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Executives

Tiffany Fox - Communications Director

Matthew J. Roberts - Chief Executive Officer, President, Director and Member of Equity Incentive Committee

I. Duncan Robertson - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Paul Judd Bieber - BofA Merrill Lynch, Research Division

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Andrew Ruud - Morgan Stanley, Research Division

James Cakmak

Andrew D. Connor - Piper Jaffray Companies, Research Division

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

OpenTable (OPEN) Q3 2012 Earnings Call November 1, 2012 5:00 PM ET

Operator

Good afternoon, everyone, and welcome to the OpenTable Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Matt Roberts; Chief Financial Officer, Duncan Robertson; and the Senior Director of Corporate Communications, Tiffany Fox. At this time, I would like to turn the call over to Tiffany. Please go ahead.

Tiffany Fox

Good afternoon. Thank you, and welcome to the OpenTable Earnings Conference Call. Joining me today to talk about our third quarter results are Matt Roberts, our President and CEO; and Duncan Robertson, our CFO. Before we begin, I would like to take this opportunity to remind you that during the course of this conference call, management may make forward-looking statements, including guidance regarding our expectation of future financial performance, which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations. A discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, and we refer you to these filings.

Also, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures in talking about the company's performance. Reconciliations to the most directly comparable GAAP financial measure are provided in the tables in the press release.

This conference call is also being broadcast on the Internet and is available through the Investor Relations section of the OpenTable website.

And now, I'll turn it over to Matt.

Matthew J. Roberts

Great. Thank you, Tiffany, and welcome to our conference call, everyone. Before I begin, I want to say that I hope those who have been affected by the hurricane are safe and on the path to recovery. We have a lot of our customers who have been negatively impacted by Hurricane Sandy, and we're working very hard to do whatever we can to help minimize the effect and get them back up and running as soon as possible.

Now let's review the third quarter results. OpenTable had a strong third quarter. Revenue for the quarter totaled $39.7 million, a 16% increase over last year. And in the third quarter, our adjusted EBITDA profit margin was 44% on a consolidated basis and 52% in our North America business.

Now let's take a look at our key metrics by geography. In North America, which includes the U.S., Canada and Mexico, seated diners grew to 27 million in the third quarter, a 26% increase over last year. And worth noting, approximately 32% of the seated diners in North America in the third quarter originated on a mobile device.

To add some additional context to our seated diner growth, during the third quarter, North America industry diner counts were essentially flat year-over-year.

Turning to our installed base of restaurants in North America, we exited the quarter with 18,975 restaurants, representing a 17% year-over-year increase. This total includes 16,642 restaurants using our core electronic reservation book product, or ERB, and 2,333 restaurants using our Connect product, which is designed primarily for walk-in restaurants that accept reservations.

In international, which includes the U.K., Germany and Japan, seated diners grew to 2.3 million in the third quarter, a 30% increase over last year.

Looking at our installed base of international restaurants, we exited the third quarter with 7,385 installed restaurants. This total includes 3,192 ERB restaurants and 4,193 Connect restaurants.

Now I'd like to provide you with a few updates on the business. We continue to see a significant shift to mobile, which we view as a long-term positive for a couple of reasons. First, our primary and fastest-growing source of revenue is reservation transactions, which monetized well in mobile devices. And second, mobile puts the OpenTable solution in the hands of diners wherever and whenever they're thinking about dining out.

To capitalize on this shift, we need to make sure that our products and consumer experience are optimized for virtually any platform and form factor. By accelerating our pace of development and continuously iterating the consumer experience, we believe we can make a positive impact on the growth of our user base and mobile conversion rates. We have a lot of work to do in this area, but we've made some great progress over the last few months.

Most recently, we launched an initiative that we view as a win-win-win for restaurants, diners and OpenTable. The new service provides our restaurant customers in the U.S., the U.K. and Canada with 3 mobile-friendly websites. The service is designed to help restaurants benefit from the growth of mobile by making it easy for diners to navigate and book reservations on restaurant websites using their smartphones. Only an estimated 10% of reservation-taking restaurants have mobile-optimized sites today, so we believe we can play an important role in improving the mobile experience.

We are also excited to be one of the first companies to launch an app customized for the iPhone 5 and to have Siri support for OpenTable showcased by Apple. Looking ahead, we're excited about our mobile roadmap and believe that OpenTable and our customers are well positioned to benefit from the shift to mobile over the long term.

In the area of personalization, we're in the early stages of laying the foundation for marrying our rich data with the social graph. For instance, you may have noticed that the Facebook Connect login feature has been added across all of our platforms. Ultimately, this type of integration will enable features such as search results with an overlay of your friends' dining experiences. We're confident that by tapping into our rich data and layering it with the social graph, we will be able to provide a richer experience for diners and deliver greater business insights for our restaurant customers.

Now let's turn to an update on the U.K. We're continuing to widen our competitive moat. We now have more than 3x the bookable restaurants of any other reservation site in the U.K. and continue to add to our stable of high-profile competitive wins.

Marquee restaurants are switching to our technology, as our leading online brands such as lastminute.com, which recently named TopTable as their exclusive online reservation provider.

In the near term, there are some things that we're watching and focused on improving. When looking at the benefits of discovering and booking restaurants online, we believe that London diners fundamentally want the same things as diners in New York, San Francisco and every other market with a vibrant dining scene. They want the best availability at the best restaurants in real time.

These benefits were not fully supported by the TopTable site prior to its relaunch in May, which we believe is the reason TopTable's historical conversion of visitors into reservations was approximately half that of OpenTable in the U.S. Based on this disparity, we've focused on re-architecting the TopTable site to a function like the OpenTable site.

Now that we have 5 months of experience with the new TopTable site, we've seen gradual improvements in conversion rates but they’re not yet at the levels we anticipated. Naturally, we're eager to accelerate the improvement in TopTable conversion rates, and we're working on a couple of areas which we believe will generate that improvement.

First, we will continue to improve the product, not through big technology efforts but with a series of enhancements which we expect will have a meaningful, cumulative impact. Second, we need to evolve our user base with a focus on the convenience of online bookings rather than on deals and promotions. Some of this evolution will be driven by marketing, and some will take place as the consumer base broadens and becomes accustomed to the compelling benefits of our service.

Notwithstanding the work that needs to be done, we're as confident as ever that our U.K. business will be an important growth engine for us in the future. And to add some context to the size of the opportunity, currently, our online restaurant reservations in the U.K. are in the low single digits as a percentage of total reservations. Given we believe that at least a majority of reservations will occur online in the future, we have a large percentage of the market remaining to capture.

In summary, we're in a great position to have mobile personalization and the U.K. play important roles in the long-term growth of the business.

And now, over to Duncan.

I. Duncan Robertson

Thank you, Matt. Good afternoon, everyone, and thanks for joining us. Before I address the third quarter results, I want to remind you that throughout this call, my comments on growth rates will refer to year-over-year changes unless I indicate otherwise. Also, all non-GAAP financial measures exclude stock-based compensation expense, amortization of acquired intangibles expense, acquisition-related expenses and the tax-related impact of these adjustments. Now let's turn to the results.

In the third quarter, our performance of our core operating metrics once again delivered strong financial results. Total Q3 revenues grew 16% to $39.7 million, and adjusted EBITDA grew 36% to $17.5 million. GAAP net income was $5.9 million or $0.26 per share. Non-GAAP net income was $9.7 million or $0.42 per share.

To provide further insight into our key financial results and metrics, it's important to segment the statistics by geography since we are at different stages of development in our North America and international operations.

First, let's look at North America. North America total revenues grew 19% to $34.5 million, which is made up of 3 main components. North America reservation revenue grew 27% to $19.2 million, which represents 56% of total North America revenue. The primary driver of reservation revenue is the total number of seated diners, which increased 26%. Related to reservation revenue, the revenue per seated diner was $0.70 in Q3.

Moving on to the next component, subscription revenue in North America grew 10% to $12.5 million. The main driver of subscription revenue is the number of installed ERB restaurants, which grew 13% over the prior year. The ERB monthly attrition on a unit basis remained near its historical level of approximately 1%.

Also related to our ERB subscription revenue, the average subscription price was $254. And lastly, the smallest component of revenue, disclosed as other revenue, increased 11% to $2.8 million.

Turning to our North America expenses, non-GAAP operating expenses totaled $18.4 million, a 7% increase over the prior year. The main driver was higher headcount-related expenses associated with a 5% increase in headcount. On a sequential basis, our North America non-GAAP operating expenses increased 1% from Q2. Our resulting third quarter North America non-GAAP operating income totaled $16.1 million or 47% of revenue. North America adjusted EBITDA totaled $17.8 million or 52% of revenue.

Now let's review the results from our international operations. International revenue for the third quarter totaled $5.2 million and represented 13% of the company's total revenue. International reservation revenue declined 5% to $2.7 million. Subscription revenue grew 15% to $1.8 million and other revenue declined 12% to $774,000. Related to reservation revenue, the revenue per seated diner was $1.18 in Q3.

Turning to expenses, our international non-GAAP operating expenses totaled $6.1 million, a 5% decrease over the prior year associated with lower marketing expenses. On a sequential basis, there was a 2% decrease primarily driven by a decrease in headcount-related costs.

Our result in Q3 international non-GAAP operating loss totaled $839,000. International adjusted EBITDA was a loss of $272,000.

Wrapping up our consolidated Q3 results. Cash and short-term investments totaled $86 million at the end of Q3. On a non-GAAP basis, taxes were $5.6 million, which is an effective rate of 37%, and our quarterly stock-based compensation expense was $4.9 million.

Let me close by turning to guidance for the fourth quarter and an update on our full year 2012 outlook. Starting with North America, we estimate Q4 revenue to be in the range of $35.9 million to $37.2 million and non-GAAP adjusted EBITDA to be in the range of $18.6 million to $19.9 million. For the full year of 2012, we now estimate North America revenue to be in the range of $138.6 million to $139.9 million and non-GAAP adjusted EBITDA to be in the range of $71.5 million to $72.9 million.

North America guidance takes into account the following factors; first, related to reservation revenue, through the first 3 weeks of October, the industry diner count declined almost 1% year-over-year, and we expect this trend to worsen as Hurricane Sandy weighs on the industry. Hurricane Sandy has interrupted operations at many of our restaurant customers along the East Coast, primarily from Washington D.C. to Boston. Not only are diner counts in this region down dramatically over the last few days, but many restaurants are facing property damage, power outages and potential supply chain disruptions.

On Tuesday, we had nearly 1,500 restaurants off-line, and we're working closely with our restaurant customers to support their operational needs at this time. The key determinants of Sandy's impact will be the magnitude and duration of the disruption, which is still largely unknown. Our best estimate is that Sandy will reduce Q4 reservation revenue by approximately $500,000. As a result, we have adjusted the previously provided midpoint of our Q4 North America revenue guidance by this amount. I'd like to stress that this is our best estimate with limited data, and the storm's impact may be higher or lower than projected.

Moving on to the subscription side, consistent with previous guidance, we expect the average subscription rate to be approximately $252 in Q4. Related to other revenue, we estimate North America other revenue will be approximately $3 million in Q4.

Turning to guidance for our international operations. We estimate Q4 revenue to be in the range of $5.6 million to $5.9 million, and non-GAAP adjusted EBITDA loss to be in the range of $0.5 million to $0.9 million. For the full year 2012, we estimate international revenue to be in the range of $21.6 million to $21.9 million, and non-GAAP adjusted EBITDA to be in the -- EBITDA loss to be in the range of $2.1 million to $2.5 million.

Our long-term expectation for the U.K. business remains unchanged, and we are confident in the growth opportunity ahead of us. The U.K. conversion rates are beginning to improve, albeit not as quickly as we initially expected, and we're looking forward to improving growth rates as we addressed the items Matt mentioned earlier in the call.

On a consolidated basis, we estimate Q4 non-GAAP EPS to be in the range of $0.41 to $0.45, and for the full year 2012, we now estimate non-GAAP EPS to be in the range of $1.64 to $1.68.

Turning to a few housekeeping items. On a Q4 consolidated basis, we estimate that our diluted weighted average shares outstanding will be approximately 23.4 million shares, stock-based compensation expense will be approximately $4.5 million, amortization of acquired intangibles will be approximately $600,000, and finally, our non-GAAP effective tax rate will be approximately 37% in Q4.

To sum up the quarter, we're very pleased with the solid growth in our core operating and financial metrics. The business continues to deliver solid operating margins and cash flows, even as we invest for the future.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from the line of Justin Post from Bank of America Merrill Lynch.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Paul Bieber in for Justin. A couple of quick questions. How do you characterize improvements in the conversion rates on the U.S. side during the quarter? And then I was just wondering if you're seeing anything different on the competitive front. Obviously, a couple of your competitors announced partnerships, so I was just wondering what your thoughts are on the partnership and, more broadly, just if there are any developments on the competitive front.

Matthew J. Roberts

Sure. I'll take the conversion first, which is we're making progress. I think one of the things about conversion is it's not a one particular development effort gets you a big pop in conversion. It's a evolution that requires iteration after iteration. So we're setting ourselves up, and Joseph and team are setting themselves up to increase the pace of plays so that we can provide more selection to consumers in terms of consumer experience. So we can see what resonates, measure it, and then try and then try again. So we're in the process of putting that pace of play out there, and I think we're really close. I think I would say probably within the next quarter or 2 at the most, we'll have a pretty rapid pace of play that will allows us to iterate it and test and learn and drive conversion. The other question is on competition, is there a specific one that you're asking about?

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Well, Urbanspoon announced the partnership with your competitor in Europe, and I'm just wondering if you're -- if that dramatically changes things in Europe?

Matthew J. Roberts

No, we don't believe so.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Okay. And then one final question. Is there any color you could give on, just in case, Siri or your usage of Siri in terms of OpenTable?

Matthew J. Roberts

As I mentioned, we're very excited that Apple chose to showcase Siri's support of OpenTable. And looking forward to continuing to work with them on enhancements over time. So I have no specifics, numerics to provide, but really excited about the opportunity to be working with them.

Operator

Our next question comes from the line of Mitch Bartlett from Craig-Hallum Capital.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

This is actually George Kelly on for Mitch, but a couple of questions. First, can you talk about -- I know the last few quarters, you've been working on boosting the 1,000-point reservation, so how has that been going?

Matthew J. Roberts

I think we're making good progress. One of the things that we're seeing relative to the 1,000 points program, there is obviously some level of seasonality associated with it, in fact going from $0.69 to $0.70 yield last quarter was attributed to the 1,000 points program. One thing that we're seeing is how to present that 1,000-point selection on mobile in a compelling way. So it's a very positive thing for us, this shift to mobile, and for the reasons I've mentioned to you. We don't have as many places to merchandise the 1,000-points program obviously with the smaller screen on the mobile. So we're working through ways to get the most out of that program on the mobile devices, which is -- obviously, it represents almost 1/3 of our total seats sold in North America.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

And did you -- have you given out any sort of metrics on as far as how many restaurants are using that program or anything there?

Matthew J. Roberts

It's -- we have in the past. I don't know the current metric that we've shared out, it's on the site. But you can see this participant list by just doing a sort on -- in any given Metro saying how many people are offering 1,000 points, and that will kind of give you a sense of the depth for selection.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

How do you [indiscernible] the total?

Matthew J. Roberts

Yes, in total, yes. So the quality of the participants is also a big factor here, and the breadth of availability is a big factor. Getting a one-time period, 5:00 on Monday from a restaurant, doesn’t really have a lot of weight associated with it in terms of impact to the success of the program. So our focus isn't only on the count of number of restaurants added, but really about which restaurants we're bringing into the program and how broad the use of the program they use. And so if they're using it throughout the week, including on weekends, that's going to drive -- that one restaurant's going to drive a lot more participant -- participation from our diner network than somebody that just limits it to a Monday night at 5:00.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay, got you. And then one quick question on Europe as well. Can you go through the things that you're doing again? I know there's -- the main conversion has happened into the -- with TopTable. But can you talk a little bit more just about the programs that are ongoing that you hope will boost conversion and what you're doing there to get the diners per restaurant per month increased?

Matthew J. Roberts

Sure. Well there's a couple of things. One is making sure that we have the greatest selection in place, and that we have that real-time availability at the best restaurants. And I think we've done a fantastic job at that. As I mentioned in the last call, one who represents our single largest market now anywhere in the world, and we have over 80% of the Michelin-starred restaurants presented to our U.K. diners and London diners. So I think we're doing fantastic work there. If you look at the consumer experience side of the equation, we have the same efforts going against the TopTable experience as we do in the North America experience, which is how do we make sure that the mobile apps, [indiscernible] really fit the form factor and the experience that consumers expect. And then there's some nuances for the local market, none of which are baked and difficult to tackle. They just take some iterative cycles to accomplish. So an example is making sure that we capture tube stop locations and tea-time shift, things that are very important for local market customization which are currently absent from the site. And some of those things were actually present on the old TopTable site. So in some cases, it's simply a matter of bringing back into the current experience what was in the TopTable experience, and that did resonate on the old site.

Operator

Our next question comes from the line of Andrew Ruud from Morgan Stanley.

Andrew Ruud - Morgan Stanley, Research Division

I was just wondering if there's any sort of opportunity to kind of move into any sort of adjacent opportunities for monetization, perhaps maybe like the waitlist market for kind of Middle America?

Matthew J. Roberts

When we think about adjacencies and the one that you just pointed out is certainly on the list of our possibilities, because it still fits our vertical, in restaurants and in people that would take reservations, so I think that it's an absolute fair add -- a potential add for our overall service. The other adjacencies, things that are spas, golf courses, et cetera, I think are not going to be anything that you'd see from us anytime soon. But almost everything else that's within our vertical are in bounds. Nothing specific to announce at this point, but I think any of those things are all in bounds.

Andrew Ruud - Morgan Stanley, Research Division

It is that something, I guess, that you're looking at more in terms of kind of 3- or 5-year time horizon? Or is this something that you're looking at more in the near term?

Matthew J. Roberts

No. We think we look at all of those type of incremental services to our customer base on a regular basis. Just talked about the one you're referencing in our team meeting the other day. So it's not -- it's something that we're thinking of in terms of 3- to 5-year horizon. Now the question is, what is the actual monetization that's available around any of these things. And that, sometimes, is really to be determined. But we look for items that we believe will enhance the diner experience with our service and add value to our restaurant customers. So if it fits both of those criteria, it's well within bounds.

Operator

Our next question comes from the line of James Cakmak from Telsey.

James Cakmak

You talked about one of your initiatives, being on the technology front developing more technology-related services. I guess, can you just talk broadly about what some of those areas may be? And on these mobile-friendly sites that you launched for restaurants fall into that bucket? And secondly, it seems that your headcount held pretty flat here over the prior quarter. Are you pretty -- does that indicate you're pretty comfortable with where things stand right now, if you look in North America and international across headcount? And then lastly, can you remind us or tell us where things stand with the repurchase authorization that you had?

Matthew J. Roberts

Sure. Why don’t I start with areas of technology focus. So at a high level, I covered some of those items in my prepared remarks, which is, we look at this shift to mobile as a tremendous positive for OpenTable. And we are looking to make sure that we have the absolute best experience for whatever device people are using, whether or not it's a smartphone, or whether it's a tablet or a desktop experience. We think we have some work to do in that to take advantage of the unique aspects of the smartphone experience in specific. And so there's a lot of our development effort and focus aligned against that. And some of that is very much a test and learn which requires a development process that can move pretty quickly, measure, try multiple things, so that's our mobile focus. So look, it's not going to be one particular killer feature, it's more in an -- a series of enhancements on the mobile side. If you look at the other item that I talked about, which is personalization and social, if you kind of group over those together, that's a fantastic opportunity for us, because we have the largest network in the world of diners and reservation-taking restaurants and amazing history of data that we can use to help our restaurants gain better insights into the preferences and history of the diners, and the diners to really help tailor their consumer choice and recommend for them something based on either data from the social graph, for example, where their friends like to eat or their past dining experiences and make correlations between what other people found, and really a true sort of recommendation engine versus the current alphabetical sort of order that we present to diners today. So that's a big focus for us. I think what will -- that will evidence itself in is an improvement in the conversion of visitors to any of those experiences, and the number of reservations that get booked. And the other thing I would say is, on the restaurant product side, we have a big push towards moving our Electronic Reservation Book infrastructure into the cloud. And we talked about that last time, we're still on track to put in market by the end of this year, so it's a couple of months away, a cloud-based ERB. And we're excited about that for a lot of reasons, but we think that, that's a good foundation to help support some of the interesting things that we want to do to help our restaurant customers gain better insights into their guests, into their operations and really drive profitability. Due to mobile, in specific, is a partnership -- a technology partnership. And in that case, we found that we were leveraging what they had already done is fantastic implementation of creating mobile-friendly websites and rather than try to build something that somebody else has done a great job at, we've partnered with them and that is being rolled out through our client relations team and also our sales team to our -- on a no-cost basis to our restaurants.

I. Duncan Robertson

James, I can take the question on headcount. We were actually pleased during the -- in the quarter with 587 people that was actually up 8 heads, sequentially. But I think if you look at that, more importantly, the areas where we're wanting to invest is tied closely with where we've added headcount. So we actually added 6. And then of the 8, 6 were in our technology team. So if you look back over the last 2 quarters, we've added -- we added, sequentially, I think it was 5 heads in the technology team in Q2, and now 6 in Q3. So we're certainly adding heads, and we're adding heads in the area that will support a lot of the areas that Matt has spoken about that will continue to support the business going forward. I think your final question was on the share repurchase. We didn't complete any repurchases in Q3. And really, the background to that is we went through the typical assessment of cash and investments on hand, expected cash flows coming out of the business, as well as requirements for investing into the business. And then an assessment of the returns of purchasing our own shares. And the conclusion in Q3 was that we didn't complete any purchases.

Operator

Our next question comes from the line of Michael Olson from Piper Jaffray.

Andrew D. Connor - Piper Jaffray Companies, Research Division

This is actually Andrew Connor in for Mike Olson. The question was really on North American restaurant count. Looks like the pace of growth slowed just a little bit versus Q2. So really, I just wanted to get your thoughts on that. I'm wondering if the Q3 is maybe a seasonally slower restaurant acquisition quarter. And then -- and as it relates to the price adjustments you all have made earlier in the year, would have thought that, that would have been an incentive and maybe an accelerating factor. So just really wanted to get your thoughts on that.

I. Duncan Robertson

Sure, Mike. I can take the question on North America restaurant installed base. We're ending with 18,975. I think that was up just 602, which in our view, is a nice add to the quarter. I think one -- a couple of things behind that. One is we mentioned that churn was stable on -- at least on unit basis at just around 1%, so no change there. And if you look back over the last quarters, you will see that there is -- there isn't necessarily seasonality, but some quarters, we will generally have a stronger sales quarter. We spoke about this about a year ago, where sales can be back-end loaded in the quarter and we'll see that those sales won't get -- necessarily get installed in the quarter. And so that certainly happens and can be the case in any quarter. But generally, we saw a reasonable growth in the installed base in Q3. In terms of the subscription price per ERB, for 2 quarters, we were at $255 and at this quarter, we were at $254, and we've been saying for a while that we expect to stay between the range of $250 to $255. In the beginning of January, we launched -- as you know we relaunched the pricing around our ERB product, where we relaunched the pricing of bundles with the standard rate of $199 and then $249, $349 and $449. And what this has done is it has largely -- it's largely kept us range bound, at least for the last 3 quarters in that $250 to $255 range. And much of the movement where we saw a $1 decline from $255 to $254, it's really associated with the mix of sales between the base and the base product of $199 and the other installed base that we have prices above that.

Andrew D. Connor - Piper Jaffray Companies, Research Division

Okay, great. And just qualitatively, how is the reception from your restaurant customers? And maybe some color around the penetration that you've made as it relates to making that bundling offer known to your North American customer base?

Matthew J. Roberts

I think the customers really appreciate the change, because we've effectively put more access in their hands for less price. And we think that's a positive for us, because the more adoption, in terms of how our system is used on a day-to-day basis, the more value adding, the more satisfied the customers are, and the lower -- the higher the retention is. So we view subscription revenue as a very important part of our overall revenue. I think if you look at the macro growth opportunity for us as a business, you'll see a reservation revenue which is our fastest-growing component of revenue really represents and will represent ultimately, the vast majority of our total revenue. Subscription revenue is important, I think, that the services that we provided and the additional services we provide or access that we provide in our bundle has been really well received by customers up to this point.

Operator

[Operator Instructions] Our next question comes from the line of George Askew from Stifel, Nicolaus.

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

A couple of questions on international, and then one domestic. What percentage of your restaurants in the U.K. have more than one online reservation service in use at the restaurant?

Matthew J. Roberts

Well, it's -- there really is -- it depends if it's an ERB. If it's an ERB customer, there really is only one reservation book, it's a full reservation book system and it's ours. You can only manage your full book with 1 system, it's in -- you're not actually managing it with 2 systems, that's quite impractical and so none our customers use 2. So the answer is anybody that's an ERB customer, they're using our reservation book functionality and table management, guest management and all -- getting all the operational benefits associated with that. Some customers in international markets, as well as in the North American market, will also allocate some availability asynchronously to other participants, other destination sites. That is an asynchronous function, they'll say, "Hey, you can have 10 tables for Monday night." And then when those are filled, they would then go and type them manually into our system. So you'll have some of that, that occurs. It's not a large percentage at all from an overall base perspective.

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

I assume bigger in London or the U.K. than it is in the U.S.

Matthew J. Roberts

Historically, it has been, because it's a much more competitive market.

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

Yes, okay. Can you also give us an update on some of the non-U.K. international markets? What kind of trends you're seeing in Germany and Japan?

Matthew J. Roberts

Sure, I'll go quickly through. So Germany is really, not the country, but it's several large cities that we're focused on and building a local selection of great restaurants. And the team's making very good progress there, adding some marquee accounts, similar to what we've been able to accomplish in London. So I love the momentum that we have right now on adding high-quality availability for our diner network. It is early, it is much more competitive than in the -- yes, U.S. And really honestly than in the U.K. And so we do have a competitor there. We're slugging it out. We like our position relative to them. We like what we're trying to accomplish and the value of that, that we provide. And we're making good progress on getting the online adoption for the destination site increased. Part of that is you have to start with making sure that the restaurant's getting the benefit of online reservations through their own site. So we spend a lot of time making sure that we implement the solution that works for the restaurants on their own website, and then ultimately, over time, there's a lot of adoption for online reservations to do destination site as well. In Japan, it's even more competitive in that there's a particular competitor there that's aggressively pricing an ERB solution and an allocation solution, so catalog. And so we're doing all the right things. We're adding to our base of electronic reservation book customers, high-quality restaurants are joining the network, seeing the value of the solution, and we're building the infrastructure just like we were building the infrastructure in every other city and the diners then come and realize the value and use of the service.

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

Are those markets, Germany and Japan seeing improving -- reduced losses, improving profitability and -- or as you say with investment mode, are we seeing more volatility with losses there?

Matthew J. Roberts

Of course, it's a little different per country, and there is some volatility associated with what we choose to put into the business at any given time, and then what will end up happening with it. But because they're highly competitive markets, we'll use pricing structures to ensure that we're competitively winning that adds some volatility to the overall bottom line in any given country. But we like the investment profile of each, but we're early. We're very early in Japan, we're very early in Germany, and we're early in an overall adoption in the U.K. market, like I talked about. But our belief is that, all of them have a vibrant dining community, where diners will want the convenience and benefits of our solution. We just have to build that solution and appropriately present it to them.

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

Okay, great. And if I may, just one last. As you ramp up innovation, does that increase the opportunity to launch into new business adjacencies, similar to the question before, new business adjacencies on an organic basis, rather than through acquisition? And I'll take that off line.

Matthew J. Roberts

Sure. Sure, it does. Whenever you can move it at a faster pace, you can try more things. And if something doesn't work, it's not that costly. You can move on and try something different. So increasing the overall throughput of our technology team and how we approach technology solutions, it's a very big benefit for the company. And like I said, I think we're really close to a couple of pretty big breakthroughs here in terms of our ability to innovate at a fast pace.

Operator

Our next question is a follow-up from the line of Mitch Bartlett from Craig-Hallum Capital.

Our next question will be from the line of Michael Olson from Piper Jaffray.

Andrew D. Connor - Piper Jaffray Companies, Research Division

This is Andrew Connor again. I just had a follow up on the industry growth and kind of what you saw in the comments about the negative 1% industry traffic. Just curious if you can clarify if that is really excluding the Hurricane Sandy. And if so, what you think is happening there? And any color about expectations for 2013?

I. Duncan Robertson

Sure, so I can take this one. As we said, the -- in Q3, we essentially had 0 growth from an industry perspective. And that was -- if you look back to Q3 of last year, I think it was around -- the industry growth was around 2% year-over-year. And then what we've said specifically around October was our measurement of the first 3 weeks of October, and that was down -- it was around 1 percentage point. But that was, obviously -- none of that related to the impact that we've seen over the last -- since Sunday on the East Coast. So certainly, we would expect. But from an industry perspective, once we end up with the full month of October. And now it's even in the first couple of days of November, we would expect that, that would continue to deteriorate.

Andrew D. Connor - Piper Jaffray Companies, Research Division

I don't know if you have any expectations for 2013.

I. Duncan Robertson

From a -- we really don't spend any time forecasting the industry. I mean, all our -- the way we forecast the business is on a neutral basis year-over-year. We don't spend a lot of time forecasting where the industry will go, and actually, nor do we spend a lot of time or resources investigating why the industry moved year-over-year, because we're simply a participant in that. I mean, other than the onetime events such as Hurricane Sandy, where we can clearly identify a specific impact in specific metros. But our view of 2013 right now from a forecasting perspective would be to take no growth. From an industry perspective, no deterioration. We forecast on a flat basis.

Operator

Our next question is a follow-up from the line of Justin Post from Bank of America Merrill Lynch.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

This is Paul again for Justin, a quick follow-up. I think you mentioned there were 1,500 restaurants, was that -- that are down because of the storm, or was that 1,500 restaurants that are in the New York area, or on the East Coast?

Matthew J. Roberts

That was the -- those were the number of restaurants that were offline.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Do you have a number of restaurants that are kind of in the impacted area?

Matthew J. Roberts

We do. We have -- I mean, is the fluctuation relative to the impact, obviously, it's a moving target right now for us. And so, I mean, that's some of the challenge in terms of providing the -- more granularity around this. We did our best to -- because we at least have much more granularity in terms of the data than you do, so we did our best to try to get an estimate about what the impact would be, and that's how we come up with the $0.5 million for the fourth quarter. It really is our best guess, with a lot of unknowns at this point. But these are macroeconomic things that we are mostly focused on right now. It's helping our customers and helping them get back online and doing everything that we can. We doubled our call center efforts. We have, really, it's all hands on deck effort going right now to make sure that our restaurant customers are able to recover as fast as possible. And it's really much less of a Q4 focus than how do we make sure that our customers can get back on their feet.

Operator

Thank you. And with no further questions in queue, I'd like to turn the conference back over to management for any closing remarks.

Matthew J. Roberts

Great. Well, thank you, everyone for joining us, and we look forward to catching up again in a few months. Take care.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.

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Source: OpenTable Management Discusses Q3 2012 Results - Earnings Call Transcript
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