Why is OpenTable going public this week while most other internet companies are struggling to survive? A look through its prospectus shows how much mileage the restaurant-reservations site has gotten from having an e-commerce revenue stream at a time when the advertising market is being crushed.
–Stable, Recurring Revenue: OpenTable gets more than half of its revenue from software that restaurants pay for that allows diners to make reservations online. OpenTable’s number of restaurant partners increased to 10,645 in the first quarter 2009 from 8,404 in 2008, indicating subscriptions are growing. (There was no information on whether the average subscription price increased or decreased over the past year; the company didn’t respond to requests for comment.)
Subscription revenue (especially business-to-business, not consumer based) tends to be more stable than advertising revenue because it is typically part of longer-term contracts. While OpenTable lets restaurants cancel their subscriptions, many tend to give a subscription product some time before pulling the plug; ad budgets, by contrast, can fluctuate from quarter-to-quarter or even week-to-week for many small local advertisers.
–Improving Margins. Operating income margins improved to 5 percent during the first quarter of 2009, up from 1 percent during the first quarter of the year earlier — all while the company increased its headcount to 300 employees from 248.
Update: According to an SEC filing, the price range for the IPO is being increased to $16 to $18 per share from $12 to $14, which would net the company about $6 million more in proceeds.
So many of the web 2.0 companies tend to be utilities with revenue as a secondary thought versus a business model that can produce revenue. As advertising continues to come under pressure, look for companies that have sustained revenue opportunity through recrurring revenue, or digital sale models. Some of my favorites:
Istock (dot) com – selling digital user-generated content. Can sell the same image over and over.
Takelessons (dot) com – applied web technolgy to scale music lessons nationwide. Gets paid every time a lesson happens.
Basecamp – project management subscription based on how much you need.
Freshbooks (dot) com – invoicing based on subscription.
^^ It's clearly one of the reasons the financial media sites like MotleyFool and TheStreet.com have survived.
Help me understand this. Opentable's IPO values the Company at ~$250M. They did ~$600k in EBIT last year and $4.6M in EBITDA. A generous extrapolation of 1Q09 results says $4M in EBIT and $9M in EBITDA. How is it possible that a business can get public at 28X EBITDA in this market? Am I crazy? What am I missing here?
Oh, and 50% of the shares being sold are owned by management, so only 50% of the net proceeds will be used to grow the business.
Chad, it's a good point you raise. While I can't give investment advice I would point out that the company has just reached profitability and has been in growth mode for a while – consistently increasing headcount as revenue grows. Your estimated EBITDA margin for this year would be about 13 percent, which most wouldn't expect to be the optimal or typical margin as the company matures. Perhaps investors are valuing it on 2010 EBITDA or this years revenue.
Do you really think that people purchasing this IPO on opening day are valuing it based on anything but momentum? Do you really think that Opentable.com is the Google of food webs? (ie its opening day price will hold and the stock price will multiply several fold over the next few years as did Google). I believe that if the management who priced their stock offering had any idea that they could get over $35 tops for shares that the opening price would have been closer to $25-28 or 25%-40% more which still would have given first day buyers a 12% pop and day traders a hefty trading opportunity with a $35.50 high.
Just being a down day for the market gave this stock added momentum with all those trading profits coming out of oils and rotating into this IPO, Intuit, Ross, Toro and other earnings stories.