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OpenTable Would Be Worth $70 If You Ignored Its International Business

By: Trefis
Posted: 12/6/2012 9:17:00 AM
Referenced Stocks: CTCT;ERB;MCRS;OPEN;YELP

OpenTable ( OPEN ) 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 ( ERB ) 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

($ thousands) 2007 2008 2009 2010 2011 2012 YTD
Revenues 1,547 2,779 3,845 8,883 20,864 15,978
Operating Income -5,830 -8,462 -5,907 -8,121 -11,384 -7,503
Costs:Revenue 477% 404% 254% 191% 155% 147%

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 concern.

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

2007 2008 2009 2010 2011 2012 YTD
Reported -2% 1.1% 12.7% 18.1% 23.4% 21.4%
Adjusted 12.6% 17.1% 22.5% 28.9% 37.1% 32.1%

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 without 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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