specific differential from new diner that we’ve been acquiring as part of the direct spend versus new diners that were acquired historically through maybe more organic channels and that it depends. It really is a channel-by-channel thing.

If you look at paid search in particular, new diners on the paid search often have much lower frequency applications than organic, direct to the service and that’s sort of an as expected. But we haven’t actually seen it as different as we would have thought it would be. I mean it’s lower, not meaningfully lower though, we thought it might be meaningful.

All that goes into our calculation now, about where is the return and the efficacy of the program and we look at both. The same program we look at, we do look at on a lifetime value basis relative to the spend versus that lifetime value, which is also why there is so much effort on our part to make sure that people try and benefit from our mobile app experience as well.

James Cakmak - Telsey Advisory Group

That’s helpful, thank you.

Matt Roberts

Sure.

Operator

Thank you. Our next question comes from the line of Shawn Milne from Janney Capital. Your line is open.

Shawn Milne - Janney Capital

Thanks for taking my questions. Duncan I just wanted to make sure I sort of had the math right. I think your North American seated diner growth, ex- Rezbook went from 25 to 29, but we had an easier comp and the bulk of that was Sandy right from last year.

Matt Roberts

So Sandy contributed 200 basis points to year-over-year growth rate. So the rate that your stripping on, the rate growth is true underlying organic growth in seated diners.

Shawn Milne - Janney Capital

And I know you talked about a bit of a tailwind in the fourth quarter. I think it was 100 basis points in the industry and your guiding to be economically neutral. Are you sensing that with all the bad weather and everything that January wasn’t – there wasn’t a bit more of a headwind in the industry?

Duncan Robertson

We obviously used full clustering to forecast seated diners. It was very difficult for us to anticipate where, but that’s completely out of our control and so I would say you know we’re strong on the east coast and the mid west. Its difficult for us to directly impact that into to and input that into our forecast as we forecast that which drives our guidance for the quarter and that’s why we go back to the statement that it really is on an economically neutral basis.

Matt Roberts

The punch line is, yes, we definitely are seeing some impact as you would expect in probably [living] (ph) to whether relative to from an industry perspective, we can see that in the industry staff so far through January.

Shawn Milne - Janney Capital

Okay, that’s why I was thinking maybe you would have suggested there was a headwind. And then lastly on the internationally, the Delaware offices, can you – you talked a little bit about the direct spend, but you also mentioned staffing up in Germany and Japan and is there a way to segregate some of those impacting into the first quarter, thanks.

Matt Roberts

Well the numbers that we gave you specifically was our planned spend for direct marketing in the international segment of around $9 million for 2014 and then the other indication was that we’ll continue to add headcount in our international segment, but we haven’t provided greater clarity or further clarity around the expense spend for 2014.

Shawn Milne - Janney Capital

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Jason Helfstein from Oppenheimer & Co. Your line is open.

Jason Helfstein - Oppenheimer & Co.

Thanks. So two first on U.S. and the second on international. So I did actually download the App and it does, it works pretty good. You rate 10 restaurants and then it starts recommending them to you. Historically I think there’s always been a concern about recommendations to the extent that the higher rated restaurants would be kind of queued above the lower rated and ultimately you want to love all your children the same as they all pay the same monthly. So just talk about how you’re thinking about integrating recommendations and just what other ideas you have to actually get consumers to post more recommendations.

And then the second question, when do we think we could actually start to see some impact from Germany and Japan with some of these initiates as far as financially and material things.

Matt Roberts

Sure, so yes and to the higher-level comment about, I guess I’m objective to have a level playing field. I would change that to say our objective is really to have a great dining experience and part of that is providing a great discovery service, and so all of our efforts would be in recommendations, what’s the best for the diner?

What do we need to be able to make sure that when they come on and use our services, whether its an app or our web that the list of recommendations or even just the list of sort order is aligned against things that we think is based on knowing where they generally dine out, where their friends like to go out to eat, the massive amount of data that we have implying our data science now, our much larger data science in to it, like what’s the best for them, that’s the focus, that’s absolutely the focus. We are not trying to level the playing field among a number of people trying to do the best selection in the right order to diners.

From a – what was the other question, consumers…

Jason Helfstein - Oppenheimer & Co.

No, no international. So Germany, Japan you are spending away. When do we think that would actually start to materially impact the international revenue on it?

Matt Roberts

Yes, we don’t think that’s a financial aspect within international. We keep it as one segment as you know. Both of these countries have crazy amount of growth opportunity in front of each one of them. I will say that neither one of them we figured out the magic formula for yet.

We are excited about being able to leverage these things that we are building across the broad from a technology perspective in each of these countries, to really give them the best opportunity to accelerate into that large opportunity. I’m giving you just a real specific example.

Until the end of last year we did not have a mobile app in Germany. We didn’t have an IOS app in Germany, we didn’t have an IOS app in Japan. So we now have a Japan IOS app of course and we have one in Germany and they are both launched and live in android as well and that, that’s just a point around the investments that we needed to make in our architecture and our technology team, to put us in a position that we actually start developing like a global company, and that’s what we do now.

When we put something new out, its new and available in all the markets that we serve and for that, I think that’s been like a really foundation element to ultimately seeing the growth in and to the opportunity in each of those markets. Because each of those markets, they are doing really, I think pretty darn well on the selection of really good availability at really great restaurants. We need to layer onto that a strong, consumer product experience so that that part of the overall network starts to spin at a robust rate.

Jason Helfstein - Oppenheimer & Co.

And just one quick follow-up, is there a update to the ERB rollout?

Matt Roberts

We are starting, this month we are starting to sell it; it’s called Guest Center. The ERB is our existing core product. Our new product will go under the name Guest Center, that’s the cloud based solution and we literally are just trained the whole sales team yesterday and we are starting to sell it this month and we are focusing on new customers initially, in making sure that we are very familiar with – the team is familiar with all the features and how to sell it and then we’ll start to look at rolling it out.

Importantly though there is no economic differential between the two, the pricing is the same for Guess Center as what we would change for ERB. So it’s really not an economics issue, its just simply better products. Ultimately will be the best product and we just want to make sure that it gets out to the hands of our customers as soon as we can.

Jason Helfstein - Oppenheimer & Co.

Thank you.

Matt Roberts

Sure.

Operator

Thank you. Our next question will be coming from the line of Kaizad Gotla from JPMorgan. Your line is open.

Kaizad Gotla - JPMorgan

Great. Thanks for taking the question. First one for Duncan; the midpoint of your guidance suggest about 18% growth. That’s about the same as you did in 2013 and that’s despite some ramp-up investments during the year. So wondering if there is just some conservatism baked in there that you are not seeing higher revenue growth as a result of those investments?

Duncan Robertson

Kaizad, I think it’s important to realize that the investments that we are making in 2014 are specifically focused on driving revenue there. They are longer term in nature, especially where we outlined $9 million, plus $9 million in North America and International direct marketing.

The way we think about that is its much more important for us to be acquiring valuable uses to the platform, rather than measuring that on a directly monetizeable transaction that will happen in 2014. So clearly the investment in online marketing, as well as headcount are positioning us for the growth of the business in 2014 and more importantly beyond.

And when I talk about the growth and the headcount, as I said in the script they are heavily influenced by tech headcounts. We just added another 11 people from Ness yesterday. If you think about the 10 people that we acquired from Quickcue, all sitting in the technology group, its the same, but that kind of gives you an indication of the people that we’ll be brining on next year. In 2014 we’ll still continue to build on the platform that Matt outlines that has benefits not just in 2014, but beyond.

Kaizad Gotla - JPMorgan

Okay, that’s helpful, thanks. And one more if I can; it does seem like you are trying to move further up the funnel, you are trying to be the first place that people will go to, to decide where to dine out. So I’m wondering if you could just give a sense for, is traffic growing at a faster rate than your seated diner growth? How do you think about that?

Matt Roberts

At a high level we are absolutely – we are trying to become what’s all sort of before, during and after the dining experience. So all of our efforts are certainly on the marketing side. Most of that marketing dollars is about getting the bid. If we don’t talk in terms of bids, as you know we talk about the metric we see in diners, but we are trying to get more new people to try our service and we are aligned and that will show up as good bid and we are trying to get engagement, meaning our frequency up with its existing meters also showing up in vivid.

So most of the acceleration, I think the easiest way to answer it is, if you look at again four quarters of acceleration in terms of that seated diner growth rate, which is fantastic and most of that acceleration has been on the vivid side, versus another way to think about it on the conversion of those vivid into transactions.

Kaizad Gotla - JPMorgan

Thanks.

Operator

Thank you. Our next question comes from the line of Michael Olson from Piper Jaffray. Your line is open.

Michael Olson - Piper Jaffray

Good afternoon. On the $9 million direct marketing spend for International in ’14, what was the international direct marketing spend in 2013. Maybe you said that, but I missed it.

Duncan Robertson

It was about $5 million, so we are looking at spending about another $4 million in 2014 versus 2013.

Michael Olson - Piper Jaffray

Okay, and then someone sort of asked this before, but would you describe this level of investment for a marketing development as a strong initial push and then it will maybe ease up as we move into 2015 or will you use the margin that’s kind of implied by the outlook for 2014 as the go forward margin level or I guess about another way, is this an investment year and then you expect margins to move higher or not so much.

Matt Roberts

Yes, I think if you look at our overall spending, so much of our spending in discretionary in nature. I mean its mostly headcount. With the amount of money that we’ve articulated in terms of direct marketing spending, its really small $18 million on our expense base and that’s like 8% of our expenses, of our revenue rather. So it’s a really, really small number of direct spend, just for marketing.

Investments that we are doing on adding technologist into the building and development resources and designers and data scientists, those are all just decisions that we made starting last year and continuing in the current year, because we believe this is – it’s the path towards a larger – into a larger growth opportunity. We could have decided to not do that as well and we had, we do have unbelievable operating leverage to the business, so I think for a few years in a row we were at 60%-plus year-over-year operating leverage. These are just discretionary spend.

I won’t say that – and also sorry, one other element is marketing. We meaningfully and what’s implied in our marketing team I should say, what’s implied in our guidance going forward to-date, really sizable increase in the marketing team, and that I think is really more a step functioning foundational thing that I won’t – that’s what we do every year for sure. I think though the technology side, we also come up with some limits with the number of people that we can have from the technology team as well, so we wouldn’t want to say that we won’t add people if we think that it will accelerate our opportunity in the future.

Michael Olson - Piper Jaffray

That makes sense. And then one last one, you mentioned the expected international dining yield $1.30, I think you said for Q1. Did you say what you expect North America dining yield to be?

Duncan Robertson

No we didn’t Mike.

Michael Olson - Piper Jaffray

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Paul Bieber from Bank of America. Your line is open.

Paul Bieber - Bank of America/Merrill Lynch

Hi Matt and Duncan, thanks for taking my question. I apologies if its repetitive; I joined late. Did you address what you learnt from the Q4 margin tests; and then secondly, can you remind us of any potential long-term impact from the rollout of Guest Center. A couple of years down the road is it possible that we could see more dynamic pricing on seated diners. Thanks.

Matt Roberts

We didn’t talk specifically about the learning, the other event on marketing spend in the fourth quarter, other than we like what we’ve got. I think then when you’re talking about a business that has grown at this level for this long with basically from a no-paid marketing, paying anything is something that we had to get used to. But we do like the efficacy of the stuff that we have employed and we have, I really like the fact that we’ve learnt what isn’t working too. There was a lot of value in the test that we ran to say, well that’s not correct, we won’t do that again.

So I think that we are now at a point and its reflected in the $9 million spend for the coming year in North America and another $9 million in international. Well we have enough – we entered the year with more confidence in what we can do and what we can do at scale. We just figured out and put the stitches and processes in place and we actually feel more confident that we know what to scale. So there is sort of good learning from that. I guess we do go through it channel by channel and program by program review that give you hopefully a good overview of it.

And what was your – oh, Guest Center. That’s a generic question. So Guest Center, its not enabled so much Paul. I think one of the things that is a primary benefit is routed in the fact that all the data will be in one place. So all the information from our entire network, both restaurant and diner side is going to have an opportunity to be in one location, which allows for a level of insight for our restaurant customers that just nobody else can deliver and that will allow them to deliver fantastic hospitality to the guests. So that’s probably the thing that we are the most excited about.

It will also facilitate exploration in other areas, one of which could be what you are talking about, dynamic pricing or something on the pricing side, but that’s not the primary focus. The primary focus is talking to make sure that we have on the phone really scalable architecture that takes advantage of all the rich data or enables us to take advantage of all the rich data that’s out there.

Paul Bieber - Bank of America/Merrill Lynch

Okay. Thank you.

Matt Roberts

Sure.

Operator

Thank you. And at this time I’m not showing any further questions. I would now like to turn the call back to management for any closing remarks.

Matt Roberts

Great. Well, thank you and I appreciate everybody joining us on the call and look forward to catching up with you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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