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OpenTable, Inc. (NASDAQ:OPEN)

Q1 2014 Earnings Conference Call

May 1, 2014 17:00 ET

Executives

Matt Roberts - President and Chief Executive Officer

Duncan Robertson - Chief Financial Officer

Dan Gibbons - Senior Director of Financial Planning and Analysis

Analysts

Dean Prissman - Credit Suisse

Chris Merwin - Barclays

Blake Harper - Wunderlich

Jason Helfstein - Oppenheimer

Kaizad Gotla - JPMorgan

Andrew Connor - Piper Jaffray

James Cakmak - Telsey Group

Paul Bieber - Bank of America/Merrill Lynch

Operator

Good afternoon, everyone, and welcome to the OpenTable First 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 Financial Planning and Analysis, (Dan Gibbons).

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

Dan Gibbons

Good afternoon. Thank you and welcome to the OpenTable earnings conference call. Joining me today to talk about our first 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 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 will turn it over to Matt.

Matt Roberts

Great, thank you, Dan and welcome to our conference call. This afternoon, I will provide you with a high level overview of Q1 performance and then I will turn it over to Duncan to walk you through the detailed financials.

OpenTable had a strong first quarter. Revenue for the quarter totaled $53.8 million, an 18% increase over last year and our adjusted EBITDA profit margin was 37% on a consolidated basis and 45% 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 $42.5 million in the first quarter, a 24% increase over last year. Also worth noting, approximately 42% of our North America seated diners originated on a mobile device, which is a new all-time high for us. Let me add some additional context to our North America seated diner growth. Like many other businesses across the Midwest and East Coast, our restaurant customers were hit by winter weather conditions. As a result, overall North America industry diner counts were down 2% year-over-year.

Turning to our installed base of restaurants in North America, we exited the quarter with 23,862 restaurants, representing a 19% year-over-year increase. This total includes 19,386 restaurants using our ERB or Guest Center solutions, 2,509 restaurants using our Connect product, which is designed primarily for walk-in restaurants that accept reservations, and 1,967 restaurants using Rezbook technology.

In our International segment, which includes the UK, Germany and Japan, seated diners grew to 4.3 million in the first quarter, a 38% increase over last year. Looking at our installed base of international restaurants, we exited the first quarter with 7,721 installed restaurants. This total includes 3,996 restaurants using our ERB or Guest Center solutions and 3,725 restaurants using our Connect product.

Now, I would like to provide you with a high level update on some strategic focus areas. Let’s start with a quick update on Guest Center. In late February, we began selling Guest Center, our next generation cloud-based hospitality solution for restaurants. New and prospective customers are excited about its elegant design as well as its nimble structure that creates an experience that is intuitive, reliable and incredibly fast. In fact, we found that Guest Center takes half the time to setup as an ERB and that Guest Center customers are a third less likely as new ERB customers to contact us for additional support in the days following their initial setup. So, we are already seeing the advantages of a cloud-based solution and the application of a great new design. I encourage you to check out the Guest Center video on our blog to see for yourself why this is a transformational product for OpenTable and for our restaurant customers.

Now, I would like to provide you with an update on mobile payments initiative. We are excited about what we have learned from our pay with OpenTable pilot in San Francisco and how it’s been received. Our experience to-date has confirmed that settling the check is a significant pain point for diners and restaurants and we are uniquely suited to solve this problem. One indication of diner interest is that our initial e-mails inviting diners to pay with OpenTable had twice the open rate of our typical marketing e-mails. Restaurants have also shown great interest in payments and they are particularly intrigued by how the technology can help them provide better hospitality for their guests. Based on these learnings and conversations with a variety of restaurants across the U.S. and internationally, we are eager to bring mobile payments to more diners and restaurants faster. So, our plan is to introduce payments to at least 20 new markets in the second half of the year.

Now, let’s turn to an update on some of our marketing initiatives. Last spring, we hired a number of domain experts in the areas of acquisition, engagement and mobile marketing. And in the second half of last year, we began testing performance marketing to build on top of our strong organic reservation growth. And we have learned a lot over the past three quarters and have seen some strong improvements in efficiency, while steadily increasing the scale of our campaigns. For example, from our starting point in the third quarter of last year in our non-brand paid search campaigns in North America, we lowered our cost per booking by more than 20% while scaling the bookings acquired by over 250%.

And in our targeted mobile app acquisition campaigns over the same period, we lowered the cost to acquire a new mobile app booker by more than 30% while increasing the number of bookings from these newly acquired app users by approximately 45%. In addition, we continue to see strong improvement in these acquisition channels within our international markets. We are also testing new acquisition channels such as retargeting and paid social advertising. Overall, we are pleased with the improvements we have seen and we will continue to invest to drive growth.

Now, I’d like to provide you with an update on the evolution of our brand strategy. As we highlighted last quarter, we believe we have a unique and exciting opportunity to fundamentally transform the dining experience at every touch point, much as we transformed the profits of booking a reservation. We think of it as the strategic expansion of OpenTable from a transaction company to an experiences company relentlessly focused on powering great dining experiences. On this trajectory and with our presence in more than 31,000 restaurants worldwide, we have a tremendous opportunity to be the global dining passport for consumers around the world. In support of this strategy last week, we’ve re-branded toptable to OpenTable in the UK. And while the UK restaurant community is very familiar with the OpenTable brand, we plan to bolster consumer awareness of OpenTable with brand advertising through the remainder of the year.

Finally, I would like to take a moment to acknowledge a significant milestone. A big part of our evolutions with dining experiences company is the role we play helping diners discover the perfect restaurant. Our user-generated restaurant reviews provide diners with rich content that helps them find the perfect spot time and time again. And what makes our reviews so unique and trusted is that only diners verified to have dined at the restaurant via an OpenTable reservation can publish a review. This is why I am excited to share that diners have contributed more than 25 million reviews, making OpenTable the largest source of verified restaurant reviews. And now, over to Duncan.

Duncan Robertson

Thank you, Matt. Good afternoon, everyone and thanks for joining us. Before I address the first 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 and impairment of acquired intangibles expense, acquisition-related expenses and the tax related impacts of these adjustments.

Now, let’s turn to the results, which demonstrate that we are off to a great start to the year with our core operating metrics once again delivering strong financial results. Total Q1 revenues grew 18% to $53.8 million and adjusted EBITDA grew 10% to $20 million. Non-GAAP net income was $11 million or $0.45 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 17% to $46 million, which is made up of three main components. North America reservation revenues grew 22% to $28.7 million, which represents 62% of total North America revenue. The primary driver of reservation revenue is the total number of seated diners which increased 24%. As a result of the weather we attributed loss of approximately 200 basis points of year-over-year seated diner growth or approximately $540,000 in North America reservation revenue in Q1. Also related to reservation revenue, the revenue per seated diner was $0.68 in Q1. During the quarter, Rezbook contributed 1.1 million seated diners and $101,000 in reservation revenue.

Moving on to the next component, subscription revenue in North America grew 12% to $14.5 million. The main driver of subscription revenue is the number of installed ERB and Guest Center restaurants, which grew 10% over the prior year. The ERB and Guest Center monthly attrition on a unit basis remains near its historical level of approximately 1%. Also related to our subscription revenue, the average subscription ERB and Guest Center price was $244. Rezbook restaurants, which totaled 1,967 at March 31, contributed subscription revenue of $442,000 in Q1. And lastly, the smallest component of revenue disclosed as other revenue, decreased 10% to $2.8 million.

Turning to our North America expenses, non-GAAP operating expenses totaled $28.2 million, a 31% increase over the prior year. The primary driver was a 49% increase in sales and marketing expenses, primarily associated with the increased marketing investments outlined on the previous calls. On a sequential basis, our North America non-GAAP operating expenses increased 14% from Q4, primarily driven by increased operations and support expenses and an increase in headcount related expenses associated with a 7% increase in total North America headcount and more specifically a 14% increase in technology headcount. Our resulting first quarter North America non-GAAP operating income totaled $17.7 million or 39% of revenue. North America adjusted EBITDA totaled $20.7 million or 45% of revenue.

Now let’s review the results from our international operations. International revenue for the first quarter increased 29% to $7.8 million, 15% of the company’s total revenue demonstrating the strongest international revenue growth rate in more than two years. International reservation revenue increased 55% to $5.5 million, subscription revenue grew 17% to $2.1 million and other revenues decreased 76% to $170,000. Related to reservation revenue, the revenue per seated diner was $1.30 in Q1.

Turning to expenses, international non-GAAP operating expenses totaled $9.2 million, a 10% increase over the prior year. The main driver is associated with increased marketing investments. On a sequential basis there was a 9% increase primarily driven by seasonal payroll related costs. Our resulting Q1 international non-GAAP operating loss totaled $1.4 million, international adjusted EBITDA was a loss of $646,000. On a non-GAAP basis taxes were $5.3 million which is an effective rate of 33%. Our quarterly stock based compensation expense was $4.4 million in Q1 as a result of the progression of the company’s brand strategy in the UK which Matt discussed and impairments of the acquired intangible assets associated with the toptable brand resulted in a non-cash GAAP expense of $12.6 million in Q1.

Wrapping up our consolidated Q1 results, cash and short-term investments totaled $117.6 million at the end of Q1. Let me close by turning to guidance for the second quarter and an update on our full year 2014 outlook. We are maintaining our revenue and non-GAAP adjusted EBITDA guidance for 2014 and are raising our non-GAAP EPS guidance for the year. Let me walk you through the details.

Starting with North America guidance, we estimate Q2 revenue to be in the range of $47 million to $48.2 million and non-GAAP adjusted EBITDA to be in the range of $22.2 million to $23.4 million. For the full year 2014, we estimate North America revenue to be in the range of $189.7 million to $194.3 million and non-GAAP adjusted EBITDA to be in the range of $88.8 million to $93 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. On this basis, we expect to see Q2 North America seated diner growth to accelerate nicely to almost 30%.

Moving on to the subscription side, we expect that the average ERB and Guest Center subscription rate to be $242 in Q2. Related to other revenue, we estimate North America other revenue will be approximately $2.6 million in Q2.

Turning to guidance for our International operations, we estimate Q2 revenue to be in the range of $7.7 million to $8.1 million and non-GAAP adjusted EBITDA loss to be in the range of $1.5 million to $2.1 million. For the full year 2014, we estimate International revenue to be in the range of $32.2 million to $33.8 million and non-GAAP adjusted EBITDA loss to be in the range of $3.5 million to $5.2 million. Related to International reservation revenue, we expect the seated diner yield to be approximately $1.28 in Q2. On a consolidated basis, we estimate Q2 non-GAAP EPS to be in the range of $0.43 to $0.48 and for the full year 2014, we are raising non-GAAP EPS guidance which we now estimate will be in the range of $1.81 to $1.96.

Turning to a few housekeeping items, on a consolidated basis we estimate that our diluted weighted average shares outstanding will be approximately 24.4 million shares in Q2 and 24.5 million shares for the full year 2014. We estimate stock based compensation expense will be approximately $5 million in Q2 and $18.4 million for the full year 2014. We estimate amortization of acquired intangibles will be approximately $2.3 million in Q2 and $8.6 million for the full year 2014. And finally, we estimate our non-GAAP effective tax rate will be approximately 34% in Q2 and the full year 2014.

To sum up the quarter, we are very pleased with the solid growth in our core operating and financial metrics. And it’s great to see the business continued to deliver solid EBITDA margins and cash flows even as we invest behind the significant growth opportunities in both North America and internationally.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Stephen Ju from Credit Suisse. Please go ahead.

Dean Prissman - Credit Suisse

This is Dean Prissman for Stephen. Thanks for thanks for taking our questions. So what are your areas of focuses driving engagement with existing users through enhancements to the consumer experience, so when you look into engagement rates today, is there anything you can share even qualitatively on what you think beyond that opportunity is? And then I have a follow-up.

Matt Roberts

Sure, this is Matt. I think this is a kind of untapped opportunity. Let me hit on a couple of them. So I think from an engagement perspective, we can think about it from a product experience and then also just from a communication and sort of engagement marketing perspective. Let’s do product first, which is we think about our pay with OpenTable product in and of itself, that’s a massive boost to engagement. We think solving and hitting on it are really significant pain point for consumers be a – for many people to become the primary reason the user application, but certainly is the support to using our application on a more frequent basis. And that’s just one example. We have a very robust roadmap of other experiences that will allow us to increase the frequency.

The other is just we invested as you know we joined forces with Ness and their team has so much passion around personalization and data science. And what we are intending to do is to apply that information in all against our – that skill against our massive data that we have as being the world’s largest network and customizing the messages that we give to our returning or recurring diner base to really drive further engagement. I will just give you a quick example. We applied just a little bit of personalization in the test scan payment saw a 50% lift to the efficiency of that particular campaign. So, what we are doing right now is trying to obviously automate all of that. So, it’s not a more manual process and then roll that out at scale. So, we are very bullish on our ability to product innovations, pay with OpenTable just being one example coupled with just becoming more thoughtful and better with data and analytics on how to personalize our communication flow getting to be driving engagement. It’s all really tied into our primary desire to transition the company from transaction to experiences. At the heart that will drive increased engagement and frequency.

Dean Prissman - Credit Suisse

Thanks. Very helpful. And then what’s the analytics tools for restaurants in Guest Center beyond obviously making your product more sticky, could usage actually lead to other commercial benefits, so for example, encourage restaurants to make more of the inventory available to you?

Matt Roberts

Well, I think that there is a host of value from moving all the information into one place. One, just our restaurant customers will more easily be able to share information among their different restaurants as they are part of a group. But I think the more interesting and exciting thing is what can we share with our restaurant customers for the benefit of our diners about people that they have never had in their restaurant before. We can bring to the table for the first time with the Guest Center architecture, a profile of a person, a guest for a restaurant and their preferences like a boost, gluten-free, all of those things that really help drive the customer experience and ultimately that will drive the restaurant’s social scores etcetera that will drive more business and so more seats. So, we are excited about in that level.

From a analytics purely sort of a business intelligence analytics perspective, our belief is that what our biggest value will be giving restaurant answers, not a bunch of reports because they are busy. They have a lot of other things going on other than to run reports. So, our desire is to focus heavily on almost issue spotting or things that they might not be able to see on their own, but because now we have our talented data science team, we can put that team to work on trying to understand areas of opportunity, but not just hey, here is a problem, but here is a way forward, here is a solution that can help you grow your business. So, it could be we look at it, the last five Wednesdays and alert them that they are off of trend in terms of capacity for the night. And we offer them an opportunity to participate in some promotional activities or send out an e-mail automatically from system or to produce messaging or create an incentive to drive volume. So, those types of things that I think are really going to be a fund benefit and important benefit for our restaurants as we get Guest Center out there and scale.

Dean Prissman - Credit Suisse

Okay, thanks a lot.

Matt Roberts

You are welcome.

Operator

Thank you. And our next question comes from Chris Merwin from Barclays. Please go ahead.

Chris Merwin - Barclays

Great, thanks. So, of the $18 million in the plan for marketing spend this year, how much did you actually spend of that in the 1Q both domestically and internationally? And can you give us any sense of what the cadence of that spend might look like for the rest of the year? And secondly, are you also finding that the diners that you have acquired through the campaign are converting at the same or better rates as your organic traffic?

Duncan Robertson

Yes, Chris, we have been spending it pretty much according to the plan origin that we said it was going to be nine and nine roughly between North America and the International business. And in Q1, we spent around $3.5 million in the split both just under 2 – just above $1.7 million in North America and about $1.8 million in the International business.

Chris Merwin - Barclays

Got it. And just a quick follow up, I am sorry, Matt do you have another comment?

Matt Roberts

So, you were just asking about the efficiency of the spend, and I think we are finding that we are actually really pleased with. It varies, right, because you were also doing some experimentation in here and trying things and that’s part of our journey right now as to just try a number of things, so that we can find those things that are available to us to scale, but certainly improvements that we have seen, I quoted some of those in my part of the remarks we are definitely seeing value. It’s one thing to lower the cost per our acquisition, but if you can’t scale up the same time, it doesn’t have that much of an impact on the overall business. So, we are really pleased with the progress that we are making on both lowering the cost to acquire as well as increasing the scale.

Chris Merwin - Barclays

Got it. Just a quick follow-up, as it relates to the payments product, when you were testing that, it’s damn friendly, can you share anything about the uplift you are seeing in engagement on a per user basis? And when you roll that out to I think to 20 or some markets this year, are those – is it fair to say that those are going to be your larger markets, so in effect you will be reaching the majority of the users that you have in the platform today?

Matt Roberts

Yes. I think the last part first, which is, yes, we would – we likely sequence it that way. There are some of the 20 that we have in our plan that aren’t on our largest markets, because it’s really important for us to understand sort of the breadth of adoption in terms of – there is different types of restaurants as you go across the country and we want to make sure that we are getting a good read on how pay with OpenTable works and feels within a number of different geographies, not just sort of our dense populations. As far as early reads on frequency, it’s all anecdotal at this point. From a statistical perspective, I don’t think we share anything with you on a read on that. We have some I think pretty cool ideas on how to scale this and get the awareness of everybody that actually goes to a restaurant that enabled for pay with OpenTable to be aware of and marketed to. So, why don’t I hold comments on that until we actually launch that, which we are going to do this quarter? I think it’s a pretty cool stuff that will play out here in the next couple of months.

Chris Merwin - Barclays

Okay, thanks a lot.

Matt Roberts

Sure.

Operator

Thank you. And our next question comes from Blake Harper from Wunderlich. Please go ahead.

Blake Harper - Wunderlich

So, I want to ask you about the thought process with the re-branding of toptable and what was kind of behind that as well. And then also you had really strong growth as you mentioned in the international reservation side. So, just understanding where that growth came from and what kind of drove the re-branding if you did have that growth there in the International?

Matt Roberts

So, fundamentally, we think – it gets back to what I was saying earlier is that we have this opportunity to be the global dining passport for consumers around the world. And we would like that to be and think it makes the most sense to be under one brand, which is OpenTable. The toptable brand is a very good brand. It’s a great brand. We also just believe that so is the OpenTable brand and we with the right support, it can easily get to and achieve the same brand recognition in the UK as a toptable brand. And then we really are building for the future with one global brand and that’s – it’s really no more complicated than that. We feel very comfortable with the transition and the implications of the transition and with a long-term view of this it makes all of the sense in the world to transition at this point. If we ever were going to transition to one brand, it’s – there is sort of no time like the present to adopt the OpenTable brand as a global. One of the things to share with you, we have a lot of our existing OpenTable diner base, let’s say our U.S. base that obviously travel and they travel to Paris, they travel to London, they travel to Hambergen, and Tokyo. And so just keeping the brand consistent for those International travelers is a really big benefit for us.

Blake Harper - Wunderlich

Got it. And then if could just follow-up on that, was there any particular strength of the any either of your three International markets that drove those results?

Matt Roberts

I think it’s pretty solid. Yes. It was pretty consistent, I mean the growth – the year-over-year growth rates were pretty consistent across all three markets. What I will – I mean, if you look at overall International reservation revenues we said it was up 55% which contributed to the really strong overall growth rate in our International segment, obviously two things driving that in Q1. One, was just a slight improvement even from Q4 on yield, but then more specifically around that the volume of seated diners which was up 38% year-over-year. And as you know we have been talking about really focusing on the quality of restaurants in our install base particularly in the UK and we are making some really nice traction there. And I think as we see the quality of restaurants in London and the UK mix towards those best to have restaurants obviously that helping with overall to seated diners in our restaurants.

Blake Harper - Wunderlich

Alright. Thanks for answering my question guys.

Matt Roberts

Sure.

Operator

Thank you. And our next question comes from Jason Helfstein from Oppenheimer. Please go ahead.

Jason Helfstein - Oppenheimer

Thanks. So you alluded in your comments that particularly using performance marketing, you are finding ways to move, so I think you said mobile app downloads, more cost effectively and so I mean it’s not a metric you guys don’t give up, but do you think we will be able to get into the position in the next few quarters where you will able to kind of quantify for us how you have been able to boost downloads of the app and ultimately accelerate the marketing given that I don’t want to call the marketing is in the test Phase, right, but you are gradually putting it out. So just maybe going through some more color to how you are seeing that playing out just ultimately drive usage in seated diners. And then secondarily should we see an acceleration in ERB restaurant as we move through the year given that some restaurants may have not signed up kind of waiting for Guest Center to come out? Thanks.

Matt Roberts

Sure. So on the app download in particular market, well I would say just let’s do our performance marketing as a total. While we are testing, we’re not testing whether or not we want to be doing performance marketing and it’s sort of a little bit – it’s just a different thing. So we are fully committed to performance marketing and feel like it’s an opportunity engine of growth for us going forward. It is building on really, really strong organic growth that we already have based on having the brand that we have and the recognition and being the leader in all of those things. But we are not testing within a performance marketing is we are in or out, we are in on performance marketing. We are testing various means of doing that performance marketing. And we are getting better and better and I just shared some ways that we are getting better on non-brand search engine marketing for example and then app download marketing. And I don’t think that’s going to be an ending process, right. You are going to continue to test and learn and try things most of which will be really effective some of which won’t. But I know that we will be continuing to test and learn.

As far as scaling it, we are very eager to scale and we will scale behind any and all programs that we find are driving good return and driving growth that make sense for us. The nice thing about mobile apps in particular I know we have mentioned to you this before is the frequency of a mobile app user or a diner for us is considerably higher than the frequency of a non-app user. So we have built in sort of lifetime value meaningful boost that we get to use to our advantage in terms of employing other performance marketing vehicles.

I am not sure we are going to ever get to a point where we said we tried this very specific mobile app download scheme and it had this kind of return, that’s kind of granularity that I don’t envision that we will get into. But I do think you will see that the boost in our mobile percentage of our total seats filled is a good evidence. And in essence like for example, that was 42% this quarter in North America, it’s an all time high for us. You will see it in that metric and really fundamentally you will see it in the growth of seated diners, which is the revenue generation component of the overall equation.

And then you asked about acceleration of the ERB base which will now kind of be combined to the ERB and Guest Center base, I think that you will – there is certainly we have talked about and have been talking to the base about Guest Center and have been increasingly marketing to prospects about Guest Center and now without its life and we are seeing some really nice adoption, meaning when we show it to prospective customers they really like it a lot for all the reasons I talked about earlier. There are some features that we are still finishing up that are for some restaurants they are saying hey, once you finish this particular feature or that particular feature, I am all in. And so I think that what you will find is as we continue to iterate the product and I am not talking about multiple months here, I am talking sort of week, sometimes days and weeks because of our new architecture we can move really fast. As we add new features and they become available for the customers I think that the sale velocity will off to be – will definitely pick up around that.

Duncan Robertson

Jason this is Duncan, I will add one other statistic to that. I mean I think as we were obviously sensitive to the fact that we were launching this fantastic new product in Q1 of this year, we did not see a deceleration of sales towards the end of last year. If you look at the increasing of our ERB installed base in Q4 I think was up 642 which clearly suggest that customers were still adopting the ERB platform even in the – with the knowledge that the new product was coming out in Q1. So the sales team is being pretty resolute and making sure they are continuing to sell the solution. So it’s not that as if there is a backlog of pent up demand for Guest Center. We have been – we have continued to sell across the platform.

Matt Roberts

Yes. I agree and I would just add though, we think we have made a better product, I mean fundamentally we think we just build a better product. It’s our new core flagship product. And as a result, we think even – we will even get more adoption and more sales velocity with this new better product.

Jason Helfstein - Oppenheimer

Thank you.

Matt Roberts

You’re welcome.

Operator

Thank you. And our next question comes from Kaizad Gotla from JPMorgan. Please go ahead.

Kaizad Gotla - JPMorgan

Thanks for taking my question. First for Duncan, the 2Q seated diner reacceleration to 30% just wondering if you could give us some sense of the drivers of that reacceleration beyond the 200 basis points weather impact you saw this quarter. And then second separately, you said a quarter of Guest Center restaurants you are trying to hit by the end of the year? Thanks.

Duncan Robertson

Sure. So, Kaizad I mean I think Q1 to Q2 clearly we gave you the statistics around the impact of weather in Q1, but what we are really seeing in Q2 is a lot of things that we have been talking around on the marketing team. So new user acquisition, engagement of existing users, we are starting to see the benefits of that. We have been talking about acquiring and engaging users since the summer of last year and we started to invest it in Q3 and Q4 of last year. Engagement marketing, paid search particularly SCO we have spend a lot of time talking about that as well on building a muscle around SCO. And so that’s really what’s starting to drive the growth and the key metric that we are all focused on which is seated diner growth. So it’s very nice to see it coming in Q2 or the quarter, so there is not a – on Guest Center we do have a – look we want all of our new sales to be under Guest Center and we have a very specific objective that we will get to you by the end of the year for sure, all of our new sales will be Guest Center and not our ERB.

When I say all, I am sure there will be some folks that are just so used to the ERB and have some feature that sort of features 72 that we provide that they really, really, really want to keep in place and its not in Guest Center yet. Then that’s fine, we can sell them the ERB. But we are moving towards a place where and the product team is doing a fantastic job getting to a place where we like to think about it as if you give 10 customers existing ERB customers a choice between their current solution which they no one love or Guest Center, nine of out ten would say, no brainier I want Guest Center. And so the product team is really I think executing quite well against that as an objective.

Kaizad Gotla - JPMorgan

Great. Thanks guys.

Matt Roberts

Sure.

Operator

Thank you. And our next question comes from Mike Olson from Piper Jaffray. Please go ahead.

Andrew Connor - Piper Jaffray

This is Andrew Connor on for Mike. I was just trying to follow-up on with Kaizad’s question, in terms of 30% you kind of said almost 30% North America seated diner growth, it seems like if you kind if you take the first half of 2014 implies seated diners it’s still kind of a deceleration on some of the rates that we saw sort of in the 2013, so I was just kind of curious if that’s sort of conservatism or maybe just some diners that were sort of lost with the winter weather. And then on top of that I mean what’s – what is the sort of total addressable market look like where is your guys penetration now, I know you given that update at the full year. I’m just curious in San Francisco where you guys continue to kind of move that penetration rate higher, who are those incremental diners that you guys are winning, what do those diners look like? Thanks.

Matt Roberts

Sure. Yes, I mean the nearly 30% year-over-year growth rate that we expect to have in North America in the second quarter I think it’s – obviously it’s a pretty significant year-over-year growth rate and in relative terms to a prior year you have got all kinds of lapping issues to strength on strength. But we are very pleased with as Duncan said the progress and the acceleration to 30% in the second quarter. On the seated diner on the TAM, total adjustable market side there is really no updates. We do that once a year. We had nearly 20% of all reservations that happened last year, happened online and through OpenTable. And in San Francisco nearly 40%, 39% of all reservations happened online and we use basically use ourselves as a proxy for online in San Francisco.

Asking about what the opportunity to get at that the remaining and let’s say San Francisco, the diner base it’s – there is two things, there is diner base and/or frequency of use because you will have some of the folks that use our solution may not use it every single time right and that gets back to the strategies that we talked about in the first question which is innovating with products that solve incremental pain points and delivers the light and that will drive frequency. So somebody that may have used maybe periodically used OpenTable that’s in San Francisco, our objective would be that they wouldn’t think of not using OpenTable because there is just so much we bring to the table as an experienced company. So that’s a definite part of the growth strategy. As far as the ones that I have never tried OpenTable before that’s where we have an opportunity on some of the acquisition marketing that we are doing, and in particular, where we think that our strength or – strengthening our skill and capacity around SCO is going to be particularly helpful.

Andrew Connor - Piper Jaffray

Thanks.

Matt Roberts

You’re welcome.

Operator

Thank you. And our next question comes from James Cakmak from Telsey Group. Please go ahead.

James Cakmak - Telsey Group

Hi, thanks. So with respect to the payments as we think about the next 20 months it’s that it’s going to be rolling out into, how should we think about how seamless this can be you already talked about payment enabling the restaurants, so if you can just talk about or provide some detail on how we should think about how quickly this can be rolled out and what proportion of the restaurants in the market can actually have that capability. And then secondly with the rebranding of toptable to OpenTable, how should we think about Rezbook? Thanks a lot.

Matt Roberts

Sure. So it’s a great question. How do you get pay with OpenTable to scale, but let’s first start with the experience question, it’s an incredibly seamless experience. I mean we wanted to do this, we wanted to do it in a way that took advantage of our unique opportunity, which was we had technology in the hands of diners and we already had technology in the restaurants. So we wanted to make sure that we could use those two things in a way that allowed the diner to truly have a seamless almost invisible opportunity to settle the check. And that’s what we, I am so proud of what the team has done there, that’s what we have created. So when you make a reservation today in restaurants that’s enabled with pay, you can add your credit card and seamlessly you don’t have to tell anybody in the restaurant that you may or may not pay with OpenTable. You walk in, there is a note in the comments field of the reservation system, our reservation system that says you may pay with OpenTable.

The host just seats you just like they normally do. They are aware you may pay but doesn’t have to be a conversation. They sit you at the table. The connection to the point of sales system is seamlessly and automatically made to the technology that we have developed. You get a notification that says, you may view or pay your check at anytime and in your app you can actually look and see how the order is building in real time. You can imagine in the future there are opportunities to give ratings and review on different dishes. You can even look at giving feedback on the server, right from our app. But the time that you are ready to go you just get up and go. You decide what tip you want, you swipe to pay and you get up to go.

And from a restaurant’s perspective and particularly the server’s perspective there is all kinds of communication that takes place in the point of sale system that in the way that we have designed it to let them know at the start you may pay with OpenTable because even though you have it enabled you may chose not to. And when you decided to pay it says now you have decided to pay and let them know what the (futurity) is. And they can still add the coffee in at the end if they need too. And then you get a final push notification and an email with the receipt, it’s that simple. So we definitely have created the killer experience from a consumer perspective.

Now how to scale it there is – at the heart it’s going to be mostly about restaurant adoption, how you get restaurants to get comfortable with this as an organic part of their overall service delivery. And because of the way that we have designed it, we have already thought ahead to that would be a critical component. The other things that we need to work on and we have actively in place right now is the robust set of sort of engagement tools of training videos, people that are able to go an have discussions with the restaurants, seminars those type of things. And we also can take advantage of an asset that we have that many other people don’t which is we already have local sales people and local restaurant relations people and local operations teams that are in the market every single day talking with customers. So they can and will be an important part of this adoption curve. So those are the really the two things that I will call out for you. There is from a technology perspective we are working really hard on making sure that we have technology that simplifies some of the connections that can get complicated, but I feel like we are on a really good path there.

Duncan Robertson

So, James, you had a second question around, you mentioned the rebranding and Rezbook are you referring to toptable to OpenTable or what’s…?

James Cakmak - Telsey Group

I was saying just given how you are thinking about the rebranding of toptable should we think a similar situation for Rezbook?

Matt Roberts

Yes, we are – I think at the time we mentioned to there wasn’t an intent to continue to market or sell Rezbook, so it was – all of the Rezbook customers are existing customers are more than happy to stay on their existing systems and they are staying under the existing business terms, etcetera and none of that has changed. They continue to be able to do that. But we as a business, we are not intending to sell to new customers or market to new customers, the Rezbook solution. Frankly, we believe that we have a much better solution that we can offer new customers in Guest Center.

James Cakmak - Telsey Group

Alright, thanks Matt.

Matt Roberts

Sure.

Operator

Thank you. And our next question comes from Paul Bieber from Bank of America/Merrill Lynch. Please go ahead.

Paul Bieber - Bank of America/Merrill Lynch

Hi, Matt and Duncan. Thanks for taking my questions. I think I may have missed it, what was your initial feedback from restaurants on the mobile payment service that has been in beta for few months here in San Francisco? And then secondly as you rollout to the 20 markets you mentioned, is there a revenue opportunity with payment service or should we just think about it as an engagement driver for consumers and then also a retention driver for restaurants?

Matt Roberts

So, the initial feedback has been really positive. Again – so, we started I think Octoberish last year really in sort of alpha, beta with certain customers. So, that has helped a lot. And our design team did a ton of works sitting with restaurants, bringing the restaurants and doing sort of focus group work, understanding what their concerns would be, and quickly mitigating any concerns that they have with product features. And it really is showing up, because the reaction that we are getting from restaurants is very, very positive, that it’s almost sort of like a non-event relative to the adoption and that’s saying something, because we are asking them to fundamentally change something that they have done for the same way forever. So, to have them be almost sort of not highlighting it as or issues around it is a major accomplishment by our team. So, we even have servers that are mentioning to their guests oh, you know, are you going to end up paying with OpenTable? It’s super cool. Let me show you how it works. So, we really like the advocacy that’s already developing. And again, I think that’s a testament to we have taken a very restaurant-centric view of what the experience needs to be to support our restaurant customers.

In terms of the revenue opportunity with pay with OpenTable, there is no discreet revenue opportunity that we are looking to pursue with restaurants meaning, there is no fee that we are charging restaurants to participate in the program. The cost, their normal recurring processing cost for credit cards and payments, we actually want to come in no worse than what they are at. So, it’s sort of at where they are at. We think there is an opportunity for us to even come in under where they are. So, it’s a really big opportunity for value-add for the restaurant. If we can get to a place at scale that we also could accomplish that objective, which is at where they are at, at their current cost and even perhaps providing savings and then also earn some basis points for ourselves, that’s great. And that could absolutely be an opportunity for us going forward. That’s something that happens with scale. And so, that’s – but it’s definitely a real opportunity for us.

I do think you hit on probably one of the biggest motivations, which is that we have a really great engagement product innovation here. We are solving a pain point for diners and they are going to want to use the product at an increasing rate, because we really solved a meaningful pain point for them. And from a restaurant perspective, in addition to perhaps even providing them lower cost of processing, there is all the kinds of qualitative benefits that will accrue to them. We could start with happier diners and happier guests, better hospitality, but you can then quickly go to elements like faster turn times. The notion that you have a happier guest is especially right at the point where they are determining what the (indiscernible) is, that means you are going to have higher tips. And higher tips allow you to retain and hire the best team and the best team gets you the best service and best social scores and it’s this nice virtuous cycle that kicks off. So, in all the analytics that we are going to be able to now couple on guest spend and guest data in with the incredible data we already have about diners and diners’ history, that’s a fantastic addition to our insight to our business intelligence product, that’s going to come along with Guest Center.

Paul Bieber - Bank of America/Merrill Lynch

Okay. And one quick follow-up, what’s driving the subscription per month down in 2Q, I think the numbers 242 that was guided to in the past quarters 244?

Matt Roberts

Yes. Paul, it’s been pretty consistent with the trend that we have been seeing over the last, I would say, 8 or 10 quarters, which is really just mix. Historically, we have had the ERB restaurants on four price points ranging from 199 to 449 and consistently over years now we have seen restaurants really just mix shifting gradually towards the price point that we were at which was 244 in Q1.

Paul Bieber - Bank of America/Merrill Lynch

Okay, thank you.

Matt Roberts

Thanks.

Operator

Thank you. And I am not showing any further questions. I would now like to turn the call back to Matt Roberts for any closing remarks.

Matt Roberts

Well, thanks everyone for joining us and we look forward to talking to you next quarter.

Operator

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

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