Three Months After IPO, Grubhub is Growing — And Profitable

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grubhub-300x300Three months after Grubhub hit the public markets, Wall Street might be warming up to ordering out. Shares of the company rose 4% Thursday morning as the online ordering firm reported solid revenue growth, and a stronger-than-expected jump in profit during its first full quarter as a public company. The strong financial news comes as the firm looks to expand the ordering service beyond metropolitan centers, into smaller cities and suburban areas where food delivery, and online ordering, is less prevalent.

During an earnings call Thursday morning, the company said top line revenue grew to $60 million in the second quarter due in part to an increase in television advertising and other national marketing spending. But the company also managed to drive down operating expenses in the wake of its merger with Seamless, which caused profits to jump by nearly 67% on a year-over-year basis.

“We spent more on advertising in the second quarter than we typically would and this included continued investment in television,” said Matt Maloney, chief executive at Grubhub. “Given that so much of the takeout market is offline, we need an effective way to reach those diners to boost its awareness, and television has been particularly helpful in reaching diners in markets which remain in the developmental stage.”

The company has grown its user base steadily since the Seamless merger last summer. The number of active diners, or users, who have ordered in the past 12 months, grew to over 4 million in the last quarter keeping the firm on track to grow its users base by nearly 70% over the course of 2014.

But the new customers appear to be ordering less. After an exceptionally strong, and cold first quarter, the company saw both the number of orders and gross food sales decline slightly in Q2. The average Grubhub user ordered about $100 in food last quarter, $12 less than the first quarter. Those declines have caused the average revenue per user, or ARPU, to decline from $15.22 dollars in Q1 to $14.32 during the spring quarter as well. Maloney says he expects to see declines in user activity as the company expands out of core markets in New York and San Francisco into secondary cities and suburban communities.

In an interesting note, the company has rolled out a pay-per-performance model to more markets. Called “restaurant-based pricing,” restaurant owners can pay larger commissions in order to show up higher in the results page — a tactic which has become a point of contention for local search sites. The model is meant to replicate the auction environment offered by companies like Google, which allows the company to more dynamically adjust pricing to perceived value within its inventory.

The model reflects an important duality of Grubhub’s business. For years, the company has served as a demand generator, which drives new traffic to restaurants, with its role as a software company that allows restaurants to process orders online, providing no way for restaurants to pay for each product differently. The auction-pricing allows the company drive prices up on the demand generation tool without completely alienating restaurants who use the service primarily as a way to allow existing customers to buy online.

The question for Grubhub is whether restaurants will be willing to pay a double digit cut of each transaction when they have the ability to process online orders directly for free through an emerging set of next-generation point-of-sale and customer-relationship management tools. As search and commerce business converge, and SaaS firms drive prices on commerce functionality downwards, the somewhat opaque and complex methods through which Yelp, Grubhub and even Google use to put a price on advertising will face new pressure.

Steven Jacobs is Street Fight’s deputy editor.