Q3 2019 Earnings Call
Greetings and welcome to the care Dot Com third quarter earnings call.
Fine all participants are in listen only mode. A brief question answer session with all the wall presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad as or Am I know this conference is being recorded it is now my pleasure to introduce your host Mr. John right Senior director of Finance. Thank you you may begin.
Thank you good morning, and welcome to care Dotcoms financial results call for the third quarter ended September Thirtyth 2019.
During the course of this conference call 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 1995.
They include among other things projected financial results were operating metrics anticipated business and marketing investment and strategies and expect the results of those investment strategies anticipated future products or services anticipated market demand or opportunities for our products and services anticipated management transition.
And other forward looking topics such statements are only predictions based on management's current expectations.
Actual results or events could differ material materially from these prediction due to a number of risks and uncertainties, including those set forth in the press release, we issued today as well those more fully described in our filings with the Securities 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 right also referring to non-GAAP measures on this call, including adjusted EBITDA, which we referred to with EBITDA. Throughout this presentation. This measure represents pretax 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.
Caster, Josh <unk> 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 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 filed this morning.
We will also be referring to profitability on this call when we refer to profitability, referring to it on an adjusted EBIT up 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.
Access the press release supplemental 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 Dot com.
Thank you John and thank you all for joining us on our third quarter 2019 earnings call Q3, with another quarter of profitable growth.
Before we cover our quarters results I'd like to spend a moment updating you on the progress of two important strategic priority.
As we mentioned previously the board has retained the services at the leading executive search firm you gone gender to place care Dot Coms next CEO , which is a top priority.
Encouraged by the caliber of the candidates, we not 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.
Joburg Act to be provided our board an update of their work the beginning late June which we expect to complete this month.
As part of our multiyear planning process with our board, we're having ongoing discussions regarding activate strategic recommendations that include priorities for our business future growth opportunities and further efficiency gains in our operations.
For our next call. We look forward to give you an update on our future plans that incorporate activates overall strategic recommendations.
Turning now to the quarter's results.
Revenue for the quarter <unk>, 8% year over year to 53.3 million EBITDA for the quarter was 5.2 million. We ended the quarter with cash and short term investments of 130 million.
You as 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 and ended period paying members.
We started to see improving results in our peak season ups or three which is typically back to school preparation time for many families seeking childcare driven by organic traffic and conversion games.
These results aligned with the most recent wave of ongoing consumer brand research. We commissioned beginning in Q1 to monitor the cure Dot com brand perception, among the general population and specifically mothers.
The latest research fielded during the quarter points to increasing positive perception and awareness of the care Dot Com brand among others 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 rollout of care check the new background checks, we are implementing for caregivers, which is going well and we expect this rollout 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 did you to reward our product team has led to faster execution on initiatives that have resulted in improved conversion rate as well as organic growth from SCR tactics.
Each of these execution improvements have contributed positively to Q3 results.
Our multi your R&D investment in improving mobile conversion rates and organic growth has been a key driver and lowering our customer acquisition cost and driving year over year growth in into pure repeat 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 platform.
Along with our ongoing improvements in mobile inorganic 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 or 2020 plans on our next call.
Now turning to our enterprise business.
Karen work continues to be Dan outperformer with strong utilization trends, new account sign up and revenue retention contributing to 57% year over year growth in the quarter ahead of our internal expectation.
New clients in the quarter included Instacart pager duty and strike.
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 years revenue level, reflecting the continued high satisfaction levels of cure at work client employees with our net promoter score or NPS greater than 70.
As a reminder, as we look ahead to the fourth quarter secure work that this will cycle against the launch of a few larger customers in Q4 of last year and as a result.
After a year over year growth comparable.
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 current work opportunity and expect strong execution to continue into 2020 .
To summarize before I hand, the call over to Mike well, 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 adjustments, we made to our U.S. consumer team and care. It works growth is a reflection that we are well positioned to capitalize on the trend of war organizations, increasing their commitment to support employees Cairney.
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 suggests a future work for both families and caregivers, we look forward to working with our future CEO on strategies to accelerate growth and our core matching segment and continue the momentum we've seen in our enterprise offerings.
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.
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% I'm 38.5 million in Q3 2018 to 39.5 million.
In Q3 2019.
Within that us matching increased 32.4 million in Q3 2018 to 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 carrot work international in marketplace grew 29% to 13.8 million compared to 10.7 million for Q3 2019.
Work continues as our fastest growing business Q3 revenue versus prior of 57% to 6.9 million from 4.4 million.
And we continue to see strong revenue retention rates at over 100% within the quarter, primarily duty utilization growth.
As a reminder, as you think about the shape of the year for care at work and keep in mind that Q4 of 2018 was especially strong given the launches 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're expecting Q4 growth rates in the range of 20% to 25%.
For the full year growth rates between 40% to 45%.
Now on to EBITDA.
You three March four years of sustained EBITDA profitability.
We remain committed to driving shareholder value through continued profitable growth.
Q3, EBITDA was 5.2 million, which was above our guidance range in 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 fact 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 2018.
Now moving to the cost lines, beginning with gross margin.
Total company gross margin for the quarter, 71% cycling against 77% in Q3 2018.
This was driven mainly by the incremental investments and safety that we have discussed on previous calls.
Additionally, we've experienced downward margin pressure as we continue to see a mix shift towards care at work.
Turning 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 incremental investments and senior care.
R&D as a percent of revenue decreased 16% compared to 18% in Q3 of 2018, Angie and as a percentage of revenue for Q3, 2019 was 22% consistent with Q3 2018.
Moving now to EPS.
For the quarter GAAP EPS on a diluted basis was negative nine cents as compared to positive three cents in the third quarter of 2018.
non-GAAP EPS was positive 11 cents as compared to.
Two positive 18 cents in the third quarter of 2018.
Regarding cash and short term investments we ended the quarter with the balance of approximately $130 million cash inflows came mainly from EBITDA cash outflows from Eric primarily related to changes in working capital in the payment of acquisition related earn outs.
The net result was the generation of approximately $5 million cash during the quarter.
Now turning to guidance and beginning with revenue.
We are narrowing in raising our full year 2019 revenue guidance to 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.
I looked at the 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 outperformance in Q3 being driven by nonrecurring 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 nonrecurring 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 17 cents with an expectation of roughly 40 million weighted average diluted shares outstanding.
For the full year non-GAAP EPS, we're guiding to roughly 49 cents 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.
And 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 open the call up today.
Operator.
Thank you will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad confirmation toner indicate your line is in the question Q. You May proceed start to if you'd like to have your question from the Q for participants you think speaker equipment, maybe necessary to pick up your hands at the four pressing the star Keith One moment. Please let me pull for your questions.
I have any our first question comes from the line of Darren Aftahi with Roth Capital Partners. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking my questions, Steve If I may.
Yes, Kevin a two part question.
The amount of cash that you have your balance sheet I guess Juan.
What do you feel like is.
An ample amount of cash that you'd need and then two with the performance of share at work is there anyway that you guys can invest 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 timeframe when.
Might see decisions made.
And then third.
A couple of quarters back when you guys talked about implement saying more stringent requirements for background checks et cetera, and you had talked about additional costs I'm just curious as we passed a couple quarters now.
The added kind of incremental costs, maybe you see the market do you feel like those are still in line, perhaps better.
That number could be a little bit higher just trying to get a sense, we're going to have.
Flows into 2020, thank you.
Thanks, Darrin, let me start with the CEO search question now turn to cash in the background check over to Mike.
We're really excited about the candidates that we think 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 we'll certainly update all of you let me turn it over to Mike on cash and background check.
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 definitive amount or number as to what we consider consider ample cash on the balance sheet I think.
We're holding where we are.
Based upon what we have.
Landscape in front of less than where we think we could invest.
As far as your question on could we invest in care at 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 the 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 speakers on the site and we believe the cost for the check Arsenal in line with a cost we've laid out earlier this year in how we expect them to impact both the balance of this year and 2020 .
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.
Good morning, Thank you for taking questions.
She will just wanted to ask about the nature of the relationship with activate it you know I know you 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 standalone business or like a strategy consultation, which would kind of indicate reviewing this strategic deal.
Section of the business.
Thanks, Jason for your questions 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 comprehend.
Simply how we are running the business in developing a multiyear plan strategy with the management team and the board.
Thank you on care at 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 the number two maybe if you can give us an update you know I know the.
To that we talked about a year ago.
But maybe you can put any numbers around how many of your care at where clients are actually offering this enterprise wide.
Let me start with your first question. We certainly are continuing to pursue enterprise wide clients were excited about large retail clients that are served servicing their sort of front end employees and not just continues at we're encouraged by the momentum and of course, it's aligned with our mission I with regards to your second.
Let me turn it over that to Mike.
Specifically around our focus around clients right. So when we think about the overall pipeline in who were targeting.
There's the pipeline still continues to remain strong as we said on previous calls.
It is evidenced and what you're seeing for growth rates.
Nearly 60% in Q3 and even against this difficult comp the 40% to 45% that we've laid out in Q4. So we still believe that as we turn the clock and looking to 2020.
But there's a lot of.
Bullishness is she'll had alluded to on the call about this business.
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 and care at work, but trying to break down how much of that.
As these expenses in kind of changing to a relationship with consumers versus what is that mix shift.
Yes, we don't typically give.
Jason as it pertains to gross margin, obviously, we've talked about and we'd given some numbers around the impact that the safety investments are going to have on it this year.
I think as you can start to see that.
Carrot work for the quarter represented up 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, so that should give you a sense of how that starting to impact overall company gross margin.
Maybe I can ask that a little bit differently can you talk at all maybe qualitatively about just in the U.S. consumer trends in gross margin and maybe the care at work trends in gross margin. Just so we have a sense of the like for like basis.
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 care check 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 at 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.
That's great. Thank you very much.
Thank you. Our next question comes from the line as Marvin Fung with BTG. Please proceed with your question.
Good morning, Thanks for taking my question.
Just first one on current work the renewal rates coming in a 110%, which is which is great. The here could you just comment should we think about that increase as being entirely driven by utilization or is there is there more margin in that number just 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 current check or is that.
That we're just getting a little further away from some of the press that that came up earlier this year and and.
Okay.
Assuming lack of further pressure.
Data, the consumer and restoring your brand reputation.
Yeah, Let me turn care at work renewal to Mike and I'll address brand awareness Marvin right. So more but as we think about the can't work done this utilization increase utilization with that.
At existing clients is certainly something that is helping to drive the year over year growth in the increase.
We're also seeing an expansion to beyond so people are clients starting to you push out beyond corporate offices other components of their business.
And then we're also starting to see Verticalized expansion. So as we think about the different kinds of products weeks that we offer.
Companies starting to adopt things like senior care planning, which also will allow us to better serve the overall client needs and I'll turn it over to Sheila from brand awareness Yeah. Martin Your question is actually overall consumer perception.
As more positive as well as overall brand awareness and it's not just specific to care check. It was a broad survey and specifically with mothers nationwide addressing specifically positive perceptions of the brand with regards to trust safety and transparency.
Great and if I could sneak one more and just.
On senior care.
Still your fastest growing vertical and you could just discussed.
How the payoff you're seeing on your marketing spend could you talk about maybe the the return on investment you're realizing in there and.
Should we expect the elevated level spend to continue into next year. Thanks.
Yeah, Marbn, we need to be excited about senior care I think we all know the tailwinds that are really supporting with the demographic shifts and we're seeing that adds our fastest growing verticals you point out we are continuing to invest it's actually a part of the work that we're also doing with with activate.
So we're excited about senior care opportunities and more to come on that on our next call.
Great. Thank you.
Thank you we have reached the end of our question and answer session and the conclusion of today's call. Thank you for your participation you may disconnect your lines and have a wonderful day.