) has no doubt established itself as the undisputed leader in all
of North America when it comes to online restaurant reservations.
After all, it is no mere feat to seat nearly 10 million diners in
the region each month. And with competitors failing to gain similar
traction in the industry, OpenTable is clearly sailing in clear
waters when it comes to its North America business.
But the same can hardly be said about its international
operations, which have yet to break even despite OpenTable's
efforts over the last five years. Even the acquisition of
toptable.com in late 2010 did not really help profitability as
OpenTable tries to replicate the success it found in the U.S.,
Canada and Mexico to the U.K., Germany and Japan.
This brings us to the pertinent question about OpenTable's
business model - wouldn't it be better for the company to forget
about geographical expansion and just focus on its home turf?
We maintain a
$52 price estimate for OpenTable's stock
, about 15% above the current market price as we believe that
there are several untapped potential revenue sources that OpenTable
will realize in the years to come.
See our complete analysis for OpenTable
OpenTable ventured across the Atlantic with its Electronic
Reservation Book (
) product offering for restaurants in the U.K. in 2004, and
followed up by setting shop in Japan and Germany in 2006 and 2007
respectively. The international expansion plans received a fillip
in October 2010, when the company announced the acquisition of
toptable.com - a reputed online restaurant reservation site with
considerable presence in the U.K. At the end of Q3 2012, the
company provided online reservation services to 3,959 restaurants
in the U.K., 1,882 in Germany and 1,544 in Japan, for a total of
7,385 restaurant customers.
But the process of expanding overseas has come at a substantial
price to OpenTable, something captured in the following table
compiled from its SEC filings over the years:
International Business Results
OpenTable has been bleeding cash in its international
operations, with the company currently recording almost 1.5 times
more expenses from these operations than the revenues they
generate. While this figure is better than the near -500% cost to
revenue ratio seen in 2007, the slow rate of decline seen in
expenses with respect to revenues is a serious cause for
So how much are the international operations actually taking
away from the profitability of OpenTable's North American
operations - and more particularly from its share value? The
answer to that, while simple, is quite appalling. Let's begin
with understanding OpenTable's operating margins with & without
the international operations.
OpenTable Operating Margins
The reported margins calculated above are the ratios of
OpenTable's net operating income for the year with its total
revenues for the year. The adjusted margins exclude the
international margins, and hence represent the operating margin for
the North American business. There is clearly a marked difference
between the two figures - about 10 percentage points on an average
- and it would not be wrong to say that OpenTable's shares would be
worth quite a bit more if the business was discontinued.
To come up with a new estimate for OpenTable's share price
the international business, we set the number of subscribing
international restaurants shown in the chart above to zero. We also
assumed no reservations on the toptable.com website. We then
changed our historical margin figures for the company to reflect
just North American operations, and then used these margins to
revise the forecast for the company.
The result - OpenTable's share value comes in at a handsome $70
without being weighed down by the international business. That's a
$18 (35%) increase over our existing $52 estimate, and a good $25
(56%) above its current market price.
Is the management team at OpenTable listening?
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