CRCM - Care.com

[ratiman]

Has anyone taken a look at Care.com? It's not a traditional value investment, but it's an interesting stock. It is on plan to lose $23M this year on $150M in revenues, but that's somewhat misleading. $12M of that is a new ERP system and earnout payments, so the operating loss is closer to $11M. It expects to be cash flow positive next year. For those who don't have kids, it's a website for finding domestic care, nannies and dog walkers and house cleaners.

 

Here is how I see the value of the parts:

 

Nanny tax business: $165M - HRB trades at 9x ebitda and grows at 1%. The Care.com nannytax business is growing at 30% and should generate a run-rate ebitda by Q4 of $11M (55% ebitda margin * $20M revenues) and that's worth 15x multiple if HRB is worth 9x, so 15*11 = $165

 

Corporate backup care (Workplace Solutions): $70M - this is a $10M business (or will be by end of q4) that is growing at 200% this year and 70% last year. It's a high margin software business with negative churn ie 110% recurring revenues. SaaS businesses growing like this and with superior margins usually get unicorn multiples of revenues but it's small at this point so 7x revenue multiple is conservative.

 

Core matching business (Care.com): $125M at 1x 2015 revenues- this is the core business and currently runs at a loss. In the long term this business has the same economics as Match.com, which is worth 3.5-4x revenues. Right now the losses are high due to high spending  (16% revenues) on R&D, which should wind down because in the long run this is  no more a tech company than Match.com or Craigslist. The real danger to this business is a PlentyofFish like competitor that offers a free service, but on the other hand the customer acquisition costs should decline as the network effects of developing a larger and larger two-sided market kick in (was that enough buzzwords? I fit in SaaS, two sided markets, unicorns and network effects. This deserves 100x multiple!)

 

Cash: $50M by end of 2015

 

Add it up:

 

$165 + $70 + $125 + $50 = $410/33 shares = $12.42

 

Currently CRCM trades at $5.65

[ratiman]

Maybe it should be added that what makes this interesting from a value investing/margin of safety perspective is that the nanny tax business (Homepay) is really a classic Buffett like business with nice margins and high switching costs. The business was bought about three years ago for ~$60M and the most impressive thing is that ARPU has increased from $88 to ~$97 even as the business has nearly doubled revenues. That part of the business is self-sustaining even without the Care.com marketing machine behind it, but it doesn't hurt. So this isn't an investment in a risky dotcom company with huge losses, it's an investment in a safe tax business with an attached option that is potentially quite valuable.

[Stevieoopsie]

Where did you get the segment profitability metrics? I haven't come across a document that details each

[ratiman]

Where did you get the segment profitability metrics? I haven't come across a document that details each

 

I made them up, basically.

 

Homepay (nannytax) - mgmt has said ebitda margins are "above 50%," and 55% is indeed above 50%. That might be a little generous. 

 

Workplace Solutions - mgmt commented that renewal rate was 110%. Getting the revenue number for that business is complicated. Care shifted the reporting last quarter so you have to compare the numbers in the q1 and q2 earnings supplements and do the math  (subtract the q2 figures from q1) to arrive at the WS numbers, which were moved to the "other revenue" category in q2.

 

Care.com - mgmt has said the core Homepay/Care.com business is breakeven on an operating basis, so back out what we know about Homepay and then you get the Care.com financials. I figured that Care.com/Homepay gets it proportional share of R&D, which accounts for about 200% of Care.com losses. I think that business in the long-term is not going to require much R&D, so the business model is already proven, imo.

 

It obviously involves lots of guesswork. 

[greenbriar]

A question I have: why is revenue totally flat in the last 4 quarters? 

 

From what I can see, last 4Q top line revenue has been (in millions):

 

Q3 2014: 32.1

Q4 2014: 33.6

Q1 2015: 35.1

Q2 2015: 35.7

 

If you back out the Citrus Lane acquisition (2.5 million revenue per quarter), which happened in late 2014, revenue in Q2 is somewhere around 32.5 million, meaning growth is totally flat if not slightly negative.

 

If the sub-businesses (payments, workplace solutions) are indeed growing as quickly as you state, then the core business (matching) must be shrinking.

[ratiman]

There's seasonality and foreign currency conversions that affect the top line numbers. US payments and matching grew 27% each last Q and that's the best way to measure the health of the core business. 27% is OK.

 

Since the IPO, Care chose to invest in R&D and smaller but higher ROI businesses like enterprise and payments. That was a disappointment to investors who wanted to see explosive growth in the matching business. In the long run it makes sense because investing in a better mobile site and enterprise and payments will earn a higher ROI than churning customers through the matching business. In the short run, it increases expenses and slows revenues and sinks the stock price. That's why this opportunity exists.

 

One way to think about Care is like a gas station. The core gas business is low-margin and high volume but the ancillary businesses (convenience store, car wash, etc) are high margin. A competitor across the street will never be able to compete on price alone. That's what Care is doing. Around the core business of providing matching (available free at Craigslist) it's building a number of higher margin businesses (payments, enterprise, and ultimately Citrus Lane). That makes the franchise more defendable in the long run. Unlike Match, Care probably won't have to buy all of its competitors. So to all the people who ask why Care is investing in these secondary businesses if the core opportunity is so huge, that's the reason.

[ratiman]

I was talking to my source in the nanny industry and he was telling me that he's seeing 10% of new clients signing up with ADP and Paychex to do nanny payroll, and he's never seen that before. Previously they had never paid much attention to the niche and provided poor service.

 

I wouldn't be surprised if Care isn't seeing some pressure in margins/acquisition costs in the Homepay (payroll/tax) side of the business. More than half of the Homepay customers come from Care (not from nanny referrals) so there is a large captive market. Some of the growth in the last few years may have also been due to catch-up growth ie Care has squeezed most of the juice out of the current customer base. That may explain why Care decided to stop reporting customer info in the payments segment starting in 2016. That's something to look out for but I don't think a couple percentage points of margin or growth is a huge factor. Paychex trades at 6x revenue and the Homepay business was purchased at 6x revenue. My esimate of 8x revenue is stratospheric but if the growth is 20% or 25% it's still growing a lot faster than Paychex.

[ratiman]

Since the stock put in an all-time low this week, it might be a good idea to go through the bear case.

 

Care bear: There are two basic problems: too high churn (25% per month) and the acquisition cost is too high in the core business. The best way to grow is through unpaid acquisition, but unpaid acquisition is slowing, for whatever reason. And if it costs over $100 to acquire a customer (and paid customers are even more expensive), then the business just isn't going to scale. Right now the customer acquisition cost is definitely over $100. The reason Care fails to put more money into marketing, despite a seemingly favorable payback, is that costs for the incremental customer rise quickly. Until Care cuts the customer acquisition cost (CAC) number in half, it won't be an interesting investment. And right now, the CAC is not coming down fast enough, if at all.

 

The bulls have to concede that right now the bears have a good argument.

 

So what sorts of things would have to change to get the CAC down? Or what does this argument miss?

 

a: High churn but high reuse. Unlike most subscription businesses, Care users come back again and again. The length of paid time is increasing for every cohort, which shows that the service is becoming more and more useful. Many of those users will come back throughout their lives, even as their children grow up, for pet care, household, tutors, etc. So Care users have a longer tail than, for instance, daters.

 

Bear counter: reacquiring customers is expensive too.

 

b: CAC is driven by competition. Care right now competes with Sittercity. Eliminating that competition (through acquisition or otherwise) would probably make a significant dent in the CAC, perhaps as much as 20-30%, to make a wild guess. SC and Care are bidding for the same adwords. 10% of SC site visitors come straight from Care.com.

 

Bear argument: the real competition is free, and free isn't going away.

 

c: network/brand effects haven't kicked in. Building out a service like this is a city-by-city effort. The high cost is largely the effect of establishing a presence in expensive new cities. Once those cities are established, costs will decline.

 

Bear argument: Care is nine years old, if it hasn't managed to reach profitability by now, the network effects will never kick in.

 

d: charge service providers, not users. Charging service providers to access the expensive pool of consumers is the real future of the business. For instance, Care is developing on-demand scheduling features for things like Date Night. Once Care becomes a platform for doing transactions, the cost of providing the service would be hidden in the fee charged the service provider. For instance, it wouldn't be difficult for Care to develop an on-demand home cleaning service, sort of like Homejoy but at a much cheaper cost to build out. Care has a huge pool of users and service providers, it's simply a matter of time before Care figures out how to get in the middle and extract a fee.

 

Bears: There is little evidence Care is even moving in this direction. Keep dreaming.

 

 

 

 

[ratiman]

Here's an interesting comparison:

 

Homepay (Care's nanny payroll/tax division) should do about $10-$11M ebitda in NTM and grow 25-30%. Paylocity (SaaS payroll, competing with Paychex) is forecasting $10-$12.5M ebitda and growth of ~31%. Paylocity trades at EV of $1.5B. Care.com trades at EV of roughly $130M.

 

I'm not saying the two business are apples to apples or that Homepay deserves to trade at 140x ebitda, but it does put my valuation estimate of 15x ebitda into perspective.

 

[ratiman]

I'm probably talking to myself here - the chart is horrendous - but Care continues to be one of the more interesting opportunities. It recently released a date night app for iOS, it's gotten very good reviews. It combines on-demand sitters, Opentable and Fandango. In one app a parent can hire a nanny, book a meal and buy a movie ticket. The real opportunity here is to charge a transaction fee to all the non-subs and hide the transaction fee within the payment ala Uber. But the date night market is probably not that big, so it's nice but not terribly interesting.

 

The interesting thing would be to turn this same tech on the nanny agency market. Right now employers like banks and law firms hire nanny agencies to provide emergency service, and hiring a nanny at short notice can be very expensive, as much as  $350/day. Bright Horizons runs a backup care unit that generates about $175M annually, with 32% operating profit margins. It's a very lucrative business and accounts for much of BFAM's very overvalued stock price. BFAM contracts with nanny agencies (to shift liability) and charges the corporate clients a huge markup. It's a great business.

 

A few years ago Sittercity entered the corporate market and ultimately BFAM had to buy those customers from Sittercity and essentially *shut it down.* The reasoning is obvious. Once clients realize they can hire nannies on their own for a fraction of the cost, then BFAM's huge backup care business is doomed. That's where Care's interesting date night app comes in. An app for on-demand corporate nannies could Uberize the corporate nanny market. Uber for x is a cliche but the similarities between the nanny agencies and the cab companies is not that far-fetched. In a big city like NY there is an almost unlimited supply of women willing to work as nannies, far more than the demand. It's not a matter of building the supply, it's a matter of connecting that supply with the demand. In the case of corporate nannies, the demand is already aggregated and subsidized by the employer.

[ratiman]

Imagine you were a mother with young kids, would finding backup care be an important service? It's a crucially important service, that's why women pay $35/month for access to what is basically a better Craigslist. The corporate side is also potentially quite large. Just 10M employees at $10/year (or more) is $100M of revenue at 95% gross margin. At some point Care could be a standard corporate benefit, backup care insurance. It's a cheap way for employers to reduce absenteeism and show they care about equality etc. It's already a standard benefit in Silicon Valley (Google FB Twitter, etc)

[jawn619]

Total families

9,284,000

Total caregivers

7,188,000

* Paying members - U.S. consumer matching & payments

254K

* Monthly average revenue per member - U.S. consumer

  matching & payments

$38

 

Cash burn of almost $10M or 15% of cash balance per quarter.

 

Hopefully this works and the growth pans out, but this has a lot of downside if it doesn't.

 

[ratiman]

Total families

9,284,000

Total caregivers

7,188,000

* Paying members - U.S. consumer matching & payments

254K

* Monthly average revenue per member - U.S. consumer

  matching & payments

$38

 

Cash burn of almost $10M or 15% of cash balance per quarter.

 

Hopefully this works and the growth pans out, but this has a lot of downside if it doesn't.

 

9c of earnings projected for Q4 and management estimates 2016 will be ebitda positive. 

[Picasso]

Nice trade so far ratiman.

[ratiman]

Selling at breakeven!

[ratiman]

Good Slate article on Care and how it's like Tinder. It's a good account of why mothers are willing to spend $35/month to find a sitter when there are free alternatives. It's also a sign that Care.com isn't that well known, or not as well known as Tinder.

 

http://slate.me/22IF00Y

 

But the flip side of the overwhelming numbers is that—just as on a dating site—it’s hard to settle, because

you know there are thousands more to choose from out there. Is this the best possible person? Or can I find someone closer, cheaper, nicer, more experienced? I “swipe left” on babysitters for bad grammar, bad photos, bad makeup, yet I still have plenty of bad first dates. Megan is a no-show for a trial babysitting session; I call her and she is clearly asleep, having completely forgotten about our appointment. (“Wasn’t it

on Thursday?” she slurs.) Jaclyn arrives 30 minutes late to the playground where I’m waiting with my son; I watch her approach, meandering with her phone, seemingly unhurried. She is pursuing an early childhood education degree online, she says, because it’s “better for my ADD.” At least we’re not stuck having dinner.

[Pelagic]

There are 12,000 (!!) English-speaking, in-home babysitters who live within five miles of me; I need to narrow the candidates down somehow.

 

It would seem Care.com could use some kind of matching algorithm, having this many choices might be a little overwhelming and encourage users to be ultra selective knowing they can always just try out another one. Choices are nice, especially when it's something as important as a babysitter, but the average user, like the article's author, probably has better things to do that interview 100s of babysitters.

[ratiman]

Based on the Slate article, Care hits new high in iOS app store at 25 in lifestyle category. It's within the top 1000 apps, so not exactly at Uber levels but improving.

 

 

http://40.media.tumblr.com/e938484784d65ba964f62f3cdb9b0290/tumblr_o0j1czlbP61qm0t57o1_1280.png

[ratiman]

My unhealthy obsession with caredotcom continues:

 

Twitter reviews:

 

the new Tinder

 

 

Easy money

 

 

Rec'd to friends

 

 

More easy money

 

 

Wall street analyst criticizes business model

 

 

 

[ratiman]

Care is getting killed by Apple's 30% app store fee. I didn't really see that coming. Care grew at 25% last year and traffic was up 50% so I figured it was doing OK. Apparently the 30% app store fee is a killer as all the users want to sign up in the app store, not on the website.  Care is selling a subscription, and a subscription is a pure digital good, so it gets the 30% fee. Uber is selling transportation, so it doesn't get the fee. Spotify is selling a digital good, so it gets the fee. It's kind of screwy that a business model stands or falls on Apple's corporate ontology. I can just see Tim Cook in his office cogitating what's digital and what's real. Apple will probably face some antitrust issues but there it is. Sold my shares yesterday.

[ratiman]

Care had a pretty good quarter. It's converting in the App store despite 20% higher fee to users, which is pretty good. What really makes Care interesting is the enterprise business. The enterprise business (Care@Work, serves employees) solves one-half of the problem any marketplace has to solve, demand. The enterprise service provides lots of demand at a near-zero acquisition cost. Care@Work will probably end 2016 with about 1 million employees at $10/employee. About 15% of employees use the service in an average year, so that's 150,000 users compared to the current paying sub base of 266,000. All of that additional demand draws more babysitters, who are increasingly paying for access to the site. So even as the number of paying "retail" subs stalls, the network continues to grow at a decent rate. So overall I think the stock is going to $10 in the near term, It's basically a healthy business with a continuing bottleneck in the Google/Apple app stores (both charge a 30% fee). As the enterprise business grows, the network will become much more valuable, and then Care can sell lots of transactions and services on top of that, like DateNight or taxis (Uber for Kids). 

[DCG]

I don't have much to add other than that we've been using Care.com to search for child car and my wife has been complaining about how terrible their site and app are.

[ratiman]

Is this your wife:

"I have disliked many apps, but never so much as this one that I had to write a review. I thought this app was for professionals, when really, anyone, including child molesters, can post their services for childcare. For $45 you don't get jack crap except more room in your inbox for loonies to fill up. If you don't pay the extra $$ on TOP of the $45 when you sign up, then you have to pay close to $60 a pop for background checks!! Then they put up a disclaimer that you can't trust the background checks. WTH??? I'm sure not everyone on this app looking for a job is heinous, and in fact there may be some great ones I'll never get the chance to meet because this app is not well regulated. It's exactly like Craigslist, except Craigslist is free to browse and contact users. Not nearly worth the money, time or headache this app has caused us."

[DCG]

ha..no..she definitely hasn't posted a review, but has expressed a similar concern that there is nothing at all preventing child molesters from using the site, and Care.com seems to not care about that at all.

[ratiman]

Looks like Care is up to $12 after an investment from Google. Unfortunately I sold out in the $9s . . . lol. Somebody timed this for the day before the last day of the quarter so the shorts would be completely screwed.