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OpenTable IPO: Is it financially sound?

The restaurant reservation service is set to go public on the Nasdaq. But as we consider its move to Wall Street, its financial health is important to consider.

Updated at 9:00 a.m. PT Thursday to include OpenTable's IPO pricing.

Online restaurant reservation provider OpenTable is getting ready to go public.

According to a release, the company will price its initial public offering at $20 per share.

But a share price doesn't tell you the whole story about a company. Whether you're thinking about investing in OpenTable, or you simply want to see why the company's executives believe that it has a good chance to be successful on the Nasdaq, there's no better way to find out than to look at its current state of operations.

Profits (or no?)
According to its latest SEC filing, OpenTable earned $16 million in revenue during the three months ended March 31. During the same period in 2008, it earned $13.2 million in revenue. For the first quarter of 2009, the company generated a profit of $366,000. Last year, it lost $87,000.

Annually, OpenTable hasn't fared so well. According to its 2008 income statement, the company lost $1.02 million on revenue of $55.8 million. In 2007, the company generated a profit of $9.2 million on $41 million in revenue. That said, its profit was the result of a $9 million tax benefit. It lost $856,000 on operations in 2008 before it incurred that benefit.

Balance Sheet
From an operations perspective, OpenTable is in a relatively stable position. The company has more than $12 million in cash on hand, with no long-term debt. That gives it enough capital to continue investing in its growth.

As an investor, dividends are a great way to generate cash flow as you wait to sell a stock. Plus, dividends are usually good indicators of a company's financial health. OpenTable reported that it does not plan to pay dividends.

Although that may seem like a warning sign, it shouldn't surprise you. Young companies rarely issue dividends, and in the tech industry, dividends are fairly unusual. They instead use extra cash to invest in growth. It's also rare to see a company going public with the promise of dividends. The IPO is typically used to increase funding and invest in the future.

It's about growth
When we consider OpenTable as a possible investment target, we need to acknowledge that OpenTable's revenue has continued to grow over the past three years.

OpenTable reports its revenue from three segments: subscriptions, reservations, and installation. Restaurants pay monthly subscription fees for access to the company's service. Reservation revenue is derived from a fee that restaurants pay for each seated guest they get from OpenTable. The company's installation fee is paid once by the restaurant to install OpenTable's hardware and software at the restaurant.

Since 2006, OpenTable's subscription revenue has nearly doubled, from $15.5 million in 2006 to $30.3 million by the end of 2008. Its reservations revenue grew from $10.7 million in 2006 to $23.1 million in 2008, representing a 53.7 percent gain. OpenTable's installation revenue grew by 58 percent over the same span, from $1 million to $2.4 million.

The idea, going forward
Although OpenTable is enjoying record revenue growth, the company's SEC filing highlighted an issue the company faces. It might be servicing more customers than ever, but adding more restaurants to its client base might become increasingly difficult.

"The ability of the restaurant industry to leverage the power of the Internet for reservation transactions has been inhibited by two key characteristics," the company wrote in its filing. "First, the reservation-taking restaurant industry has been slow to computerize host-stand operations. Second, the industry is highly fragmented, with independent restaurants and small, local restaurant groups comprising a significant majority of restaurant locations."

OpenTable claims that there are 30,000 reservation-taking restaurants in North America that seat approximately 600 million diners through reservations annually. Although that might seem like a huge market for it to exploit, OpenTable has been able to seat just 100 million diners through OpenTable reservations since 1998.

During the three months ended March 31, 2009, it seated an average of approximately 3 million diners per month. That gives OpenTable just 6 percent of the North America market. And as the company points out in its filing, it's not competing with a variety of companies--it's competing with phone-initiated, "pen and paper" reservations at individual restaurants.

The bottom line
So what's the takeaway for OpenTable? It's a tough call. The company has been profitable over the past few months. It has cash on hand to invest in its growth. It's also operating in a market that provides opportunities to grow. Plus, it's widely considered to be one of the best reservation tools on the Web, (most recently being named a Webware 100 winner).

But at the same time, it's a small company that will be facing a variety of regulations, thanks to the Sarbanes-Oxley Act of 2002. Getting family-owned restaurants around the world to invest in OpenTable might be difficult, since it does require an investment on their part. And although it has experienced growth, with only 6 percent of the market in its corner, its 11 years of operation hasn't completely changed the landscape.

OpenTable might be an enigma for IPO investors. If you want to see how Web 2.0 will fare on Wall Street, OpenTable is a company to watch.