Should OpenTable Reserve Some Shares for You?

401K balance got you down? How about sinking some cash into the initial public offering registered with the SEC earlier this month by online restaurant reservation management company OpenTable? Its revenues are way up and both the number of restaurants who offer the company’s technology and the number of dining patrons who use it have increased incrementally. Numbers aside, OpenTable has proven to work flawlessly in real-world settings and provides a terrific convenience for its customers. Yet its IPO investors will be buying the company’s future growth—something that’s hard to envision for a business that depends on the health of the full-service restaurant segment. OpenTable dominates its market, but would you be willing to bet on its prospects right now?

San Francisco-based OpenTable filed its $40 million IPO earlier this month and, in most circumstances, it’s exactly the kind of offering investors would jump on. The company is young, aggressive and has already built a strong, nearly unassailable franchise in its chosen market.

Its numbers look good, too. At year-end 2008, the company’s installed restaurant base count topped the 10,000 mark, up nearly 3,000 units from one year ago. OpenTable sat 25.5 million diners last year, 8 million more than the prior year; revenues topped $41 million in the first nine months of 2008, up nearly $12 million from 2007.

On the profitability front, OpenTable is like a lot of start-up companies; it makes or loses a little each year. It does very well in the U.S.—netting 17 percent of its domestic revenue—but has spent most of those profits on international expansion. The company should really take off once it deploys its IPO proceeds to increase the scale of its business. The company makes money exclusively from its full-service restaurant clients. Restaurants pay OpenTable a one-time installation fee, a monthly subscription fee and a per-guest charge for each customer seated through OpenTable’s online reservations system.

Thus its fortunes are tied to those of the full-service restaurants it serves. If existing restaurants stop using the service (not very likely) or if additional restaurants don’t get on board (possible, but also not very likely), revenues would stagnate or fall. But it also matters that an ever-growing number of restaurant customers continues to book reservations online through OpenTable. That’s where a huge chunk of the revenue comes from.

Which brings us to the disclaimer—maybe it’s more like a warning—OpenTable felt compelled to add to its IPO filing. It neatly summarizes the current state of the full-service restaurant market today, and does so better than anything else we’ve read elsewhere. It’s probably because OpenTable’s ongoing real-time view of activity in the full-service restaurant business gives the company a perspective no one else can hope to have.

First comes a look at the big economic picture.

“Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending, which have recently deteriorated significantly and may remain depressed, or be subject to further deterioration, for the foreseeable future. Some of the factors having an impact on discretionary consumer spending included general economic conditions, unemployment, consumer debt, reductions in net worth based on recent severe market declines, residential real estate and mortgage markets, taxation, energy prices, interest rates, consumer confidence and other macroeconomic factors. There can be no assurance that government responses to disruptions in the financial markets and other factors contributing to the recession we are currently experiencing will restore consumer confidence.”

OK, we’re all on board with that. But what does it mean for full-service restaurants?

“Consumer purchases of discretionary items generally decline during recessionary periods and other periods where disposable income is adversely affected. Because spending for restaurant dining is generally considered to be a discretionary purchase, declines in consumer spending may have a more negative effect on our business than on other companies in general. In particular, a significant majority of our restaurant customers are fine-dining restaurants which have been particularly affected by economic downturns such as the one we are currently experiencing. We believe that the total number of reservations, including reservations by phone, seated by our restaurant customers has decreased approximately 10% to 15% for the fourth quarter of 2008 from the same period in 2007.”

Whoa. These numbers aren’t coming from analysts who compiled them after combing through three- or-four-month-old data from a small number of publicly held fine and casual dining chains. These are up-to-the-minute figures drawn straight from a database that keeps tabs on OpenTable’s 10,000-plus fine and high-end casual dining restaurant customers, very few of which are publicly held. This customer base includes most of the elite restaurants in the country—the last ones you’d think would be suffering double-digit declines in what has traditionally been the best month of the year for full-service restaurants.

So the full-service market is soft right now, but we still ask: Should you invest in OpenTable if and when its IPO comes to market? As you decide, consider this statement from the company’s SEC filing: “We believe based on our internal estimates that there are approximately 30,000 reservation-taking restaurants in North America that seat approximately 600 million diners through reservations annually.” This means that OpenTable has about one-third of its potential customer base under contract already, and that roughly six percent of all restaurant reservations in the U.S. are made through its system. The company has plenty of room to grow domestically, let alone internationally. If you want to get in on the ground floor—and given the current state of the restaurant industry, that would be now—here’s a chance.

Be sure to read the SEC filing before you decide. You can find it at: www.sec.gov/Archives/edgar/data/1125914/000104746909000513/a2190140zs-1.htm - dm41301