Q2 2019 Earnings Call
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. John right controller. Thank you John you may begin.
Thank you good morning, and welcome to care Dot Coms financial results call for the second quarter ended June 29, 2000, Nike 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 were 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 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 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 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 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 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 Dotcom. Thank you John 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 cure Dot Coms mission has been to build the most trusted scalable and affordable care solution for family with over 34 million members more than one and a half 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.
Bounding building care Dot 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 seniors our mission to help families and caregivers has never felt more relevant which is why the work we're 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 dot com the balls in the ecosystem of caregivers and care seekers growth I feel greater responsibility to focus my efforts and expertise on advocating boot 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 decided to step into the role of executive Chair women, 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 build upon our success and takes us into a new phase of growth.
As part of this transition will be kicking off a search for a new CEO to lead care dotcom 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 Chairman I look forward to working very closely with the CEO and the management team advising on cure Dot com strategic initiatives during the transition and in my capacity as executive Chair women 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 us matching end of period paying family growth.
Our prior full year guidance reflected an expectation of four percentage points of total company revenue growth acceleration, yielding 14% growth versus prior at the midpoint the softness in US 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.
We ended the quarter with a healthy cash and short term investments balance of 125 million.
Now turning to the individual businesses, starting with you as consumer the combination of us matching and payments, where we saw ended period paying member growth of 8% versus prior this underperformance in with matching during Q2 was driven primarily by the downward pressure on member Rose from three main sources first expected conversion improvements from our Q2 product initiatives, including enhancements to our enrollment flows in hiring experienced were smaller than expected expected second.
There was an unexpected traffic mix shift to mobile which had represented roughly two thirds of visitor traffic over the past couple of years in Q2, we've seen it grow to closer to three quarters visitor traffic as a result, the conversion gains that we did get from our product initiatives were offset.
As a reminder across industry mobile is typically a lower converting platform than desktop.
Finally, third there was a larger than expected negative impact on traffic from word of mouth in Q2 stemming from this infusion 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 on in your financial results.
Let me now turn our product priorities and investments starting with the importance to our customers and our brand.
To set some context since our founding in 2006, our marketplace was designed to help families find illicit prescreened caregivers and then offer them I look her background check option for their final candidate.
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 the consumer expectations are shifting towards on demand.
This trend informed our mid 2018 acquisition of trusted a leading on demand babysitting startup, 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 checks.
We are on track with the implementation of this program across our customer base and expect the rollout to be complete by early next year. We're encouraged by early signs of caregivers 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 ships, 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 US matching growth consists of four elements.
A laser like focus on improving mobile conversion and organic growth with some new opportunities and social.
Ongoing value prop and price testing to evolve and expand our overall subscription products as well as Alec heart background check offering.
Especially in light of our additional investments in developing a new safety standard for history.
Growth through non childcare verticals, such as senior care and housekeeping and sub verticals within childcare, such as on demand babysitting and afterschool 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 drove year over year improvements in member growth.
So seen dipped in the trajectory of conversion rate improvement was unusual for us.
Given these challenges we started by making some switching just 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 off and refocus the work of our ongoing engagement squad responsible for our or matching and hiring experience.
And to take advantage of the benefits of improving conversion, we've seen in the past via price and package testing, we added relevant leadership and operational experience scaling growth from companies like ancestry Dot com tortilla.
The changes we've made so far have yielded early positive results such as improvements in conversion during the hiring experienced.
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've also decided to consolidate our development teams and our new tuck in acquisition in the child care space.
To streamline our operations were winding down Siguiri and moving support of its mobile app to the U.S. operations team.
In addition, we are having the team from truck to take the lead on the integration of their differentiated experiences into our core U.S matching platform.
Although argument babysitting is still a small part of our service and overall child care total addressable market.
We believe that the evolution and integration of trust its business model will present future growth opportunities for our us matching platform.
Moving now to the unit economic fundamentals of our us consumer business.
Although we experienced top of the funnel softness in Q2, especially in childcare, we continued to see strong fundamentals, including improvement in length of paid time orlandi from 15.7 months for the first half of 2018 to 16.4 months for the first half of 2019.
This trend came from the mix shift to longer term subscription packages and also from reuse of our service by pass subscribers, especially with respect to users of non chalk your services.
This increase in loss is the key driver of our healthy ROI of 4.9 X.
Turning now to cure at 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 stripe.
Despite the confusion created by reporting earlier this year about pure dot com caregiver vetting practices. Our clients have responded well as we shared the details of our safety protocols in particular, the index screening we perform on our enterprise backup care providers and partners.
One of our largest claims after conducting an extensive audit has resumed their care at 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 heritage health bandwidth Dotcom and Kraft Heinz.
To summarize before I hand, the call over to Michael while our businesses experienced some near term pressure as reflected in our updated guidance. We remain confident that the investments we are making in our new seeking him 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 family and drive profitable growth.
With our goal of penetrating ever more of the 336 billion spent annually on care in the US alone predominantly on child care and senior care, we remain confident in our ability to leverage our leadership position.
As the largest two sided online care marketplace and 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 cure infrastructure to address the future work for both families and caregivers.
And one last note.
I would like to take a moment to thank Michael Echenberg for his many contributions to care dotcom over the past four 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 my costs and our excellent financed.
Michael.
Thank you very much Sheila.
A few quick words for me.
I want to thank everyone in the extended care Dotcom family for these past four 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 current dot com family as an advisor during the CFO transition period.
In this capacity I will remain engaged with Mike Goss as these steps into the acting CFO role.
I've worked closely with him since 2015, and I am a big fan of his I can assure you that Hughes are a safe pair of hands on that he is surrounded by terrific people.
With that ill turn the call Mike.
Thank you Michael.
Ill 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 us consumer business, which grew 7% from $35.6 million in Q2, 2018 to 38.2 million in Q2 2019.
Within that us matching increased 7% from $29.6 million in Q2, 2000 $18 million 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, but 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 carrot work international in marketplace grew 23% to 12.8 million compared to 10.4 million for Q2 2019.
Garrett work continues as our fastest growing business with Q2 revenue versus prior 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 three quarters of 2019, we 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 us consumer business, which as a reminder that the combination.
Us matching and payments.
Focusing on the first half of 2019 versus the first half of 2018.
Ill start with lumpy.
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.
Beginning lumpy was a function of our continued focus on driving long term improvements in member engagement through our product investments and a mix shift towards longer duration subscription packages.
In keeping with our standard approach, we've taken the opportunity to extend the observation window from seven years eight years.
Our pool is 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 whose business model. We're in the process of transitioning as we continue our integration.
No in the back half of 2019 will anniversary 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 and 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 us matching member growth, resulting from downward pressure on board of mall traffic.
You don't have an LTV and CAC led to a reduction in ROI from 5.6, X. and the first half of 2018, two is still healthy 4.9 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 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 a 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 us 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 $2.2 million in Q2 of 2018.
Included in this was a $16.1 million charge associated with the wind down of figures.
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 us profit before taxes or PBT in the near term will be negative.
Let me be clear that notwithstanding this point about U.S.P. Beattie, 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 were 73% cycling against 79% in Q2 of 2018.
I already covered the us consumer drivers in the context of the unit economics deep dive.
In addition, as we described on past calls as care or continues to grow as a percentage of revenue.
This mix shift effects total company gross margin.
Turning to sales and marketing, which will be 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 induced investments in safety.
R&D as a percentage 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 eight.
Charges that do not affect EBITDA.
Absent these costs R&D as a percent of revenue would have been in line with 2018.
DNA as a percent of revenue for Q2 2019 was 21%.
A four 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 a valuation allowance and the wind down a figure eight compared to a loss of three cents in the second quarter of 2018.
non-GAAP EPS was nine cents as compared to our guidance of approximately eight cents and as compared to 14 cents 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 volumes.
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 consist the same three factors that you described earlier.
Our Q2 conversion initiatives underperformed.
It was an unexpected traffic mix shift to mobile.
Our larger than expected downward pressure on traffic from quarter mile for 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 or adjusting our full year 2019 guidance to 20 to 21 multi million, yielding EBITDA margin of 10% at the middle of the range.
This adjustment is mainly a function of flow through from the change to the revenue outlook, partially offset by the compensation impact and cost management 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.
The EBITDA guidance flows through to our Q3 non-GAAP EPS guidance of approximately 10 cents with an expectation of roughly 39 million weighted average diluted shares outstanding.
For full year non-GAAP EPS, we now expect 49 cents to 52 cents.
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 will turn the call back to Sheila.
Thank you Mike.
Before I open the call upticks Una I'd like to share my excitement to bring on new leadership to take us to our next chapter of growth.
I'll also express my gratitude to the care Dotcom 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 Chairman.
I hope to amplify further how deeply important curious not just individual families and caregivers black 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 Mason 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 in welcoming new CEO , who will have our collective support she or he charts. The next stage of accelerated growth per care dotcom with that I'll open the call up to acuity operator.
Thank you.
We will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
A confirmation Tom will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Your first question comes from Darren Aftahi with Roth Capital Partners.
Please go ahead.
Hey, good morning.
Taking my question.
Couple of if I may so I'm sort of curious the last time you gave guidance. So obviously three months has transpired in the 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 you know early may.
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 Im just kind of curious about capital allocation strategies.
Whether you guys would consider.
Buyback like going forward. Thank you.
Thanks, Darren with regard to the changes that we shared in our prepared remarks.
What we saw in Q2 is 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 two thirds to three quarters and we have been sort of in that two thirds level Darren for a couple of years.
And what hit US in Q2 was sort of in that three quarters of Oh.
The traffic coming from visitor traffic coming from mobile and then the third was at.
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 continue to see in Q2. So those were sort of the changes that we saw since we provided guidance and 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 that Mike shared on his prepared remarks, and with regards to capital allocation, let me turn that over to him.
Thanks, Sheila so Darren we.
Weve as Weve always said we.
Take pride in the cash balance that we've built over the years and we will continue to evaluate whenever various options that may be the appropriate use of cash whether that be through something like a buyback that you had alluded to you or through selective M&A in the future.
There are no imminent plans right now for either but we are keeping our options open.
Thank you.
Thank you once again, if you wish to ask a question. Please press star one on your telephone keypad.
Your next question comes from Marvin Fung with BTI Ci. Please go ahead.
Great. Thanks for taking my question.
Just wanted to focus on care at work a little more encouraging that the growth is still there could you could you just kind of expand a little more on.
On the dynamics are you.
Able to be adding.
New clients and how's the churn going on there and then secondly on current work.
Does it make sense the baby kind of view this as a separate business that maybe you can re brand or otherwise kind of.
You know if it's being.
Pressured by.
Association with so the Reputationally hit at the core matching platform. It if you've thought about perhaps separating that business.
Thanks.
Thanks, Marvin and with regards to the dynamics of the carrot work business. It continues to be a double digit a strong fastest growing part of our business. We are getting very excited about it.
Our pipeline is strong and healthy and with regards to your question around churn and 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 and on average they are getting larger so with TD excited with regard to your question around rebranding we believe that the brand is quite strong.
Leveraging care dotcom.
With regards to care at work as an overall brand offering given that we are servicing a mass market and actually serve that well.
In terms of knowledge already of consumers knowing that it's care dotcom behind the overall services that is giving them the ability to go to work.
Okay, great and if I could just a follow up question fulfil the three factors you've mentioned.
So on the conversion gain.
First of all could you, perhaps maybe give us.
A sense of the magnitude of it to the <unk> specifically is the is the word of mouth impact you know how would you characterize that as sort of a distant third or or still meaningful part and the second part of the question is how can you be sure that the word of mouth impact is not actually.
A factor in sort of the conversion of the disappointing conversion.
Thanks, Yeah, we actually haven't shared the magnitude of each in all three 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 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 a new standard for safety in our industry and going ahead, and making the safety investments that we did Marvin.
Great. Thanks, and good luck to you Michael and.
Congratulation Sheila good luck on your next step as executive chair sort of woman. Thank you Marvin.
Thank you there are no further questions at this time.
That does conclude our conference for today.
Thank you for participating you may now disconnect.
[noise] Oh.
Mhm.
[noise].
Oh.
Oh.
Oh.
Oh.
Mm Hmm.
[noise].
[noise].
[noise].