GrubHub's (GRUB) CEO Matt Maloney on Q4 2015 Results - Earnings Call Transcript

| About: GrubHub Inc. (GRUB)

Call Start: 10:00

Call End: 11:03

GrubHub, Inc. (NYSE:GRUB)

Q4 2015 Earnings Conference Call

February 4, 2016, 10:00 ET

Executives

Anan Kashyap - Head, IR

Matt Maloney - CEO

Adam DeWitt - CFO

Analysts

Ralph Schackart - William Blair

Dean Prissman - Morgan Stanley

Heath Terry - Goldman Sach

Mark May - Citi

James Cakmak - Monness, Crespi, Hardt and Company

John Egbert - Stifel

Aaron Kessler - Raymond James

Ron Josey - JMP Securities

Arvin Bhatia - Sterne Agee

Jason Helfstein - Oppenheimer

Thomas Forte - Brean Capital

Rohit Kulkarni - RBC

Nat Schindler - Bank of America Merrill Lynch\

Operator

At this time I would like to welcome everyone to the GrubHub Q4 2015 Earnings Conference Call. [Operator Instructions]. Thank you. Mr. Anan Kashyap, you may begin your conference.

Anan Kashyap

Good morning, everyone. Welcome to GrubHub's fourth quarter of 2015 earnings call. I am Anan Kashyap, Head of Investor Relations. Joining me today to discuss GrubHub's results are CEO Matt Maloney and CFO Adam DeWitt.

This conference call is available via webcast on the Investor Relations section of our web site at investors.grubhub.com. In addition, we'll be referencing our investor presentation and press release which are available on our investor relations web site and the press really has been filed as an exhibit to a Form 8-K filed with the SEC.

I would like to take this opportunity to remind you that during the course of this call we will be making forward-looking statements, including guidance, as to our future performance. These forward-looking statements are made in reliance on the Safe Harbor provisions of the Securities and Exchange Act and are subject to substantial risks and uncertainties that may cause actual results to differ materially from those in these forward-looking statements.

For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC, including the risk factors section of the annual report on Form 10-K filed with the SEC on March 5, 2015 and our quarterly reports on Form 10-Q and our annual report on form 10-K that will be filed with the SEC. Our SEC filings are available electronically on our investor website at investors.grubhub.com or the SEC's website at www.SEC.gov.

Also, I'd like to remind you during the course of this call we will discuss non-GAAP financial measures in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. And now, I'll turn the call over to Matt Maloney, GrubHub's CEO.

Matt Maloney

Thank you, Anan. Good morning, everyone, thank you for joining the call. I am excited to give you an update on the fourth quarter and 2015 as a whole. It has been a strong, successful year for GrubHub and we're starting 2016 with great progress in our delivery effort and some new chain partners which I will discuss shortly. After that I will turn it over to Adam, who will give us a more detailed look at the numbers and forward guidance.

From both an operational and financial standpoint, 2015 was another solid year for GrubHub. We continued our strong growth trajectory across the country, generating record profits and revenues, while making significant investments in delivery. We generated $100 million of net revenue for the fourth quarter, up 36% from the fourth quarter of 2014. And we ended 2015 with nearly $362 million of revenue, up 43% from 2014.

Adjusted EBITDA was $27 million for the fourth quarter and $105 million for 2015. We ended 2015 with $6.7 million active diners and generated record food sales of $2.4 billion for 2015, $560 million higher than 2014. In the fourth quarter, we averaged nearly 242,000 orders per day. That's over $640 million in food sales that we generated for our local restaurant partners, serving over a thousand cities. Our diners ordered 22 million times in the fourth quarter, 3.6 million more orders than the fourth quarter of last year.

We still believe we're in the early days of the growth of online food delivery in the U.S.. Historically we have discussed our total available market as being approximately $75 billion which is the delivery and pickup component of the $240 billion consumers spend annually on independent restaurants in the United States. Still, only a fraction of that 75 billion is transacted online. With our delivery capability continuing to ramp, we're in a better position to address the broader opportunity of take out for all chains and we continue to make solid progress.

In addition to signing up Fatburger last quarter, we now have formal relationships with California Pizza Kitchen, Panda Express, Buca di Beppo and VeggieGrill. We're very excited to be able to work alongside these high profile brands, but they are just the beginning. We expect many more of these relationships over time. Including these chains in our platform increases our TAM to well over $200 billion of takeout annually in the U.S..

Growing our delivery capability was a strategic priority for 2015 and we made significant strides in the last 12 months. We have gone from essentially zero delivery volume at the beginning of 2015 to a current run rate of more than $200 million in annualized delivery gross food sales in almost 50 markets.

We acquired three of the leading restaurant delivery services, expanding our foot print and jump-starting a number of delivery markets for us, with embedded demand, strong restaurants and mature driver networks. Just over 8% of our total volume is delivered by our driver network. As a result, we believe we're generating more net revenue from delivery than anyone else in the space.

We also believe we're best positioned to win the lion's share of the online food delivery market over the coming years. First, our restaurant partners love us because we're 100% focused on them, the restaurants. And the one thing that they care about most, more takeout and delivery orders.

Restaurant delivery is not ancillary for us. We have built our business on connecting diners and restaurants for more than 10 years. With 1.7million orders per week, we generate dramatically more volume than anyone else sending orders to restaurants. In fact, our research shows that restaurants that join GrubHub typically grow their delivery business by, on average, 30% in their first year on the platform.

Our very close partnership with restaurants, including on-site technical integration, ensure that they receive and fill GrubHub orders accurately and efficiently. If there are any issues with an order, a menu, operating hours or anything else, our restaurants know exactly who their dedicated service reps are and they have a dedicated contact center to handle any urgent issues.

I share in the excitement of the on demand delivery space, especially as it applies to restaurants and takeout food. However, we have been in this industry long enough to know that logistical efficiency alone won't determine a winner. Efficient routing, dynamic dispatch order batching and GPS tracking are all table stakes now. But capturing the hearts of diners and supporting your network, especially when things go wrong, is the extra mile required to stay ahead in this space.

Part of the reason why our cohorts grow in value over time is that our core value to diners is beyond compare. We offer incredible choice with the largest restaurant network of over 40,000 restaurants nationwide. And we keep a live list of more than 6 million menu items with prices and descriptions that can be prepared for you on demand because of our scale, we don't markup menu prices like some others and we strive to have the lowest diner facing fees in the industry. Not only is our total cost to diners extremely low, but we back our product with excellent customer service, including over 500 24-by-7 reps who ensure that if everything doesn't go smoothly for the diner or restaurant, we're there to fix it.

Our commitment to customer service is another reason diners love GrubHub and Seamless. I would like to give a shout out to the customer care reps that did their best to make sure that over 40,000 people on the eastern seaboard got their orders on the recent Saturday of Storm Jonas. Despite many businesses closing and even streets being closed to drivers, we went the extra mile to support our restaurants that chose to stay open to serve their neighbors.

On the other side of the country we have a delivery success story in the Silicon Valley. Historically a slower market for us, this bastion of innovation is now driving strong growth and is a great example of delivery pushing the market to another level. We jump started our two-sided network by adding 40% more restaurants, specifically neighborhood favorites that have never delivered for themselves before.

GrubHub delivery allowed us to add a breadth of cuisines, price points and local favorites, as we built our restaurant base there. These efforts have led to order growth re-accelerating, growing at a much higher rate in the fourth quarter than the recent past. We're seeing this play out in many of the markets where delivery is making up a significant portion of our volume.

2015 was also a big year for us on the product side. As we've discussed, we migrated to Seamless web site and mobile apps over the summer and released new versions of the GrubHub web site and mobile apps in the fourth quarter. We've had positive feedback to date, including Apple choosing the new GrubHub app as one of the best new apps in the app store for two weeks straight in December.

In terms of functionality, we've invested heavily in improving our search and recommendation infrastructure, leveraging our incredibly vast local transactional data and all of your favorite dishes, as a key priority for our teams. We're working on a new ratings and review system that collects multiple facets of diner feedback on specific dishes, as well as restaurants more broadly. We're also investing heavily in content collection of presentation, including working to push more restaurant-specific content front and center, to help diners get to know their local options better.

In addition to the face lift of our web sites and mobile apps, we've also been hard at work updating the GrubHub brand. Both our Seamless and GrubHub brands are powerful in their own right and have become synonymous with online ordering for over 10 years. GrubHub's fun and irreverence helped it grow from a local Chicago favorite to a powerful national brand.

That said, as GrubHub's reach has broadened, it has become time for an update. We partner with incredible restaurants and our new brand will focus on celebrating these great restaurants and chefs all across these amazing United States of Food. Our messages will focus on the moments when diners are inspired to order food and the delight they feel when they receive their meal. In order to convey the personal nature of these moments, we will use more visual representations of our diners, our restaurants and the food that is key to both.

You will notice that our new investor presentation has the updated branding. We plan to launch a broader public marketing campaign around the new brand soon. Before wrapping up, I would like to take a moment to talk about the press release we issued last week regarding the stock buyback authorization, credit facility and board composition.

Our management and board of directors believe strongly in our market leadership position, growth opportunities and long-term strategy. We have a strong balance sheet and generate a significant amount of free cash flow. Given the recent volatility in public markets, we wanted to authorize the buyback to be in a position to take advantage of opportunities to purchase shares at attractive prices. The market dislocation may also create opportunities for us to be aggressive in purchasing assets at attractive prices.

We're in the process of securing a credit facility which we expect to be larger than the buyback authorization, to have the flexibility to pursue potential acquisition opportunities as well as buy back stock when appropriate. Even if we use the entire buy back authorization during the coming year, we're anticipating adding net cash capacity to pursue deals opportunistically.

Furthermore, as a young public company, we think it's important to evaluate the composition of our board and expertise and qualifications of our directors, on an ongoing basis. In keeping with this and as the company continues to grow, we recently initiated a process to identify two new independent board members. It is our goal to bring in directors with skill sets that will enhance our ability to grow our business and execute against the significant opportunity in front of us.

2015 has been a monumental year for GrubHub and I am extremely proud of what we've achieved. Moving to a shared technology stack for GrubHub and Seamless has freed up product and development resources to iterate our product faster and focus on improving conversion, retention and frequency.

We have made great strides with delivery, including three acquisitions and our momentum is strong. We're in approximately 50 markets already and continue to expand our reach. There is still much work to be done, however and we look forward to sharing more milestones with you throughout 2016.

And with that I will hand it over to Adam, who will walk you through financials and some highlights of the early success we're seeing with GrubHub delivery.

Adam DeWitt

Thanks, Matt. I will start with our fourth quarter performance, provide some forward-looking color, then we'll open the call up to questions. Before I begin, I wanted to note, as Matt alluded to in his remarks, that we have uploaded a new investor presentation to our IR web site at investors.grubhub.com. It's not meant to be an earnings presentation, but we have included some new detail around cohort performance and how our investment delivery impacts our financials, that we haven't in the past. Some of the data points I will highlight during the call are reinforced in the presentation and I encourage you to review it following the call.

We ended the fourth quarter with active diners reaching 6.7 million, a 34% year-over-year increase. We processed 241,800 daily average grubs and $643 million in gross food sales during the fourth quarter, 19% and 26% year-over-year increases, respectively. The acquisitions we completed in the first and fourth quarters of last year, contributed roughly 1% and 3% to those totals.

Fourth quarter revenues were $100 million, 36% higher than the year-ago quarter of $73.3 million. If we exclude all the acquisitions, revenue growth would have been approximately 27%. If Delivered Dish acquisition contributed approximately a half a million dollars in revenue for December.

We continued to see higher revenue capture rates, driven by our own delivery efforts, as well as the acquisitions of Restaurants on the Run, DiningIn and Delivered Dish. Capture rates excluding delivery revenue were roughly consistent with the last quarter.

We hit the high end of our guidance even after accounting for the negative impact from the weather during the quarter. As most of you know, El Nino has caused an unseasonably warm winter in parts of the U.S.. This affected many parts of the east coast and midwest, where we have our highest concentration of diners, in November and December.

The impact on our order volume was exaggerated, due to last year's particularly cold and wet winter. Average temperatures in 2015 were 15 to 20 degrees warmer than 2014 -- I'm sorry, warmer than in 2014 and precipitation was considerably lower than the prior year.

While we expect to grow our business in any climate, this phenomenon, in what is typically our best new diner acquisition season, does impact our numbers. In total, we believe weather drove a headwind of about 200,000 orders across the entire quarter, or 1 point of DAGs growth. Our diner cohorts continue to exhibit very sticky behavior. In fact, most of our diner cohorts increase in value as they age. This is a function of low user turnover time, increasing frequency per diner, increasing food prices and increasing commission rates in each market.

This is true of all of our cohorts, new and old and independent of geography. To help you get a better sense for this, we've laid out the revenue we've generated from specific cohorts in four of our markets, New York, Chicago, Los Angeles and Denver, on slide 11 of our investor presentation. We've included both older and newer cohorts for New York and Chicago, to demonstrate that this behavior persisted over time. Diner activity on a market by market basis has been stable over time as well.

On slide 12 of the same presentation, we're showing frequency rate trends for corporate diners, Manhattan diners, other New York diners and the remainder of our Tier 1 markets. You will notice that the frequency for each of these individually is remarkably stable over time. Frequency across the entire diner base has come down, as the mix by market has changed, but our individual market basis diner frequency is stable.

On the expense side, totals sales and marketing expenses were $24.9 million this quarter, a 31% increase compared to $19 million in the same quarter last year. As a result, we grew our diner base by roughly 315,000 net active diners during the quarter. While our diner growth was healthy, it was negatively impacted by two factors during the quarter. One, the warm weather we discussed earlier and two, an intentional reduction in marketing spend towards the end of the quarter, in preparation for the rebranding that Matt talked about.

As we head into 2016, we're planning on getting a little bit more leverage out of our marketing expense. We expect to increase sales and marketing spend in 2016, but by slightly less than in years past. We plan to concentrate spend in areas where we get the highest ROI, on both quality and quantity and we won't be growing spend in a few areas where we're finding the lifetime values of the incremental diners to be less attractive. Consequently, in the coming year, we expect the growth in active diners to more closely match the growth in orders than it has in the past.

Since these new diners will be high quality, this will have the secondary impact of stabilizing the frequency trend, that had been declining as the growth in new diners outpaced the growth in orders. We believe that frequency trend will improve over the course of 2016.

Operations and support expenses in Q4 were $32.5 million, an 83% increase compared to $17.8 million in the fourth quarter of last year. This increase is from a combination of our growth in orders; the inclusion of delivery costs from our DiningIn, Restaurants on the Run and Delivered Dish acquisitions; and the aggressive scaling of our delivery capacity, as we have discussed on this and previous calls.

In the fourth quarter, we ramped up our delivery investment or the amount that our incremental expenses on delivery exceed our delivery costs, to about $5.5 million, as discussed on last quarter's call. That was actually on the low end of our expectations, as our increasing scale and delivery has enabled us to better manage the excess capacity and drive our cost per order down.

As a result, we're confident that once we get to a higher degree of scale, we will be able to generate enough revenue on the delivery component, to completely offset delivery costs and that we will be able to do so while maintaining a reasonable cost to the end diner.

In our new investor presentation, we thought it would be helpful to give a better sense of the impact the delivery investment had on our business in the fourth quarter. What you'll see is that excluding delivery and its $5.5 million burn, GrubHub's core platform generated 35% adjusted EBITDA margins in Q4. This is higher than the 34% margins in Q4 of last year, before we began investing in delivery.

For purposes of this calculation, we excluded all revenue and expenses associated with the delivery function in Q4, to give a true apples to apples comparison with the business, prior to our acquisitions and investment in delivery. On a percentage basis, the 4Q loss on delivery is actually much improved compared to the third quarter, due to the scale benefits I mentioned earlier. As a result of this momentum and the benefits we've seen on the growth side which we have shared on slide 16, we plan on continuing to ramp our delivery efforts.

We also continue to be comfortable with the $10 million to $20 million net investment in 2016, that we mentioned on the last call. We currently believe that that will give us the runway we need to build appropriate scale across our network. We also believe that we'll be able to begin reducing the quarterly loss by the third quarter of this year.

Technology expenses, excluding amortization of web development, were $8.8 million for the quarter, increasing 22% from the fourth quarter of last year and 5% from the prior quarter. This increase is consistent with the investment we have been making our technology and product teams.

Depreciation and amortization was $6.7 million for the quarter, a sequential increase of 6% from the third quarter. This was driven mostly by a small amount for the amortization of acquired Delivered Dish intangibles. We expect depreciation and amortization expense in the first quarter to be slightly higher than the level in Q4, due to a full quarter of those intangibles.

G&A costs were $11.5 million, an increase of 59% from the fourth quarter of last year. The growth was mostly driven by general and administrative expenses of acquired business, but the comparison was also favorable, given a roughly $1 million reversal in Q4 of last year.

Adjusted EBITDA for the quarter was $26.8 million, an increase of 7% from $25 million in the same quarter of the prior year. Our adjusted EBITDA margin was 27% this quarter. From my comments earlier about becoming more efficient on the delivery side, we were able to expand our margins this quarter from 25% in the third quarter, to 27% this quarter, even with our aggressive delivery investment.

Net income was $11.3 million, compared to the prior year of $10.8 million. Net income for fully diluted common share was $0.13, on approximately 86 million weighted average fully diluted shares. Our tax rate this quarter unusually low at 28%, mostly due to a significant tax credit that came in during the quarter, that was applied to all of 2015. We expect the go-forward tax rate to be approximately 41% in 2016.

Non-GAAP net income was $16.7 million or $0.19 per fully diluted common share, compared to the prior year of $14.4 million or $0.17 per fully diluted common share. Non-GAAP net income excludes amortization of acquired intangibles, acquisition and restructuring costs and stock based compensation expense, as well as the income tax effects of these non-GAAP adjustments.

At the beginning of December, we acquired Delivered Dish, a small restaurant delivery service with a focus on the Pacific northwest. While the contribution from the acquisition will have limited impact on our financials, given its size, it has a great presence in Portland and a good presence in a number of other markets and we're excited to bring aboard the great team that ran the company.

In terms of our outlook, for Q1 we're estimating total revenue to be between $109 million and $112 million and adjusted EBITDA to be between $30 million and $33 million. For the full year, we expect revenue to be between $445 million and $465 million and adjusted EBITDA to be between $122 million and $130 million. Our Q1 guidance implies a modestly lower level of delivery investment than Q4. As I said earlier, we continue to expect our total investment delivery capacity to be between $10 million and $20 million for this year.

In addition, as we head into the new year, I wanted to remind everyone about our seasonality. The first and fourth quarters are strongest and second and third are slower. What this means is that we expect Q2 and Q3 revenue to be down a few million from Q1, before a jump up in Q4. Given this dynamic and the cadence of our investment in 2016, we would expect EBITDA to be lower in Q2 versus Q1 and trough in Q3, ahead of Q4.

With that, Matt and I will take your questions. Operator, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question is from the line of Ralph Schackart with William Blair. Your line is now open.

Ralph Schackart

Matt, maybe you can give us perspective as it relates to change, the economics of the change and how it compares to maybe some of your broader independent restaurants, specifically focusing on CBK and Panda since they are larger and one more, you talked about adding more throughout the year, sort of give us perspective on the cadence of that. Thanks.

Matt Maloney

So, as we said before, we believe the chains bring significant value to the diners and restaurant network. In terms of the value, the chain's recognize that we bring scale food expertise and customer support and the economics are very similar to the independent restaurants and they represent that value that we bring. CPK and panda are outstanding partners. It's exciting to have them on the platform. In terms of cadence, I say a few earnings calls ago we opened the door on this and said we would be aggressive seeking out strong partnerships with chains and I would say that our intensity has only increased.

Operator

Your next question is from the line of Dean Prissman with Morgan Stanley. Your line is now open.

Dean Prissman

Some of your private competitors seem to have exceptionally high turn in the driver pool that drives recruitment expenses and create quality control challenges. As you scale your driver pool, how are you your recruitments and pay structure definitely. Thanks?

Matt Maloney

So, this is an interesting question because we focus on increasing the service level to our restaurants and our diners. As such, we believe that we have to have very good delivery drivers. So, we pay appropriately. So, the pay to GrubHub delivery is significantly more than what I have seen in published reports from the private delivery companies. We do that because we want great drivers and we want them to come back to work every day with a smile and represent our brand positively. So, I think from what I have seen, obviously I don't know the private company information, but we have significantly less churn. If you talk to drivers, which we have done it many prefer working shifts for GrubHub versus other companies because of the -- many factors. So, we are very aware of the quality control issues of the independent contractors that work with us and we are very aggressive in trying to limit the quality issues that we have and the structure we have chosen.

Dean Prissman

Maybe a quick follow-up. Given the momentum in San Francisco, just curious how you are thinking of marketing. Do we expect a more aggressive ad campaign.

Matt Maloney

In gem, we are taking advantage -- in general, we are taking advantage of the new brand and focusing on higher quality diners. In 2016, focused on the higher quality diners, reengaging significant amount of diners that are currently transacting on our platform and we believe that both of those can be achieved through the new brand and commune communications.

Operator

Your next question is from the line of Heath Terry with Goldman Sach. Your line is now open.

Heath Terry

I realize it may be early for this question but curious whether or not you are starting to see any change in behavior among some of your competitors out there, particularly as we see what at least so far appears to be a tighter venture funding environment to the extent that you had competitors extremely promotional with free food offers, marketing campaigns, whether or not you are starting to see any change in behavior that is either impacting your business positively or whether or not the guidance that you are giving for this year anticipates any change in behavior relative to what you guys had to go through last year?

Matt Maloney

So, I would say that we continue to see players in markets. I don't think they are being as aggressive as they have been. For example, in Q3 and Q4 of 15 but we haven't seen a material impact on our business one way or the other. That is part of the reason we excessed the cohort in the investor deck to show you guys that every time we come back to you from competitive questions saying it's not impacting our business, there is the data behind that statement. So, our cohorts are stable. We continue to track diners that we think are attractive and we have not taken expectations of competitive activity in account in our guidance. We are looking at our own business and what we know very well.

Heath Terry

So, the commentary around being a little more ROI focused on marketing this year, a little more focused on customers that have a similar order of frequency to your existing base, to the extent that there is a difference in sort of the customer profile that you see in major markets like New York, San Francisco versus the earlier stage emerging markets where you don't have the same level of coverage as you do in those, is there -- in that strategy is there an underlying strategy that is making you less focused or just embedded within that, less focused on the earlier stage markets versus going deeper into the markets where you had obviously a significant level of success.

Adam DeWitt

The comments were more focused around the incremental diners that have less attractive ROIs but not that they are in smaller markets versus larger markets. It's more the less attractive ROI diners in all the markets. As we look out to 2016, we think that we are going to be acquiring plenty of new diners in both the tier 1 and tier 2 and even tier 3 Z to hit our growth goals for 2016.

Operator

Your next question comes from the line of Mark May with Citi. Your line is now open.

Mark May

I wonder if you could, Adam -- you quantified the weather impact in Q4. I wonder if you could comment a bit on the impact, if any, that you expect to see in your Q1 guide. And, you know, curious if you could shed any light in terms of the share of the business that is currently outside, say, your top 2 or 3 cities and the relative growth rate between those two kind of cohorts if you will. Then I had one more if I could that had to with the sort. And, you know, given that you have more control over the customer experience for the delivery owned and operated delivery -- delivers, are you in some way favoring those in the sort. Thanks.

Matt Maloney

So, I will take the first two and then I will let Matt talk about the source. In terms of Q1 weather, instead of giving you the exact input, what I will say is what we have seen to date is certainly incorporated in our guidance. In the fourth quarter, we mentioned most of the impact was in November and December, October really didn't have a lot of impact from a weather perspective. So, you can kind of officer what you will for what exactly is beamed in there. That's how we are thinking about the Q1 weather. We obviously are looking forward don't -- don't forecast whether El Nino will impact February or March.

Mark May

Is it fair to say it's still a headwind year on year -- at least year to date?

Matt Maloney

January had a little bit of a headwind. That's already baked into our -- baked into the guidance.

Adam DeWitt

In terms of the tier 1 versus the tier 2, you know, the -- in terms of the share of the business, I think we have -- we talked about it in the past, the tier 1, since we have been in the longest, clearly have -- it's clearly a majority of our business, in terms of New York, Chicago, Boston, Philly, D.C. , L.A. , San Francisco and then the rest of the markets are smaller but they are certainly, to your question, they are growing more quickly than the tier 1s. Although it's not -- the disparity is not that the tier 1s are growing at 10% and the ones outside at 300%, it's closer than that. It's just that the tier 2 and tier 3 custody stain higher growth rates for a much longer period of time. So, I will let mat answer the sort question.

Matt Maloney

So, our [indiscernible], we are playing around with it to figure out what makes a diner most satisfied measured how we measure LTV frequency, long-term order statistics. What we found and what defines the short rate, three primary variables among others commission rate they paid us, the frequency that we see -- conversion of frequency through diner behavior and the service quality at that time if the restaurant is blacked out, issues, getting feedback from customer care groups that there is a problem. Our delivery in many cases and especially in peak delivery times is far superior than restaurant delivery programs themselves. We see that over and over again because of the scale of our network. We are not giving preferential treatment to our delivery system as a rule. It's just as our service is better than the restaurants, they may be -- have an advantage.

Operator

Your next question comes from the line of James Cakmak with Monness, Crespi, Hardt and Company. Your line is now open.

James Cakmak

The first on M&A appetite and how you are thinking about it. If you were to conduct some type of deal as we look forward, what would it be about, acquiring users, networks, accretion important? How to think about that. Secondly, on the capital allocation, how you guys are thinking about that, how you came up with the 100 on the buyback, 200 on the credit facility. Highlight thoughts there. Thank you.

Adam DeWitt

In terms of the M&A, I think the opportunities are all over the map. Obviously we have been active on the restaurant delivery side. We did three deals last year. Those are attractive because they give us scale in three areas of our network, right, restaurants, diners and drivers. But, you know, we are interested in doing more of those deals but we are interested in if there is, perhaps, technology that can help us leap frog ahead on taking advantage of the scale that we have in delivery or some other product related technology or it could be on the marketplace side.

We are open across the board. What I say is, as in the past, deals have to be financially attractive. And, you know, we are looking for teams that are good operators. I don't think we will be limited, you know, in one particular area. You know, what I will say, you are less likely to see us, this is consistent with what we have seen in the past, less likely to do deals outside of -- outside of the US right now but, you know, we could at some later date. In terms of the -- the capital allocation, what I would say is that the board and management took a look at kind of our cash situation, which is pretty robust. We have something like over 3 1/2 dollars a share in cash on the balance sheet.

We have strong cash flow and we have very little capital expense on an annual basis. Generating free cash and cash on the balance sheet and seeing some dislocation in the market, looked like it was creating opportunities for us to buy stock back at attractive prices, I don't think the 100 million was any magic number. I think it was what we felt was right at the time and right moving forward with. In terms of the credit line and the size there, I think what we are trying to do is net-net create more financial responsibility between the moves. Assuming and, you know, I'm not saying this is the case, but assuming that we did complete all -- 100% of the buy back, even within a year, that we would be in a position to have more financial flexibility rather than less. We have -- with the strong balance sheet that I mentioned, we do have the ability to put on a little debt and give ourselves more cash flexibility. So, we decided to move forward there.

Operator

Your next question comes from the line of John Egbert with Stifel. Your line is now open.

John Egbert

Can you talk about exploring startups in the space like fast lunch up ordering where economics may not be as good but you could win brownie points with consumers. There is appetite for these products in large cities so we were wondering how you think about that?

Matt Maloney

We have already tested out fast lunch sub ten minute stuff. It's not that tough. Easy. You go to a restaurant, have a bulk order and inventory it in the car. I would say that what we found is that the quality really isn't that great when you have a burrito sitting in a car for 45 minutes before someone orders it but you are right, some people want that. It's no big deal as long as you have the driver network in place that is able to do this. So, I would not be shocked if we are rolling something out on an experimental basis in key markets in the next year.

Operator

Your next question is from the line of Aaron Kessler with Raymond James. Your line is now open.

Aaron Kessler

Any updates on mobile percentage for the year over Q4. Second now that you are expanding the -- in terms of expanding the restaurant network, now that you can pick up more restaurants, how are you thinking about getting more aggressive about expanding the network of 40,000 restaurants and do you think you need to rebrand that to consumers, let them know they can order from a broader selection as you expand the network. Thanks.

Adam DeWitt

In terms of the mobile, I don't know if we have given that in a couple of quarters. It's close. It's just under 60%. It's around 59% of our volume is being transacted through mobile. In terms of the restaurants, I'm glad you asked the question. One of the areas of where we are investigating quite a bit in 2016 is the network restaurants and sales team. You will see the sales and marketing line go up. Some of that cost will be restaurant sales. And as we get bigger, there is more areas that we can effectively sell restaurants because we have a presence there. Easier to sell more restaurants in a network when we have a good base.

So, we have been ramping up our sales efforts throughout 2015 and coming to 2016 because not only do we have the broader geographic footprint that we can sell to but we have a delivery product and, so, it opens up a whole new universe of potential opportunities in the markets that we are selling into. So, we see a lot of opportunity to increase on that 40,000 number. As we have said in the past, the number is not as important as the quality of the restaurants. It's not something that I -- that we pay that much attention to, but we should see the number go up and there certainly is the opportunity and the means to get there.

Aaron Kessler

The number you gave before, 80%, is that the coverage of the volume of the restaurants you are in with the delivery network site?

Adam DeWitt

The 80%?

Aaron Kessler

Yes. I think you said 80% in the prepared remarks.

Adam DeWitt

I don't remember. I know that we said last quarter I know -- I'm pretty sure we said that we are now delivering in markets that represent something like two thirds or three quarters of the population. So, but I'm not sure about the 80%.

Matt Maloney

We said we had 40% more restaurants in the silicon valley.

Aaron Kessler

Okay. I thought I heard 80%. I can follow-up later.

Adam DeWitt

So, the 80% of our -- delivering in 80% of GrubHub's coverage.

Operator

Your next question comes from the line of Ron Josey with JMP Securities. Your line is now open.

Ron Josey

I wanted to ask about the price delivery to consumers. Particularly, Matt, I think you said a few months back 1.99 was the optimal price based on what you are seeing on your research. I'm wondering now that you are delivering in a few markets is there more elasticity in price than you thought you would see or is that 1.99 what to expecting forward. In terms of the buy pack you announce -- buy back you announced a week ago, have you started that already? Thanks.

Matt Maloney

We have done a ton of research. The elasticity is broad. In some markets like San Francisco it's effectively zero because there is so much competition and free food that diners aren't willing to pay delivery fees. The 1.99 comes from an average across a lot of markets. We tend to like that $2.1.99 price point a lot. We are testing in individual markets the sensitivities. So if you look in any given city you may see a different delivery fee but that is defined by the conversion rates in the data. For the buy pack I will let Adam speak to that.

In terms of the buy back and where we are, to be candidate, we have been blacked out for most of the period since we had the buyback authorized but we were able to buy a few shares over a couple of days before we got blacked out for the quarter. I was going to say, the plan is to be opportunistic, you know, as the market dictates.

Ron Josey

Matt, quickly, on the delivery, a quick follow-up, is there any number of restaurants that are needed before you all turn on delivery. I know you launch D.C. this week, 15 plus restaurants. You launched San Francisco and L.A. with hundreds of restaurants. Anything to sort of help us understand what turns on a market or when a market is ready, that would be helpful, too.

Matt Maloney

We deliver far more than 15. I'm not sure we got that number in D.C. I will say that the nice thing about having a massive two sided network in at least every major market preshifting, it's not like there is a light switch that goes on when recalled we are delivering. We can deliver for one restaurants and it folds into the rest of our platform and diners order from it. So, I think the press that we are doing around the market launches is really when we feel that we have a critical mass where we know we have enough drivers in the market that we are able to leverage the efficiency to scale that we find. It's a little more air by tear when we push the press around, we are in D.C. and San Francisco.

Operator

Your next question comes from the line of Arvin Bhatia with Sterne Agee. Your line is now open.

Arvin Bhatia

A couple of small ones. I wonder if you can comment on how your corporate business was in New York this quarter and then, Adam, your take rates with chains, any color there, any different? And lastly the cost of the rebranding, if you can put color on that. Thank you.

Matt Maloney

Yes. So, I will take all of them. In terms of the corporate business, really, I mean, to be honest, really stable. Whether it's New York or other parts of the country. We continue, as we said in the past, great business for us because the customers are so sticky. There is no -- very little credit card processing fees. And we generate some revenue from the companies as well. The fourth quarter was just as good.

To be honest, less impacted by the weather than the consumer side. But, you know, being closer to 10% of our business than 15% of our business it won't -- not going to have that much of an offset. In terms of take rate on chains, Matt answered a question earlier. What I would say the economics with the chains so far to date have been very similar to the economics that we have had on our independent restaurants.

We have been thoughtful about our relationships with the chains and the partnerships that we have required a tight integration. And the chains that we are working with value that because we have a very large contact center that is there to answer their questions, to help out their chain store managers and help out their diners if there are issues that come up during orders and at the end of the day, everybody seems to be happy with economics that work for both of us. In terms of the cost of the rebrand, you won't see anything significant jump out in the first quarter, second quarter, things like that.

It's embedded in the sales and marketing costs and to be honest, we have done a lot of the upfront work already that occurred in the kind of third and fourth quarters and, so, it's really about deploying marketing tools that we deployed in the past just with a new rebrand and less about incremental costs on the rebrand.

Operator

Your next question is from the line of Jason Helfstein with Oppenheimer. Your line is open.

Jason Helfstein

Is there a way to think about how much the higher commission rate in the quarter was due to the delivery surcharge versus restaurants bidding more or less for slots? Then, we look at the cohost tables, is the -- cohort tables, lastly on slide 16 maybe comment market number 4 did not improve with delivery. That was like a one off but maybe why you might add delivery in a market and not see an up lift. Thanks.

Matt Maloney

In terms of the commission rate, I think we said it during the prepared remarks that if you exclude the impact from delivery, the commission rates would have been pretty stable. As we have said in the past, what we expect in the marketplace side is of that the -- the steady drum beat of increasing commission rates within a given market is going to be offset by the higher volume that we are doing in the lower market, smaller markets with lower commission rates.

That is typically what we have seen. In terms of the cohorts charts, the scales on the left and right charts are approximately the same. I mean, we have talked in the past, you know that Manhattan in general is higher than Chicago. Chicago and Los Angeles and Denver are going to be closer to each other. Manhattan will be a little higher. In terms of the last -- in terms of the last question, these are frequency -- are you referring to the frequency or the growth?

Jason Helfstein

Time chart shows you rolled out delivery in market number 4, the red line, August the 15th but didn't see any lift versus the other market saw an up lift.

Matt Maloney

Look, we can debate whether or not. It does have a lift. You can see the improvement in the frequency chart on the bottom where the number of orders per diner that is active is going up. We think over time that will drive.

Operator

Your next question is from the line of Thomas Forte of Brean Capital. Your line is now open.

Thomas Forte

I want to talk about the opportunity on advancing your content. Did you find in comparable markets where you have similar nuns of restaurants and diners that if you have more robust review content or details or just content in general that there is a material difference in use of the network?

Matt Maloney

So, I would say -- so think about content more broadly and not just review. Review and ratings information is interesting and helps a diner make a selection. But more imagery, video increases conversion more. When we think about content, especially in light of the new brand where we are celebrating restaurants and the amazing chefs that are preparing food for our diners, we want to bring the food to life more vividly. So, in your construct where you have a market with similar restaurants and diners, I would say that you see higher conversion rates for the market that you have, larger percentage of restaurants representing the actual food beautifully.

Thomas Forte

One quick second question. So I'm clear, I wanted to know if you are anticipating or experiencing the same as you have historical on the take rate for the nondelivery portion of the business meaning that as you enter markets similar to what happened in Chicago, New York, you see the take rate or commission rate increase over time.

Matt Maloney

Yes, absolutely. And that same -- I tried to address this in the last question. We have -- if you straight out the delivery restaurants and look at the nondelivery restaurants, the same dynamic true a year and a half ago is true now which is overall, right, if you look at any individual market the commission rate is trending up. We are adding more restaurants in areas where we are doing less volume and they are starting out at a lower rate. So, adding more restaurants and more volume at a lower rate is being offset by kind of the whole pool rising a little bit with commission rates. So, net-net we end up more flat.

Operator

Your next question comes from the line of Rohit Kulkarni with RBC. Your line is now open.

Rohit Kulkarni

2016 guidance, implied acceleration to the second half if you take into account your comments, Adam. Wonder if you can layer in how should we think about the underlying drivers particularly the top, top line of sales. You talked about adding $500 million in food sales, that would get us to about $2.9 million which [indiscernible] slightly lower than revenue growth. If you can help us get to the drivers, how we should think about them then I have a follow-up.

Adam DeWitt

So, just to clarify a couple of things. The guidance we gave for 2016, the 445 to 465, the 500 million in gross food sales is organic growth right near the middle of that guidance. I don't know if it's exactly but it's right near the middle. There is an additional 25ish million or so for delivered dish acquisition but we talked about the 500 million as being organic. In terms of the implication for the rest of the year, the way we are thinking about it, is this. We certainly think that we are going to see a stabilization in the deacceleration of growth this year. And there is a number of reasons behind that.

One is we are doing a lot more on the CRM side. We initiated programs in the back half of 2015 on an experimental basis that worked really well and we are going to be applying those more broadly in 2016. We have behind us and we talked about this on a number of calls, so, is the technical my graduations of both the Seamless platform and GrubHub are behind us and we have entered a face where what we refer to internally as continuous optimization. We are doing constant AB testing on the product and improving conversion consistently.

And, so, while we have seen a number of things that we have implemented actually improve conversion on a small by sis, we think we can replicate this enough so that by the back half of the year, it's actually trothing meaningful to the growth in orders. I think finally the thing to think about is as we get to the -- so, there are a couple of top issues, right? So, for one, the first quarter of this year, 2016, as we talked about earlier, it's a little bit weighed down by weather in January.

The back half of the year, you may remember that we talked about on the last call for the third quarter we had weather issues and we had outage -- outage issues as well. Then in the fourth quarter of -- on this call, fourth quarter having a weather impact. Comps are easier in the back half of the year. We are forecasting a stabilization in the growth rate for this year and we feel good about it.

Rohit Kulkarni

If I could ask one more question be the net expense that you have for delivery, any particular kind of cadence of that. You would probably have greater scale in second half and cash would be more front-end loaded?

Adam DeWitt

That is what we alluded to. Theoretically we could -- association ten to 20 million was the guidance of net cash burn. Given where we excited Q4 -- exited Q4 and what we have seen in Q1 we feel comfortable with those figures. You know, we certainly think -- our gut is it's biased to the front half of the year and toward the back half of the year we will work toward getting to that cash flow neutrality number and pricing. I don't expect to be at zero by the end of the year but I expect us to be close.

Operator

Your next question comes from the line of Nat Schindler of Bank of America Merrill Lynch. Your line is now open.

Nat Schindler

Two quick questions. One, over the last several years there has been a continuous drum beat of new competition or threats of new competition. The cast of characters seems to change over time but they continue to be talked about. How has competition affected you on both the consumer side and the restaurant side and who is keeping you up at night at least in potential future competition? Second question I was wondering clearly New York has been your biggest market and is also one of the oldest, if you look at the tier 2 markets are there any markets that are showing metrics of a similar, you know, age that are as good as New York, Chicago or other really high end tier 1 markets.

Matt Maloney

Competition, so, competition is kind of crazy. As you pointed out, there is a lot of dome pet tors talked about over the past year and seems to be a new rash of competitors now, I would say that in any high growth, very high potential marketplace you will see a lot of people trying to get involved. That is a good sign and we are not -- we are not afraid of the competition. We think we are extremely well positioned versus the competitors, whether it was the old cohort or new cohort because we remain very, very focused on connecting diners with restaurants. We are not worried about building the most efficient logistical network in the country. That is not fundamentally what we do.

We have to win the hearts, minds and storm makes of our diners. We want to make sure that we have the greatest selection of restaurants and cuisines, lowest fees and best experience backed by our extensive customer support. If you think about who will win this industry from that perspective, assuming that the diner is the King, you can see that we have a massive head start. We have a significant head start in the restaurant footprint. Your question on the consumer versus restaurant, the consumer -- you have to have the restaurants to do that. This isn't an exclusive game.

You don't see any players that are coming in with the ability to take restaurants away from a different marketplace. It's who can out compete in orders. That's all that restaurants care about. I guess in all, we, you know, we think a lot about the innovations going on in the space. We think a lot about who is active and what is happening, but we are very comfortable in the current positioning and strategy and we will aggressively continue growing into the large 200-plus billion dollar team in front of us.

Adam DeWitt

Nat, in terms of the markets, I don't want to get too detailed but some of the markets that we talked about before that we believe have potential, long-term potential to become tier 1 markets, Denver, Atlanta, Baltimore, Miami, Phoenix and some of the Texas markets as well and they are early but they are certainly showing signs that they could be just as big and strong as the tier 1s.

Operator

This now concludes today's conference call. You may now disconnect.

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