GrubHub (GRUB) Matthew M. Maloney on Q1 2016 Results - Earnings Call Transcript

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GrubHub, Inc. (GRUB) Q1 2016 Earnings Call May 3, 2016 10:00 AM ET

Executives

Anan Kashyap - Vice-President, Strategic Finance, Investor Relations & Corporate Development

Matthew M. Maloney - Chief Executive Officer

Adam J. DeWitt - Chief Financial Officer

Analysts

Aaron M. Kessler - Raymond James & Associates, Inc.

Heath Terry - Goldman Sachs & Co.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Ron Victor Josey - JMP Securities LLC

Dean J. Prissman - Morgan Stanley & Co. LLC

James Cakmak - Monness, Crespi, Hardt & Co., Inc.

Michael Graham - Canaccord Genuity, Inc.

Neil A. Doshi - Mizuho Securities USA, Inc.

Ralph E. Schackart - William Blair & Co. LLC

Jason Helfstein - Oppenheimer & Co., Inc. (Broker)

John P. Egbert - Stifel, Nicolaus & Co., Inc.

Arvind Bhatia - CRT Capital Group LLC

Nat H. Schindler - Bank of America Merrill Lynch

Jeff Houston - Northland Securities, Inc.

Operator

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grubhub Inc. Q1 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. Mr. Anan Kashyap, VP of Investor Relations. You may begin your conference.

Anan Kashyap - Vice-President, Strategic Finance, Investor Relations & Corporate Development

Good morning, everyone. Welcome to Grubhub's first quarter of 2016 earnings call. I'm Anan Kashyap, VP of Investor Relations. Joining me today to discuss Grubhub's results are CEO, Matt Maloney and CFO, Adam DeWitt. This conference call is available via webcast on the Investor Relations section of our website at investors.grubhub.com. In addition, we'll be referencing our press release, which has been filed as an Exhibit to a 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 and are subject to substantial risks and uncertainties that may cause actual results to differ materially, from those in these forward-looking statements.

For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC, including the Risk Factors section of our Annual Report on Form 10-K filed with the SEC on February 26, 2016, and our Quarterly Report on Form 10-Q that will be filed with the SEC. Our SEC filings are available electronically on our investor website at investors.grubhub.com or the SEC's website at www.sec.gov.

Also, I'd like to remind you 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.

And now, I'll turn the call over to Matt Maloney, Grubhub's CEO.

Matthew M. Maloney - Chief Executive Officer

Thank you for joining our Q1 earnings call. I will begin with some highlights from the quarter and then give an update on our progress towards our top 2016 strategic priorities. After that, I will turn the call over to Adam who will give us some more detailed look at the numbers and forward guidance.

We continued our strong growth trajectory across the country in Q1, generating record revenues and profits, while aggressively expanding our delivery footprint. We generated $112 million of net revenue for the seasonally strong first quarter, up 27% from the first quarter of 2015. Adjusted EBITDA was $32 million for the first quarter, including our continued investment in delivery. We ended the quarter with nearly 7 million active diners and generated food sales of $713 million for our local restaurant partners, 24% and 21% increases from the prior year, respectively. This was despite exceptionally warm weather for all three months of the first quarter and a very difficult weather comp from the prior year. In Q1, we averaged over 267,000 orders per day and our diners ordered over 24 million times, that's 3.2 million more orders than the first quarter of last year.

On our last call, we reviewed the milestones we achieved in 2015 and how excited we were about our momentum as we entered this year. We highlighted the progress we'd made across many key growth drivers for our business, including delivery, chain partnerships, a renewed focus on product iteration and the roll out of the updated Grubhub brand.

In short, we've made great strides across all of these initiatives even though 2016 is barely four months old. We also began to see a positive impact to growth from these initiatives as we exited March, and we've seen order growth accelerate in April from Q1 levels. These dynamics give us increased confidence in the reacceleration of order growth we implied in our guidance last quarter and updated today.

Q1 was another strong quarter for Grubhub delivery. Excluding LAbite, we are now delivering more than $250 million annual gross food sales on a run rate basis, a significant step up from Q4. This is impressive growth, but even more so in the context of our improved efficiency and decreased investment level as compared to the prior quarter. We are seeing material economies of scale with our logistics network including decreasing incremental cost per delivery and reduced delivery times. We still see diners who placed their first order through restaurants we deliver for, exhibiting improved retention and increased ordering frequency versus those who don't.

We are hitting our target service levels in major metros, including keeping delivery times near 30 minutes in many cities. Even with our significant increase in scale, investment in delivery was down to just $4 million for the quarter. We are currently operating delivery on a cash neutral basis in some high demand residential neighborhoods. Meaning that from a cash generation perspective, we earn different between orders that we deliver versus orders restaurants deliver for themselves. However, Grubhub delivery provides a significantly better experience for our diners through its more consistent and better service, as well as a much broader selection of restaurants. We're very pleased with this growth and we'll continue to step on the accelerator, including acquisitions of key delivery players like the one announced this morning. These will help augment our scale and service abilities.

Our new partner, LAbite, is one of the largest independent restaurant delivery services in the country with a strong presence in the greater Los Angeles area. They have significant scale with diners, restaurants, gross food sales and drivers. We believe that with the addition of LAbite to our portfolio, we are the leading online food service provider in the Los Angeles area by a very significant margin. We hope to leverage their knowledge and experience to further expand our lead in this huge market and Adam will follow up with more details in the company later.

Our delivery initiative goes hand-in-hand with another strategic priority, expanding our team partnerships. Following up on our success last quarter, we added several new high profile partners in the first quarter, including Johnny Rockets, Boston Market, Uno Pizzeria & Grill and On The Border. This adds to our already strong lineup of national and regional chain partners and we're just getting started.

These partners are excited about the incremental growth we drive with our network of nearly 7 million diners, our key technology focusing only on connecting restaurants and diners and our driver logistics expertise. While delivery and our chain initiative are improving the quality and selection for our restaurant network, we're driving diner engagement with a renewed focus on product innovation and the Grubhub brand update. As discussed, we spent much of the last two years, building and transitioning both brands, Grubhub and Seamless on to a single, nimble, scalable technology platform. With the technical debt largely behind us, we've been able to focus on increasing conversion and driving frequency by improving the diner facing platforms.

Let me highlight one of the more meaningful successes we've already had. With our improved technology, we are better able to address friction points from search, all the way through check-out. Improved add to bag functionalities, streamlined diner on-boarding and payment processes, as well as cutting page load times have all resulted in measurable conversion increases as we've rolled these improvements out to our diner network in late Q1 and early Q2.

This means that our apps and site are easier to use, diners are more likely to complete a purchase once they land on any of our properties. This increases our ability to drive high quality traffic through marketing and converted to new diners, which over the long-term should drive growth and generate more profit.

Our product innovation roadmap is very strong and we will continue to focus on improving the conversion of new and returned diners, personalization and the ease of use to drive more orders. One of our primary goals going forward is to ensure that we surface the local favorite dishes and restaurants that our diners love in more engaging ways. We made some great improvements so far and I'm excited about what we have in the pipeline as this year moves on.

On our last call, we mentioned the new Grubhub brand that started rolling out. Our new creative gives Grubhub a bold new look, designed to highlight the connection between restaurants and diners, focusing on the amazing food that diners enjoy every day from their local favorite restaurants. From eye-catching out-of-home ads to updates through our web, apps and Apple TV platforms, the rebrand is now in full force. The initial results are positive. We've seen a great response from diners on social media and a boost in brand awareness and ad recall. We also feel that the new position allows us to more easily recruit key premium restaurants onto our platform and broaden our appeal to diners in every neighborhood, truly becoming the platform of choice for ordering food across the country.

Thanks to the elevated brand and a fresh emphasis on moving eating forward, we're thinking more broadly about how we can engage with diners. One example from this quarter is our recently created emoji keyboard called mmmoji, another is our decision to stop distributing plastic take-out bags in order to help generate awareness around Earth Day and environmental consequences.

We are also pursuing partnerships in line with our ongoing efforts to be relevant to diners in all the moments that matter, whether at home or on-the-go. We recently launched a pilot program with three Hyatt-centric hotels to deliver food from top local hotspots to the Hyatt-centric brands' new restaurants on-the-go program, satisfying guests who prefer to stay in rather than go out while traveling. Additionally, through a partnership with HBO, Grubhub curated a selection of restaurant choices so that diners could pair tastes and flavors with five HBO viewing favorites. We continue to execute very aggressively in our space, as the opportunity is still tremendous, and no one comes close to us at connecting diners with their local favorite restaurants.

We're very excited about what the rest of 2016 holds, and I look forward to updating you on more of our progress next quarter.

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

Adam J. DeWitt - Chief Financial Officer

Thanks, Matt. I'll start with our first quarter performance, provide some forward-looking color, and then we'll open the call up to questions. First quarter, seasonally one of our strongest, was a record quarter for us. We achieved records across all of our key metrics, revenue and profitability, despite significant headwinds from the extremely mild winter on the East Coast and Chicago. We ended the first quarter with active diners reaching 7 million, a 24% year-over-year increase. We processed 267,800 Daily Average Grubs and $713 million in gross food sales during the first quarter, 14% and 21% year-over-year increases, respectively.

The acquisitions we completed in the first quarter and fourth quarters of last year contributed roughly 0.5 percentage point to year-over-year order growth and 2 percentage points to year-over-year growth in gross food sales. First quarter revenues were $112 million, 27% higher than the year-ago quarter of $88 million. If we exclude the acquisitions, revenue growth would have been approximately 23%. We achieved these records and hit the high end of our guidance for the first quarter, even with the negative impact from weather.

While our guidance for the first quarter reflected the weather through January, it ended up being a significant headwind for the remainder of the quarter. To help quantify the impact, we believe weather was approximately a 200-basis-point headwind to year-over-year order growth for the quarter, and a little more than $2 million in revenue. Net revenue as a percentage of gross food sales was 15.7% during the first quarter. This compares to 15% during the first quarter of last year. The higher revenue capture rate is driven by the growth in our delivery efforts, including the restaurant delivery service acquisitions that we have made to date. Capture rates excluding the delivery portion of our business were consistent with the fourth quarter.

As I noted, year-over-year gross food sales growth outpaced order growth 21% to14%. This variance is driven in small part by an extra day in February, and mostly by a 5% increase in average order size, from $27.93 to $29.25. Approximately two-thirds of the increase in average order size is organic growth that we've seen year after year. The remainder is driven by the acquisitions of DiningIn and Restaurants on the Run that closed mid-quarter last year and Delivered Dish, which closed late in the fourth quarter.

On the expense side, total sales and marketing expenses were $28.8 million this quarter, a 20% increase compared to the same quarter last year, and a sequential increase of 16% as compared to fourth quarter. As a reminder, last quarter we said that for 2016, we would be focusing more on quality diners and increasing our advertising, but at a lower rate than we have in the past. Our first quarter spend level is consistent with this goal.

We've also been communicating that, as a result of our marketing strategy to target more quality diners, we expect overall diner growth to more closely match order growth, and diner frequency to decline less. We saw both of these dynamics in the first quarter, as active diners grew 24% on a year-over-year basis, and 30-day orders per ending active diner declined 8% compared to first quarter of 2015, a slowest decline since we've been public. We expect diner frequency to continue to stabilize throughout this year.

As an aside here, I wanted to note that the best way to look at the growth in active diners is on a year-over-year basis. There is a fair amount of noise in this metric quarter-to-quarter, as we have seen over time. So there can be some volatility when constructing a net diner adds metric on a sequential basis. For example, in the first quarter, to support our rebranded Grubhub, we spent more of our advertising dollars at the end of the quarter, including a fair amount of brand-related non-direct response advertising that takes more time to have an impact.

In addition, during the first quarter, the weather that impacted our order volume also impacted our new diner growth. As a result, this year, we will most likely add more net diners in the second quarter than we did in the first, while last year, as is more typical, it was the opposite. Regardless of the timing, our growth in diners was right in line with our internal expectations, and we are confident it will support the accelerated growth we have implied in our guidance for the remainder of 2016.

Operations and support expenses in Q1 were $35 million, a 54% increase compared to $22.7 million in the first quarter of last year, and sequential increase of 8% as compared to the fourth quarter. This increase is from our aggressive scaling of Grubhub delivery, the inclusion of delivery costs from the three acquisitions we concluded last year, and the organic growth in overall orders.

In the first quarter, our delivery investment or the amount we spent to pay for delivery in excess of the incremental revenue we received for delivery orders declined to approximately $4 million compared to the more than $5 million in the fourth quarter. This decline came despite a significant increase in volume to a run rate of approximately $250 million in gross food sales annually, demonstrating operating leverage we are achieving as we scale. We expect a similar level investment in Q2 as we continue to roll out new markets and grow in existing markets, while continuing to expect the investment for the full year to be between $10 million and $20 million.

Technology expenses excluding amortization of web development were $10.2 million for the quarter, increasing 33% from the first quarter of 2015 and 16% from the fourth quarter. This increase is consistent with the investment we've been making in our technology and product teams, which has helped to drive the improvements Matt talked about earlier. Depreciation and amortization was $7.3 million for the quarter, a sequential increase of 10% from the fourth quarter. This was driven by a number of items including a full quarter of amortization of Delivered Dish intangibles, software development capitalization and the accelerated planned retirement of some acquired software.

G&A costs were $13.6 million, a sequential increase of 19% from the $11.5 million in the fourth quarter. This increase is coming primarily from $1.7 million in accelerated stock comp, associated with some terminations in our acquired businesses and deal costs associated with the LAbite acquisition. Adjusted EBITDA for the quarter was $32.4 million, an increase of 15% from $28.3 million in the same quarter the prior year. Adjusted EBITDA margin was 29% this quarter, an improvement of 200 basis points from the fourth quarter, partially driven by the improved efficiency on the delivery side even with our aggressive delivery growth.

Net income was $9.9 million compared to the prior year of $10.6 million. Net income per fully diluted common share was $0.12 on approximately 86 million weighted average fully diluted shares. Our tax rate for the first quarter was a little less than 43% and we expect approximately this rate for the rest of the year. Non-GAAP net income was $17.2 million or $0.20 per fully diluted common share compared to the prior year of $14.9 million or $0.18 per fully diluted common share. Non-GAAP net income excludes amortization of acquired intangibles, acquisition and restructuring costs and stock based compensation expense, as well as the income tax effects of these non-GAAP adjustments.

As Matt noted, this morning we announced our acquisition of LAbite, a growing and profitable restaurant delivery service focused primarily in Los Angeles, with a smaller presence in Austin and the Bay area that generated $80 million in gross food sales last year. The deal will be approximately $65 million all cash and we expect it to close shortly. We will update guidance more formally when we close, but we expect LAbite to generate roughly $2 million in monthly revenue and a little less than $500,000 of monthly EBITDA for the remainder of the year.

Even with the acquisition of LAbite, our cash flow and strong balance sheet give us a lot of flexibility. To give us even more flexibility in pursuing acquisition opportunities, we are announcing a closing of a new credit facility, which took place last week. This facility gives us a $185 million of immediate capacity and potentially another $30 million if we needed. In addition, we repurchased approximately 0.50 million shares under our recently authorized buyback in the first quarter. We will continue to exercise our buyback opportunistically based on a combination of factors including the value of our stock and other potential opportunities to use our cash.

Finally, I want to share some thoughts on second quarter and full year guidance. We currently expect between $109 million and $111 million of revenue for the second quarter and adjusted EBITDA between $29 million and $31 million. As you may recall, we typically see a sequential decline from the first quarter to the second quarter. Last year, for example, we saw an approximately 6% decline in organic DAG's between those two quarters. However, given the positive impact of the initiatives Matt discussed earlier, the robust new diner trends we've seen in March and April and a strong order growth thus far in Q2, we are expecting only a small sequential decline in organic DAG's for the coming quarter. In addition, as implied by our guidance, we expect to see year-over-year DAG growth higher in the second quarter than the first quarter, even after normalizing for the first quarter weather impact.

We typically don't give inter-quarter updates on performance, but we thought it would be helpful to highlight the strength we saw in April to help explain the growth acceleration in the guidance. For the full year, we are bringing up the low end of the range for revenue by $5 million, and now expect revenue to be between $450 million to $465 million. We continue to expect adjusted EBITDA to be between $122 million and $130 million. Implied in this guidance is our expectation that we'll able to maintain a higher level of DAG growth for the remainder of the year. We do expect to see normal seasonality in both revenue and EBITDA in the back half of the year, with both metrics bottoming in Q3 before increasing in Q4. But overall, we expect DAG growth for 2016 to be higher than it was in the first quarter.

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

Question-and-Answer Session

Operator

Your first question comes from Aaron Kessler with Raymond James. Your line is open.

Aaron M. Kessler - Raymond James & Associates, Inc.

Yes, great. Thanks guys. First question is, if you can provide us maybe a cohort update, kind of largest cities kind of versus tier-two cities like you usually give? And second Matt, for some of the initiatives you talked about that are driving some of the improved performance within the app and the site. Can you rank those, maybe just what's having the biggest impact on those growth rates? Thank you.

Adam J. DeWitt - Chief Financial Officer

Yeah. So, Aaron, I'll take the cohort question I think. And Matt will talk about the initiatives. So the cohorts look very stable across both the tier-ones and the tier-twos. Obviously, we had the weather impact that we talked about in the first quarter in general that dragged on order frequency. But when we saw – we've been talking about the improvement that we saw at the end of the quarter and specifically in April. And we saw the improvements across all the cohorts from old and new as well as tier-one and tier-two markets. So, it is pretty much the same story that we've had in all the quarters, which is very stable cohorts and order frequency.

Matthew M. Maloney - Chief Executive Officer

And Aaron, there is not a clear-cut answer to what you're asking what's the prioritized impact of multiple product improvements over a quarter. I can talk a little bit more about where the teams are focusing. We're really looking into – like the transaction funnel, we've invested a lot in optimization in AB testing and making sure that we're evaluating multiple changes at the same time across web platforms, mobile web, native app, wherever people are placing orders. And so, we're really looking at what can drive the highest conversion rate once somebody lands on the properties. We're also looking a lot at content and how can we augment and increase the content available, how can we collect it from our restaurants and display it intelligently in a way that drives order.

We spent a lot of time on recommendations, increasing relevancy in investing and reviews, if you're placing orders, you will notice that very frequently we send SMS reviews and we have a high return of those and those are feeding directly into our recommendation system. And so, I think it's something like we get a new – every restaurant on the platform gets a new review about every 24 hours or so. So, we have a very high velocity of engagement with our diners and that's all channeling into being able to better tell you what the best dishes, what the best restaurants are in every neighborhood that we cover all the way across the country.

And then finally like I mentioned in the notes, we spend a lot of time on page load. How can we reduce page load time to make sure that it's a very snappy experience and that we are right there with the menus when you're hungry.

Aaron M. Kessler - Raymond James & Associates, Inc.

Great. Thank you.

Operator

Your next question comes from Heath Terry with Goldman Sachs. Your line is open.

Heath Terry - Goldman Sachs & Co.

Great. Just curious if you can give us a sense, given customer growth, what you're seeing in the trends and customer acquisition costs, particularly as we at least see the perception of some of the venture backed competitors in the space, maybe getting a little less aggressive, whether or not you're seeing that show up in the efficiency of your marketing or your activity from a customer basis?

Adam J. DeWitt - Chief Financial Officer

Yeah. How are you doing Heath? So, what I say is in the past, we've talked about the customer acquisition costs on the margin being pretty stable. And I think, when you dive really deep into it and you look at the different channels, we're seeing it very similar. So, we're not seeing big fluctuations in anything like the rates that we're buying, SEM words or display ads. For us particularly, if you try to imply a cost per acquisition, you see a little bit of a higher one in the first quarter.

But I think, as I talked about in my prepared remarks, it's more optics. We did spend a lot on branding which doesn't have an immediate payoff and there were a lot of weather headwinds. But we're not seeing any dramatic fluctuations in markets from competition, and in fact we've talked already a little bit about the strength in April, and it was just as much on the new diner side as it was on the order side.

Heath Terry - Goldman Sachs & Co.

Great. Thanks.

Operator

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

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Hey, thanks for taking my questions. I wonder if you could comment on what impact that you've seen both at the time of initial launch and then as they've been in the market for a while from the launch of say Amazon Prime Now restaurant delivery and/or UberEATS in some of the markets that they've launched and that you operate in, where you overlap.

And then secondly, you provided some color on why the diner growth decelerated in Q1 and comment about how April is going. But relative to your marketing spend, marketing spend came down, but relative to the diner growth, obviously, it was still relatively high. Just trying to understand what drove, again, the diner growth deceleration and why there is a little bit of a disconnect there, because you back into a pretty high cost of new diner acquisition in Q1 because of that?

And then lastly just a housekeeping question for LAbites I'm backing into roughly a 30% take rate. Is that roughly correct and maybe if you can help us think about how incorporating LAbites into the model may impact take rate? Thanks.

Matthew M. Maloney - Chief Executive Officer

Sure, Mark. I'll answer the first one and Adam will take the rest of them. So Uber and Amazon are the new boogiemen in the market. I think last year there was more concern around venture-backed startups that ended up not being quite as competitive as people were worried they would be, and now we're looking at these companies. And they're great companies, but I want to take a step back and really understand the marketplace dynamics. We focus on bringing the best selection in every market. And that's not just restaurants we deliver for, but that's also restaurants that do their own delivery, and it's also pickup. We try to address the market needs, the demands of diners, the best way we possibly can, and we're significantly further along than anyone else in that space. We also believe that having the lowest fees is critical, that diners actually care about transactional cost, and that they will always migrate to the lowest cost opportunity if given that choice.

And then finally, we believe in exceptional support. So making sure that we're there at the transaction if anything happens for the diner or for the restaurant, wherever we need to be, we want to be there to be supporting our transactions. And if you execute on those three strategies, you will win. There really is no logistical advantage as people are concerned about. And if you think about it logically, the majority of the wait time for delivery is food preparation, which no third-party can impact. And then this second largest bucket is physically delivering the food from point A to point B, and unless someone invents flying bicycles, I don't think that is going to be dramatically reduced in the near future.

And so really, when you're thinking about logistical advantage, as long as you're using contemporary software, GPS alerts, geofencing, auto dispatch, aggressive algorithms, you're pretty much either – the most you can impact is about five minutes and that's food after being prepared, before it's picked up by your driver, and I can tell you that a lot of this investment that we keep talking about quarter-after-quarter is making sure that Grubhub food does not sit on the counter waiting for a Grubhub driver. We want to make sure the driver is there before the food is ready.

And so, if you add it all up, there is no logical way for anyone to say, I have 2x your drivers on the road, so I'm going to have food there faster. And so, if you think about it, it's all about executing, giving the diners what they want, when they want it, making sure you can send incredible demand for restaurants, and that's what's going to win.

Now to your specific question, we talk to restaurants every day. We have a lot of friends in a lot of markets, and the community is saying that there just aren't that many orders flowing through these competitive systems that everyone is concerned about. We clearly don't see it impacting our value or our growth rate. And so, we're going to continue executing as best we can and not pay attention to the noise, because in spite of all of it, and in spite of all the new competition, we're seeing some of the strongest trends in our order growth that we've seen in the past year.

Adam J. DeWitt - Chief Financial Officer

Mark, this is Adam. I'll talk a little bit about the CPI. I tried to give a little color during the last question, so I think there's a number of things at play. One, you have to remember that our diner number is not a gross diner number. It's an active diner, which we think is the best metric, best reflection of what's driving orders in the business at that time. So it's not a gross add number.

I think, two, there's a lot of volatility in the number quarter-to-quarter, depending on what's happening. This quarter, there was volatility around the rebrand spend, which we biased towards the end of the quarter and also, was a lot of what I call non-direct response, and so more branding, more out of home, more billboards, more train stations, less on SEM and promotions and, as a result, it's got a little bit of a lagged impact. I think the biggest factor, though, in this quarter, is really the weather. In addition to orders, weather has just as significant, if not more significant, impact on new diner growth, and the headwind that we saw on the order side certainly played into the change in the active diner number. I do want to point out that we do expect a bigger sequential increase in the second quarter than we saw in the first quarter, even though it's typically a slower quarter.

And then to your third question on LAbites, I think you are close. I think you should take that gross food sales number, and you have the revenue number. When we close, we will publish, we will update our guidance, but in terms of the take rate, I think you are close. The LAbite model is very similar to the DiningIn and Restaurants on the Run models as well. So it's obviously a significantly higher take rate, but the volume's fairly small relative to Grubhub overall.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Thanks, guys.

Operator

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

Ron Victor Josey - JMP Securities LLC

Great. Thanks for taking the question. With delivery now in 50 markets, just wondering how has the algorithm evolved in terms of matching driver supply and consumer demand, call it the last 18 months? I think, Matt, you just talked about shaving five minutes off delivery time. Have you achieved that? And then also, I think you said decreasing incremental cost per delivery, reduced delivery time, and also cash-neutral delivery in number of markets. Can you just talk about how well staffed you are from a driver perspective? I think that's where a lot of the investments are heading this year. And then also, how you're generating consumer demand for delivery? Thank you.

Matthew M. Maloney - Chief Executive Officer

Sure, Ron. So the algorithm's evolved, definitely over the past year. We've hired a bunch of outstanding data scientists that do a lot of work, both live and in lab simulations. And, like I said, the majority of the delivery itself is taken up by actual work product and preparing food and moving food, but there is a lot you can do around deadhead legs and making sure that the drivers are as fully utilized as possible when they're driving from one place to another, and that's really where you see the value of algorithmic innovation, is in the cost savings part. And so we've definitely seen a decreasing incremental cost of delivery as we increase network utilization. We see it every month. We pay a lot of attention to it.

With decreasing delivery times, I think what you're seeing is a reduction of volatility around pickup. As you're starting out with not a lot of volume in your network, I think there are times when the food sits around or perhaps the communication with the restaurant isn't as tight as it needs to be. I think over the past 1.5 year, especially now that we're at closer to $250 million in gross food sales on a run rate basis, there's not a lot of room for lose communications, and so we've tightened everything up. We're very much hardened and we have thousands of drivers in the market at any given time, and that's increasing very aggressively. As you point out, a lot of the investment is to build up the infrastructure around recruiting, training, management and making sure that we have the platform that drivers want to drive on.

Ron Victor Josey - JMP Securities LLC

And on the demand side for consumers just normal change of events in terms of your brand marketing and things like that just to make sure consumers know you have delivery?

Matthew M. Maloney - Chief Executive Officer

Yes. Right now what we're focusing on is having ubiquitous selection. So if you want outstanding premium, high-quality, best-of-breed food it's there; if you want pizzas and wings, it's there; if you want chain foods, we got it; if you want the independents, we got it. And so the new brand reposition is really about highlighting the restaurants, highlighting the incredible food that's available to you and really motivating hunger so that we can then fulfill it. And so we don't highlight right now which restaurants are Grubhub delivery versus which aren't, and we're still working through how we're going to highlight either just the best restaurants or just the restaurants we deliver for or some clear expectations around delivery time. But right now, they're just in the mix on the Grubhub platform and they participate in a significant demand that we generate natively.

Ron Victor Josey - JMP Securities LLC

Great. Thank you.

Operator

Your next question comes from Dean Prissman with Morgan Stanley. Your line is open.

Dean J. Prissman - Morgan Stanley & Co. LLC

Thanks for taking my question. You guys have added a meaningful amount of new restaurant supply for your in-house delivery business. Can you discuss the level of productivity you are seeing with the supply versus your delivery (36:16) restaurant supply? Thanks.

Matthew M. Maloney - Chief Executive Officer

Yes. So, hey, Dean, how are you? So as we had talked about before, I think, one of the advantages – or the key advantage for us doing delivery is that we can add restaurants that we couldn't add to the platform before. And so as we're going to markets and adding delivery and selling restaurants, we're able to pick the best, highest-quality restaurants, the most popular restaurants that we are able to identify and prioritize based on what people are searching for on Grubhub and Seamless, what they are searching for on all menus and menu pages, et cetera. And so we are adding what we view is really high-quality restaurants.

And so as a result of just the restaurants being high-quality and also us being able to deliver a consistent service level on the delivery side, we're seeing the, what I'll call, diner retention and diner frequency metrics for the restaurants that we're adding on the delivery side to be pretty much universally better than the average restaurant at Grubhub. And so we continue to see that over the time and we think that that will have an impact overall as that base of restaurants continues to grow.

Dean J. Prissman - Morgan Stanley & Co. LLC

Great. Thanks for the color.

Operator

Your next question comes from James Cakmak with Monness, Crespi, Hardt. Your line is open.

James Cakmak - Monness, Crespi, Hardt & Co., Inc.

Hi, thanks. With the focus on higher value diners, we are seeing the declines in the frequency of ordering improve. As we progress through the year, do you think that it could potentially reach a positive territory at least by year-end? And then looking at your credit facility, $185 million and the acquisitions that you're making, can you talk about how you think about the acquisitions that you make, at least in terms of valuation and what it adds? And can we just assume the balance that you have is going to be continued dry powder for delivery-related acquisitions? Thanks.

Matthew M. Maloney - Chief Executive Officer

So in terms of the frequency decline, I think what I said in the prepared remarks was that we continue to see improvement in that metric throughout the year. Whether or not it gets to zero, I'm probably not prepared to say, but we do expect to see continued improvement in that metric and it's just part of our general strategy of focusing on the high value-add diners. It's obviously still going to be offset by the mix shift away from corporate and New York, which we've had for a couple of years now and that'll continue, but I would think it's going to be offset by the addition of and the focus on the higher quality diners.

In terms of the credit facility and the acquisitions, when we think about acquisitions, we think about a lot of things, but primarily we're looking for things that add to our diner network, our restaurant network, and our driver network. And we think about valuing the acquisition in a lot of different ways. It depends on the company that we're looking at. We also look at on a smaller basis potentially some technology add-ons that could either put us in a position to better service our restaurants or better service our diners. But when you think about, your question specifically was around valuation, I think, we're thinking about what's it going to add or what's it going to bring to Grubhub shareholders over the next several years, right. And so how are we going to turn the asset into something that's generating cash or more cash than it was generating by itself. And then quantifying how much value it's going to bring to the platform.

Operator

Your next question comes from Michael Graham with Canaccord. Your line is open.

Michael Graham - Canaccord Genuity, Inc.

Hey, guys. Thank you. Just a couple. First, thanks for quantifying the weather impact on revenue. Is it possible to quantify the impact on diners is the first one? And then, on the acquisition, can you just talk a little bit about two things. One is the pipeline of future deals. Do you have a lot of them planned in terms of delivery? I'm just wondering, you mentioned that the diner for LAbites and the restaurants for LAbites were also important assets in addition to the delivery functionality. Can you talk about how, if at all, you're planning to integrate those parties on to the Grubhub platform? Are you going to run it as a separate local business in LA and just maybe how you're thinking about that? Thank you.

Adam J. DeWitt - Chief Financial Officer

Hey, Mike. I'll take the weather question and Matt will give you a little bit more color on the deals and how we think about them. But in terms of the diner and the weather, it's really a tough number to back into. What I'd say is it was material, it's certainly in the tens of thousands. Was it several hundred thousand? Probably not. But it was a material number of new diners, just based on the weather. What we do see is when we look at our orders on a daily basis and we look at the new diners, we see even more dramatic fluctuations in the new diner comps year-over-year than we do in the orders year-over-year. So, hopefully, that helps give you a little bit of context.

Matthew M. Maloney - Chief Executive Officer

And then, Mike, in terms of LAbite and deals more broadly, we don't have a pipeline of deals that we're looking at. I think we're very open and opportunistic for what's out there. However, through our DiningIn and Restaurants on the Run, Delivered Dish and now LAbite, I think, we've pretty much picked off the largest restaurant delivery networks in the country. And there is a few more out there, but these are really the big ones. And it really goes to our almost cookie cutter strategy of building delivery. These are significant and valuable assets that are being underutilized and with their current logistical infrastructure and the ability to drop them on our platform, we'll be able to pull higher returns out of the same assets and that's the way we look at it.

So DiningIn is nearly fully integrated on the platform, Delivered Dish which until now was our most recent one. All of those restaurants are now available on Grubhub. So all of our advertising that we're pushing in Delivered Dish markets, you're able to order through Grubhub from the ads and then actually it's executed through those contracts. And so LAbite is going to be the same thing. We're going to work as hard as we can to get those restaurants live on our platform and then we're going to migrate the driver second, and then finally, we're going to see if we fully migrate the brands in from a DiningIn perspective or not. It's still kind of TBD.

Operator

Your next question comes from Neil Doshi with Mizuho. Your line is open.

Neil A. Doshi - Mizuho Securities USA, Inc.

Great. Thanks for the questions. Matt, looks like LAbite, the model is a little bit different. There's like $5 or $6 delivery fee, convenience fee. So any plan to migrate the pricing model for some of these acquisitions to the Grubhub model? Or do you plan on just leaving that as is? And then, also if you could maybe talk a little bit about the Hyatt partnership. I think that was pretty interesting. It seems like in-room dining for hotels is a pretty high margin business. So how has that been trending. I know it's only been a few weeks, but what are you seeing from that relationship and how do you think that can progress over time? Thanks.

Matthew M. Maloney - Chief Executive Officer

Sure, Neil. In terms of the convenience fee, we've done a lot of work around the elasticity of diner demand and what they're looking for. And we believe that we are optimizing for throughput and conversion. And so absolutely any property that we're acquiring, we are going to update that with, I'd say, the most advanced pricing intelligence behind it. The $5 transactional fee, no matter what platform you're on, absolutely hinders conversion, it absolutely slows down growth. And so we're going to do everything we can to maximize growth in orders to restaurants. So that definitely means that we will be rethinking the convenience fee that they have out there right now.

In terms of the Hyatt partnership, in-room dining in general, and I'm not an expert in a hotel space, but from everyone I've talked to, is a big money loser and they don't – it's a real headache and they don't really want to do it. So, Hyatt came to us and said essentially we'd like to replace our room service functionality and the kitchen space in at least some new hotels with your product.

And so we worked hard with them to be able to highlight the best restaurants around these new Hyatt centric concepts, and then we worked with them on a page and they're doing a bunch of in-hotel promotions to tell the guests at their properties that Grubhub knows where the best restaurants are and if you're hungry and you don't want to go out and experience the neighborhoods, then absolutely use Grubhub and order in, and so we're continuing to work on our integrations and potentially even payment capabilities.

But I think that this represents a huge opportunity not just with Hyatt, but with other hotel chains that are looking to roll off of their kitchen commissary services.

Operator

Your next question comes from Ralph Schackart with William Blair. Your line is open.

Ralph E. Schackart - William Blair & Co. LLC

Hey, good morning. Adam, just curious to give maybe a little more color context just in terms of what caused the April DAG reacceleration, either maybe you could rank it or sort of give some attribution from the marketing initiatives that kicked in at the end of the quarter, is weather a big factor on the compares, higher quality at diners, any more color would be great?

Adam J. DeWitt - Chief Financial Officer

Yeah. I mean so the color I'll give you there is look, certainly weather was a little bit of a headwind in April. We saw – first of all, the comp was easier from last year, and it's been a fairly wet and cool start to the spring in our biggest markets, but what I'd say is, when you look at April order growth and how it's larger or bigger than the first quarter that we've been trending, most of the increase has been organic. So, let's just say that – look, if you say that a couple points of the growth was a tailwind from the weather. There's still a, what I would consider a significant increase in April, even after accounting for that, from kind of January, February and March; to give it some context, April was our biggest order growth month since summer of last year.

Operator

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

Jason Helfstein - Oppenheimer & Co., Inc. (Broker)

Thanks. Two questions. Just any update on kind of the tech stack and the integration of Seamless, Grubhub and for particularly like in New York, when does all of that – when is it identical between the two apps, and secondly, just remind us, the delivery fee – if the restaurants chooses to add a delivery fee, does that show up in the average order value metric? Thanks.

Matthew M. Maloney - Chief Executive Officer

Sure, Jason. This is Matt. So update on tech integration. I think we've said before that the majority of the technical debt is complete, at least on the consumer side in New York, as well as any other market.

So from a diner perspective, it is identical on the platforms, whether you're on web, mobile web, native app, it doesn't matter, it's all going through the same pipes. Now, the corporate business is a little bit different. It's on a longer delay, because that's just a tremendous amount of work that we're very excited to do, because it's a significant differentiator in the space, being able to channel local restaurants through a coordinated corporate product. But that's taking a little bit longer.

In terms of delivery fee in the average order size, I believe it is in there when the restaurant defines a delivery fee, when they are doing their own delivery.

Operator

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

John P. Egbert - Stifel, Nicolaus & Co., Inc.

Thanks for taking the question. Given that New York is such a disproportionately large market for takeout ordering, I was wondering if you could talk about some of the progress you're seeing in delivery in the outer boroughs so far? I know it's still early. And then, given that you said Grubhub delivery is proving to be a better customer experience in a lot of ways than restaurants doing it themselves, does this change your willingness to enter delivery in Manhattan, and it seems like average order uplift could offset maybe some margin concerns. What are the pros and cons that you have to weigh with a decision like that? Thanks.

Matthew M. Maloney - Chief Executive Officer

Sure, John. So, we've definitely seen a ton of growth in the outer boroughs and really, if you look at a market like Queens or Brooklyn, it's very similar to other markets like Chicago or Philly on a standalone basis. New York's just a dramatic market for delivery in general. And so, we know exactly what we're doing. We target the highest premium, high profile restaurants, and we execute very efficiently at a high level of service for a low transactional fee, and that's just the secret sauce that works, whether it's in the Bronx or really anywhere else.

So, when thinking about delivery in Manhattan, you're right, it is a unique proposition, because the ecosystem in Manhattan has evolved over, who knows, 50 years and delivery is extraordinarily efficient in the city of Manhattan. It's why I believe New Yorkers and people in Manhattan order roughly four times more than in most other markets, is because you can order delivery from any restaurant at any time at almost zero transactional fee.

And so, are we able to augment that and I would say, it is trickier. We are experimenting with delivery in Manhattan. I know there are other players doing it, but I frankly don't know the value they bring to the system, because the typical bodega will get a sandwich to your office lightening fast, and I don't know why they'd need a third-party to do it.

Now, for restaurants that don't actually do delivery, obviously there's benefit there. And if you're thinking about augmenting delivery zones, it has its own problems when you're trying to get cross town around rush hour. So, we are working in Manhattan. We clearly haven't done a press release on it yet. We don't feel like we're at a critical scale to be able to pound our chest there, but I think that we're experimenting, we're trying to figure out where the value we can bring is. It's not as obvious as in the outer boroughs. But I think Manhattan is just the greatest delivery market in the world, and I've said that repeatedly, and so we are all in in Manhattan.

Operator

Your next question comes from Arvind Bhatia with CRT Capital. Your line is open.

Arvind Bhatia - CRT Capital Group LLC

Thanks for taking my question. I've got two questions. First one, on the corporate side, wondering if you can provide some color on how the trends were for that? And then, the $250 million run rate for the delivery business, Adam, can you remind us what you're thinking the run rate might be by the end of this year?

Adam J. DeWitt - Chief Financial Officer

Yeah. So, on the first, what I would say is, the corporate business, remember that it's something in the low, very low double-digits, close to 10% of our overall business. I think it continues to be a business that we can grow in kind of the single-digits. I think first quarter was in the single-digits, probably a tiny bit lighter than it's been in the past, but still very strong, and it's generating a ton of cash, and we think there's a lot of opportunity there. It's just since we have a lot of the big potential customers out there, it's tough to grow at a significant rate.

In terms of the run rate with delivery for the rest of the year, I don't think we gave a full year target for what we would be doing. Obviously with the LAbite acquisition, they did $80 million last year, there's probably a little bit – there's probably some growth in there, so you can add that on top – or kind of somewhere in the mid-3%s (54:44) right now. And we expect to continue to grow quickly on the delivery side, particularly on the organic side. Just to give some context, I think last quarter, we said we were at $200 million, this quarter we said we're at $250 million, of that $50 million in growth almost all of it's coming from the growth in organic delivery. So, hopefully that gives you a little bit more context, but I don't think we've given an explicit yearend number.

Operator

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

Nat H. Schindler - Bank of America Merrill Lynch

Yes. Hi guys. Thanks a lot for taking my questions. I had two quick questions, one you said promotions were a little less than normal and more brand than normal. One, I've been seeing actually quite a few promotions, just did a 20% one last week, thanks a lot for that by the way, but additionally I wanted to just go a little bit into that and see if you could give us some of the normal level of contra revenue impact that you do in promotions in the quarter, and how much you're seeing now or how much you're doing now and how much has that changed?

Secondly, I think in San Francisco we obviously have a lot of these delivery players. And there was a restaurant I took the picture of their – in the mission (56:13) took a picture of their window. And I think they had 10 stickers on it for different delivery players. How are the restaurants reacting to basically all this noise in the market place?

Adam J. DeWitt - Chief Financial Officer

So, I'll take the question on the promos. I mean, look, what I'll say is, overall it's a small enough number that you're not going to see the fluctuations quarter-to-quarter so much unless we're doing something dramatic. And to your point, just to point out, we are back to a more of a normal level in the second quarter, and it's more the first quarter where – particularly at the beginning of the first quarter where we were a little bit light. But we don't rely very heavily on promotion, so it's just a low single-digits percent of revenue on a quarterly basis. And then I'll let Matt give you a little color on the San Francisco restaurants.

Matthew M. Maloney - Chief Executive Officer

Yeah. Hey Matt, I agree with you. The noise is a little asinine and it's kind of crazy. From a restaurant's perspective, this is really a winner-take-most market and the restaurants really only want to deal with one or maybe two. They don't like to be beholden to a single partner. They feel like they want some pricing leverage and so they'll generally open up their front counters for another partner and obviously they're going to keep the one that are actually generating real business for them. And so that's what we've seen historically. I think in San Francisco you're at another level in terms of funded ideas.

But what we see is, as restaurant owners are looking to manage their business and manage the knowledge transfer and execution of their hourly workers, you can't realistically train them on five different tablets. You want to go with the one that produces the most volume and nobody is giving up their Grubhub tablets and preference for anyone else because no one drives even near the volume that we do.

Operator

Your next question comes from Jeff Houston with Northland. Your line is open.

Jeff Houston - Northland Securities, Inc.

Hey, Matt and Adam, thanks for taking my questions. So looking at the momentum you're having with chains, can you talk a bit about how the take rates compare between chain restaurants and independents? And are they generally given higher priority in the listings compared with the independents?

Matthew M. Maloney - Chief Executive Officer

Sure, Jeff. Chains are huge opportunity and when they talk to us and have those conversations, they're excited about two things. They're excited about the amount of volume that we can drive them in terms of business and they're excited about the fact that we can execute delivery at a very high service level and set expectations and partner with them. And so, because we are bringing the business and fulfilling it, they are more than happy to pay these standard rack rates and there's no economic preference given to chains in contracts whatsoever.

And also, in terms of exposure on our platform, we give them the same amount of exposure as any restaurant that produces great food. And so, we like to highlight our best restaurants, the local favorites, the chefs that are really working their tails off to produce the best food possible, and many times that includes chains, and so we highlight all of them based on how much business we believe we can drive them.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

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