GrubHub's (GRUB) CEO Matt Maloney on Q2 2016 Results - Earnings Call Transcript

| About: GrubHub Inc. (GRUB)

GrubHub, Inc. (NYSE:GRUB)

Q2 2016 Earnings Conference Call

July 28, 2016, 10:00 ET

Executives

David Zaragoza - Head, IR

Matt Maloney - CEO

Adam DeWitt - CFO

Analysts

Ron Josey - JMP Securities

Ralph Schackart - William Blair & Company

Heath Terry - Goldman Sachs

Aaron Kessler - Raymond James

Chris Merwin - Barclays Capital

Brian Nowak - Morgan Stanley

Michael Graham - Canaccord Genuity

Nat Schindler - Bank of America Merrill Lynch

John Egbert - Morgan Stanley

Mark May - Citigroup

Tom Forte - Maxim Group

James Packna - Monet, Christie, Hart

Neil Deutsch - Mitahu

Blake Harper - Luke Capital

Operator

Good morning. My name is Amy and I'll be conference operator today. At this time, I would like to everyone to the GrubHub Incorporated Q2 2016 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Mr. David Zaragoza. You may begin.

David Zaragoza

Thanks, Amy. Morning, everyone. Welcome to GrubHub's second quarter of 2016 earnings call. I'm Dave Zaragoza, Head of Investor Relations and joining me today to discuss GrubHub's results are our CEO, Matt Maloney and our CFO, Adam DeWitt. This conference call is available via webcast on the Investor Relations section of our website at investors.grubhub.com. In addition, we'll be referencing our press release which has been filed as an exhibit to a current report on Form 8-K filed with the SEC.

I'd like to take this opportunity to remind you that during the course of this call, we will make 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 of 1934 as amended 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 Factor section of the annual report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on February 26, 2016 and our quarterly report on Form 10-Q for the quarter ended June 30, 2016 that will be filed with the SEC. Our SEC filings are available electronically on our investor website at investors.gruhub.com or the edgar portion of the SEC's website at www.sec.gov.

Also, I'd like to remind you that 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.

With that, I'll turn the call over to Matt Maloney, GrubHub's CEO.

Matt Maloney

Thank you for joining us on our Q2 earnings call. We had a great quarter both financially and operationally. We believe our tech platform improvements have accelerated our growth and we continue to make good progress on the 2016 strategic priorities we outlined in our last call. Later in the call, I'll give you a more detailed update on our near term goals as well as talk a little bit about our longer term vision here at GrubHub. First, a few highlights from our record quarter.

GrubHub generated $120 million of net revenue in Q2, up 37% year over year. To underscore the strength of the quarter, net revenue was up 7% from Q1. Even excluding the contribution from our acquired business, LAbite, GrubHub would have grown sequentially in what is typically a down quarter for us. We believe we took the right steps over the last two years to rebuild the technology foundation of our Company and it is now yielding tangible results.

Net income was nearly $13 million for the quarter, an increase of 37% from the prior year. Adjusted EBITDA was $38 million for the quarter, a record for us by a significant amount and well above our expectations. The incremental margins of our marketplace business continue to be strong and have allowed us to invest in building out our delivery infrastructure from a position of strength. The benefits of delivery for our diners are clear. The most comprehensive restaurant network, increased transparency and consistent service.

We ended Q2 with nearly 7.4 million active diners and generated gross food sales of $733 million for our local restaurant Partners. Increases of 24% and 29% from the prior year respectively. In Q2, we averaged over 271,000 orders per day and our diners ordered almost 25 million times. That's 5 million more orders than we received in the second quarter of last year.

We've improved our order growth through technology and product improvements, investment and delivery and a reinvigorated brand image. Over the next several years, however, we see the opportunity to submit our leadership in on-line food and delivery by providing more value to both sides of the network, our diners and our restaurants. Our aim is to do this by becoming the most comprehensive marketplace for takeout diners and restaurants. That means aggressively increasing the breadth of our already industry-leading restaurant network. Helping our diners find the perfect choice among the huge selection we're building.

On that note, we've begun pushing forward with platform customization for our diners. The goal is to use our data from hundreds of millions of orders to offer diners recommendations, putting the right restaurant and right meal in front of diners at exactly the right time. We've begun soliciting more relevant reviews from diners after they order. The streamlined interfaces on both the home sage and via SMS text. We're now receiving 70,000 data points per day from our customers and we believe we're building the most accurate and most relevant ratings database specifically tailored significantly to takeout orders.

We also displaying this vast amount of data in increasing insightful ways. In early July, we launched a new restaurant rating display, showing diners how well restaurants perform across three key metrics, food quality, delivery time estimation and order accuracy. As our recommendation engine gathers more data points our review base continues to grow, we expect to continually improve our ability to tailor the ordering experience to each specific diner.

In addition to specific food and restaurant recommendations, we spent a lot of time understanding diner habits and how to drive lifetime value for each individual diner which also drives increased value to our restaurant Partners. For example, we've seen that new diners behave differently than repeat diners, so for new diners we've begun incorporating certain quality metrics in each restaurant search rate team to more prominently feature restaurant we know result in higher lifetime value. For restaurants, our goal is to deliver insightful and actionable business analytics in addition to order volume. To that end, we recently revamped our original restaurant facing technology with the development of Grub Central.

While Grub Central offers some notable updates over OrderHub, including access from any device, realtime menu updates and stronger integration to GrubHub delivery, it is more importantly a more robust operating platform that allows us to iterate more easily going forward. We're excited about what we'll be able to deliver restaurants as we lay our new features into Grub Central going forward.

We believe that restaurant ubiquity and data driven insights for both diners and restaurants will position us well for years to come. With our industry-leading diner and restaurant bases, high diner loyalty and industry low diner fees, we believe we're in a commanding position in this large and growing space.

In the near term, we've been able to accelerate growth by executing on our 2016 strategic imperatives. Product improvements, delivery and our updated brand image. As we discussed on our Q1 call, we're excited about how our new technology stack has allowed us to optimize for product conversion. As we notice, we began seeing the benefit of this optimization with some wins in April and continue to see that positive impact through the remainder of the second quarter.

A significant amount of our technology resources are focused on making incremental changes to the platform that drive conversion, diner frequency and ultimately lifetime value. These changes tend to be more singles and doubles rather than home runs.

For example, to give you an idea of what these changes looks like, some of the improvements in the second quarter include improved layout of the mobile web restaurant landing page, adding personal recommendations on the homepage and simplified search form instructions. We've had a number of wins already and expect product improvements to be part of our arsenal going forward, even if the impact isn't quite as dramatic as what we saw in the second quarter.

Delivery also continues to drive growth for us because it allows us to offer diners restaurant options that's we couldn't before. Helping us fulfill that promise of being the most comprehensive marketplace for takeout. All restaurants are valuable to us, but underscoring our ability to target high-quality restaurants, those that we deliver for, generated approximately 10% more orders per restaurant and 60% more new diners per restaurant in June than other restaurants on our platform.

As we've talked about in the past, delivery has also helped us sell chains, particularly those without current delivery capabilities. We continue to make good progress on this front as well. This quarter, we've added Buffalo Wild Wings which we think is a fantastic complement to our marketplaces, as well as Lou Malnati's, Bravo Brio, Landry's, Cantina Laredo and a large number of Papa John's franchises among other things. Additionally, while we've highlighted a number of our prominent chain partners on our calls the last few quarters, we have many more national chain restaurants currently live on the site by way of their local franchise owners. We're encouraged by what we've seen from the chains in terms of new diners and order frequency, but also note that chains are still only a very small portion of our overall volume. But while the multi-year opportunity to grow our restaurant network through chains is significant, we do not expect them to be a meaningful driver of overall Company growth in the near term.

Finally, we continue to broaden the appeal of the GrubHub and Seamless brands in order to grow awareness with diners. With our new creative end market for all of Q2, we saw net diner additions improve compared to Q1. Our biggest opportunity continues to be converting offline diners to on-line. While traditional on-line and brand advertising drives significant awareness for GrubHub, we also aim to incorporate our brand in fun and engaging ways that encourage diners to make GrubHub a part of their everyday lives.

Two recent examples are our partnership with the Discovery Channel around Shark Week and our recent promotion of Apple Pay. Shark Week is one the most watched weeks of programming on television. Through cobranded social media, e-mail marketing and commercial placement during TV airings of Shark Week events, GrubHub was able to form a meaningful partnership with the Discovery Channel and take advantage of all the buzz. Our partnership drove strong engagement on Facebook, Twitter and ShapChat, with notable traction in some of our smaller markets.

Demonstrating the power of product marketing, we launched Apple Pay in early June as new checkout option on the GrubHub and Seamless apps. We're always looking for ways to make ordering on our platform even easier and Apple Pay was a clear way for us to enable this for our diners. We were also included in the Summer of Apple Pay marketing campaign, putting us squarely in front of many potential new diners and front and center in the industry-leading App Store.

We're very excited about the direction our Company is headed and we have a large opportunity ahead of us. I look forward to giving you more updates next quarter.

With that, I'll hand it over to Adam who will walk you through the financials.

Adam DeWitt

Thanks, Matt. I'll start with our second quarter performance, provide some forward-looking color and then we'll open the call for questions. As Matt noted, the second quarter was a very good quarter for us. It's typically softer than the first quarter due to the arrival of better weather and summer vacations, but it ended up being our strongest across key financial and operational metrics.

We ended the second quarter with almost 7.4 million active diners, a 24% year-over-year increase, including the contribution of approximately 100,000 diners from LAbite. We processed 271 daily average grubs and $733 million in gross food sales during the quarter. 23% and 29% year-over-year increases respectively. Excluding the acquisitions of Delivered Dish and LAbite, year-over-year DAG growth would have been 22% and year-over-year gross food sales would have been 25%. Making this our best quarter of organic growth since the second quarter of last year.

While April and May saw the benefit of colder and wetter weather than 2015, weather actually became a bit of a headwind in June as the weather was dryer and more mild this year than last. Net-net, the weather added approximately 1% to our year-over-year DAG growth rate this quarter. As a result, year-over-year DAG growth net of acquisition and weather impacts was 21%, a significant acceleration from last quarter. Of note, growth was consistently strong across each of the three months of the quarter.

Second quarter net revenues were $120 million, 37% higher than the year-ago quarter's net revenues of $88 million. If we exclude acquisitions, revenue growth would have been approximately 29%. Net revenue as a percentage of gross food sales was 16.4% during the second quarter. This compares to 15.5% during the second quarter of last year. Consistent with recent quarters, the increase in revenue capture rate is driven by the growth in our delivery efforts, including the restaurant delivery acquisitions we have made to date. Capture rates excluding the delivery impact were is up slightly sequentially, in line with typical seasonal trends.

On the expense side, total sales and marketing expenses were $25.4 million this quarter. A 23% increase compared to the same quarter last year and a sequential decrease of 12% as compared to the first quarter. As a reminder, last quarter we discussed that we would be focusing more on high-quality diner acquisition and that while we would still grow our advertising spend year-over-year growth would be at a lower level than prior periods. Our second quarter spend level in growth and active diners are consistent with this goal.

An additional expectation from this strategy to focus on higher-quality diners was that diner frequency declines would abate as the underlying quality of the diners improved. We saw this materialize in the second quarter, as 30-day orders per ending active diner declined less than 1% compared to the second quarter of 2015. The smallest year-over-year decline in frequency since we've been public. We expect this metric to behave similarly or even a little better over the next few quarters.

Operations and support expenses in the second quarter were $40.7 million. A 65% increase compared to the $24.6 million in the second quarter of last year and a sequential increase of 16% as compared to the first quarter. This increase is from the aggressive scaling of our delivery infrastructure, the inclusion of Delivered Dish and LAbite and the organic growth in overall orders.

In the second quarter, our delivery investment was approximately $4 million. So more to the amount we invested in the first quarter. As a point of clarification, we define delivery investment as the incremental revenue we receive for delivery orders, less the incremental costs we incur to operate delivery logistics.

The incremental revenue portion of this calculation only includes the extra fee a restaurant pays for delivery and the delivery fee the diner pays to us. It does not include the traditional advertising commission we always receive for generating orders for our restaurant Partners. In effect, it is the opportunity cost of a delivery order compared to a traditional marketplace order that a restaurant delivers on its own behalf. While the overall investment level this quarter was similar to what we incurred in the first quarter, it's important to note that the order volume we delivered was significantly higher. In other words, we're becoming increasingly efficient and the per order investment continues to decline. Given the progress we've made on the efficiency side and the performance Matt noted in terms of better new diner acquisition and improved diner frequency for GrubHub delivery restaurants, we remain confident that our delivery investment has a high long term ROI.

Accordingly, we're continuing to build out our capabilities in many markets, both old and new. However, even though we're expanding aggressively, because of the efficiencies we've achieved through our scale, we do not have to increase our investment level. We currently expect our net third quarter investment delivery to be similar the second quarter and a similar story for the fourth quarter.

By the end of the year, we believe we'll grow our current footprint of 50 markets to approximately 70 markets nationwide for delivery. We now have more than 5,000 active drivers in our network every month and by year-end, our coverage footprint will enable delivery for a very large majority of GrubHub's footprint. We're excited by the long term opportunity for incremental growth that delivery is opening for us. Technology expenses, excluding amortization of web development, were $10.6 million for the quarter, increasing 34% from the second quarter of 2015 and 4% from the prior quarter. This increase is consistent with the investment we've been making in our technology and product teams which has helped to drive the impactful improvements Matt talked about earlier.

Depreciation and amortization was $8.9 million for the quarter, a sequential increase of 22% from the first quarter. Most of that increase was driven by the inclusion of the amortization of LAbite and tangibles. G&A costs were $12.2 million, a sequential decrease of 11% from the $13.6 million in the first quarter. As a reminder, we had $1.7 million in accelerated stock compensation related to some terminations in the first quarter. The decrease in G&A is mostly due to the absence of that accelerated stock comp.

Net income was $12.8 million compared to the prior year of $9.4 million. Net income per fully diluted common share was $0.15 on approximately 86 million weighted average fully diluted shares. Our tax rate for the second quarter was around 43%. And we currently expect this rate to be a good estimate for the rest of the year. Non-GAAP net income was $19.6 million or $0.23 per fully diluted common share, compared to the prior year of $15 million or $0.17 for fully diluted common share.

Adjusted EBITDA for the second quarter was $37.6 million, an increase of 32% from the $28.4 million in the same quarter of the prior year. Adjusted EBITDA margin was 31% this quarter, an improvement of 200 basis points from the first quarter and within 100 basis points of our adjusted EBITDA margin last year in the second quarter before we started investing in delivery. Since we announced our delivery initiative, we've had questions about whether it would hurt our profitability. In the second quarter, adjusted EBITDA per order actually expanded to $1.52 from $1.42 in the second quarter of last year.

This is the highest level we've had for this metric ever and we achieved this while we're still growing delivery aggressively. This clearly shows the power of scale and leverage in our business and our ability to increase profitability for shareholders, even with GrubHub delivery capturing an increasing percentage of our overall orders.

Our balance sheet continues to provide us with significant financial flexibility. We completed our previously announced acquisition of LAbite in May for approximately $66 million in net cash. We also bought back roughly $5 million worth of stock in the second quarter and we'll continue to buy back stock in the open market on an opportunistic basis. CapEx will was a little higher in Q2 than in prior quarters as we're currently in the midst of building out more floor space in our Chicago office and remodeling existing office space in New York and Chicago. The bulk of this work is paid for at this point, but CapEx might remain slightly higher than normal through the end of the year. We ended the quarter with $270 million in cash and $185 million in untapped on our revolver.

Finally, I would like to share some thoughts on third quarter guidance and the rest of year. We've seen a number of benefits to growth from the initiatives now outlined and we expect these benefits to continue. That being said, the unseasonal growth we saw in the second quarter versus the first quarter was atypical and we expect third quarter revenue to be down sequentially in line with more typical seasonality.

We currently expect third quarter revenue to be $116 million to $119 million. Given this top line expectation and the underlining growth of our business in terms of headcount and driver pay, we expect third quarter adjusted EBITDA to be in the range of $30 million to $32 million. The fourth quarter will continue to show normal seasonal upticks in revenue and EBITDA trends as we enter our stronger period of our year.

Given the outperformance we saw this quarter and our current forward expectations, we're raising full-year revenue and EBITDA guidance. We now expect full-year revenue to be within $480 million to $488 million and adjusted EBITDA to be within $136 million to $142 million.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question today comes from the line of Ron Josey of JMP Securities. Your line is open.

Ron Josey

I wanted to ask a little bit more about the platform changes and improvements, Matt. I think in March, you talked about better search, better onboarding process, faster load pages. And then in 2Q, you talked about other improvements around ratings and whatnot. But you also said that the incremental benefit wouldn't be as dramatic this quarter.

So I just want to ask a little bit more about the permanency of these improvements to conversion rates, particularly as incremental changes, I would imagine, layer on top of the other. So while the improvements may not be as great in 2Q, you're still benefiting and improving those that were done in 1Q. I just wanted to get some more details there and if you could highlight any of those improvements in 2Q specifically, that would be really helpful. Thank you.

Matt Maloney

Sure, Ron. So I think that in Q1 we hit a bunch of low hanging fruit. We knew there was a bunch of work to do post technical transition and we knew those would have an impact on conversion rates that would be positive and would remain but it wouldn't be as dramatic of an increase in Q2.

I think the ratings in the Q2 and some other things were really put in place in order to the deport the personalization we're really working on right now. We have a lot of people looking at personalization and the data insights in the restaurants and generally matching hungry diners with the right dishes to optimize conversion.

During that time, we also did a lot of funnel optimization, this has been something we've been investing in for over six months. That really has paid off more than we were expecting. So I think while we knew we would see some increase in product conversion across the funnel, I think we saw more conversion increase than we were expecting across more than just the main funnel and not the side funnel work.

And so the product conversion benefits should remain. I think we're, again, we're not committing to seeing dramatic increases in conversion. But I think the, at least from the product perspective, what we've seen in beneficial conversion increase should remain. In Q3, I think we just have a lot of people looking at personality and experimenting with suggested menu items, I think that's really cool. I think it is a first step towards really leveraging the vast amount of order data we have and we'll continue to push down this path in an attempt to continually raise conversion and just generally provide a better service to our diners.

Operator

Your next question today comes from the line of Ralph Schackart from William Blair. Your line is open.

Ralph Schackart

It doesn't appear to be affecting you in the results today on the competitive side, but just want to get that question out of the way. Maybe you can talk about what you're seeing or not seeing from the larger tech companies, as well as the VC funded companies in Q2 maybe versus a year ago.

And then, Adam, just a clarifying question. I think you said you'll have delivery spend in Q3, in Q4 similar to what you saw in Q2. But did you also say that you intend to grow from 50 to 70 markets as part of that overall 2016 spend? If you could clarify that, that would be great. Thanks.

Matt Maloney

Sure, Ralph. Simply, we just turned in our strongest quarter in a year, despite the accelerating competition. People have been questioning our ability to compete, first against the valet start-ups and now against these heavyweights. And we're extremely confident in our ability to compete and win and say to the larger tech companies, we believe we'll succeed because of our singular focus. We connect diners with their favorite restaurants and our ability to engineer our entire product around this purpose and our comprehensive restaurant network. It's important to remember that it's difficult to deliver much faster than GrubHub because the kitchen still needs to cook the food and the driver needs to deliver it.

So it's hard for logistics companies to do better. We're still seeing most of the reason that 30-minute, 30s, timeframe and much closer to 30 during meal times in our major metros. In regards to VC funded private competitors, it's clear that many of our private competitors are being driven with a greater eye towards profitability opposed to pure growth which is great for the market.

I think any market level change that leads to competitors giving away less free food is necessarily a positive for us, but broadly our competitive advantage industry-wise based the on greatest selection of restaurants and cuisines based on the lowest diner facing fees and finally the best product experience backed by our extensive customer support. So I think we're happy to compete with anyone. We're clearly doing a great job. And because we have the best depth and breadth of products and restaurants.

Adam DeWitt

Ralph, in terms of the delivery investment. So yes, based on the great feedback that we've gotten from the diner performance, we're probably pushing a little bit more aggressively than we had thought about before. So between now and the end of the year, we expect to push our delivery footprint from 50 to 70 markets.

I think the important thing to note in that is that the guidance on the spend hasn't increased and the reason it hasn't is we've been able to get more efficient with our scale and so the per order investment is going down. So we were able to ratchet up our market expansion in terms of delivery without increasing our investment. And just as a corollary there, we expect that investment level to go down on a net basis next year.

Operator

Your next question today comes from the line of Heath Terry from Goldman Sachs. Your line is open.

Heath Terry

Obviously saw a lot of leverage in sales and marketing this quarter. Wondering if you can give us a sense of how sustainable you feel like that is? And to the extent that there's anything you can unpack for us on what's driving that? Whether it's better ROIs because of that less competitive venture environment out there or simply better traction with customer orders? That would be really helpful.

Adam DeWitt

So we certainly saw some leverage second quarter versus first quarter. I think last quarter we tried to give you guys some color around that metric. It is a net metric and so it's sometimes it's a little hard to gauge how well we're doing from an acquisitions standpoint purely by looking at that metric. So it can be affected by noise, let's say we ran a really aggressive campaign in the year before that didn't have a lot of high quality diners in it. So it bounces around.

We did see an improved environment for new diner acquisition along with all the improvements on the on the order frequency side. And we think it's, look, it's a combination of the same things that are driving the order growth. It's the product and improved conversion, it's an improved brand or an updated brand and a more effective brand. And so all of those things trickle down. To some degree, the weather is a little bit of a tailwind as well. So all three of those things together that helped push the order growth also helped push new diners. So obviously we think a large portion of that is going to be sustainable, the product improvements and the improvements from the brand side.

Heath Terry

And I guess just one follow up. When we look at the I guess 90 basis points of increase in the commission rate year over year, how much of that would you attribute to the higher fees associated with delivery versus the core commission rate increasing?

Adam DeWitt

Yes. Most of it is related to the addition of delivery and so whether it's our own delivery or the acquired businesses. So as you point out, the added fees to the diner and the incremental commission to the restaurant. I think overall you're probably seeing a very small part of that increase due to the natural increase in our underlying commission rate due to the restaurant driven pricing model that we have. But most of it's going to be the delivery.

Operator

Your next question today comes from the line of Aaron Kessler from Raymond James. Your line is open.

Aaron Kessler

A couple questions. First, can you just update us maybe on the overall penetration rates that you view for the industry, especially your tier one versus tier two cities? And then you talked about maybe increasing the breadth of the restaurant network. Can you give us a sense where you think that could go longer term and would you see 100,000 plus restaurants in the network? Thank you.

Adam DeWitt

Yes. In terms of the penetration rates, I think it's safe to say that the penetration has increased at least as much as our growth. There's obviously been some other entrants that are also converting. But I think overall, you're still seeing our top penetration rate in New York, if it's north of 20%, it's just north of 20%. It differs potentially between Manhattan which is probably a little higher in the surrounding boroughs. But you're still seeing overall a lot of capacity in New York which is our most penetrated market.

I think the story in the other tier one markets is the same or perhaps even, there's even more opportunity left. Think about Chicago and that penetration is going to be probably closer to 10% than it is to 20% and the rest of the tier ones is probably in a very similar place. So a lot of capacity still in tier ones and it's very early innings in the tier twos, obviously.

In terms of the restaurant network, it's tough to say. We intentionally don't give restaurant numbers as a key metric because it's not necessarily a good indicator of or an easy driver to model the business off of. But more restaurants is obviously better for the network over time. There's something like, I want to say there's something like 600,000 restaurants overall in the U.S. About half of those are chains and half are independent. So I would say that it's easy to see a total north of 100,000 over time.

Aaron Kessler

And just finally, I think you've given the example in the past quarter maybe a San Jose has seen some nice benefits in the model. Any further updates on specific cities or cohorts seeing that inflection in the growth rate from the delivery model?

Adam DeWitt

Yes, instead of giving specifics, San Jose continues to be a really good success story for us. The growth rates there are still very high. If they're not triple digits, they're certainly closer to triple digits than they are to 50%, but there's other markets like that.

And what we've found is and this just reinforces the story that Matt was telling about delivery and how it's benefiting us, but in markets where we've added a lot of delivery restaurants relative to total restaurants or to put it a different way, where delivery restaurants are a very high percentage of our volume, it's very easy to see the inflection point on the growth rates. And it's several markets, it's not just San Jose, but there's other markets that look like that as well.

Operator

Your next question today comes from the line of Chris Merwin of Barclays. Your line is open.

Chris Merwin

So your orders per active diner was I think almost flat in the 2Q after many quarters of decline. So is that all due to the engagement improvements that you've seen from some the site changes including the recommendation algorithm? Also within the context of your guidance, should we expect this metric to remain about flat for the rest of year or even possibly inflect higher? I know as you move into some tier two markets that may also weigh on orders per diner, so just was curious about some of the puts and takes there. Thanks.

Adam DeWitt

Yes, absolutely. So the when you think about the cause, you hit the nail on the head. It's basically the same drivers that drove engagement over the quarter, so product, marketing and a little bit of the weather. So we certainly think that most of the impact there is repeatable and sustainable and so should continue to drive that metric. In terms of the guidance, I think you got it. I think what I said in my prepared remarks was that we expect it to behave similar to this flattish result. If anything, there might be a little bit of upside there.

I think, look, underlying, we still have the mix shift away from New York is still a headwind for that metric. So as you pointed out, as we add diners from at a higher rate in markets outside of New York and outside of corporate, frankly, that naturally pushes that frequency down. I think what you're seeing is the underlying strength of all of the diners is effectively offsetting that and may offset it to a degree where it becomes positive at some point during the remainder of the year.

Operator

Your next question comes from Brian Nowak of Morgan Stanley. Your line is open.

Brian Nowak

I have two, the first one, could you give us any update at all on the growth of the different tierings of cities? I know you have in the past, New York versus a tier one cities versus the rest of the U.S. given the traction with delivery. And then second, can you help us with the acquisition impacts on the full year EBITDA for 2016? Thanks.

Adam DeWitt

Sure. So in terms of the first question, I think the last time we gave an update there what we said was the tier ones were probably growing at a roughly the same level of growth as the overall Company. And that the tier twos and tier threes were growing at closer to 50%. And what I'd say is, if you look at the markets now and to your point, deliveries had an outsize impact on the tier twos and tier threes.

But if you look at the markets now, it's probably very similar. So the tier ones are go going to be closer to the growth rate of the overall Company and the tier twos and tier threes are going to be closer to 50% when you look at them overall. In terms of the EBITDA for the full year, I assume that you're looking for the contribution of LAbite. What we've said prior to this is basically $0.5 million a month and so you get to a roughly $3 million for the remainder of 2016.

Operator

Your next question today comes from the line of Michael Graham of Canaccord. Your line is open.

Michael Graham

The casual dining sector had a pretty tough quarter I think by most measures and I'm just wondering if you have any appreciation for whether that impacted your business in what was a strong quarter for you? And then could you just talk, Adam, about your current philosophy on margins over the medium to long term. We took a step backwards in margins in 2015 and then we're flattish in 2016. You've got a 35% plus long term target and I'm just wondering do you feel like you'll need to possibly take a step backwards again at some year coming up? Or do you feel like it's more of a steady ramp towards that goal? Thanks.

Matt Maloney

In compare to the casual dining segment, I think our growth rate is pretty astronomical. I think that's because we have so much potential ahead of us and the market is so large and comparatively we're simply so small. So I don't think the macro affects that are hitting the casual dining segment are hitting us to the same degree or at all, to be frank. I think that our growth really was around the product optimization and doing better what we have, with effective marketing and getting more diners into the funnel. And then ultimately the incremental growth from delivery that we're just starting to see. I think that's why we're out performing and it's really just limited to that.

Adam DeWitt

Mike, in terms of the margins, in my prepared remarks, I tried to emphasize -- I think and we since we've started delivery, we've been trying to emphasize that the benefits of delivery are that over time we can generate the same cash per order as we could without delivery. Only we're generating a lot more orders because we can add a lot more restaurants and popular restaurants at that to the platform. So that original 35% long term margin target at the IPO did not assume any delivery in our future. And what delivery does is it has the effect of grossing up the P&L so that you have additional revenue and additional expense that offset each other. So margin percentage can go down, but the cash that you're generating on a per order basis can actually improve.

And so in terms of where we're today, if you backed out that $4 million that I mentioned, I think you'd get to something like a 38% EBITDA margin. So we're actually ahead of that 35% on a like per like basis. The long term margins really depend on where the ultimate mix of delivery versus non-delivery ends up being. But I think that in terms of thinking about the profitability or how we're generating operating leverage for shareholders, I think it's instructive to look at that metric which I highlighted, the EBITDA per order. And if you look at what we did this quarter, we hit $1.52 per order which is our highest level ever, even with delivery.

So I think what you have over time, if you're actually trying to model out the margin percentage, you have offsetting impacts of delivery growing as a percentage of our total which hurts that margin percentage, but increases revenue and operating leverage in the business. We have seen, even with delivery, that margin percentage creep up. It was 25% in the third quarter of last year and 27%% in the fourth quarter, 29% and now 31%. So it has ticked up even with delivery, but it really depends on where the ultimate mix is.

I think if you're looking at profitably though, you really should focus on that EBITDA per order. Because how much cash we generate on a per order basis is really most important thing.

Operator

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

Nat Schindler

Yes, guys, hello. Just trying to figure out your guidance. As you look at take rate being up so much this quarter, a lot of that was LAbite coming in midway through the quarter. Where would you consider take rate ending the quarter and should be our new base rate now that you've done the acquisition and we can apply it through? And that way we can figure out gross food sales.

Adam DeWitt

Sure. So the take rate, last quarter, first quarter we were at 15.7%, we're at 16.4% with LAbite. And as we mentioned in the prepared remarks, most of that or almost all of that increase is LAbite. And so we had LAbite in there for about two months, so it lifted it 0.7% for two months, so add a few more percent or another 30, 35 basis points for that extra month and then that's probably your base rate or a decent base rate for the third quarter. So if you add 30 basis -- so to be very clear, it's 16.7%ish is your base rate for the quarter if we had LAbite in there for the whole quarter.

Nat Schindler

And on the second question, what was the specifically the new marketing channels that you were -- what's been so effective that it allows you to grow net active diners added in the quarter faster than you have in the past and to maintain your growth rate even as your spending falls as a percentage of revenue?

Matt Maloney

Nat, I think there's two things to this. One is remember, we had a brand update. So the communications themselves are all more effective. I think they're resonating more with diners so we get more power out of every dollar. And second, also remember that the brand refresh came around in the February/March timeframe, so there was significant investments made late in the first quarter. So if you think that a marketing investment has a three, four-month window, you can imagine that a lot of the benefit of that spend that was accounted for in the first quarter hit in the second quarter.

Operator

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

John Egbert

Your new faceted ratings and review system, are you building that data asset essentially from scratch or have you found any ways to make some of your legacy review content informative to the new system perhaps by identifying keywords or things like that? And then I know it's pretty early on with the new system, but have you done any analysis on how delivery time ratings compare for a Grub delivered order versus a third-party delivered order for similar restaurants?

Matt Maloney

Yes, absolutely. Great questions. So to answer your first question, we do have a huge trove of data from the 10 to 15 years we've been executing, but they don't have the granularity that we're looking for in the new system. By separating the different facets of feedback for diners, we're really capturing what diners really care about and unfortunately we were not able to re-use a lot of the reviews.

There are ways you can mine into that for general perspective. But we really want the high-quality, high-fidelity data in realtime. So we have been building it, but the velocity of data that we're aggregating is incredible. It's 70,000 data points per day. There's multiple data points per restaurant, so generally we're looking at one review or rating per day per restaurant across the entire network. So you can imagine that over a course of a week, you can see a restaurant's aggregate rating really change if they're doing something very wrong or very right.

And I think that you don't have that kind of clarity and realtime feedback anywhere in on-line reviews, but especially in takeout. So I think we've already built a critical mass of data for the majority of our restaurants and I think that it's an incredible asset for the Company going forward.

In terms of delivery times, specifically, we're absolutely measuring the quality, the speed and the accuracy of delivery across all of our restaurants. Obviously, we have a lot more data on the restaurants that we're doing delivery for, but I think that we will be soon highlighting the best performing restaurants in the areas that diners care about. And I believe that our delivery system will have a much larger representation in these high-quality segments, simply because we're able to execute delivery at a much higher quality, much more consistently than anyone else because of our scale.

Operator

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

Mark May

And I had two. Recognizing that as Adam said a couple times that you're seeing a per order leverage in the face of the delivery investments. But just wondering how we should be thinking about the delivery investments beyond Q3? Could delivery next year turn from being a net investment to a net return? And then secondly, you mentioned that your I think it was organic DAGs growth was consistent throughout Q2. Just wondering if you could comment how that's trended through the month of July, any meaningful changes? Thanks.

Adam DeWitt

On the first point, in terms of the delivery investment, what I try to outline in the prepared remarks was that we probably think that the investment level in Q3 and Q4 is going to be similar to what we saw in Q2. Which we think is a big win, because one, we're delivering a lot more orders and will deliver a lot more orders in Q3 and even more in Q4. But we're also able to invest growing our footprint from 50 to 70 markets without increasing our overall level of investment. In terms of what it's going to be going forward, we think it's going to decrease in 2017. I don't know if it's going to get to a positive. I think that what we've said in the past is, we'd really like this to be that part of our business to be break even and pass on the saving or pass on any opportunity to the diner to drive more volume.

So if we become so efficient that we're able to reduce delivery fees, for example, we think that that could be a huge benefit to demand. But we're getting a lot of leverage. We delivered a lot more orders in Q2 than we did in Q1 with the same level of investment. We're going to roll out 20 more markets, again not increasing the investment and we expect that to manifest. We expect to grow into our skin in 2017 and see that number decline.

The July. Yes, last quarter we talked about April. I think we talked about April because our guidance was a pretty significant departure from the existing trends that we saw in January through March. So I don't think I want to get in the habit of commenting on the months. What I'll say is, the guidance that we gave for Q3 obviously includes our intelligence so far to date from July. And we feel good about, Matt and I, I think separately have both said that a lot of the drivers behind the engagement in Q2 we think are lasting drivers or sustainable drivers. So I think that gives you a little bit of color there.

Operator

Your next question comes from the line of Tom Forte of Maxim Group. Your line is open.

Tom Forte

So as you advance your first-party delivery efforts in the start doing more for the chain restaurants, what have you learned. How should we think about the long term economics of the chain restaurant versus the independents?

Adam DeWitt

Yes. I think we've talked about this on a number of calls so far. In terms of the chains, we're not seeing a big difference in overall economics when we sign on a chain partner versus an independent restaurant. And I think that the reason is, first of all, I think the overall the service is reasonably priced for delivering pure incremental orders that have a very high ROI.

They're full-priced orders and all your doing is cooking them and putting them in a container. And our model of partnership with the restaurants is really close and the chains that we're working with appreciate the way that we integrate with them, the way that we service their diners and the attention that we give to their restaurants and their orders. So to date, we really haven't seen an impact on commission rate from the chains that we've signed on.

Operator

Your next question comes from the line of James Packna of Monet, Christie, Hart. Your line is open.

James Packna

Just one question please. On your POS integration, is this something that you guys are thinking about that a strategic area for you? Can you just generally talk about how GrubHub is approaching plugging into the POS system? Thanks a lot.

Matt Maloney

Sure. Our goal is to create the most comprehensive marketplace. We believe that providing the restaurants that diners across the country are hungry for is the way that we will win. If doing so requires integrating to the POS, then we will pursue it. We haven't done so, so far to date, we haven't felt like it was required. As we partner with more chains if we find that this is a very important element to the chain relationship, then it will become more important to us.

Operator

Your next question comes from the line of Neil Deutsch of Mitahu. Your line is open.

Neil Deutsch

On the M&A front, Matt, do you still see an opportunity in acquiring companies that have delivery footprint or would you also consider moving into some of the more vertically integrated delivery businesses? And then I have another follow up.

Matt Maloney

So in terms of M&A, we're always opportunistic. We've boosted our or we created the revolver to make sure we had plenty of cash on hand for opportunities. I would say that our acquisitions over the past year in the restaurant delivery service space, that's the cookie cutter we love. Existing revenue and profitability and we can bring them on our delivery platform for much higher efficiency and much more scalable growth. I think that any geographical footprint that has diners is worth something. I think that we could argue a lot about whether they are more expensive or not right now.

In terms of vertically integrated delivery systems, I think we want to stay out of the business of cooking food. I think what we're really good at is generating demand and facilitating the orders and so I think that we're less interested in the actual preparation, but like I said, we're opportunistic. We'll look at any deal that is near our industry and I think we're pretty aggressive.

Neil Deutsch

And then in terms of going from 50 delivery markets to 70 markets, how should we think about that number moving into 2017? Do you expect to double from there or are we hitting critical mass once we get to 70 markets on the delivery front?

Adam DeWitt

I think we're getting pretty close, once we get to the 70, I think we're getting pretty close to critical mass. We're going to have coverage over a vast majority of GrubHub diners. So I think at that point, it's going to be a matter of adding more restaurants in those markets as opposed to launching new markets. But there might be some additional ones. But it's not going to be -- we've gone from zero to 70 to in a very short period of time. I would expect the growth from there to slow quite a bit.

Neil Deutsch

And then just one more quick one. Did you guys provide an update in terms of run rate for delivery of gross food sales.

Adam DeWitt

We didn't. We didn't give an explicit amount. What I'd say is with LAbite, we're delivering just a little bit over 10% of our gross food sales now. We're delivering either through GrubHub delivery or one of the restaurant delivery services that we've acquired, so a combination of those two gets you a couple points over 10%.

Operator

Your last question for today comes from the line of Blake Harper of Luke Capital. Your line is open.

Blake Harper

Just had one question, again on the delivery. I wanted to ask how much of the integration chains is delivery that you do this off the GrubHub network and if you're focused on doing that? And then secondly, with -- would you expect to make some of the further investments into delivery as far as logistics and analytics and automation so much that you've gone the tech migration on more of the consumer side to increase some of the speed and efficiencies there with the delivery network?

Adam DeWitt

Can you repeat the first part of the question? I don't think we completely heard it.

Blake Harper

Yes, so I'm talking about any delivery that you would do for chains that's done off of the GrubHub network. For example orders that come in to the chains directly that you would do the delivery for them or would it all be done basically through the GrubHub platform?

Matt Maloney

Yes, we predominantly only deliver through GrubHub. We drive demand first, that's the majority of our business and our margin. But I think we definitely focus on fulfilling the orders for GrubHub diners that place their orders through our channels and not your white label. In terms of investments and logistics, I think we have -- that is what this big investment in delivery really is. It's not -- it's scaling out drivers but it's also building the infrastructure on the back end to be a state of the art logistics operator where we're executing at as high efficiency as possible.

And I think that as we continue to add scale to our delivered orders quarter after quarter, we're seeing that scale generating increased efficiency over time. And this is part of why we had such a strong quarter. But I wouldn't say that we're looking to invest more than what Adam has already outlined in terms of our growth for delivery.

Adam DeWitt

Operator you can disconnect.

Operator

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

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