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Care.com Inc (CRCM)
Q2Â 2019 Earnings Call
Aug 6, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Care.com Second Quarter Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Jon Wright, Controller. Thank you, John. You may begin.
Jonathan Wright -- Investor Relations
Thank you. Good morning and welcome to Care.com's financial results call for the second quarter ended June 29, 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 and expected results of those investments and strategies, anticipated future products or services, anticipated market demand or opportunities for our products and services, anticipated management transitions and other forward-looking topics.
Such statements are only predictions based on management's current expectations. Actual results or events could differ materially from these 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 will 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 noncash adjustments, such as stock-based comp, M&A and restructuring costs. We also refer to non-GAAP EPS, which represents net income or loss, less certain, unusual or noncash expenses, such as stock-based comp, M&A, restructuring costs and the realization of a valuation allowance on deferred tax assets. These non-GAAP measures are not prepared in accordance with Generally Accepting 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 1 week following the conclusion of the call. To access the press release, supplemental and financial information or the 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 and Chief Executive Officer
Thank you, Jon, and thank you all for joining us on our second quarter 2019 earnings call. I'd like to share a few brief thoughts and some news before we get to the Q2 results.. For the past 13 years, Care.com's mission has been to build the most trusted, scalable and affordable care solution for family. With over 34 million members, more than 1.5 million successful matches and strong repeat usage, we are the leading trusted brand when it comes to care. Over the past several years, we have become a business with strong revenue growth and profitability and generated significant cash.
Founding and building Care.com has been my life's passion, and I'm very proud of all we have accomplished. With historic numbers of people entering the workforce, while juggling the care of children and seniors, our mission to help families and caregivers has never felt more relevant. Which is why the work we are doing to improve the care infrastructure in our markets has never been more important. There's still so much work to be done. We've only begun to scratch the surface. As Care.com evolves and the ecosystem of caregivers and care seekers grows, I feel greater responsibility to focus my efforts and expertise on advocating both for more sustainable care solutions that address the affordability, quality and accessibility of care. And for better training and wages for the caregiving workforce on which we all depend.
This is why I've decided to step into the role of Executive Chairwoman, where I can work hand-in-hand with business leaders and policymakers toward building the future of the nation's care infrastructure. It has been an incredible journey, leading this company from its early beginnings in 2006 to a healthy profitable business, and it's time for us to turn the page to a new chapter that builds upon our success and takes us into a new phase of growth. As part of this transition, we will be kicking off a search for a new CEO to lead Care.com into its next chapter, continuing profitable growth, operating the company day-to-day and driving new strategies and innovations that align with our mission. I will be on the Board's search committee for the new CEO and will remain CEO until a successor is found. After which, I will transition to Executive Chairwomen. I look forward to working very closely with the new CEO and the management team, advising on Care.com's strategic initiatives during the transition.
And my capacity as Executive Chairwoman will leverage my areas of experience as needed. Now turning to our results for the quarter. Total revenue for the quarter was $51 million for 11% growth versus Q2 of 2018. This was below our expectation due primarily to softness in U.S. Matching end-of-period paying family growth. Our prior full year guidance reflected an expectation of 4 percentage points of total company revenue growth acceleration, yielding 14% growth versus prior at the midpoint. The softness in U.S. Matching member growth has now led us to adjust our expectations for 2019 revenue growth to approximately 8% at the midpoint. EBITDA for the quarter was $5.9 million, and we ended the quarter with a healthy cash and short-term investments balance of $125 million. Now turning to the individual businesses, starting with U.S. consumer. The combination of U.S. Matching payments, where we saw end-of-period paying member growth of 8% versus prior.
This underperformance in U.S. Matching during Q2 was driven primarily by the downward pressure on member growth from 3 main sources. First, the expected conversion improvements from our Q2 product initiatives, including enhancements to our enrollment flows and hiring experience were smaller than expected. Second, there was an unexpected traffic mix shift to mobile, which had represented roughly 2/3 of visitor traffic over the past couple of years. In Q2, we've seen it grow to closer to 3/4 of visitor traffic. As a result, the conversion gains that we did get from our product initiatives were offset. As a reminder, across the industry, mobile is typically a lower-converting platform than desktop. Finally, third, there was a larger-than-expected negative impact on traffic from word to mouth in Q2 stemming from this confusion generated by the Wall Street Journal coverage. As a reminder, given our subscription model, sign-ups missed earlier in the year have an outsized impact in year financial results. Let me now turn our product priorities and investments, starting with the importance of safety to our customers and our brand. To set some context, since our founding in 2006, our marketplace was designed to help families find a list of prescreen caregivers and then offer them ala carte background check options for their final candidates.
With the rise of the on-demand mobile economy and the fact that the largest group of new parents now consists of millennials, we're beginning to see signals that consumer expectations are shifting toward on-demand. This trend informed our mid-2018 acquisition of Trusted, a leading on-demand babysitting start-up, which background checks all of its caregivers. Given changing consumer expectations and the fact that we're the leading online care platform trusted by millions of members, we believe it is important for us to set a new standard for safety, including a Social Security number verification process and an in-depth caregiver background check. We're on track with the implementation of this program across our caregiver base and expect the rollout to be complete by early next year, we're encouraged by early signs of caregiver engagement. Turning back to the underperforming conversion initiatives. As I mentioned before, as we move to address the volume softness we observed in U.S. Matching, we realized we needed to be faster to respond to the shifts we are seeing in mobile traffic and conversion. We're continuing with the strategy that has served us well over the past couple of years, while optimizing for executional efficiency.
As a reminder, this strategy, which has been the foundation for U.S. Matching growth consists of 4 elements: a laser-like focus on improving mobile conversion and organic growth with some new opportunities in social; ongoing value prop and price testing to evolve and expand our overall subscription products as well as ala carte background check offerings, especially in light of our additional investments in developing a new safety standard for our industry; growth through nonchild care verticals, such as senior care and housekeeping, and sub verticals within child care, such as on-demand babysitting and after-school care; and expanding our marketing efficiency through new tools, such as the modern multichannel CRM platform that we implemented earlier this year. For context, over the past few years, these focus areas took year-over-year improvements in member growth.
The scene dipped in the trajectory of conversion rate improvement was unusual for us. Given these challenges, we started by making some swift changes to optimize the agile organizational structure that supports our multi-platform user experience. We simplified our squad structure to focus on top-of-the-funnel growth with fast-moving tactical teams to address conversion drop-offs and refocus the work of our ongoing engagement squad responsible for our core Matching and hiring experience. And to take advantage of the benefits of improving conversion, we've seen in the past via pricing and package testing. We added relevant leadership and operational experience scaling growth from companies like ancestry.com to our team. The changes we've made so far have yielded early positive results, such as improvements in conversion during the hiring experience as well as in geo-based pricing, and we believe we are moving toward a more effective agile structure to deliver future growth.
And as part of refocusing our product organization, we have also decided to consolidate our development teams in our new tuck-in acquisition in the child care space. To streamline our operations, we are winding down Figure Eight and moving support of its mobile app to the U.S. operations team. In addition, we are having the team from Trusted to take the lead on the integration of their differentiated experiences into our core U.S. Matching platform. Although on-demand babysitting is still a small part of our service and overall child care total addressable market, we believe that the evolution and integration of Trusted's business model will present future growth opportunities for our U.S. Matching platform. Moving now to the unit economic fundamentals of our U.S. consumer business. Although we experienced top-of-the-funnel softness in Q2, especially in child care, we continue to see strong fundamentals, including improvement in Length-of-Paid-Time or LOPT from 15.7 months for the first half of 2018 to 16.4 months for the first half of 2019.
This trend came from a mix shift to longer-term subscription packages and also from reuse of our service by past subscribers, especially with respect to users of nonchild care services. This increase in LOPT is the key driver of our healthy ROI of 4.9x. Turning now to Care@Work. Our Care@Work business continued its strong performance with 47% year-over-year revenue growth in Q2. We continue to add new customers, and our pipelines are solid. New clients in Q2 include Horizon Pharma, Eversource and Stride. Despite the confusion created by reporting earlier this year about Care.com's caregiver vetting practices, our clients have responded well as we shared the details of our safety protocols. In particular, the in-depth screening we performed on our enterprise backup care providers and partners. One of our largest clients after conducting an extensive audit has resumed their Care@Work backup care program and relaunched it to their full employee base. Our revenue retention rate remains above 100% with key client renewals in Q2, including Harris Health, bandwidth.com and Kraft Heinz.
To summarize, before I hand the call over to Michael. While our business is experiencing some near-term pressure as reflected in our updated guidance, we remain confident that the investments we are making at our new safe enhancements and our overall user experience will enable us to continue to build trust in our leading brands, deliver on our mission to provide affordable and scalable solution for families and drive profitable growth. With our goal of penetrating ever more of the $336 billion spent annually on care in the U.S. alone, predominantly on child care and senior care, we remain confident in our ability to leverage our leadership position as the largest 2-sited online care marketplace in one of the leading enterprise solutions, providing mass-market care services for people at all income levels.
We believe we play a critical role in building a scalable care infrastructure to address the future of work for both families and caregivers. And one last note, I would like to take a minute to thank you Michael Echenberg for his many contributions to Care.com over the past 4-plus years. He has been an incredible partner in this journey. We wish him well in his new endeavors and know that we are in good hands with Mike Goss and our excellent finance team. Michael?
Michael Echenberg -- Chief Financial Officer
Thank you very much, Sheila. A few quick words from me. I want to thank everyone in the extended Care.com family for these past 4-plus years and to point out that my decision to move on had everything to do with my new opportunity. I will continue to be part of the Care.com family as an advisor during the CFO transition period. In this capacity, I will remain engaged with Mike Goss, as he steps into the acting CFO role. I've worked closely with him since 2015, and I'm a big fan of his. I can assure you that his are a safe pair of hands and that he is surrounded by terrific people. With that, I'll turn the call over to Mike.
Mike Goss -- Vice President, Finance & Corporate Controller
Thank you, Michael. I'll now provide more color on our Q2 results. Starting with revenue, which was $51 million, representing 11% growth versus Q2 2018 revenue of $46 million. I'll begin with our U.S. consumer business, which grew 7% from $35.6 million in Q2 2018 to $38.2 million in Q2 2019. Within that, U.S. Matching increased 7% from $29.6 million in Q2 2018 to $31.8 million in Q2 2019. The primary driver was 8% growth versus prior in end-of-period paying families. This compares to 10% growth in end-of-period paying families as of the end of Q1 with the deceleration mapping to the drivers that Sheila described. Payments revenue also increased 7% versus prior from $6 million to $6.4 million, driven by growth in clients. Our other businesses, which include Care@Work, international and marketplace, grew 23% to $12.8 million compared to $10.4 million for Q2 2019.
Care@Work continues as our fastest-growing business, with Q2 revenue versus prior of 47% to $6.1 million from $4.1 million, and our revenue retention rate remains strong at over 100%. As you think about the shape of the year for Care@Work, keep in mind that Q4 of 2018 was especially strong given the launches of multiple new large client relationships. We expect that the first 3 quarters of 2019 will continue to benefit from these deals. While in Q4, we will start to cycle against them. In keeping with our normal cadence, I'll now provide an updated deep dive into the unit economics of our U.S. consumer business, which, as a reminder, is a combination of U.S. Matching and payments. Focusing on the first half of 2019 versus the first half of 2018. I'll start with LOPT, which increased 5% versus prior to 16.4 months for the first half of 2019 from 15.7 months for the first half of 2018.
The gain in LOPT was a function of our continued focus on driving long-term improvements in member engagement through our product investments and a mix shift toward longer-duration subscription packages. In keeping with our standard approach, we've taken the opportunity to extend the observation window from 7 years to 8 years. ARPU was roughly flat versus prior at $38.46 for the first half of 2019. Gross margin was 79% in the first half of 2019 compared to 83% in the first half of 2018. As we described in the last call, the biggest driver of this delta was our recent acquisition of Trusted. This business model we're in the process of transitioning as we continue our integration. Note in the back half of 2019, we'll have anniversary of this acquisition. So we expect this impact to moderate.
Going the other way, we expect to see incremental cost of revenue associated with our new safety programs, which we expect will put further downward pressure on gross margin. These factors led to a 1% decrease versus prior in LTV for the first half of 2019 to $498. Cost per acquired customer or CAC increased from $90 in the first half of 2018 to $102 in the first half of 2019, driven by the softness in U.S. Matching member growth resulting from downward pressure on board with most traffic. We felt that the LTV and CAC led to a reduction in ROI from 5.6x in the first half of 2018 to a still healthy 4.9x in the first half of 2019. Now onto EBITDA. Q2 was another quarter of EBITDA profitability in line with our commitment to driving shareholder value through sustained profitable growth. Q2 EBITDA was $5.9 million, which was above our guidance range for a margin of 11.5% the EBITDA beat within the quarter related in part to the adjustment down of performance-based compensation in line with the revised revenue outlook. This, along with other operational cost savings, more than offset the flow-through to EBITDA of the U.S. Matching revenue softness.
For the second quarter of 2019, GAAP net loss attributable to common stockholders was about $64 million as compared to a net loss of $0.2 million in Q2 of 2018. Included in this was a $16.1 million charge associated with the wind-down of Figure Eight. Additionally, we recorded a onetime income tax expense of $44.5 million, resulting from the establishment of the company's valuation allowance against certain deferred tax assets. This was primarily the result of the reduction in our current year forecasted GAAP profitability and the possibility that our U.S. profit before taxes or PBT in the near term will be negative. Let me be clear that notwithstanding this point about U.S. PBT, our expectation going forward is that we'll remain profitable on an adjusted EBITDA basis. Now moving to the cost lines, beginning with gross margin.
Total company gross margin for the quarter was 73%, cycling against 79% in Q2 of 2018. I already covered the U.S. consumer drivers in the context of the unit economics deep dive. In addition, as we've described on past calls, as Care@Work continues to grow as a percentage of revenue, this mix shift affects total company gross margin. Turning to sales and Marketing, which were reduced as a percent of revenue from 35% in Q2 2018 to 33% in Q2 2019. As noted on prior calls, this includes the impact of our incremental investments in safety. R&D as a percent of revenue was 33% compared to 18% in Q2 of 2018. This includes the impact of certain onetime charges associated with the wind-down of Figure Eighth, charges that do not affect EBITDA. Absent these costs, R&D as a percent of revenue would have been in line with 2018. G&A as a percent of revenue for Q2 2019 was 21%, a 4 percentage point decrease against Q2 of 2018. This was primarily the result of the moderation in stock-based comp that we described on previous calls. Moving now to EPS.
For the quarter, GAAP EPS attributable to common stockholders was a loss of $2.01, driven by the establishment of the valuation allowance and the wind-down of Figure Eight compared to a loss of $0.03 in the second quarter of 2018. Non-GAAP EPS was $0.09 as compared to our guidance of approximately $0.08 and as compared to $0.14 in the second quarter of 2018. Regarding cash and short-term investments, we ended the quarter with a balance of approximately $125 million, consistent with the end of Q1. Cash inflows came mainly from EBITDA. Cash outflows were primarily related to changes in working capital and the payment of acquisition-related ramps. Now turning to guidance and beginning with revenue. We are adjusting our full year 2019 revenue guidance to $206.5 million to $208 million, representing approximately 8% growth versus prior year at the midpoint.
The context here consists of the same 3 factors that Sheila described earlier: Our future conversion initiatives underperformed. We saw an unexpected traffic mix shift to mobile. We saw a larger-than-expected downward pressure on traffic from word of mouth in Q2. For the third quarter, our revenue guidance is $52 million to $52.5 million, representing roughly 6% growth versus prior at the midpoint. On EBITDA, we're adjusting our full year 2019 guidance to $20 million to $21 million, yielding EBITDA margin of 10% at the middle of the range. This adjustment is mainly a function of flow-through from the change with the revenue outlook, partially offset by the compensation impact and cost management that I described earlier.
For the third quarter, our EBITDA guidance is $4.2 million to $4.5 million, representing margin of about 8% at the midpoint. This EBITDA guidance flows through to our Q3 non-GAAP EPS guidance of approximately $0.1, with an expectation of roughly 39 million weighted average diluted shares outstanding. The full year non-GAAP EPS, we now expect $0.49 to $0.52. This is also based on an expectation of about 39 million weighted average diluted shares outstanding. Finally, including the impact of the payments associated with the wind-down of Figure Eight offsetting the cash generated from the back half EBITDA in our revised guidance. We expect to end 2019 with $125 million in cash and short-term investments.
With that, I'll turn the call back to Sheila.
Sheila Lirio Marcelo -- President, CEO & Chairwoman
Thank you, Mike. Before I open the call up to Q&A, I'd like to share my excitement to bring on new leadership to take us to our next chapter of growth. I'll also stress my deepest gratitude to the Care.com team that has worked with me through the years to deliver on our mission. I'm enormously proud of what we've accomplished and in my future role as Executive Chairwoman. I hope to amplify further how deeply important care is not just to individual families and caregivers but to our overall economy. Our marketplace dynamics have evolved over the last 13 years, but what remains undeniable is the market opportunity for care, particularly in nascent areas such as senior care.
While we've only scratched the surface on penetrating our total addressable market, we have become a business with strong revenue growth and profitability and generated significant cash. We're excited about the transition plan we have in place as we find and welcome a new CEO, who will have our collective support as she or he charges the next stage of accelerated growth for Care.com. With that, I'll open the call up to Q&A. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from Darren Aftahi with from Roth Capital Partners. Please go ahead.
Darren Aftahi with -- Roth Capital Partners -- Analyst
Good morning. Thanks for taking my question. Couple, if I may. So I'm just kind of curious, the last time you gave guidance, so obviously, 3 months have transpired to be kind of called out a number of things for softness. I'm just kind of curious, what were kind of some of the biggest changes versus early May to today. And then as it pertains to that, should we expect you guys to kind of have an elevated level of marketing going forward to kind of offset that softness? And then lastly, you guys have a pretty material cash balance relative to your market cap. I'm just kind of curious about capital allocation strategies, whether you guys would consider a buyback for the life going forward?
Sheila Lirio Marcelo -- Founder, Chairwoman and Chief Executive Officer
Thanks, Darren. With regards to the changes that we shared in our prepared remarks, what we saw in Q2 was really the smaller-than-expected conversion gains from some of the tactical things that we had planned for Q2. And even though we did see some small gains, that was offset by unexpected increase in visitor traffic to mobile going from 2/3 to 3/4. And we've been sort of at that 2/3 level, Darren, for a couple of years. And what hit us in Q2 was sort of in that 3/4 of the traffic coming from -- visitor traffic coming from mobile. And then the third was, we saw some early signs of word-of-mouth impact stemming from the confusion of the coverage, specifically around safety on care. And so that continued softness we'll continue to see in Q2. So those are sort of the changes that we saw since we provided guidance.
Now with regards to elevated marketing, our current plans and our guidance actually continues to include our current marketing plans, and that's already part of the guidance that Mike Goss shared on his prepared remarks. And with regards to capital allocation, let me turn that over to him.
Mike Goss -- Vice President, Finance & Corporate Controller
Thanks, Sheila. So Darren, as we've always said, we take pride in the cash balance that we built over the years, and we will continue to evaluate whatever various options that may be the appropriate use of cash, whether that'd be through something like a buyback that you had alluded to or through selective M&A in the future, there are no imminent plans right now for either, but we are keeping our options open.
Operator
Thank you. [Operator Instructions]. Your next question comes from Marvin Fong with BTIG. Please go ahead.
Marvin Fong -- BTIG -- Analyst
All right. Thanks for taking my question. Just wanted to focus on Care@Work a little more. It's encouraging that the growth is still there. Could you just kind of expand a little more on the dynamics? Are you able to be adding new clients? And how is the churn going on there? And then just secondly on Care@Work, does it make sense to maybe kind of view this as a separate business that maybe can rebrand or otherwise kind of -- if it's being pressured by association with the reputational hit at the core Matching platform if you've thought about perhaps separating the business?
Sheila Lirio Marcelo -- Founder, Chairwoman and Chief Executive Officer
Thanks, Marvin. With regards to the dynamics of the Care@Work business, it continues to be a double-digit, strong, fastest-growing part of our business. We should be very excited about it. Our pipeline is strong and healthy. And with regards to your question around churn, it's -- in fact, we have 100% revenue retention overall for the business and continue to really be excited about servicing our clients and our customers. And on average, they're getting larger. So we're really excited.
With regards to your question around rebranding, we believe that the brand is quite strong, leveraging Care.com with regards to care at work as an overall brand offering, given that we are servicing a mass market, and it actually served it well in terms of knowledge already of consumers knowing that it's Care.com behind the overall services that is giving them the ability to go to work.
Marvin Fong -- BTIG -- Analyst
Okay, great. And if I could, just a follow-up question. So the 3 factors you've mentioned. So on the conversion gains, I mean, first of all, could you perhaps maybe give us a sense of the magnitude of each of these? And specifically, is the word-of-mouth impact, how would you characterize that as sort of the distance third or still a meaningful part. And the second part of that question is, how can you be sure that the word-of-mouth impact is not actually a factor in sort of the conversion, the disappointing conversion gain?
Sheila Lirio Marcelo -- Founder, Chairwoman and Chief Executive Officer
Yes. We actually have ensured the magnitude of each, and all 3 factors really contributed to the softness that we guided to that Mike shared in his prepared remarks. With regards to expectation of word of mouth, we saw some initial softness, as we shared on our last earnings call, which is one of the reasons, along with changing consumer expectations, with regards to the push on, on-demand and expectation around mobile. That combination really led us to what we shared on our last call of creating new standard for safety in our industry and going ahead and making the safety investments that we did, Marvin.
Marvin Fong -- BTIG -- Analyst
Great. And good luck to you, Michael. And congratulations, Sheila. Good luck on your next step as the executive chairwoman?
Sheila Lirio Marcelo -- Founder, Chairwoman and Chief Executive Officer
Thank you, Marvin.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Jonathan Wright -- Investor Relations
Sheila Lirio Marcelo -- Founder, Chairwoman and Chief Executive Officer
Michael Echenberg -- Chief Financial Officer
Mike Goss -- Vice President, Finance & Corporate Controller
Sheila Lirio Marcelo -- President, CEO & Chairwoman
Darren Aftahi with -- Roth Capital Partners -- Analyst
Marvin Fong -- BTIG -- Analyst
