Three concerning takeaways from Zomato’s earnings release

Zomato did not spell out the bad news as it said adjusted revenue increased 26% sequentially while adjusted Ebitda loss widened from ₹1.2 billion at the end of March quarter to ₹1.7 billion at the end of June quarter.

Zomato said adjusted Ebitda widened because it booked higher costs for giving employee stock options (ESOPs).

“This is largely on account of non-cash ESOP expenses which have increased meaningfully in Q1 FY22 due to significant ESOPs grants made in the quarter pursuant to creation of a new ESOPs 2021 scheme," the company said.

This doesn’t quite reveal the context. Most of the ESOPs expenses are actually on account of the ESOPs granted to CEO Goyal.

Goyal was granted 368,500,000 ESOPs on 12 April. The fair value of these ESOPs was ₹13.63 billion. This will vest over the next six years. The company pencilled in ₹1.7 billion in costs.

Zomato’s adjusted Ebitda and Ebitda during the quarter stood at ₹1.7 billion and ₹3.6 billion, respectively. This means the total share-based expenses were ₹1.932 billion.

To put it simply, 88% of the total share-based expenses or ₹1.7 billion was because of the ESOPs paid to Goyal.

A more accurate summary for the reason for widening Ebitda losses would have been this: “This is largely on account of non-cash ESOPs expenses which have increased meaningfully in Q1 FY22 due to significant ESOP grants made to Deepinder Goyal in the quarter pursuant to creation of a new ESOP 2021."

Deepinder owns 4.7% in Zomato. Upon vesting of all ESOPs, including the latest tranche awarded to him in April, Deepinder Goyal's ownership will increase to 8.9% in Zomato (over six years), according to an analysis by Nitin Mangal, an independent research analyst.

The second niggle is the extent of “other expenses" in the profit and loss statement of the company. About 60% or ₹755.8 crore of the total ₹1,259.7 crore in expenses incurred in the April-June quarter are dubbed as “others". There is no individual break-up of what constitutes these other expenses, which many analysts find surprising, and is an oddity when compared to listed companies.

Another interesting set of figures in the earnings release was the operational performance and the rising discounts the company is offering. Zomato’s total active delivery workforce stood at 310,000 at the end of the latest quarter. Zomato defines active delivery partners as “unique delivery partners identified by their national identity proof who successfully delivered at least one order in India".

Zomato’s delivery workforce jumped 82% to 310,000 at the end of June quarter from 169,802 at the end of March but the company’s revenue during the same period rose 22% to ₹844 crore. Zomato claims that it made 100 million orders in the quarter, the highest-ever. Zomato has not shared any other metric but the only reasonable way to make sense of why revenue growth was less than the pace of growth of delivery people added and food orders placed is that the company gave more discounts than in the earlier quarters.

Finally, Goyal writes in his letter that he will not hold any post-earnings quarterly interactions with analysts and instead will only have once-a-year rendezvous with analysts.

It is understandable that Goyal and the team want to focus on business rather than be quizzed by analysts on its performance, every quarter.

But it is surely bizarre that the management does not want to disclose important operating metrics like monthly transaction users or average order value or active food restaurants or contribution margin. Remember, all these metrics were shared by Zomato before it went public in its draft red herring prospectus and subsequently in the red herring prospectus.

Zomato, which got listed last month, says that bad news is an opportunity to improve. The management would be well served to keep in mind that investors and analysts don’t like bad surprises.