It is now my pleasure to introduce your host, Denise Garcia, Investor Relations. Thank you. You may begin.

Transcription

1 Care.com Second Quarter 2015 Earnings Results Conference Call August 4, 2015 Operator: Greetings. Welcome to the Care.com Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a 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, Denise Garcia, Investor Relations. Thank you. You may begin. Denise Garcia: Thank you. Good morning and welcome to Care.com s financial results call for the fiscal quarter ended June 27, 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 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 and other forward-looking topics. Such statements are only predictions based on Management s current expectations. Actual results or events could differ materially from those predictions due to a number of risks and uncertainties, including those set forth in the press release we issued this morning, 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 also be referring to non-gaap measures on this call, including Adjusted EBITDA, which we refer to as EBITDA throughout this presentation. EBITDA represents pre-tax net loss, less depreciation and amortization, as well as certain other non-cash adjustments and certain unusual expenses such as M&A costs. 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 8-K filed this morning.

2 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 section of Care.com. With that, let me turn the call over to Sheila Lirio Marcelo, Founder, Chairwoman, and CEO of Care.com. Sheila Lirio Marcelo: Thanks, Denise. Good morning. Thank you all for joining us today. On today s call I ll walk you through our second quarter financial highlights and discuss the progress we ve made against the key priorities we outlined earlier this year. I ll then turn the call over to our new CFO, Michael Echenberg who will walk you through a more detailed discussion of our financial results. Following our prepared remarks we ll open the call for questions. Before we begin, I would like to remind everyone that throughout our remarks this morning when I refer to break-even or profitability, we re referring to these items on an Adjusted EBITDA basis. We remained focused on executing across our key priorities this quarter. As we've mentioned our key priorities for 2015 include mobile optimization, price and package testing and our path to breakeven by mid-2016 with sustain profitability thereafter. I'm excited to share more details with you in a moment. Before I do I'll review our consolidated quarterly highlights and financial details. Consistent with our plan, we continue to drive top-line growth as the leading online destination for finding and managing family care in an addressable market consisting of 42 million families in the US alone. We delivered solid revenue results while increasing operating leverage and remaining committed to our profitability goals. For the second quarter revenue grew to $35.7 million, a 38% increase over Q on a consolidated basis and a 27% increase organically, that is excluding Citrus Lane which we acquired in July Second quarter net loss was $7.2 million as compared to a net loss of $9.9 million in the second quarter of On an EBITDA basis for the consolidated business, the second quarter 2015 loss was $3.7 million which compares to an EBITDA loss of $6.6 million in the second quarter of These solid results were driven largely by growth from our US Consumer business which is a combination of our US Matching and Payment services. Our US Consumer business makes up 76% of our revenue and grew 27% versus Q2 of As we have discussed on previous calls, the reason we've combined our businesses is that we target the same customer segment with the same marketing budget across both and our plan is to move to an even tighter product and marketing integration. I'll also note

3 that we no longer include Workplace Solutions when referring to our Matching service. We had included it previously because we consider it a key channel of growth for the Matching service but given the fundamental difference in operations and unit economics, which Michael will discuss in his section, we are excluding it going forward. For US Consumer we ended the quarter with over 254,000 paying members representing a 24% increase over Q While this is lower than the 28% growth we saw in Q1 for the US Consumer business, it is on track with our moderated growth expectation and guidance for the full year of between 20% and 25% provided earlier this year. As a reminder, we moderated our growth expectations because of our price and package testing, our new untested mobile initiatives, and our marketing spend optimization. As part of our marketing optimization initiative, we've identified a number of digital platforms as scalable channels of growth given that they enable us to target Moms efficiently. We did experience fewer than expected new signups from these new digital channels in Q2 because we purposely balanced growth with profitability as we tested and learned and we expect this flow-through to softer Q3 renewals. However, given the latest results have been strong we're continuing to test spend aggressively on these new digital channels and expect to begin to see the benefits in Q4. Our international and B2B businesses which now include Workplace Solutions delivered combined revenue growth of 29% over Q2 14, or 41% on a constant currency basis to $4.2 million. We're excited about these businesses and the growth opportunities they represent as they leverage the strength of the Care.com platform while expanding our TAM. Workplace Solution continues to be a high growth channel of recurring revenue. We continued to add new clients in the quarter such as Twitter and McKinsey and Company. Existing clients including AMD, HubSpot, MIT and many others continue to renew and in many cases expand their relationships with us by adding additional products such as back-up care which is a key part of Workplace Solution Suite of services and increasing their employee coverage. Thus our revenue retention rate for existing clients is 110% which is not surprising given high user satisfaction. By way of example, back-up care had a net promoter score of 73% in Q2. Separately, Citrus Lane revenue was $2.7 million for the quarter. While this was less than anticipated we've been pleased with our progress on gross margin. We've seen a significant step-up from the low single-digit incremental gross margin we saw earlier this year as we diversified marketing tactics beyond Citrus Lane s reliance on discounting prior to our acquisition of the company and improved overall operations in the first half of this year. With the Team's focus on improving gross margin, we saw overall sequential improvements month over month in incremental gross margins for new subscribers from 6% in January to 33% in June. These improvements in new subscriber economics, a

4 result of new marketing and operational tactics contributed to overall incremental gross margin of 22% in June. Our focus for the second half of this year is increasing the top line through new box acquisitions and cross sell synergy tactics with the matching platform such as integrated marketing via Pinterest and other channels. Moving to our key business initiatives we continue to make investments in mobile which, as in Q1, represented about two-thirds of our traffic. The full integration of availability, bookings, and payments is now complete as we prepare to launch on demand, mobile offerings starting in the latter half of this year. Our goal here is to increase the number of families and caregivers that we monetize. As an example of these transactional offerings we shared on last quarter's earnings call our Date Night offering is on track to launch in September. We re working with two partners at launch, Open Table as our exclusive restaurant reservation provider and Fandango as our exclusive movie provider. We're exciting about the upcoming launch of Date Night products with these partners. This product will enable users, every time they have a date, to arrange their childcare, dining and entertainment together as one integrated one user experience. In addition we've begun in market testing of our mobile enrollment update on mobile web and expect to continue to enhance our US matching app along the lines of recent launch of real time video interviewing capabilities in the second half of this year. We'll have more to say in our next call about future mobile apps and enhancements. Moving now to our second area of focus; price and package testing and our US Consumer business with the goal of driving up both ARPU and conversion, we have designed packages at different price levels that are more tailored to the specific needs of different member segments. We started testing in June and we're encouraged by the early results with indications over the last several weeks of winning test cells that are pushing both ARPU and conversion in the right direction. Moving now to our focus on profitability. A key driver of profitability for us is sales and marketing leverage. While revenue increased 38% versus Q2 of 2014, sales and marketing expense grew just 4%. As a result, sales and marketing, as a percentage of revenue, fell by 17 percentage points from 70% in Q to 53% in Q and for the full year we expect sales and marketing as a percentage of revenue to be in the low 50s. Cost per customer acquisition or CAC, a leading indicator of sales and marketing leverage is also heading in the right direction. In the first half of this year it was down 20% versus the first half of 2014 exceeding our guidance of a 15% reduction in CAC which Michael will provide more detail on CAC shortly. This improved efficiency is the result of growth in unpaid signups via organic activity - SEO traffic grew 38% this period and in our paid channels we saw improvement as well.

5 Our end of period members grew by 24% while direct spend fell by 8% versus the prior in the first half of 2014 and within that, TV Spend fell by 31%. We expect to continue to reduce CAC in the second half of 2015 relative to 2014 as we benefit from our organic investments and expand promising new digital channels of growth such as Facebook and Pinterest. That said, we made good progress on efficiency in the back half of 2014 so on a relative basis we expect to make less progress versus prior in H than we did in H1. For the full year we expect CAC to fall by 8% to 10%. These CAC improvements and our overall unit economics give us a window to our expected path to near term profitability. Now let me turn the call over to Michael to talk about the unit economics in detail and also to discuss other sources of operating leverage beyond sales and marketing, including G&A. Michael Echenberg: Thanks, Sheila. I'd like to start by sharing my excitement of being part of this terrific mission-driven Company. I've now been here for a little over three months and I've been impressed by the size of our opportunity and by the talent and sense of urgency among the people on the Team pursuing that opportunity. In my role as CFO I'm focused on the same strategic goals as Sheila with an emphasis on cost consciousness alongside a prioritized set of revenue growth initiatives. I view judiciousness on cost as critical to getting us to breakeven by mid-2016 and sustained profitability thereafter. I'll now share perspective on the business beginning with the unit economics for the US consumer and then shifting to operating leverage. The unit economics for our consumer business in the US are strong and getting stronger. Since I joined in late April, we've evolved how we make use of the key metrics to manage the business. To align with that, I've made a few adjustments to our calculations. I'll walk you through the new calculations in some detail so that we can all track them in a consistent way. Ultimately, this is about getting to an ROI calculation that compares the lifetime value of a customer (her LTV) to the cost to acquire that customer (or CAC). For starters let me be explicit about what's in and what's out of our analysis. What's in is the B2C matching and payments business in the US. What's out is B2B, most notably Workplace Solutions. The reason for including payments alongside matching is that we acquire customers for the two products with a single set of integrated marketing activities and a single marketing budget and our plan going forward is for further integration of the product such as through Nanny Premium. Turning now to Workplace Solutions, while we previously included it in our ROI calculation, since it's a channel of growth to expand our matching business, we are excluding it moving forward because it has fundamentally different dynamics. To highlight a couple of examples, first the cadence of our Workplace Solutions business maps to the timing of corporate benefits enrollment such that its peak season is different than that of B2C. This means that we typically see a step up in revenue from Q4 to Q1

6 and then relatively flat revenue across quarters sequentially until the next open enrollment cycle. Secondly, our Workplace Solutions clients typically pay us on as per employee, per year basis and then we work with them to drive penetration among their employees. We sell these services and manage these client relationships with a small, dedicated sales and account management team. This model is difficult to translate in an apples-to-apples way into consumer unit economic terms. Finally, I'll note that the time period I'll be focused on in discussing unit economics is the first half of 2015 in comparison to the first half of 2014 and the metrics I'll reference are calculated the same way in the two time periods. Let's dive in now, starting with CAC. The numerator of CAC is direct marketing spend focused on US consumers. This is our largest category of marketing spend comprising 77% of the total for US consumer and about 60% of total company sales and marketing. It covers all media spend, in particular television and digital. I'm excluding from the numerator our indirect marketing spend which includes people expense both inside the company, our marketing, public relations, creative and business development teams, and outside the company. For example, our spend this year with a consultant helping us with the price and package work that Sheila referenced. Given that we're focused on consumer unit economics, I'm also excluding any expense associated with selling into Workplace Solutions clients. The denominator of CAC is solely new customers for the period in question. I'm explicitly excluding re-users in order to keep the math internally consistent and you'll see why when I get to the LTV calculation. CAC for the first half of 2015 is $134, a decrease of 17% versus the first half of Parenthetically, in the past we've shared the version of CAC that includes re-users in the denominator. I'll share it now for those who continue to track it. For the first half of 2015, as Sheila referenced earlier, it was down 20% versus the first half of 2014, to $93. I'll move on now to lifetime value or LTV. LTV is the product of average revenue per user per month or ARPU, length of paid time in months or LOPT and gross margin. ARPU for the first half of 2015 was $37.58, an increase versus prior of 1%. Length of paid time, which includes a customer's initial subscription as well as any reuse cycles is 14.4 months, an increase versus prior of 5%. This 14.4 months is the weighted average of 8.8 months for matching and 40 months for payments. Note that through the end of this year you'll find the LOPT for matching and other component details on the IR website. Beginning in 2016, we ll provide the combined metrics exclusively because that matches how we manage the business. Finally gross margin is 83%, an improvement versus prior of about 230 basis points. For simplicity I'm using total gross margin here rather than incremental gross margin making this a bit conservative as a result.

7 Dividing LTV by CAC gives us our ROI of 3.3X for the first half of 2015 up versus 2.5X for the first half of We'll be refreshing this analysis and updating the underlying detail on the IR website twice a year as we look to drive improvements in each of the critical drivers. By way of example, the price and package work that Sheila described is focused on driving up ARPU while the sales and marketing optimization is focused on driving down CAC. Moving on from unit economics to operating leverage, we continue to get leverage on the sales and marketing line. Sheila mentioned the 17 percentage points of improvement versus prior in sales and marketing as a percent of revenue overall in Q2 of For the organic business, it was 15 points of improvement and you see a clear continuation of the story from Q1. In both quarters we spent almost exactly the same in sales and marketing in 2015 as we did in 2014; $20 million in both first quarters and $18 million in both second quarters, and in each case we added about $7 million, or 27%, to the top line. More broadly, we've been achieving sales and marketing leverage improvements versus prior year for four quarters in a row now. Outside of Sales and Marketing, we saw incremental leverage versus prior on the cost of revenue, G&A, and R&D lines. On an organic basis we saw gross margin expansion versus prior in Q2 of about 200 basis points, and G&A as a percent of revenue fell by 300 basis points versus prior in Q2. R&D as a percent of revenue fell by about 100 basis points versus prior with improvements partially offset as we stepped up our investments in critical innovation, most notably the mobile initiatives that Sheila described. While we've seen some positive cost dynamics in the quarter, with 17 percentage points of Adjusted EBITDA margin improvement versus Q2 of 2014 on an organic basis, and 15 percentage points overall, it's critical for us to go further. We've already begun to find cost savings across the company and expect more in the upcoming quarters as we continue to review all aspects of the business with our team. This effort, which is a partnership with Sheila and the rest of the management team, is among the most important to me in my first year as CFO. As a team, we're intent on managing the pace of expenses while also driving revenue growth through the right prioritized set of strategic initiatives. We view top-line growth and cost discipline as not at all mutually exclusive. This shared mind-set is part of why I'm confident in my belief that we'll break even by mid We'll have more to say about these savings initiatives on future calls. I'll turn now to guidance. For the third quarter our revenue guidance is $36.5million to $39.5 million with $34 million to $36 million for the organic business. This is a bit below what we had anticipated earlier as we expected our new digital marketing tactics in Q2 to have scaled sooner. Separately, the price and package testing that we started in June caused a decrease in the volume of signups as anticipated, as we continued to optimize. We expect that the

8 impact of both factors will be time bound given the early indications that Sheila described on both fronts as the benefits of optimization kick in. For Citrus Lane in the third quarter we're guiding to $2.5 million to $3.5 million. For the full year we're guiding to $146 million to $153 million with $134 million to $140 million for the organic business and $12 million to $13 million for Citrus Lane. On to Adjusted EBITDA. Here I'll start with the full year. For the full year our Adjusted EBITDA guidance is negative $13 million to negative $10 million. Given that Adjusted EBITDA for the first half was negative $10.8 million, this translates into negative $2.2 million to positive $0.8 million for the second half. The split between Q3 and Q4 is a function of the cadence of our spend, specifically on sales and marketing. Given the timing of our peak season Q3 is slated to be the quarter of highest sales and marketing spend in 2015 just as it was in 2014 and in years prior. I'll also note that similar to last year, about 85% of our direct marketing spending will occur in the first three quarters of the year. Thus Q4 is slated to be the quarter of lowest sales and marketing spend. Consistent with 2014, then, we're expecting lower Adjusted EBITDA in Q3 than in Q2 and positive Adjusted EBITDA in Q4. Our Q3 Adjusted EBITDA guidance is minus $6 million to minus $5 million, and to carve out the Citrus Lane portion of Adjusted EBITDA we expect Citrus Lane to represent roughly negative $0.5 million in Q3 and between negative $3.5 million and negative $2.5 million for the full year. Our non-gaap EPS we're guiding to negative $0.68 to negative $0.60 for the full year and to negative $0.27 to negative $0.24 for the third quarter. For the balance of the year we're expecting the Euro to be at $1.03 and the pound to be at $1.47, 5% in either direction for both represents roughly $300,000 of revenue, just $10,000 of Adjusted EBITDA, and about $0.02 of non-gaap EPS. Note that the non-gaap EPS sensitivity includes the impact of revaluing balance sheet items denominated in foreign currencies. Finally, on cash. Our cash position at the end of the quarter was about $56.5 million compared to $62.7 million at the end of Q1. Note that to facilitate the implementation of our new ERP system we chose to accelerate roughly $3 million in payments to vendors that we would have otherwise have made in July. We continue to expect to end 2015 with approximately $50 million in cash. I'll close by saying that we believe we're executing well against the strategic priorities we outlined at the beginning of the year. We continue to drive top-line growth with improving margins and believe we'll break even in mid-2016 and achieve sustained profitability thereafter, and I'm excited to be on the team. Now Sheila and I will be happy to take your questions. Operator:

9 Thank you, we will now be conducting a question-and-answer session. If you would like to ask a question please press star, one on your telephone key pad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you'd like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star key. One moment while we poll for yes, sir. Our first question comes from the line of Kerry Rice with Needham and Company. Please proceed with your question. Thanks. I know you just walked through the unit economics and CAC and operating with what you expected but I was a little still unclear as it relates to the timing around the pricing and bundles. You said that you'd vetted (phon) a scale as soon as you expected. Why is that, if you can highlight that again and then is it just a matter of, you know, you did see positive results and you were just finishing testing and now that you have seen positive results and so now you're scaling up? Just a little more clarification on that and then I have a follow-up question. Sure, Kerry, good morning. Good morning. Specifically, we started testing the pricing and packaging in June and so it did have an impact on the Q2 results that we believe we're assuming pulling through into Q3. In July you can see and visit the website, we do have a winning test sell today that will flow through into Q4 based on our testing that is included in our guidance for the year, and so with regards to unit economics, we expect that that winning test sell will impact both ARPU and conversion in the right direction. OK. So was it just later I m trying what s the difference between maybe post-q1 and now post-q2 as we think about revenue growth. I mean, was it always slated for June and so it what s the difference there, I guess, and why that you're kind of bringing why it s a little bit lower your full year guidance?

10 Sure. As we mentioned in Q1, when we guided for the year, that we moderated expectation on end of period signups between 20 and 25. It was actually moderated from the previous year of 25 to 30. We expected to start testing in June, and with that, we shared in our last earnings call of our expectation that we're going to take certain traffic and go ahead and test it and may have an overall conversion impact which is what we saw with early testing. That's been our experience for the past eight years when you start to begin testing, to optimize. So these were anticipated changes that we expected. What we found (Inaudible). Go ahead, I'm sorry. But what we found for annually, we did moderate our expectation on the top of our guidance for about a million dollars on the organic side of the business specifically because some of the new digital channels that we were going after, which were very promising because it's got good ROI when we're targeting Moms, so it's quite efficient, but in testing as well in Q2, it was not what we anticipated that we would have a slower ramp of those new digital channels that impacts the year that we're expecting. Okay and any reason that you can disclose why that was a slower ramp in those digital channels? Certainly it's well-known that, you know, a specific channel in June was having sort of algorithm challenges and we continued to spend aggressively and we're now working with some of these vendors and they've assigned Teams and so in July we've seen improvements already. Okay and that kind of dovetails with my second question. Can you talk a little bit at all about I think in previous quarter s maybe you provided a little more detail on what you're seeing at SCO and Facebook and affiliates? Sure. With regards to SCO we continue to increase traffic and it continues to be a promising channel for us and, as you know, Kerry, we started investing significantly in SCO in mid-2013 and certainly garnering the benefits of that that's helping drive CAC down, though, we guided CAC down to 15% we actually hit for the first half CAC declining by 20% versus first half prior so that's been really good. With regards to the

11 digital channels, you'll see with television, we indicated we decreased TV by 31%. We maintained overall spending flat between last year and this year in the same quarter and so we're starting to channel that spending into the digital channels. OK, and (Inaudible) So primarily social, you know, you mentioned Pinterest as well. You're seeing good traffic from Pinterest? We're definitely focused around social marketing and these new digital channels. Thank you very much. Operator: As a reminder, ladies and gentlemen, if you would like to ask a question, press star, one on your telephone key pad. If you are using a speakerphone, you may need to pick up your handset before you press the star keys. Our next question comes from the line of Mitch Bartlett with Craig Hallum. Proceed with your question. Sure Sheila, just to reiterate again, the changes on pricing and the packages are across the board now or are they rollout over the next six months or how does that work? Good morning, Mitch. It's certainly across the board now; it's running at 100% of our test sells during the peak season. I will note that we are continuously testing even though we might find winning test sells we're constantly iterating, which you know we've been doing for a number of years to ensure we're optimizing and overall monetizing our members.

12 And the Open Table, Fandango partners for Date Night that rolls out in the second half here? As we've indicated in our prepared remarks, we plan, and it's on schedule to launch, Date Night is expected to launch in September. Okay. With those partners. Is that pricing something you could discuss or what does that look like? The pricing that we're going to test and will continue to test is transactional, and as you know one of monetizer families in our caregivers. This year we're expecting about 15% to 18% overall conversion of basic to premiums, and so we do believe that we can offer other products to our members, both families and caregivers, to further monetize them with other products such as Date Night and we'll be rolling out other transactional products before the end of the year. Perfect, and then Michael, I like the new calculation, I'm glad you walked through it so deliberately. Michael Echenberg: Thank you. But why should we start looking at the combined payments and matching business on a LTV to CAC basis? Why are they so intimately related? Shouldn't we be following each of the separate businesses?

13 Michael Echenberg: Sure, it s a great question. I appreciate it. They're intimately related for a couple of reasons. One related to marketing and the other related to the products themselves. On marketing, our marketing activities, our marketing budget across the two products are basically one and the same. There isn't a separate CAC really for the one and the other, and then from a customer facing product standpoint there's some integration today and the goal going forward is to get ever more integrated, you know, the synergies having the relationship with the families and the caregivers such that we can serve up the opportunity to take advantage of the Home Pay services at just the right time. That was part of the logic of the acquisition in the first place and we're taking steps to take advantage ever more of those synergies. Perfect. I can appreciate that. I know you've just now combined them, but for the simplicity of looking into our models, could you offer up how many subscribers you had in the payment side in the quarter? Or are you just moving away from that? Michael Echenberg: We're really moving away from that. You know, we're focused on the combined 254,000 end of period members which represents about 24% growth versus prior. Perfect. One more, just one more. Sheila, you talked about video interviewing? I didn't understand that. Yes. We just very recently launched Real Time Video Interviewing through our mobile app making it easier and convenient for families and also providing them a safer way to screen caregivers. Sounds interesting. Thank you. Operator: As a final reminder, if you would like to ask a question press star, one on your telephone key pad. One moment, please, while we re-poll for any additional questions.

14 Thank you. We have reached the end of the question-and-answer session, and with that the end of today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.