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Open Table's Business Model & Glaring Omission

|Includes: OpenTable, Inc. (OPEN)

Open Table Annual Report 2012

For a company that supposedly earns USD161Million in 2012, here are some glaring omissions OpenTable's 2012 annual report (Stock code:OPEN).

a. In the 2012 annual report, page 41 - under heading "revenue recognition" regarding transaction by transaction basis, it totally fails to say how OpenTable ensures restaurants will honor their side of the deal (ie. to pay Open Table commission) if customers honor their reservation and end up paying for their meal, how much does Open table gets in commission? who is to ensure the restaurant will pay OpenTable commission?

These are critical issues not even considered in their audit & control sections. Where is the audit & control to ensure restaurants pay their commission in event diners who made reservations actually sat & dined. Especially so when 56% of Open Table 2012 revenue of $161.6Million was supposedly derived from "reservations" (ie. the transaction by transaction commission system) versus "subscription".

These are glaring omissions for a company that supposedly had USD$161 Million in revenues base upon the business model of helping restaurants get customers whilst earning a commission.

This "gentlemen's" arrangement with the restaurants to pay Open Table their commission is not even highlighted in their business risk statement.

As such, it is even more curious how the company is able to assess on page 38 of their 2012 annual report the number of seated diners.

These are issues for your consideration & further investigation

Assuming for one moment we believe the annual report and it's figures.

The revenue & margin earned per diner is on the decline.

In 2011 - Revenue was $139.5Million based on 96.6Million seated diners (page 38 of 2012 Open Table Annual Report). Resulting in revenue of $1.44/seated diner

In 2012 - Revenue was $161.6Million based on 122.8Million seated diners. Resulting in revenue of $1.31/seated diner.

A drastic 9% drop in revenue per seated diner from 2011 levels.

For Nine months ended 30 Sept 2013 - Revenue was $137.7Million based on 114Million seated diners. Resulting in revenue of $1.20/seated diner.

Another 8.3% drop in revenue per seated diner from 2012 levels.

Clearly if the Annual Report is to be trusted, Open Table is also suffering from a severe decline in margins from revenue per seated diner.

In my humble opinion it is better to stay away from this stock until the company clarifies such glaring omissions. Furthermore, in light of the declining margins per seated diner, the prospects of OpenTable does not look good.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.