GrubHub, Inc. (GRUB) Q3 2014 Earnings Conference Call October 23, 2014 10:00 AM ET
Executives
Anan Kashyap - Head of Investor Relations
Matthew Maloney - Chief Executive Officer, Director
Adam DeWitt - Chief Financial Officer, Treasurer
Analysts
Nat Schindler - Bank of America
Ralph Schackart - William Blair
Heath Terry - Goldman Sachs
Mark May - Citi
Aaron Kessler - Raymond James
Ron Josey - JMP Securities
Michael Graham - Canaccord Genuity
Edward Williams - BMO
Neil Doshi - CRT Capital
Jeff Houston - Barrington Research
Tom Forte - Brean Capital
Operator
Good morning ladies and gentlemen and welcome to the GrubHub Q3 2014 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) I will now turn the call over to Mr. Anan Kashyap. Please go ahead sir.
Anan Kashyap
Good morning everyone. Welcome to GurbHubs’ Third Quarter of 2014 Earnings Call. I’m Anan Kashyap, Head of Investor Relations. Joining me today to discuss GrubHub’s results are CEO Matt Maloney and CFO Adam DeWitt. This conference call is available via webcast on the Investor Relation section of our website. In addition, we’ll be referencing our press release which is available on our Investor Relations website.
I’d like to take this opportunity to remind you that during the course of this call we will make forward-looking statements including guidance as to our future performance. These forward-looking statements are made in reliance on the Safe Harbor provisions of the Securities and Exchange Act and are subject to substantial risks and uncertainties that may cause actual results to differ materially from those in these forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC, including the Risk Factors section of our prospectus filed with the SEC on September 05, 2014 and our quarterly reports on From10-Q. Our SEC filings are available electronically on our Investor website at investors.grubhub.com or the SEC’s website at www.sec.gov.
Also I’d like to remind you that during the course of this call we will discuss non-GAAP financial measures in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in press release which is available on our Investor website at investors.grubhub.com and has been filed as an exhibit to a Form 8-K filed with the SEC. As a quickly reminder to everyone, the metrics and financial results we’re using throughout this call are pro-forma for the combined seamless in GrugHub platform regardless of whether the period discussed took place before or after the merger.
And now, I will turn the call over to Matt Maloney, GrubHub’s Founder and CEO.
Matthew Maloney
Thanks Anan, and thanks to everyone on the call for joining us this morning. I’ll start by summarizing our results for the third quarter and then provide an update on our business before turning the call over to Adam DeWitt our CFO, who will give us some more detailed look at the numbers and our outlook for the fourth quarter.
So with that let’s talk about the third quarter results. GrubHub has built the largest online marketplace in the United States for takeout from independent restaurants. We are the clear market leader connecting millions of hungry diners with thousands of local restaurants. In the third quarter of 2014 we had a record 4.6 million active diners and generated approximately 173,000 orders per day for our restaurant partners for an annual run rate of $1.7 billion in gross food sales.
With over 95% of the takeout markets still being served by paper menu and telephone we are still in the very early stages of market development. We continued our growth momentum up from the second quarter with $61.9 million of total revenue for the quarter up 51% from the third quarter in 2013. We grew active diners 50% from 3.1 million at the end of last year’s third quarter. We processed roughly 173,000 DAGs or Daily Average Grubs during the third quarter, a 33% year-over-year increase from 130,000 Daily Average Grubs third quarter last year.
We also processed $424 million in gross food sales during the quarter, a 37% increase year-over-year. As expected our DAGs were slightly lower in the third quarter than in the second due to seasonality. As we have mentioned in the past the second and third quarters are our slowest quarters of the year with the third quarter being our slowest in terms of activity. The good news is that we are now in our typically stronger fourth quarter and approaching the first quarter when the weather is colder, people are taking fewer vacations and school is back in session.
As we noted on our last call we invested slighted less in marketing this quarter than we did in the second quarter because of the seasonality. We spent less in July and August since they are seasonally slower months and is more difficult to spend effectively in those summer months. Overall sales and marketing was down 8% from the prior quarter but what we did spend remain very effective at attracting diners in all of our markets.
We began to ramp up our marketing spend again in September and expect to spend at a higher rate for the rest of this quarter and during the first quarter of 2015. In September we launched a new creative across all of our media that focuses on communicating the pain points of traditional takeout ordering and we have seen positive results to date. The two new TV spots that we are running already appeared to be more effective than our previous TV spots. Given the so much of the takeout market is still using offline paper menus we need an effective way to reach those diners outside of traditional online channels like SEM, [SE hour] display.
We found the TV is a great way to drive new diner acquisition because it leverages our large network of restaurants that reaches well beyond our most developed markets. As a result TV has been particularly successful in reaching diners in our newer markets and it is helping us develop those markets more quickly than if we just use online tactics alone. I also wanted to give a quick update on restaurant driven pricing on a seamless platform, it has been a significant driver of growth for our net revenue capture rates over the last couple of quarters. The capture rate improved from 13.5% in the first quarter to 14.2% in the second quarter. In the third quarter net revenue capture increased further to 14.6% which was higher than we had expected due to Seamless platform restaurants taking advantage of being able to pay for higher placement more aggressively than we had anticipated.
We think the increase we have seen in the revenue capture rate validates our strategy of letting the market set the rates and opposed to the other way around. But we expect this trend to level off now. The change has increased our capture rates by over a 100 basis points all which drops to the bottom line.
Moving on to mobile, which is driving majority of our new diner growth. As of this past quarter 50% of our orders take place on mobile devices. People are using smartphones from more and more of the daily transactions in their lives and for us in particular mobile applications and mobile web products provide additional used cases for our diners.
As we have mentioned before these mobile orders monetize at exactly the same rate as our web based orders. The continued adoption in mobile platforms helped drive overall growth because of these additional use cases.
We maintain our aggressive investment in product and technology by adding over 20 great engineers and product mangers this past quarter. Over the near and medium term we will continue to seek out and hire top talent as we strongly believe that increasing the quality, flexibility and conversion of our products will serve our diners better and drive more orders to our restaurants. Ultimately we believe having the best team is fundamental to increasing the market leadership.
I’m also excited to introduce the most recent addition in our management team Brian Lanier our new CTO. Brian has over 25 years of experience working in a broad range of products and significant leadership experience overseeing large innovative growth oriented teams. Brian was mostly recently at Comcast and was responsible for designing and delivering their next gen X1 platform, prior to that he was at TIVO, creating Emmy winning consumer products. We believe he brings the energy and curiosity necessary to push our organization and drive us to innovate more aggressively.
Our CIO, Sanjay Tiwary, has decided to pursue other opportunities but it is staying on to the end of the year to help with the transition.
Online takeout remains a very large opportunity and vastly different from any other product available online. The food is ordered, prepared, delivered and consumed all in less than one hour. Sub hour delivery is significantly more difficult than same day delivery. In the third quarter we process approximately 173,000 orders per day and we believe the ultimate market for this product is about 40 times larger.
We remain very excited about the substantial opportunity and are focused on being one indispensible takeout platform for connecting diners and independent restaurants across the country. And with that I’ll hand it over to Adam who will walk you through the financials.
Adam DeWitt
Thanks Matt. I’ll review our third quarter performance in more detail provide some forward looking color and then we will open the call to questions. Before I start once again I want to clarify that the prior year metrics and financial results I will be using for comparison purposes, will be pro forma based on the combined businesses of GrubHub and Seamless even though the merger between the two companies occurred midway through the third quarter of 2013 on August 8th.
This is different from the GAAP presentation which for the third quarter of 2013 includes results from both businesses after the date of the merger and only legacy Seamless results prior to August 8th. We believe the pro forma view which includes the combined businesses is a helpful way to compare historical results to our current quarter.
GrubHub delivered record third quarter revenues of $61.9 million, 51% growth from the year-ago quarter of $41 million. Strong growth across all of our key metrics continued into the third quarter.
We ended the quarter with active diners reaching a 4.6 million, a 50% year-over-year increase. This 4.6 million is a small fraction of the total market size with over 95% of takeout transaction still taking plays offline. While our largest source of that new diners remains product driven word of mouth referrals our biggest challenge is reaching that 95%. And to that end we are increasingly looking at ways to reach that group since they are not yet looking for takeout online.
We are getting better and better using TV advertising to access this group and even though we decreased our media spend in the third quarter due to seasonality we expect TV to help us drive active diners higher by reaching some more than 95%.
As a result of this growth in diners we processed a 173,000 daily average grubs and $424 million in gross food sales during the quarter, a 33% and 37% year-over-year increase respectively. Both of these totals were similar to that of the second quarter as expected.
As Matt noted we generally expect lower activity in the second and third quarters when the weather is warmer, school is on break and people are taking vacations. The third quarter is typically our bottom and we expect activity rates to increase in the fourth and first quarters. In terms of how this activity translated into revenue, we did see some continued impact from the second quarter due to the implementation of restaurant driven pricing on the Seamless platform with revenue growth outpacing gross food sales growth.
Our net revenue as a percentage of gross food sales increased from 13.5% in the first quarter to 14.2% in the second quarter to further increase to 14.6% in the third quarter. As Matt mentioned earlier our expecting improvement in the third quarter the magnitude of the increase is higher than anticipate due to continued momentum of restaurants on Seamless choosing to pay higher commission rates in order get in front more hungry diners.
At this point we believe most of the impact from the conversion to restaurant driven pricing on Seamless is incorporated the net capture rate. Going forward we expect our net capture rate to return to more typical patterns of fluctuating up and down on a quarter-to-quarter basis. While in each individual market capture rates are trending up we are growing disproportionally in less developed markets where there are fewer restaurants in the platform and therefore lower commission rates.
Turning to expenses, I’ll start with sales and marketing. Total sales and marketing expenses were $14.9 million this quarter, a 43% increase compared to $10.4 million in the same quarter last year. As a percentage of revenue, sales and marketing drop slightly from 25% to 24%. As discussed in the last call, we reduced our level of advertising in the third quarter from the second quarter due to seasonality. That said we are able to grow diners at a healthy rate despite the lower level of spend that we had during the second quarter. We increased active diners by 380,000 which compares to 340,000 in the second quarter with 8% less spend. As Matt mentioned that we launched two new television commercials designed to highlight the pain points of the traditional way of ordering takeout. Our TV campaigns have been effective in helping us acquire new diners in our secondary and even tertiary markets where we previously had less exposure.
We expect TV to continue to be an important part of our advertising arsenal in the future. For the fourth quarter we plan to increase our advertising spending in lock step with the arrival of the seasonally stronger fourth and first quarters. For the fourth quarter, expect sales and marketing to be approximately 25% to 30% higher than it was in this third quarter. Operations and support expenses were $14.9 million, a 33% increase compared to the $11.2 million in the third quarter of last year. As a reminder this line item is comprised of largely variable cost such as credit card processing, customer care and menu operations which generally scale with orders in gross food sales. As a result operations and support cost are up in line with volume.
Technology expenses excluding amortization were $6.6 million for the quarter increasing 29% from third quarter of 2013. As Matt discussed earlier we continue to invest in our technology and product team impart because of the attractive recruiting environment for us. This is driven technology cost higher this quarter and we expect another increase in the fourth quarter. We will continue to hire good engineers and product experts opportunistically since we are confident that the long term ROI is high.
Depreciation and amortization was $5.7 million for the quarter, 42% higher than the third quarter of 2013 relatively consistent with the second quarter. The year-over-year increase is due to the inclusion of intangibles amortization from the Seamless-Grubhub merger. G&A cost were $8.1 million an increase of 7% from the third quarter last year. But when we exclude merger and restructuring expenses the increase was roughly 26% year-over-year driven by higher miscellaneous cost to support the growth in the business, stock based comp and public company cost.
This quarter we had approximately $0.5 million in the restructuring charges due to the lease termination of our Salt Lake City offices. Adjusted EBITDA was $20.4 million, an increase of 99% from the $10.3 million in the same quarter in the prior year. Our adjusted EBITDA margin was 33% this quarter which is an improvement from the first and second quarters due mostly to the continued impact from the restaurant driven pricing on the Seamless platform and planned reduction in advertising spend.
Net income was $6.5 million compared to the prior year $1.2 million. GAAP net income for fully diluted common share was $0.08 per share compared to $0.01 per share in the third quarter of last year. For the diluted EPS calculation, there were 82.8 million weighted average fully diluted shares for the quarter. On September 3rd, we announce the pricing of a follow-on offering in which the company sold 1.25 million primary shares; including the impact from our follow-on offering we believe that the fully diluted share count outstanding would be approximately 84 million in the fourth quarter.
We ended the third quarter with $278 million in cash and short term investments which includes $48 million raised from our secondary offering. In terms of forward guidance, we are estimating total revenue for the fourth quarter to be approximately $68.5 million to $70.5 million. As we’ve mentioned before we expect activity rates for the fourth quarter to be better than the third quarter due to colder temperatures and return of college students to their campuses. In terms of profit, due to the anticipated increase in marketing spend and continued investment in our technology and product teams, we current expect adjusted EBITDA margin rates to be closer to the first and second quarter margins than the third quarter level.
In terms of specific guidance for the fourth quarter we expect adjusted EBITDA to be approximately $20 million to $22 million. The growth opportunity is significant and GrubHub is well positioned to take advantage of it. With that I’ll turn it over to the operator to take questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Nat Schindler from Bank of America, your line is open.
Nat Schindler - Bank of America
Yes, hi guys, thank you very much for taking my question. Take rates beat our expectations significantly and grew quarter-over-quarter once again. Are you seeing this because food sales in your more mature markets are better than expected or newer markets coming up with the competitive take rate curve faster? And additionally should we expect take rate to have any significant seasonal impact in the future with restaurants possibly looking to maximize volume and lower takeout times like Q3 but less competitive when they already have volume such as in the fourth quarter?
Adam DeWitt
Hey Nat, how are you doing? So those two questions the first is on the take rate between the third quarter and the second quarter so we did see a tick up again from 14.2% to 14.6%. Really most of that impact as Matt said in the remarks is related to the transition on the Seamless platform from the old tier based rate structure to the new kind of what we call auction based structure where the restaurants have the ability to influence where they end up in the search order by paying higher rates.
I think what you saw in the third quarter is really the follow through from us reaching out to the restaurants educating them and then getting educated on the new system and choosing to pay higher rates to influence where they end up in the search order where they couldn’t do that before on the platform. Just to note we do think that the impact from that conversion is now fully baked in and so we are going to return to a more historical pattern of up and down fluctuations. Which I think is a good segway to the next part of your question which is the seasonal impact.
So we do see a slight seasonal impact, but really what on balance where you are seeing every quarter is, we have a continued drum beat of restaurants in our existing markets deciding to pay higher so there is kind of this upward pressure on rates from restaurants across the whole network deciding to pay higher rates. But at the same time we are adding a lot of restaurants and we are actually adding restaurants just proportionally in our secondary and treasury markets where there is less competition right now, so they by nature start out as the lower rates. So you have the balance of those two factors.
There is the slight seasonal impact that more comes from folks, when we have more colleges ordering because traditionally those market have fewer restaurants and so have slightly lower rate and so we do see a little bit of seasonal impact there. But overall it’s really going to be the impact from that first dynamic that I talked about.
Nat Schindler - Bank of America
Great, thank you and great quarter.
Operator
Your next question comes from the line of Ralph Schackart with William Blair. Your line is open.
Ralph Schackart - William Blair
Good morning. Just a question on diners delivering much more upside than the way they are modeled in the quarter. I know you called out TV, just curious was all the TV branding campaign that was sort of driving that upside, then how should we think about pace of diner growth going forward given the tailwind from the branding campaign from TV that’s occurring and sort of the step up in marketing campaign I guess this quarter and seasonally strong quarter?
Matthew Maloney
Hi Ralph, this is Matt I’ll take the first part of your question then hand it over Adam to give you more inside on the diners going forward. If you think about long-term we are looking to displace 95% in orders that are being placed to the telephone paper menus and while we are returning to high season for people ordering takeout we have seen this as an ideal opportunity to really increase brand awareness and push when purchase in itself is higher.
So television has been successful in all markets but particularly in strong newer markets and the quality is good as diner frequency is great, it still a really big market and TV is the way for us that really access those offline diners and take share from the paper menus and telephones. I think you heard us mentioned earlier the new TV ads are much better because they highlight real pain points and pinpoint where GrubHub is a much better way of ordering takeout and they just work, they are working better. You can say we reduced our marketing -- our advertising spend overall and we saw still a dramatic increase in active diners.
So looking in the fourth quarter and the first quarter next year we are going to look to scale TV is going to be the prime focus of lot of our advertising, especially as we continue to get deeper into the busy season of our industry.
Adam DeWitt
In terms of the growth, Ralph sometimes what we expect going forward certainly with the additional spend and the stronger seasonality in the fourth quarter we expect a tick up in the number diners added to that active diner metric. And then what really happens is just based on seasonality that will kind of become the new normal through kind of first quarter, second and third quarter next year I mean it might be a little bit plus or minus and then you will see another bump up typically in the fourth quarter of following year. So we definitely expect a little bit of improvement in the fourth quarter.
Ralph Schackart - William Blair
Okay, great. Thank you.
Operator
Your next question comes from the line of Heath Terry with Goldman Sachs. Your line is open.
Heath Terry - Goldman Sachs
Great, thanks. I was wondering if you can give us a sense of what kind of growth you are seeing in diners and order volume and even restaurant and sort of some of the in the newer markets that you are in. Would you characterize it is being on a similar growth curve to what you have seen in more mature markets like New York and Chicago? And how does that now what you’re seeing in those markets have you thinking about the potential for those second tier markets to reaching level of penetration that you have in markets like New York and Chicago.
Matthew Maloney
So we continue to see a great market -- great growth across all markets, the Tier-1 markets are still adding majority of the diners, but the emerging markets are definitely growing faster in terms of percentage growth. We have seen great traction in our second tier markets, cities like Denver, Atlanta, Miami, they’re growing a lot quicker than our more developed markets and we are very positive about the diversification across our 700 cities.
So if you look at New York and Chicago they’re both growing at rate that isn’t far from the overall company and given their size, it’s hard for the smaller markets to catch up.
In terms of penetration in our largest market which New York Metro we believe we have approximately 10% of the market and we have been in the market for over 10 years. So we have lowest single digit penetration in nearly all of our other markets, so we believe at we are still in the early stages of adoption even in our most mature markets and we have a long way to go in our newer market. So I’m kind of back to what I was saying that well TV is a critical component of the strategy to address 95% or the 95% of the orders that are not online or mobile yet.
Heath Terry - Goldman Sachs
And in those market I know you have talked about increasing the level of investment there. In -- other than you are doing from a marketing -- in marketing whether it’s in marketing, whether it's television or otherwise. Are you -- how would you characterize the returns on that marketing spend in those earlier stage market irrelative to what you saw either in the early stage of markets like New York and Chicago or relative to what your spending in marketing in those markets now?
Adam DeWitt
Yes, this is Adam, how are you doing. In terms of the lifecycle of the markets, they all look very similar and so we acquired diners in Phoenixs, the Denvers, the Miamis is the world based on where those markets are in their lifecycle, the diners like very similar to the other markets including Chicago, Boston, DTE, San Francisco, LA. I think the one outlier that we talked about in the past is New York, New York is just simply a different market, if you look at all the other markets they all look very similar, New York’s little bit of an outlier and that the New York customers tend to be a little bit more active and travel little bit to profile - just because they’re used to the culture there.
Heath Terry - Goldman Sachs
Got it, thank you.
Operator
Your next question comes from the line of Mark May with Citi, your line is open.
Mark May - Citi
Hey guys, thanks for taking my question. I’m going to touch again on the take rate. I have been surprised I guess on your comments about how quickly the take rate in the seamless kind of New York area has picked up and your expectation for to come out level off from here, has that surprised you how quickly that’s been taken -- the absorb promotion? And what makes you think that it’s likely to level off so quickly is that because kind of your average take rates in the seamless market and New York City are now already at levels as some of your more mature markets? And then second question on marketing given that you operate a pretty hyper local kind of business. How are you thinking about your marketing strategy going forward, are you going to be doing much more national advertising or are you really focused still on local? And if it’s local can you help me think about the dispersion, how you’re focusing marketing on some of your newer markets versus your more established markets? Thanks.
Adam DeWitt
Sure, thanks Mark, this is Adam. So in terms of -- I’ll take the take rate and then I’ll let Matt talk about the marketing strategy. So in terms of whether or not it was a surprise, I think what I say that we are not surprised by what we have seen in New York. I think that the speed at which the restaurants have migrated to the restaurant taking advantage of the restaurant driven pricing model has been certainly being quicker than we anticipated. Basically I guess what’s happened is when we have shown the restaurants the impact of moving up in the search order and the number of orders that is generated. It’s just created this kind of this virtuous cycle where they continually have bit up the rate and so how many of the New York restaurants taking advantage of the ability to change the rates to drive more orders.
In terms of why we think it’s going to level off and we can just see the pace of the changes and kind of the rate at the pace that change and a lot of what we saw in the third quarter happened earlier in the third quarter and towards the end of the second quarter and so while we continue to see restaurants taking advantage of that pricing model and being able to bid up it’s not at a pace that’s that much different at this point than our other markets like Chicago. So we saw kind of an initial flood if you will of people taking advantage of it and now it’s kind of more in lock step with our other markets.
Mark May - Citi
Thanks.
Matthew Maloney
Hey Mark, this is Matt. And I’ll address your marketing strategy question. So, the way we think about marketing strategy is its not necessarily specific market by specific market because we are building this two side of market that grows in value overtime in all of the markets and so our efforts are really to drive new diner acquisition to get that conversion from offline to online and really do that at where we consider the efficient frontier and we talked about this through the road show but it’s primarily how do you -- acceleration and overall the taking over more of that 95% of orders is going to fundamentally relay on product.
So, all marketing and acquisition strategies fundamentally relay on the product. So let me go through first, how we think about marketing what we are doing and then second, what we are doing around the product because we actually believe that drives stronger longer term growth? Obviously we spoke a lot about television. In general we -- like I said we attempt to spend at that efficient frontier and so while we spend less in Q3 versus Q2 in aggregate we actually added more diners and so we are definitely getting more efficient, we are optimizing our channels and our communications. Television specifically allowed us to add tremendous scale. You can only grow SEO or SEM based on the eyeballs that are currently online looking for restaurants, television added to those eyeballs, which is why we believe it’s such a strong channel for us. It also allows us national coverage, so through the same campaign we’re advertising in New York, Chicago, San Francisco and Denver, Phoenix, Miami and a bunch of the tertiary market to smaller markets so we are driving demand there for the local restaurants that are leveraging our platform.
Clearly we see bumps in the SEO the SEM in all other marketing channels when we are running these TV campaign for us. The mix of strategies we are leveraging at any given time are very interdependent. So coming back to product, while we are spending as efficiently or as effectively as we can a national scale we are fundamentally investing the product and technology groups of organization which we called out the last earnings call and then again this one we added a bunch more people. We are being opportunistic about this but the hiring market has been very favorable to us and we are seeing very quality applicants looking to drive real change in this massive and pretty much untapped market. And so obviously we hire new CTO which we are excited about to continue to push the innovation to build on this momentum, because ultimately if we can address diners needs through control and transparency -- increase control, increase transparency we are going to have more orders for the restaurants we can have a better product is going to be stronger.
And then in the tertiary markets is not just about communicating this as an option, it’s about showing them that they can access all of their local restaurants and is just a better experience.
Mark May - Citi
Thanks Matt, thanks Adam.
Operator
Your next question comes from the line of Aaron Kessler with Raymond James. Your line is open.
Aaron Kessler - Raymond James
Thank you, good quarter. A couple of questions, first if you can talk about maybe potential uses of cash close to $300 million on the balance sheet at this point following the secondary. Also just, can you talk a little maybe potential ways you could remove -- I mean friction in the process at this point, are you -- would you consider having a delivery platform as we see some competition in that area and how you are thinking about that longer term. Thank you.
Adam DeWitt
Hi Aaron, how are you doing? I’ll take the cash and then Matt will talk about the delivery ecosystem. In terms of the cash is really dry powder, I think in couple of different ways that we can use the cash. Matt talked a lot about -- in the last response about products and how important it is to our long term growth strategy. So there was something from a product perspective that we felt we can use and we can leverage to drive more growth and convert more that 95%. We certainly would take the advantage of being able to invest in it, up to that standpoint that kind of Segways into whether it’s in M&A, investment or it’s in an internal investment. So that’s really what it is, we don’t have it necessarily ear marked right now.
Aaron Kessler - Raymond James
Okay.
Matthew Maloney
Hi, Aaron. So kind of taking the big step back because the delivery question seem to getting a lot lately. We exist -- GrubHub exists to drive more orders restaurants and to bring more control and transparency like I said to diners. And so for us to really understand how to do that, we definitely need to understand what part delivery played in that value chain. So we have a lot of experiments running, whether specifically in delivery or it’s in other areas of the driving satisfaction to hungry diners. And so I would say we have a lot experiments we have a lot of learnings, we are getting a lot of learnings and we absolutely will figure out how to reduce friction whether that specifically by delivering food at scale or whether that’s by assisting restaurants to deliver food better or whether that’s through communication strategies and more applications and apps currently like our strategy is now with the order hub and the delivery hub and ways we can augment restaurants through data and technology.
But regardless through our experimentation we are going to find out learnings and we will be rolling those out at scale at some point because we are here reduce the frictions, where you have to drive more and more restaurants to increase control in transparency to diners.
Aaron Kessler - Raymond James
Great. Thank you.
Operator
Your next question comes from the line of Ron Josey with JMP Securities. Your line is open.
Ron Josey - JMP Securities
Great. Thanks for taking the question, two please. Just first on mobile, now that mobile has 50% of orders I would love to hear if you can talk any difference in frequency between app users versus non-app users in terms of orders. And then secondly I believe you also had to deal with YP earlier in the quarter, can you just provide more information on that maybe when it launch it is revenue share? Thank you very much.
Adam DeWitt
Sure. Hi Ron how are you doing? It’s Adam. In terms of the mobile customers I think we talk about this in the past that our diners that are using the mobile platforms, do order more frequently than diners that just use the PC platform or the web based platform. We caution to say that it’s causing effect though, I think it’s that the our more valuable users are finding that it’s easier and better to use the mobile phone in a lot of used cases. But we do in general have a slightly higher value from the mobile users. One thing that is great about the mobile platform though is we do think that it can help us we talked about product and how it’s part of long term growth strategy, the mobile can help us convert some of that 95% because it does give us additional used cases where you can be on your way home for something and order takeout or on your way to something and not necessarily at home and so it does add additional used case and we think that it is a driver of growth. It certainly since it’s been taking share from the PC it’s certainly has been generating a disproportion of share of our growth in orders over the last few years.
In terms of the yellow pages partnership, it is a revenue share, it’s constructed in a way that if we have a lot of control over the customer and the transaction and we feel really good about it. Ultimately we don’t think it’s really not going to add a lot of volume but seems to make sense there wasn’t a lot of downside and could increase our distribution a little bit.
Ron Josey - JMP Securities
Great, thanks, great quarter guys.
Operator
Your next question comes from the line of Michael Graham with Canaccord Genuity. Your line is open.
Michael Graham - Canaccord Genuity
Hey thanks and congrats on the momentum. Just two questions one on take rates again I know you are pushing up towards 15%. Can you just maybe share some color around where some of the peaks and take rates are either some of your best markets or maybe some of your most ambitious restaurants, what they are doing? And maybe just touch on whether any restaurant have sort of hit a peak and then reduce their take rate as they try to figure out where the best level of spend is? Any color around that and second question is, just how you’re thinking about restaurant density in some of the second tier markets maybe how you measure it how it compares with some of your first tier markets and how you are thinking about the investment to drive restaurant growth in some of those second tier markets? Thanks.
Adam DeWitt
Hey Mike, how are you doing? In terms of the take rate, I’m not sure that we talked about it before but I think the way that we talked -- the way that we generally talk about where rates can go. If you look at Chicago and New York on the GrubHub side not on the Seamless side that’s obviously still converting. You see rates that are higher than 15% but lower than 20% and a lot closer to 15% but really what’s going there is that if you look Chicago, on a market basis it’s really Chicago is really made up of thousand different markets right and so some of the markets there the more urban which is a live concentration of restaurants, you are going to see take rates that are actually higher than kind of the mid-teens but then you will go to the suburbs and where there is fewer restaurants, there is going to be lower take rates obviously because there is not as much competition.
We certainly think overall that there is upside in all of our markets from where we are today just because that’s what we -- our experiences has been overtime is that the rates go up. So, there is a lot of room -- I mean there is some difference in some of the suburban markets where you come out 5 or 10 restaurants and they are all in the front page and so there is not a lot of incentive to go from third to first but in the more advanced markets where there is a lot more restaurants there is a lot of competition we still see rates going up even in individual markets within Chicago.
In terms of the restaurant density question, the other -- all the markets -- the way the restaurant density looks from a market perspective is, there is generally a certain number of restaurants for a number of people. So it’s really based on how many people are in a marketplace and so you know more populated markets like New York, Chicago are going to have a lot more restaurants, there is a slight difference, there is slight higher bias in those more dense markets for a little higher density of restaurants but if you look across the landscape market like I don’t know the populations of the top of my head but if you look at markets like Phoenix, Houston, Dallas to the extent that they have similar populations, they are all going to have similar numbers of restaurants and you look like in LA and Chicago and they are going to have very similar numbers of restaurants.
But as we talked it on the past it’s not always about the number for us it’s a number of restaurants isn’t necessarily a driver of our growth it’s really the diner side and on the restaurant side we really need to make sure that we are getting the right restaurants. So it’s more about the quality of the restaurants and focusing on the diner side.
Michael Graham - Canaccord Genuity
Thank you, Adam.
Operator
Your next question comes from the line of Edward Williams with BMO. Your line is open.
Edward Williams - BMO
Good morning, just to follow up a little bit on Mike's question about restaurants, can you give us a little bit of color as to what sort of growth you have seen in restaurants being added to the platforms through your marketing spend? So, in addition to driving diners are you seeing benefit and that also driving restaurants to the platform especially in those markets where you have maybe little bit more under penetrated with your restaurant level.
Matthew Maloney
This is Matt. So restaurant growth is strong across the board I want to reiterate what Adam said we have currently over 30,000 restaurants but this isn’t the primary growth driver it’s really about the quality and the share of those. We have a critical mass in all of the secondary and tertiary markets that we are focusing on for sure. It’s true that especially TV as a national channel is driving diners and it is driving restaurant awareness. We do see that but still the primary method of signing restaurant up is us reaching out to them and we definitely have to keep up, one thing that’s critical in our marketplace are two sided marketplace as we add diners we have to add restaurants because you can’t get to over weighted on one side versus the other.
And so we are absolutely focused on expanding the restaurant choices in our secondary and tertiary markets especially as we continue to aggressively spend national dollars on marketing. But we feel we are at a critical mass and we are always looking to argument quality. So I think as you look forward we are going to continue to add. As long as you see us doing national advertising we are going to be adding restaurants across the country. You will see our restaurant count go up, really it’s about maintaining balance in these markets so that we are presenting a quality product to diners from they go on GrubHub online or mobile for the first time.
Edward Williams - BMO
Okay. Thank you.
Operator
Your next question comes from the line of Neil Doshi with CRT Capital. Your line is open.
Neil Doshi - CRT Capital
Great, thanks for taking my questions. Can you guys talk a little bit about the efforts on the data side, and how you guys are doing in terms of packaging that data and sharing that data back with the restaurants? And will the new CTO be kind of focused on that data side? And then, I think you might have touched on this, but frequency declined again. How should we think about frequency orders per diner going forward? Thanks.
Matthew Maloney
Hi Neil, this is Matt again. Yes, leveraging our transactional data we see is a huge opportunity for us going forward. If you think about what we are looking to do in terms of product pipeline we said it before I will said again personalization and more directed search base on data is keep to presenting diners with exactly what they want to increase their satisfaction faster. And so we’re focusing a lot on that. Our new CTO will be driving that as well as lot of other initiatives -- I guess on our prepared remarks tremendous curiosity and a real drive to the organization which invigorating and the team is responding very positively.
In terms of other things we are looking on -- looking to deal with, its leverage the data not just for the diners but also for the restaurants to help them present a better product to the diners and more in line with their markets making sure that they are making money they need to make. And then incremental improvements across all of our platforms aimed at conversion could be high leverage and also our in-restaurant tablet is also in its very early stages of development. So we have lots of opportunity to innovate there taking advantage of the data but also just relieving other friction points in the order fulfillment process for the restaurants.
Speaking to the frequency part of your question, we really didn’t get worse than we did in Q2 it’s really normal seasonality, if lower for the same reasons I talked about last quarter and the main factors for that decline is, our national advertising campaign means that we are attracting more diverse diners and more diversifying way from New York incorporate which are very distinct as well as other Tier-1 markets. These are still great diners but initially they will have lower frequencies because the markets are just simply not as developed as we kind of mention the couple of times here.
And also to a less extend there is a higher concentration of new and unseasonal diners.
Neil Doshi - CRT Capital
Thanks Matt.
Operator
Your next question comes from the line of Jeff Houston with Barrington Research. Your line is open.
Jeff Houston - Barrington Research
Hi Matt and Adam. Thanks for taking my question. Could you talk a bit about the opportunity to work with franchise restaurants over time? Is this more of a very long-term opportunity? Any color there would be great.
Matthew Maloney
Sure. So we have historically stayed away from chains for a variety of reasons, I think that as we continue add more new diners obviously we have 4.5 million active diners now as like 10 million active diners plus, it’s going to be a lot more interesting from a chain perspective to work with us. I think we are open, there are many franchisees that are currently listing their own sites on GrubHub and if you think about that what that means as they are paying not only their franchise fees but they are also paying the incremental GrubHub marketing fees. And so, if those mom-and-pop entrepreneurs see it as additive to their business obviously ROI positive, otherwise they wouldn’t be doing it, then that’s a strong signal that there is definite value there.
I think as we grow larger we will definitely address chains in time. But I hesitate to say that’s a short term versus long term, short term priority but I think overtime for sure.
Jeff Houston - Barrington Research
Got it. Thank you.
Operator
Your next question comes from the line of Tom Forte with Brean Capital. Your line is open.
Tom Forte - Brean Capital
Great, thank you for taking my questions. Two quick ones. First, when we think about the overall opportunity on 95% offline, 5% online, is there material difference between urban and suburban markets on that mix first tier and second tier cities? And then second, you have talked about how you are mobile monetization is similar to your desktop, laptop, how should we think about the fact that the smaller screen sizes in mobile change perhaps the number of restaurants you show in a search and the change the placement and how that effects your efforts to give restaurants the opportunity to gauge their commission rate based on placement? Thank you.
Matthew Maloney
Yes, thanks for question Tom. I would say the opportunity in terms of the 95% and the $70 billion in annual spend density in urban, it is stronger. We are going to follow the diners. So, we kind of cut our teeth and found that the company in urban metro markets where it was easier to get a critical mass of restaurants and there is a lot more diners especially in New York that simply relay on delivery as a weekly part of how they feed their families. As we are growing we are definitely seeing a lot of success in the more suburban markets and we continue to aggressively expand out there and my answer to the question a minute ago about television and maintaining that balance and tier 2, tier 3 in suburban markets kind of goes for that. So we see a lot of opportunity in the suburbs but we are historically very strong in urban markets and given the size of urban markets it’s going to take a long time for the smaller markets to even an aggregate add up to kind of a balance there.
For your mobile question it’s a really interesting talk. You are exactly right, smaller real estate on the phone you don’t have the opportunity to display 10 or 20 of the top restaurants, diners pretty much see the top one maybe the top two or top 3 and they have to scroll much stronger. I can’t say that we have specifically attended to target accelerated commission rates on the mobile platform because of this but it make sense if you think about fact that the people convert more aggressively on the restaurants they see versus the restaurants they have to scroll to find, it makes sense to say that we potentially see more revenue from the mobile platform because of that. But I can’t say definitely that we are seeing that or not.
Tom Forte - Brean Capital
Great, thank you.
Operator
There are no further questions at this time and thank you ladies and gentlemen for joining us today. This concludes today’s conference call. You may now disconnect.
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