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Care.com Inc (NYSE:CRCM)
Q1 2019 Earnings Call
May. 9, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Care.com's First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mike Goss, Vice President of Finance for Care.com. Thank you, sir. You may begin.

Mike Goss -- Vice President-Finance

Thank you. Good morning and welcome to Care.com's financial results call for the first quarter ended March 30, 2019.

During the course of this conference call, we will discuss our business outlook and make other forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These may include, among other things, projected financial results or operating metrics; anticipated business and marketing investments and strategies, as well as the expected results of those investments and strategies; anticipated future products or services; anticipated market demand or opportunities for our products and services; and other forward-looking topics. Such statements are only predictions on management's current expectations. Actual results or events could differ materially from those predictions due to a number of risks and uncertainties, including those set forth in the press release we issued today, as well as those more fully described in our filings with the Securities and Exchange Commission.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

We'll be referring to non-GAAP measures on this call, including adjusted EBITDA, which we refer to as EBITDA throughout this presentation. This measure represents pre-tax net income or loss from continuing operations excluding the accretion of preferred stock dividends, less depreciation and amortization, as well as certain other unusual expenses and non-cash adjustments such as stock-based compensation, M&A and restructuring costs. We also refer to non-GAAP EPS, which represents net income or loss, less certain unusual or non-cash expenses such as stock-based comp, M&A and restructuring costs. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release and Form 10-Q to be filed. We will also be referring to profitability on this call. When we refer to profitability, we're referring to it on an adjusted EBITDA basis unless otherwise noted.

Today's call is available via webcast and a telephone replay will be available for one week following the conclusion of the call. To access the press release, supplemental and financial information or webcast replay, please consult the IR website.

With that, let me turn the call over to Sheila Lirio Marcelo, Founder, Chairwoman and CEO of Care.com.

Sheila Lirio Marcelo -- Founder, Chairwoman & Chief Executive Officer

Thank you all for joining our Q1 2019 earnings call. From the founding of the Company, it has been our mission to help build a trusted, scalable, affordable care solution for families. I'm inspired by the millions of members we serve and excited about the evolution of our safety practices that we are announcing today and that we expect to launch in the next few months.

And so before we get to results, I want to take some time to describe our broad set of new enhancements to secure and strengthen the core of our service, which is trust; trust between caregivers and families, trust of our Care@Work clients and their employees, and trust among our colleagues throughout the care industry that we're working toward creating a new safety standard for digital care marketplaces. Over the course of 12 years with more than 1.5 million successful matches and strong repeat usage, we believe we have earned the trust of families.

We care deeply for our members. And as consumer expectations with respect to digital services, especially on-demand and mobile experiences continue to evolve, we remain committed to building on this trust by staying agile and innovative in our approach to safety. This is all the more important in light of confusions stemming from the recent Wall Street Journal article about our Company. But I want to be clear, safety has been a pillar of our mission from the very beginning.

As the largest online family care marketplace, we believe in the importance of creating a new safety standard for digital care marketplaces and solidifying our leadership position while ensuring that we stay true to our mission of providing a breadth of care solutions that are affordable for families. And what I'm about to describe marks a substantial step toward those goals.

Our long-standing preliminary screening of individual caregivers already includes a search of a national criminal database and the National Sex Offender Public Website. Starting in the next few months, we will implement additional screening on caregivers looking to match with families through the platform with the improvements to be rolled out by the end of the year.

The enhancements will include: First, a Social Security Number verification process for caregivers. Second, an in-depth background check that includes federal and county level criminal records checks dating back seven years. These checks, which will be paid for by Care.com, will be conducted by a leading provider of background checks and identity services. And third, displays of the date of most recent background check on each caregiver's profile. We expect to update these caregiver checks annually and we'll continue to offer additional ala carte background checks for a fee, so families can choose to get the most current records available. We continue to remind families that running background checks is only one step in their hiring process. We encourage our members to visit our Safety Center and review the five-step process for safer hiring.

In addition to these changes related to background checks, we have two more safety initiatives in the works. Our exploration of identity verification announced in March has resulted in a pilot to be implemented this month and includes facial recognition matched to a government-issued ID. Pending the success of the pilot, we will look to expand the use of the technology later this year. And we are actively developing a plan to verify the state licensor information on child care centers in our free directory. This move allow our announcement in March that we have removed all unclaimed child care center listing from our free digital directory.

These investments while substantial in size, are aimed at making our service safer, increasing value to our consumers and clients and enhancing the category leadership of our brand, while ensuring we keep our services affordable for families. In addition, we believe there are potential growth opportunities and we're excited to test them. These include: One, our brand positioning as the leader in the digital care space, creating new safety standards, including in-depth background checks. And two, new product packaging and pricing for our overall subscription products, as well as other ala carte offerings. We look forward to providing updates on these investments and growth opportunities on future earnings calls.

Also, I'm pleased to announce that Clark K. Ervin has joined our Board of Directors and has been appointed to the Board's Safety and Cybersecurity Committee. Clark's extensive expertise in both of these areas spans the public and private sectors. He's served as Inspector General of the State Department under President George W. Bush, who subsequently appointed him as the Founding Inspector General of the then newly created Department of Homeland Security. He's served as Co-Chairman of the Homeland Security Department Transition Team for then President-elect Barack Obama. At the state level he served as Assistant Secretary of State of Texas and as a Deputy Attorney General. Clark also founded the Homeland Security Program at the Aspen Institute and is currently a Partner with the global law firm Squire Patton Boggs. We're thrilled to add someone of his stature to our Board. His thought leadership and experience will be invaluable as we continue to augment our safety protocols and as we look to innovate further down the road.

I will now turn to our Q1 results where our fundamentals remained strong. Total revenue for the quarter was $53.3 million, which was above our guidance range. This flowed through to EBITDA of $4.3 million, which was also ahead of our guidance. We ended the quarter with a cash and short-term investments balance of $125 million.

Now, turning to the individual businesses, starting with US Consumer, which brings together US Matching and HomePay. We saw end-of-period paying-member growth of 10% versus prior. We achieved this end-of-period member growth while improving marketing efficiency, while we are making investments in key areas including mobile, senior care and higher frequency care solutions. US Consumer cap continues to improve and declined 5% to $90 versus $95 in the prior-year period. These results were driven by continuous improvement in our paid optimization campaigns, as well as our ongoing product investments, which I will now turn to, specifically for US Matching.

Our organic initiatives in Q1 2019 included an updated version of our community experience and our ongoing content development. With our high-quality content and articles, we have continued to perform well on a year-over-year basis on high-intense search keywords that lead to sign-ups and premium subscription. We also continue to optimize our enrollment experience and our user experience overall, especially through verticalization as we provide our members a breadth of services across child care, senior care, housekeeping and other verticals. Since our founding, Care.com has set out to support families as their care needs evolve over time. And we're seeing families expand their use of our services more and more as the Company grows.

In addition, in Q1, we made further improvements in our child care vertical to better serve the needs of our After-School segment where families have complex needs when it comes to logistics and coordination. Similar to our work last year in optimizing senior care, this investment in After-School, one of the largest and most important segments within child care, has also contributed toward strong results in Q1.

Turning now to Mobile. We mentioned on the last call that our mobile app users have been matching factor and more often, and have shown to be more likely to reupgrade down the road, driving future length of paid time. In Q1, we continued to see exciting growth in our native app both as a channel to acquire new members and a platform for higher member engagement.

We believe these ongoing investments in our user experience, along with the safety enhancements I described earlier, will continue to help us drive member growth and trust in our brand. We measure trust in our brand in the growth of our subscriber base and increases in LOPT or length of paid time. We've been seeing growth in LOPT. As a reminder, on last call, we showed that US Consumer LOPT had grown from 14 months in 2017 to 14.8 months in 2018. This trend came from a mix shift to longer term subscription packages, but also from reuse of our service by past subscribers. This is most notable with respect to users of our new services where subscriber volume has been on the rise.

Moving on to Care@Work, which saw continued solid revenue growth during the quarter, up 51% versus prior. We have a strong pipeline as we continue to drive increasing penetration among the largest and most admired employers, in line with our stated strategy. In Q1, we signed new clients in range of industries and sectors including aerospace, healthcare, financial services and government. Our innovative Care@Work experience and exceptional service delivery continued to fuel growth in our enterprise business. Our Care@Work services that include backup care, senior care advising and access to our consumer digital platform all have high customer satisfaction, driving new business growth and revenue renewal rates in excess of 100%.

With backup care, the fastest-growing part of our enterprise offering, momentum has been driven by our leading technology solutions, high fulfillment rates and breadth of quality care options. The caregivers and the network of child care centers through our backup care offering have always been thoroughly vetted, given that they need to be available on short-term notice. And we believe that the significant safety investments in our US digital matching service we're announcing today will enhance our strong brand reputation among our enterprise clients, many of whom have a widespread national employee base that includes consumers who use our digital matching service for their ongoing care needs.

As evidenced by high Net Promoter Scores across all of our Care@Work offerings, we believe that there is deep trust in our services among our client's employees, which is critical to the growth of our enterprise business. Renewals in Q1 included Arcamine, (ph) athenahealth, Beth Israel Medical Center, Boston Medical Center, Dana-Farber Cancer Institute, Dropbox, NVIDIA, Palo Alto Networks, Seattle Children's, Tesla, TripAdvisor and Twitter. We expect that Care@Work will remain the fastest-growing part of our overall business in 2019. As we scale both the B2B and B2C parts of our business, we are focused on operational excellence to ensure we deliver exceptional member and client experiences. Investing in our new safety enhancements and overall user experience enables us to continue to build trust in our leading brand and deliver on our mission to provide affordable and scalable solutions for families.

With that, I'll now turn the call over to Michael.

Michael Echenberg -- Chief Financial Officer

Thank you, Sheila. I'll now provide more color on our Q1 results, starting with revenue, which was $53.3 million. This was ahead of our guidance of $52.5 million of $52.8 million, and represents 12.7% growth versus Q1 2018 revenue of $47.3 million.

The US Consumer business grew 10% to $40.8 million for the quarter from $37.1 million in the first quarter of last year. This matched end-of-period paid family growth of 10%, as Sheila mentioned, cycling against 9% growth for Q1 of 2018 versus Q1 of 2017. As usual, we will be sharing a deep dive into the US Consumer unit economics on the next call. As Sheila noted, the early read on marketing efficiency even in the context of our senior care investment is positive.

Our other businesses, which include International, Care@Work and Marketplace, grew 22% to $12.5 million for the quarter, compared to $10.3 million in the same period last year. Care@Work continues as a source of strength. For Q1, revenue was $6 million. It grew 51% versus $4 million in Q1 of 2018. Given the high rate of growth and the impact that a single big deal can have, we expect to continue to see some flux in the delta versus prior from one quarter to the next.

Now on to EBITDA. Q1 marked our 14th consecutive quarter EBITDA profitability, and we remain committed to driving shareholder value through sustained profitable growth. For Q1, EBITDA was $4.3 million, which was ahead of expectations, a function of the flow-through from the revenue beat. Margin was 8%, which compares to 14% in Q1 of 2018. We started our investments earlier in the year this year than the last given our roadmap to drive accelerated top line growth.

As a reminder, our key 2019 investments include: One, the expansion of our child care offerings to include higher frequency care solutions like after-school through the integration of our tuck-ins and including organic. Two, senior care marketing, which we expect to drive revenue efficiently with much of that revenue coming after 2019. Three, Care@Work product innovation, for example, through on-demand services in support of continued healthy growth fueled by new clients and renewals. And Four, operational excellence initiatives which always covered safety and now include the new safety enhancements that Sheila described earlier. I'll go deeper into their impact on our P&L when I get to guidance.

For the first quarter of 2019, net loss attributable to common stockholders was $1.7 million as compared to net income attributable to common stockholders of $1.7 million in Q1 of 2018.

Now, moving on to the cost lines, starting with gross margin. The 74% gross margin in Q1 of 2019 compares to 80% in Q1 of 2018. Roughly half of this reduction versus prior relates to our recently acquired businesses, whose models were in the process of transitioning as we integrate them. Note that in the back half of 2019 we'll have anniversaried key acquisition milestones, so we expect the impact versus prior to moderate.

Another key driver is mix shift toward Care@Work, which, as we've described, is a lower gross margin business. We're comfortable that the full year 2019 gross margin delta versus prior will be similar to the Q1 delta versus prior as the incremental safety-related costs take the place of the pieces that should moderate in the back-half. More on those safety-related costs when I get to guidance.

On to sales and marketing. For the quarter, sales and marketing as a percent of revenue was 35% compared to 36% in Q1 of 2018. This includes the impact of the beginning of our incremental investment in senior care. I'll note our expectation that sales and marketing as a percent of revenue for the full year will be down a bit versus prior even with that continued investment.

R&D increased year-over-year as a percent of revenue from 18% to 21% as we continue to invest in innovation on both the B2C and B2B sides of the business, including the impact of building on-demand services in line with consumer expectations. And G&A as a percent of revenue for Q1 2019 was 21%, a 1 percentage point improvement versus 22% in the year-ago period.

Moving now to EPS. For the quarter, GAAP EPS from continuing operations on a diluted basis was negative $0.05 as compared to positive $0.05 in the first quarter of 2018. Non-GAAP EPS was positive $0.12 as compared to positive $0.19 in the first quarter of 2018.

Regarding cash and short-term investments, we ended the quarter with a balance of $125 million. Inflows came mainly from the $4.3 million of EBITDA, outflows were primarily related to the Figure Eight acquisition, which we described last quarter.

Now, turning to guidance and beginning with revenue. For full year 2019, we continue to expect revenue of $217 million to $221 million; the guidance we shared on the last call, which is up approximately 14% versus prior at the midpoint. As a reminder, this represents about 4 percentage points of acceleration relative to the 10% growth versus prior we saw in 2018. For Q2 we are guiding to revenue of $52 million to $52.3 million, which represents 13.5% year-over-year growth at the midpoint as compared to the 12.7% growth versus prior we saw in Q1. In line with our expectations that revenue growth in 2019 will accelerate across the year. Specific drivers of the expected acceleration in Q2 relative to Q1 include our investments in organic, senior care and after-school. More to come on the results of those initiatives on future calls.

Turning to EBITDA now. The meaningful safety enhancements that Sheila described, including Social Security Number verifications, in-depth caregiver background checks and the identity verification pilot represents significant new investments for us, including both one-time ramp-up costs and ongoing expenses, mainly affecting cost of revenue. These investments along with the one-time costs associated with responding to the confusion stemming from The Wall Street Journal articles represent a notable EBITDA impact to 2019. We are now guiding to EBITDA for the year in the range of $25 million to $27 million as compared to our initial guidance this year of $33 million to $35 million. The middle of this new range represents margin of about 12% as compared to 16% in the middle of our original range.

Looking beyond 2019, we expect the impact to start to moderate in 2020, and for margin to be back in the mid-teens by 2021, and to expand from there in the years beyond. As we refresh our long-range plan, we continue to reinforce a judiciousness on cost management. This includes our ongoing efforts associated with improving operating efficiency across all of our businesses; more to come on that on future calls.

Coming back to Q2. For Q2 we expect EBITDA in the range of $3.7 million to $4 million. I'll note that we expect Q2 to include the continuation of the investments I described earlier in the context of Q1, notably organic senior care and after-school, along with one-time incremental safety-related costs. We expect the second half of the year to see additional one-time costs along with the beginning of the ongoing impact of the new safety programs.

For full year non-GAAP EPS, we now expect $0.52 to $0.56. This is based on flow-through from our changed EBITDA guidance and reflects an expectation of about 40 million weighted average diluted shares outstanding. For the second quarter, we're guiding to non-GAAP EPS of approximately $0.08 with an expectation of roughly $39 million weighted average diluted shares outstanding.

Finally, we expect to end 2019 with about $137 million in cash and short-term investments. The change versus the $145 million we shared on the last call maps to the change in EBITDA guidance.

To wrap up, I want to emphasize that while we expect some of the safety investments we describe today to be ongoing, we have looked at similar investments made by other marketplaces where long-term benefit often improves in the form of brand loyalty and incremental top line growth; for example, through new pricing and packaging. The guidance we share today does not factor in this kind of benefit. We look forward to updating you on future calls.

With that, I'll open the call to your questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Darren Aftahi with ROTH Capital Partners. Please proceed with your question.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Yeah. Good morning. Thanks for taking my questions. Just a couple, if I may. First on Care@work, you talked about the renewals. I'm just kind of curious with everything that's kind of out there in the market, did you see anybody suspend, pause or kind of churn as a client as a result of this?

Second point with your sort of ongoing costs. I'm just curious, there is a number of safety steps you kind of outlined in the release. Is this kind of like step one of multiple steps longer term or do you feel like this is sufficient exiting 2019 to be in a place where you feel good?

And then, last point, with the ala carte kind of background check, Sheila, you mentioned, I'm just kind of curious if there's plans to potentially raise or augment subscription prices longer term with these kind of new added costs? Thanks.

Sheila Lirio Marcelo -- Founder, Chairwoman & Chief Executive Officer

Sure. Thanks, Darren. Overall, our Care@Work clients have actually responded positively over the past couple of months, as we walked them through the different safety-related practices as we reviewed them with them to just clarify any of the confusions stemming from The Wall Street Journal article. And we'll continue to work closely with them. We have seen a handful of very small clients who chosen not to renew their services, and this adds up to a very de minimis impact on our revenue, that's the reason for affirming our guidance. It's actually been less than 0.1% that's impacted the business with regard to the Care@Work clients.

With regards to ongoing costs, let me turn that over to Michael and then I'll come back to ala carte.

Michael Echenberg -- Chief Financial Officer

Yeah. So, look, with respect to the categories of cost, as we outlined on the call, we're thinking about it broadly in three categories. There's the one-time cost associated directly with responding to the confusion stemming from the articles. And then with respect to the new safety programs, there is the piece that's around ramping up and there is the piece that's ongoing. As far as whether or not there could be more, look, what we're talking about today represents a step change with respect to our safety programs and relatedly a step change with respect to cost. We are not currently planning another similar step change, but at the same time, we're committed to safety and we're focused on continuing to evolve our programs over time based on evolving consumer expectations. And so we'll have more to say about that as time goes on.

Sheila Lirio Marcelo -- Founder, Chairwoman & Chief Executive Officer

And then, Darren, to your question around packaging and pricing, we're looking forward to actually -- looking to do some testing as we factor in our ala carte background checks, as you pointed out, in the overall subscription service. And we have not factored that into our modeling and the guidance that we gave today.

Second growth opportunity is clearly the improvements about -- of the value proposition, because we truly believe that we've earned the trust of families and that equates to the Care.com brand. And so as we think about the value proposition of safety, we think that that actually will help drive future growth given the importance of word-of-mouth, reuse and then overall really top line growth and eventually long-term shareholder value.

Darren Aftahi -- ROTH Capital Partners -- Analyst

If I could just sneak one more in, I think you commented about after-school having a positive impact on growth acceleration on the top line. I'm just kind of curious if maybe you could further kind of quantify that and perhaps for the rest of fiscal 2019? Thanks.

Sheila Lirio Marcelo -- Founder, Chairwoman & Chief Executive Officer

We look forward to announcing that in the future, Darren. It's related to part of our acquisitions, specifically our Care.com Explore. And so we're excited about as we expand that vertical altogether.

Operator

Thank you. (Operator Instruction) Thank you. It appears we have no more questions at this time; and thus does conclude today's teleconference. Ladies and gentlemen, we thank you for your participation and you may disconnect your lines at this time.

Duration: 29 minutes

Call participants:

Mike Goss -- Vice President-Finance

Sheila Lirio Marcelo -- Founder, Chairwoman & Chief Executive Officer

Michael Echenberg -- Chief Financial Officer

Darren Aftahi -- ROTH Capital Partners -- Analyst

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