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CRCM earnings call for the period ending September 30, 2019.

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Q3 2019 Earnings Call
Nov 6, 2019, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, and welcome to the Third Quarter Earnings Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

It is now my pleasure to introduce your host Mr. Jon Wright, Senior Director of Finance. Thank you. You may begin.

Jonathan Wright -- Senior Director, Finance

Thank you. Good morning and welcome to's financial results call for the third quarter ended September 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 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 also 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 comp, 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, 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 filed this morning.

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 two weeks 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

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

Thank you, Jon, and thank you all for joining us on our third quarter 2019 earnings call. Q3 was another quarter of profitable growth.

Before we cover our quarter's results, I'd like to spend a moment updating you on the progress of two important strategic priorities. As we mentioned previously, the Board has retained the services of a leading executive search firm Egon Zehnder to place's next CEO, which is a top priority. We're encouraged by the caliber of the candidates we've met and are working to conclude the search expeditiously.

Additionally, we engaged Activate, a leading strategic consulting firm, we retained in June to conduct a comprehensive review of our business. In October, Activate provided our board an update of their work that began in late June, which we expect to complete this month. As part of our multi-year planning process with our board, we are having ongoing discussions regarding Activate's strategic recommendations that include priorities for our business, future growth opportunities and further efficiency gains in our operations. On our next call, we look forward to give you an update on our future plans that incorporate Activate's overall strategic recommendations.

Turning now to the quarter's results. Total revenue for the quarter grew 8% year-over-year to $53.3 million, and EBITDA for the quarter was $5.2 million. We ended the quarter with cash and short-term investments of $130 million. U.S. Consumer, which is the combination of U.S. Matching and Payments posted year-over-year revenue growth from $38.5 million in Q3 2018 to $39.5 million in Q3 2019, with 5% growth in end of period paying members.

We started to see improving results in our peak season of Q3, which is typically back-to-school preparation time for many families seeking child care, driven by organic traffic and conversion gains. These results aligned with the most recent wave of ongoing consumer brand research, we commissioned beginning in Q1 to monitor the brand perception among the general population and specifically mothers. The latest research fielded during the quarter point to increasing positive perception and awareness of the brand among mothers in terms of trust, safety and transparency when compared to our research fielded late in Q1. We believe our ongoing investments in creating a new safety standard for our industry that we announced in May, coupled with our focus on improving our user experience across all our platforms will continue to strengthen our brand.

I also wanted to share an update regarding a few strategic initiatives we prioritize this year. First, our ongoing roll-out of CareCheck, the new background check we are implementing for caregivers, which is going well and we expect this roll-out will continue into next year. Second, our planned product enhancements, along with our shift of marketing spend toward our fastest growing vertical senior care is continuing to add to our membership growth. And third, the Q2 reorg of our product teams has led to faster execution, an initiative that have resulted in improved conversion rates as well as organic growth from SEO tactics. Each of these execution improvements have contributed positively to Q3 results.

Our multi-year R&D investment in improving mobile conversion rates and organic growth has been a key driver in lowering our customer acquisition costs, and driving year-over-year growth in end-of-period paying families, despite a reduction in overall direct marketing spend by 30% from 2016 to 2019. With these improving results, we have also undertaken R&D initiatives to ensure a more streamlined and consistent user experience, while increasing our operational efficiency when developing and deploying code across all our mobile and desktop platforms.

Along with our ongoing improvements in mobile and organic growth, we expect these investments in R&D efficiency will set us up to realize increasing productivity of our innovation and marketing investments in 2020 to drive growth. We look forward to updating you on our 2020 plans on our next call.

Now turning to our enterprise business. Care@Work continues to be a standout performer with strong utilization trends, new account sign-ups and revenue retention contributing to 57% year-over-year growth in the quarter ahead of our internal expectations. New clients in the quarter included Instacart, PagerDuty and Stride. Renewals included Feeding America and Harvard Management Company, and given that many colleges and universities begin their fiscal years in Q3, we had a large number of higher ed client renewals in the quarter, including MIT, Cornell, Northwestern University, Oregon State University and several others.

Year-to-date, the average client renewed at 110% of the prior year's revenue level, reflecting the continued high satisfaction levels of Care@Work client employees with our net promoter score or NPS greater than 70. As a reminder, as we look ahead to the fourth quarter, the Care@Work business will cycle against the launch of a few larger customers in Q4 of last year. And as a result, we'll have softer year-over-year growth comparables which Mike will describe shortly. While we expect absolute year-over-year growth rates will moderate with these expected Q4 results, we remain bullish on the Care@Work opportunity and expect strong execution to continue into 2020.

To summarize, before I hand the call over to Mike, while our financials reflect the impact of Q2 softness in our U.S. Matching business, we're encouraged by the progress we're making on a number of strategic priorities. Our safety initiatives, our investments in our senior care vertical and the adjustments we made to our U.S. Consumer teams and Care@Work's growth is a reflection that we are well positioned to capitalize on the trend of more organizations increasing their commitment to support employees' care needs.

In addition, our work with Activate underscores the compelling opportunity that remains in front of us as the clear market leader, reflected in the size of our marketplace and our brand awareness. These give us a significant advantage as we go after the 49 million households in our addressable market in the U.S. alone. Between our leading consumer and enterprise platforms, we believe we play a critical role in building a scalable care infrastructure to address the future of work for both families and caregivers.

We look forward to working with our future CEO on strategies to accelerate growth in our core Matching segment and continue the momentum we've seen in our Enterprise offering.

I'll now turn the call over to Mike to elaborate on our performance in the quarter and our outlook for the remainder of the year.

Mike Goss -- Acting Chief Financial Officer

Thank you, Sheila. I'll now provide more color on our Q3 results starting with revenue, which was $53.3 million, representing 8% growth versus Q3 2018 revenue of $49.2 million.

I'll begin with our U.S. Consumer business, which grew 3% from $38.5 million in Q3 2018 to $39.5 million in Q3 2019. Within that, U.S. Matching increased $32.4 million in Q3 2018; $33 million in Q3 2019. The primary driver was 5% growth versus prior in end-of-period paying families. Payments revenue grew from $6.1 million to $6.5 million driven by growth in clients.

Our other businesses which include Care@Work, International and Marketplace grew 29% to $13.8 million compared to $10.7 million for Q3 2019. Care@Work continues as our fastest growing business. Q3 revenue versus prior 57% to $6.9 million from $4.4 million, and we continued to see strong revenue retention rates at over 100% within the quarter primarily due to utilization growth. As a reminder, 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 saw the first three quarters of 2019 benefit from these deals. While in Q4 we will start to cycle against that. Notwithstanding, we are expecting Q4 growth rates in the range of 20% to 25%, and for the full year, growth rates between 40% to 45%.

Now on to EBITDA. Q3 marked four years of sustained EBITDA profitability, and we remain committed to driving shareholder value through continued profitable growth. Q3 EBITDA was $5.2 million, which was above our guidance range and a function of the flow through from revenue as well as our continued focus on judicious cost management. For the quarter, margin was 10% compared to 14% in Q3 2018, which reflects the safety investments that we announced earlier this year.

For the third quarter of 2019, GAAP net loss attributable to common stockholders was about $2.2 million as compared to net income of $1.9 million in Q3 of 2018.

Now moving to the cost lines, beginning with gross margin. Total company gross margin for the quarter was 71% cycling against 77% in Q3 of 2018. This was driven mainly by the incremental investments in safety that we have discussed on previous calls. Additionally, we've experienced downward margin pressure as we continue to see a mix shift toward Care@Work.

Coming to sales and marketing, which as a percent of revenue was 33% in Q3 2019, consistent with Q3 2018. As a reminder, this includes the impact of our incremental investments in senior care. R&D as a percentage of revenue decreased to 16% compared to 18% in Q3 of 2018. And G&A as a percent of revenue for Q3 2019 was 22%, consistent with Q3 of 2018.

Moving now to EPS. For the quarter, GAAP EPS on a diluted basis was negative $0.09 as compared to positive $0.03 in the third quarter of 2018. Non-GAAP EPS was positive $0.11 as compared to positive $0.18 in the third quarter of 2018.

Regarding cash and short-term investments, we ended the quarter with a balance of approximately $130 million. Cash inflows came mainly from EBITDA. Cash outflows were primarily related to changes in working capital and the payment of acquisition-related earn-outs. The net result was the generation of approximately $5 million of cash during the quarter.

Now turning to guidance and beginning with revenue. We are narrowing and raising our full year 2019 revenue guidance $208.3 million to $208.5 million, representing approximately 8% growth versus prior at the midpoint. For the fourth quarter, our revenue guidance is $50.7 million to $50.9 million. Midpoint of our Q4 guidance is roughly unchanged relative to what was implied in our guidance on the last call. This is consistent with the revenue out-performance in Q3 being driven by non-recurring revenue streams, and with our expectation for the top line as we exit the year being mostly unchanged.

On EBITDA, our full year 2019 guidance is $21.6 million to $21.8 million, which raises the midpoint relative to our prior guidance, yielding EBITDA margin of 10% at the middle of the range. The increase in full year guidance range is driven by the over performance we experienced in Q3 which was primarily the result of the non-recurring revenue streams previously noted. We are guiding to Q4 EBITDA of $6.2 million to $6.4 million, representing margin of about 12% at the midpoint.

This EBITDA guidance flows through to our Q4 non-GAAP EPS guidance of approximately $0.17 with an expectation of roughly 40 million weighted average diluted shares outstanding. For the full year non-GAAP EPS, we are guiding to roughly $0.49, is also based on an expectation of about 40 million weighted average diluted shares outstanding.

Finally, we believe we will end 2019 with $133 million in cash and short-term investments, up from $125 million at the end of 2018 and $130 million at the end of Q3 2019. The increase of $3 million from the end of Q3 is being driven by the EBITDA flow through, partially offset by changes in working capital and consistent with the natural cadence of our business.

With that, I'll open the call up to Q&A. Operator?

Questions and Answers:


Thank you. We will now 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

Hey, guys. Good morning. Thanks for taking my questions. Just few if I may. It's kind of a two-part question. With the amount of cash that you have on your balance sheet, I guess, one, what do you feel like is an ample amount of cash that you need; and then, two, with the performance of Care@Work, is there any way that you guys can invest in that business more aggressively to perhaps accelerate or grow that business faster?

And then on the CEO search, I'm just kind of curious in terms of time frame, when we might see a decision made?

And then third, a couple of quarters back when you guys talked about implementing more stringent requirements for background checks, etc., and you had talked about additional costs. I'm just curious as we passed a couple of quarters now, the added kind of incremental costs, maybe you signal to the market, do you feel like those are still in line, perhaps better, that that number could be a little bit higher? Just trying to get a sense, we're going to have that flows into 2020. Thank you.

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

Thanks, Darren. Let me start with the CEO search question and I'll turn the cash and the background check over to Mike. We are really excited about the candidates that we've been meeting, and as we shared in our prepared remarks, as a board, it's a top priority for us. And we're working expeditiously to go through the interviews. So as we learn more, we will certainly update all of you.

Let me turn it over to Mike on cash and background checks.

Mike Goss -- Acting Chief Financial Officer

Hi, Darren. So cash on the balance sheet, we've talked about many times in the past. We feel like it gives us optionality to head down different roads. I don't know that we would be willing to commit to saying a definitive amount or number as to what we consider ample cash on the balance sheet. I think we're holding where we are based upon what we have in the landscape in front of us and where we think we could invest.

As far as your question on could we invest in Care@Work to grow faster, I think we have a plan in front of us to continue to scale that business. We're continuing to add to the sales team and looking at a strong pipeline. So we believe that we're investing appropriately in that business to scale.

And then to answer your question on the background check costs, we've been rolling that program out. Things have been going well thus far. We like the traction that we're seeing. We like the responsiveness that we're getting both from providers, as well as seekers on the site. And we believe the cost for the check are still in line with the cost that we've laid out earlier this year, and how we expect them to impact both the balance of this year and 2020.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Great. Thank you.


Thank you. Our next question comes from the line of Jason Kreyer with Craig-Hallum Capital Group. Please proceed with your question.

Jason Kreyer -- Craig-Hallum Capital Group -- Analyst

Good morning. Thank you for taking questions. Sheila, I just wanted to ask about the nature of the relationship with Activate. I know you've talked about this a little in the press releases you put out. I'm just wondering if this is more a strategic review that's kind of reviewing the future as a stand-alone business or like a strategy consultation, which would kind of indicate reviewing the strategic direction of the business?

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

Thanks, Jason, for your question. It's actually overall comprehensive review of our strategic priorities in business units that we continue to pursue, as well as growth opportunities, and then also looking at further efficiency gains in our operations. It really is about overall comprehensively how we are running the business and developing a multi-year plan strategy with the management team and the board.

Jason Kreyer -- Craig-Hallum Capital Group -- Analyst

Thank you. On Care@Work, so you referenced that we're lapping some of the big engagements that you announced a year ago. Just wondering if you could talk about the things that are in your pipeline, if you're having more of those enterprise wide types of discussions? Number one.

And then number two, maybe if you can give us an update, you know I know the two that we talked about a year ago, but maybe if you can put any numbers around how many of your Care@Work clients are actually offering this enterprisewide?

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

Let me start with your first question. We certainly are continuing to pursue enterprise wide clients. We're excited about large retail clients that are servicing their sort of front-end employees, and that just continues. We're encouraged by the momentum, and of course, it's aligned with our mission.

With regards to your second question, let me turn it over that to Mike, specifically around -- our focus around clients.

Mike Goss -- Acting Chief Financial Officer

Right. So when we think about the overall pipeline and who we're targeting, there is -- the pipeline still continues to remain strong as we've said on previous calls. It's evidenced in what you're seeing for growth rates nearly 60% in Q3 and even against this difficult comp of 40% to 45% that we've laid out in Q4. But we still believe that as we turn the clock and look into 2020, that there is a lot of bullishness, as Sheila had alluded to on the call about this business.

Jason Kreyer -- Craig-Hallum Capital Group -- Analyst

Okay. Last one, Mike, on just the gross margin changes that we've seen, is there any way to break down kind of the one-timers in there, because I know as you referenced, we're getting a mix shift that's weighing on gross margins, especially when you put up strong quarters like this in Care@work, but trying to break down, how much of that is these expenses in kind of changing the relationship with consumers versus what is that mix shift?

Mike Goss -- Acting Chief Financial Officer

Yes. We don't typically give guidance, Jason, as it pertains to gross margin. Obviously, we've talked about and we've given some numbers around the impact that the safety investments are going to have on us this year. And I think as you can start to see that, Care@Work for the quarter represented roughly 13% of total company revenue. And if you think about the growth rates that we put out there in the implied percentage of our overall revenue, it maintains that level going into Q4. That should give you a sense of how that starting to impact overall company gross margin.

Jason Kreyer -- Craig-Hallum Capital Group -- Analyst

Maybe I can ask that a little bit differently. Can you talk at all, maybe qualitatively about just the U.S. Consumer trends in gross margin and maybe the Care@Work trends in gross margin, just so we have a sense of the like-for-like basis?

Mike Goss -- Acting Chief Financial Officer

Certainly. So as we think about the U.S. Consumer business, we're obviously experiencing some gross margin pressure, because of the impact of the CareCheck initiatives that we announced earlier this year. So as you think about a year-over-year comp there, we would expect to see that gross margin within that business start to trend slightly downward. On the Care@Work business, I think you could start to see the inverse where as we're starting to scale that business more. We're starting to recognize some of the benefits of being a larger player and the margins there are starting to trend upward.

Jason Kreyer -- Craig-Hallum Capital Group -- Analyst

That's great. Thank you very much.


Thank you. Our next question comes from the line of Marvin Fong with BTIG. Please proceed with your question.

Marvin Fong -- BTIG -- Analyst

Good morning. Thanks for taking my questions. The first one on Care@Work, the renewal rates coming in at 110%, which is great to hear. Could you comment, should we think about that increase as being entirely driven by utilization or is there more margin in that number, just kind of following up on what you just said?

And then on the brand awareness, the positive brand awareness ticking up versus your last study. Could you just elaborate on that? Do you attribute that to more awareness of CareCheck? Or is it that we're just getting a little further away from some of the press that came up earlier this year and seeming lack of further press as aided the consumer in restoring your brand reputation? Thanks.

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

Yes. Let me turn Care@Work renewal to Mike, and I'll address brand awareness, Marvin.

Mike Goss -- Acting Chief Financial Officer

Right. So Marvin, as we think about the Care@Work business, utilization -- increased utilization with that at existing clients is certainly something that is helping to drive the year-over-year growth and the increase. We're also seeing an expansion to beyond, so people or clients starting to push out beyond corporate offices to other components of their business. And then we're also starting to see verticalized expansion, so as we think about the different kinds of product suites that we offer, company starting to adopt things like senior care planning, which also allow us to better serve the overall client needs. And I'll turn it over to Sheila for the brand awareness.

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

Yes. Marvin, your question is actually overall consumer perception is more positive as well as overall brand awareness, and it's not just specific to CareCheck. It was a broad survey and specifically with mothers nationwide, addressing specifically positive perceptions of the brand with regards to trust, safety and transparency.

Marvin Fong -- BTIG -- Analyst

Great. And if I could sneak one more in. Just on senior care, is it still your fastest growing vertical? And if you could just discuss how the payoff you're seeing on your marketing spend, could you talk about maybe the return on investment you're realizing in there? And should we expect a elevated level of spend to continue into next year? Thanks.

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

Yes, Marvin, we're really excited about senior care. I think we all know the tailwinds that are really supporting with the demographic shifts, and we're seeing that as our fastest growing vertical as you point out. We are continuing to invest. It's actually part of the work that we're also doing with Activate. So we're excited about senior care opportunities and more to come on that on our next call.

Marvin Fong -- BTIG -- Analyst

Great. Thank you.


[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Jonathan Wright -- Senior Director, Finance

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

Mike Goss -- Acting Chief Financial Officer

Darren Aftahi -- ROTH Capital Partners -- Analyst

Jason Kreyer -- Craig-Hallum Capital Group -- Analyst

Marvin Fong -- BTIG -- Analyst

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