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OPEN > SEC Filings for OPEN > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for OPENTABLE INC

Form 10-Q for OPENTABLE INC


5-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our 2011 Annual Report.

This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "would" and similar expressions or variations intended to identify forward-looking


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statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included below and in our 2011 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We provide solutions that form an online network connecting reservation-taking restaurants and people who dine at those restaurants. Our solutions for restaurants include our proprietary Electronic Reservation Book, or ERB, and Connect. Our solutions for diners include our popular restaurant reservation websites, www.opentable.com and www.toptable.co.uk, as well as a variety of mobile applications. We refer to www.opentable.com, www.toptable.co.uk and related websites as the OpenTable websites. The OpenTable network includes more than 26,000 OpenTable restaurant customers spanning all 50 states as well as select markets outside of the United States. Since our inception in 1998, we have seated over 385 million diners through OpenTable reservations, and during the three months ended September 30, 2012, we seated an average of approximately 10 million diners per month. Restaurants that use our ERB pay us a one-time installation fee for onsite installation and training, a monthly subscription fee for the use of our software and hardware and a fee for each restaurant guest seated through online reservations. Restaurants that use Connect pay us a fee for each restaurant guest seated through online reservations. Diners can use our online restaurant reservation service for free. For the three months ended September 30, 2012 and 2011, our net revenues were $39.7 million and $34.4 million, respectively. For the nine months ended September 30, 2012 and 2011, our net revenues were $118.7 million and $102.4 million, respectively. For the three months ended September 30, 2012 and 2011, our reservation revenues accounted for 55% and 52% of our total revenues, respectively, and 56% and 53% of total revenues for the nine months ended September 30, 2012 and 2011, respectively. For the three months ended September 30, 2012 and 2011, our subscription revenues accounted for 36% and 38% of our total revenues, respectively, and 35% and 37% of revenues for the nine months ended September 30, 2012 and 2011, respectively.

In 2004, we began to selectively expand outside of North America into countries that are characterized by large numbers of online consumer transactions and reservation-taking restaurants. To date, we have concentrated our international efforts in Germany, Japan and the United Kingdom. Our revenues outside of North America for the three months ended September 30, 2012 and 2011 represented 13% and 15% of our total revenues, respectively, and for the nine months ended September 30, 2012 and 2011, represented 13% and 15% of our total revenues, respectively. We intend to continue to incur substantial expenses in advance of recognizing material related revenues as we attempt to further penetrate our existing international markets and selectively enter new markets. Some international markets may fail to meet our expectations, and we may decide to realign our focus.

Basis of Presentation

General

We report consolidated operations in U.S. dollars and operate in two geographic segments: North America and International. The North America segment is comprised of all of our operations in the United States, Canada and Mexico, and the International segment is comprised of all non-North America operations, which includes operations in Europe and Asia.


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Revenues

We generate substantially all of our revenues from our restaurant customers. Our revenues include monthly subscription fees, a fee for each restaurant guest seated through online reservations and other revenue, including installation fees for our ERB (including training). Subscription revenues are recognized on a straight-line basis during the contractual period over which the service is delivered to our restaurant customers. Revenues from online reservations are recognized on a transaction basis as the diners are seated by the restaurant. Installation fees are recognized on a straight-line basis over an estimated customer life of approximately three to six years. Revenues are shown net of redeemable Dining Points issued to diners. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates-Dining Rewards Loyalty Program" in our 2011 Annual Report.

Costs and Expenses

Operations and support. Our operations and support expenses consist primarily of payroll and related costs, including bonuses and stock-based compensation, for those employees associated with installation, support and maintenance for our restaurant customers, as well as costs related to our outsourced call center. Operations and support expenses also include restaurant equipment costs, such as depreciation on restaurant-related hardware, shipping costs related to restaurant equipment, restaurant equipment costs that do not meet the capitalization threshold, referral payments and website connectivity costs. Operations and support expenses also include amortization of capitalized website and software development costs (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates-Website and Software Development Costs" in our 2011 Annual Report). Also included in operations and support expenses are travel and related expenses incurred by the employees providing installation and support services for our restaurant customers, plus allocated facilities costs.

Sales and marketing. Our sales and marketing expenses consist primarily of salaries, benefits and incentive compensation for sales and marketing employees, including stock-based compensation. Also included are expenses for trade shows, public relations and other promotional and marketing activities, travel and entertainment expenses and allocated facilities costs.

Technology. Our technology expenses consist primarily of salaries and benefits, including bonuses and stock-based compensation, for employees and contractors engaged in the development and ongoing maintenance of our websites, infrastructure and software, as well as allocated facilities costs.

General and administrative. Our general and administrative costs consist primarily of salaries and benefits, including stock-based compensation, for general and administrative employees and contractors involved in executive, finance, accounting, risk management, human resources and legal roles. In addition, general and administrative costs include consulting, legal, accounting and other professional fees. Bad debt, third-party payment processor, credit card, bank processing fees and allocated facilities costs are also included in general and administrative expenses.

Headcount consists of full-time equivalent employees, including full-time equivalent temporary employees, in all of the sections noted below.

Other Income, Net

Other income, net consists primarily of the interest income earned on our cash, cash equivalents and short-term investments. Foreign exchange gains and losses are also included in other income, net.


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Income Taxes

We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may also be subject to current U.S. income tax.

Our effective tax rates for the three and nine months ended September 30, 2012 are not necessarily indicative of the effective tax rate that may be expected for fiscal year 2012.

Critical Accounting Policies and Estimates

In presenting our financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Our future estimates may change if the underlying assumptions change. Actual results may differ significantly from these estimates.

We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements:

          Revenue Recognition;

          Dining Rewards Loyalty Program;

          Valuation of Long-Lived and Intangible Assets, Including Goodwill;

          Website and Software Development Costs;

          Income Taxes; and

          Stock-Based Compensation.

For a description of our critical and significant accounting policies, see below and in our 2011 Annual Report. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2012.

Valuation of Long-Lived and Intangible Assets, Including Goodwill

Long-lived assets are reviewed for impairment whenever events or changes in circumstances or a triggering event, such as service discontinuance or technological obsolescence, may indicate that the carrying amount of the long-lived asset may not be recoverable. Determining whether a triggering event has occurred often involves significant judgment from management. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated and a charge is recorded. The amount of the impairment is determined to be the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist for the asset, fair value is estimated using discounted expected cash flows attributable to the asset. Significant judgment and estimates are involved in any impairment evaluation and our estimates, including estimates used in determining future cash flows.


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We test goodwill for impairment at least annually. We review goodwill for impairment as of August 31 and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed its fair value. Our assessment is performed at the reporting unit level. The goodwill evaluation for impairment is performed using a two-step process. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. The process of evaluating goodwill for impairment under the two-step model involves the determination of the fair value of our reporting units. The fair value of the reporting units is determined using discounted future cash flows. Forecasts of future cash flow are based on management's best estimate of future revenues and operating expenses, based primarily on expected growth in installed restaurants, seated diners, pricing and general economic conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any.

Goodwill is tested for impairment at the reporting unit level and is based on the net assets for each unit, including goodwill and intangible assets. We assign goodwill to each operating segment as this represents the lowest level which constitutes a business and for which discrete financial information is available and management regularly reviews. We have determined that we have two geographical reporting units: North America and the United Kingdom.

As of August 31, 2012, the fair value of our North America reporting unit, which carries approximately $6.8 million in goodwill associated with the Treat, Guestbridge and Table Maestro acquisitions, exceeds the carrying value by a substantial amount, indicating no impairment in goodwill for the North America reporting unit. As of August 31, 2012, the fair value of the U.K. reporting unit, which carries approximately $39.5 million in goodwill associated with the toptable acquisition, exceeds the carrying value by a substantial amount, indicating no goodwill impairment for the U.K. reporting unit.

During the year, management monitored the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test. For the periods presented, no triggering events were identified that required an update to our annual impairment test. As a measure of sensitivity, a 10% decrease in the fair value of either of our reporting units as of September 30, 2012 or December 31, 2011 would not have changed our assessment of the carrying value of goodwill.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.


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                                           Three Months Ended         Nine Months Ended
                                             September 30,              September 30,
                                           2012           2011        2012        2011
                                            (In thousands, except per share amounts)

REVENUES                               $      39,738    $  34,356   $ 118,665   $ 102,353

COSTS AND EXPENSES:
Operations and support (1)                    10,544        9,916      31,402      29,074
Sales and marketing (1)                        8,216        7,477      25,559      21,692
Technology (1)                                 3,741        3,748      10,599      11,326
General and administrative (1)                 8,072        7,407      25,673      18,417

Total costs and expenses                      30,573       28,548      93,233      80,509

Income from operations                         9,165        5,808      25,432      21,844
Other income, net                                 36           23          66          68

Income before taxes                            9,201        5,831      25,498      21,912
Income tax expense                             3,253        1,775       8,989       7,346

NET INCOME                             $       5,948    $   4,056   $  16,509   $  14,566

Net income per share:
Basic                                  $        0.26    $    0.17   $    0.73   $    0.62
Diluted                                $        0.26    $    0.17   $    0.71   $    0.59

Weighted average shares outstanding:
Basic                                         22,641       23,695      22,585      23,530
Diluted                                       23,261       24,488      23,188      24,545



--------------------------------------------------------------------------------
(1) Stock-based compensation
included in above line items:
Operations and support                  $     332    $     431    $     966    $   1,289
Sales and marketing                         1,290          571        4,046        1,574
Technology                                  1,020          431        2,184        1,319
General and administrative                  2,268        2,536        8,891        4,627
                                        $   4,910    $   3,969    $  16,087    $   8,809

Other Operational Data:
Installed restaurants (at period
end):
North America                              18,975       16,237       18,975       16,237
International                               7,385        7,629        7,385        7,629
Total                                      26,360       23,866       26,360       23,866

Seated diners (in thousands):
North America                              27,438       21,818       83,192       64,884
International                               2,302        1,768        6,800        4,939
Total                                      29,740       23,586       89,992       69,823

Headcount (at period end):
North America                                 425          403          425          403
International                                 162          165          162          165
Total                                         587          568          587          568


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                                     Three Months Ended         Nine Months Ended
                                       September 30,              September 30,
                                     2012           2011        2012        2011
                                      (In thousands, except per share amounts)

Additional Financial Data:
Revenues:
North America
Reservation                      $      19,193    $  15,154   $  58,128   $  45,690
Subscription                            12,510       11,406      36,675      33,117
Other                                    2,789        2,521       7,884       8,290
Total North America Revenues     $      34,492    $  29,081   $ 102,687   $  87,097
International
Reservation                      $       2,718    $   2,861   $   8,421   $   8,228
Subscription                             1,754        1,531       5,056       4,400
Other                                      774          883       2,501       2,628
Total International Revenues             5,246        5,275      15,978      15,256
Total Revenues                   $      39,738    $  34,356   $ 118,665   $ 102,353

Income (loss) from operations:
North America                    $      11,581    $   8,532   $  32,935   $  30,857
International                           (2,416 )     (2,724 )    (7,503 )    (9,013 )
Total                            $       9,165    $   5,808   $  25,432   $  21,844

Depreciation and amortization:
North America                    $       1,912    $   1,726   $   5,460   $   5,162
International                            1,455        1,321       4,213       3,666
Total                            $       3,367    $   3,047   $   9,673   $   8,828

Stock-based compensation:
North America                    $       4,221    $   3,295   $  14,447   $   6,176
International                              689          674       1,640       2,633
Total                            $       4,910    $   3,969   $  16,087   $   8,809




                              Three Months Ended     Nine Months Ended
                                September 30,          September 30,
                               2012        2011       2012        2011
                                    (as a percentage of revenue)

REVENUES                          100 %       100 %      100 %       100 %

COSTS AND EXPENSES:
Operations and support             27          29         25          29
Sales and marketing                21          22         22          21
Technology                          9          11          9          11
General and administrative         20          21         22          18

Total costs and expenses           77          83         78          79

Income from operations             23          17         22          21
Other income, net                   -           -          -           -

Income before taxes                23          17         22          21
Income tax expense                  8           5          8           7

NET INCOME                         15 %        12 %       14 %        14 %

Segments

We have identified two reportable segments: North America and International. In both segments, we derive revenue primarily from online reservations and guest management solutions. Total North America revenues increased from $29.1 million for the three months ended September 30, 2011, to $34.5 million for the three months ended September 30, 2012, and increased from $87.1 million for the nine months ended September 30, 2011 to $102.7 million for the nine months ended September 30, 2012. North America reservation revenues increased from $15.2 million for the three months ended September 30, 2011, to $19.2 million for the three months ended September 30, 2012, and increased from $45.7 million for the nine


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months ended September 30, 2011, to $58.1 million for the nine months ended September 30, 2012. North America reservation revenues increased as a result of an increase in seated diners. North America subscription revenues increased from $11.4 million for the three months ended September 30, 2011, to $12.5 million for the three months ended September 30, 2012, and increased from $33.1 million for the nine months ended September 30, 2011, to $36.7 million for the nine months ended September 30, 2012. North America subscription revenues increased as a result of an increase in installed restaurants. North America income from operations increased from $8.5 million for the three months ended September 30, 2011, to $11.6 million for the three months ended September 30, 2012, and increased from $30.8 million for the nine months ended September 30, 2011, to $32.9 million for the nine months ended September 30, 2012. The increase in income from operations is due to revenue increases exceeding the increase in expenses, due to operational efficiencies.

Total International revenues were $5.2 million for the three months ended September 30, 2011 and 2012, and increased from $15.3 million for the nine months ended September 30, 2011 to $16.0 million for the nine months ended September 30, 2012. International reservation revenues decreased from $2.9 million for the three months ended September 30, 2011, to $2.7 million for the three months ended September 30, 2012, and increased from $8.2 million for the nine months ended September 30, 2011, to $8.4 million for the nine months ended September 30, 2012. International reservation revenues decreased in the three months ended September 30, 2012 primarily driven by changes in per seated diner fees made at toptable earlier in the year. International subscription revenues increased from $1.5 million for the three months ended September 30, 2011, to $1.8 million for the three months ended September 30, 2012, and increased from $4.4 million for the nine months ended September 30, 2011, to $5.1 million for the nine months ended September 30, 2012. International subscription revenues increased as a result of an increase in installed restaurants. International loss from operations decreased from $2.7 million for the three months ended September 30, 2011, to $2.4 million for the three months ended September 30, 2012, and decreased from $9.0 million for the nine months ended September 30, 2011, to $7.5 million for the nine months ended September 30, 2012. The decrease in the loss from operations is due to decreases in marketing spending, specifically the purchasing of pay per click marketing. Refer to Note 10 to the consolidated financial statements for additional segment information.

Revenues



                          Three Months Ended         Nine Months Ended
                             September 30,             September 30,        Three Month   Nine Month
                           2012         2011         2012         2011       % Change      % Change
                                     (Dollars in thousands)

Revenues by Type:
Reservation             $    21,911   $  18,015   $   66,549   $   53,918            22 %         23 %
Subscription                 14,264      12,937       41,731       37,517            10 %         11 %
Other                         3,563       3,404       10,385       10,918             5 %         -5 %
Total                   $    39,738   $  34,356   $  118,665   $  102,353            16 %         16 %

Percentage of
Revenues by Type:
Reservation                      55 %        52 %         56 %         53 %
Subscription                     36 %        38 %         35 %         37 %
Other                             9 %        10 %          9 %         10 %
Total                           100 %       100 %        100 %        100 %

Revenues by Location:
North America           $    34,492   $  29,081   $  102,687   $   87,097            19 %         18 %
International                 5,246       5,275       15,978       15,256            -1 %          5 %
Total                   $    39,738   $  34,356   $  118,665   $  102,353            16 %         16 %

Percentage of
Revenues by Location:
North America                    87 %        85 %         87 %         85 %
International                    13 %        15 %         13 %         15 %
Total                           100 %       100 %        100 %        100 %

. . .

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