Care.com's (CRCM) CEO Sheila Marcelo on Q2 2014 Results - Earnings Call Transcript

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 |  About: Care.com, Inc. (CRCM)
by: SA Transcripts

Care.com Inc. (NYSE:CRCM)

Q2 2014 Earnings Conference Call

July 31, 2014 08:00 AM ET

Executives

Denise Garcia - IR

Sheila Marcelo - President and CEO

John Leahy - EVP and CFO

Analysts

Justin Post - Bank of America Merrill Lynch

Douglas Anmuth - JPMorgan

Operator

Greetings and welcome to the Care.com Second Quarter 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Denise Garcia, Investor Relations. Miss Garcia, you may now begin.

Denise Garcia

Thank you. Good morning and welcome to Care.com’s financial results call for the fiscal quarter ended June 28, 2014. During the course of this conference call, we will discuss our business outlook and make other forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These may include, among other things, projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities, and other forward-looking topics. Such statements are only predictions based on Management's current expectations. Actual events or results could differ materially from those predictions, due to a number of risks and uncertainties, including those set forth in the press release that we issued earlier 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 also be referring to non-GAAP measures on this call. 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 earlier this morning with the SEC.

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 financial information or the Web cast replay, please consult the IR section of Care.com. On today's call are Sheila Lirio Marcelo, Founder and CEO, and John Leahy, EVP and CFO.

With that, let me turn the call over to Sheila Marcelo.

Sheila Marcelo

Thanks, Denise. Good morning. Thanks for joining us today to discuss our second quarter results. I'll start with our recent business and quarterly highlights. Earlier this month we announced that Care.com acquired Citrus Lane, the largest social commerce platform designed for moms, with 400,000 members, 45,000 monthly paying subscribers, a similar demographic with Care.com’s mom-centric customer base, and significant opportunities to leverage our assets online, offline and in the local community. We expect that adding the Citrus Lane experience to existing Care.com offerings will further extend strong LTV across our platform and enhance our 'Care.com Everyday' engagement strategy. I’ll share the details regarding both with you shortly.

Moving to our 2nd quarter highlights, second quarter revenue was $25.8 million, an increase of 35% over Q2 of last year. Q2 Adjusted EBITDA was a loss of $6.6 million. We continue to make significant progress in each of our businesses. Our worldwide membership grew to 11.8 million members, a 44% increase over Q2 of last year, with families growing 48% and caregivers growing 40%.

In our U.S. Matching business, end of period paying members grew to 192,000, a 28% increase over last year. Our latest cohorts demonstrated gains in length of paid time, which along with member of monetization initiatives, is driving continued growth in ARPU and LTV. Finally, we are making highly targeted direct marketing investments, while ramping initiatives to further drive organic growth, as we target profitability in our U.S. matching business this year.

In our Payments business, we saw continued acceleration, as we drive adoption of this underpenetrated, high-ROI business. Payments revenue grew 35% over Q2 of last year, and members grew 28%. This included 42% of new Payments members sourced via Care.com, compared to 26% in Q4 2012, just after we acquired this business, and 31% in Q2 of 2013. In fact, our core operating model is now geared to integrated marketing and product initiatives in order to monetize across our matching and payments platforms. I will share more on the results of these initiatives in a few minutes.

Our emerging businesses continue to show strong progress, with 68% growth in Q2 over last year. This includes acceleration in our International operations, following the transition to a common technology platform, and promising results in our B2B provider recruiting platform and SMB businesses, what we call our Marketplace businesses.

You may recall Big Tent, another successful acquisition we completed last year that is a hosted community platform. We are very pleased with our progress there, and launched the Big Tent Mobile App by Care.com. We now have more than 1 million registered members and over 1,700 parent groups under Big Tent, and have added mobile capability. Big Tent is becoming the core of what we call the 'Care.com Everyday' strategy, our plan to engage millions of our registered members across all the Care.com platforms on a daily basis.

Finally, we have made important additions to our leadership team, adding depth and targeted expertise to help us innovate, enhance and grow our family-focused platforms. Mauria Finley, Founder and CEO of Citrus Lane, whose career as a product innovator has included tenures at eBay, PayPal, AOL and Netscape, has been named SVP and GM of Citrus Lane, and Caroline Sheu, formerly Head of Global Marketing at Disney Interactive and Sony Interactive has joined us as Care.com's Chief Marketing Officer. Caroline's extensive experience includes launching numerous number one iPhone apps for Disney as well as digital content across Sony's various channels. We welcome both Mauria and Caroline to the team and look forward to working with them and, in particular, their contributions to our mobile, organic and 'Care.com Everyday' strategy.

Now, I’d like to share with you our second quarter performance results, beginning with our Core U.S. Matching and Payments businesses. Our U.S. Matching business includes our consumer marketplace, matching families and caregivers, as well as our workplace solutions business, made of annual and multi-year contracts with corporate employers. Q2 U.S. Matching revenue grew to $19.1 million, a 30% increase over Q2 of last year, driven by strong member growth, monetization initiatives, and recurring revenues from our employer program.

Revenue growth in the quarter was slightly impacted by a shift toward longer-term subscription packages, driven by planned promotions. Three-month subscriptions represented approximately 20% of Q2 subscriptions, versus 15% in Q1 and 12% in Q2 of last year. While this shift had the impact of lowering in-quarter revenue, we expect a longer subscription term to drive a higher LTV over time. Historically, the average 3 month subscriber has approximately 50% higher LTV than a monthly subscriber.

At the end of Q2, we had 192,000 paying members in our U.S. Matching business, a 28% increase over the same period last year, and in line with our targeted member growth in the range of 25% to 30% for the full year 2014.

Our U.S. Matching member economics continue to be very strong. Average monthly revenue per user, or ARPU, was $34 in Q2, a 3% increase over Q2 of last year. Recurring revenue from our employer program, and monetization initiatives, such as enhanced background checks and our premium provider product, were key drivers of ARPU expansion, with no pricing increases during the quarter. We are continuing to invest to capture our large market opportunity, and are driving efficiency in our marketing spend, by investing in initiatives to accelerate organic growth, with a priority on building out the Care.com community experience, as part of our 'Care.com Everyday' strategy.

Over the past several quarters we have made a number of enhancements to our Big Tent community platform. With over 1 million registered members and over 1,700 parenting groups, the Big Tent community has a high degree of similar demographics shared with our targeted Care.com member base. We have already seen the conversion rate to paid matching membership for Big Tent members at twice the rate of the average Care.com visitor. We believe the future opportunity is significant. This morning we are announcing the launch of the new Big Tent community mobile app, the first phase in transitioning to a 'home page' experience for all Care.com members, including both basic and paying matching subscribers, to drive everyday engagement. We are very excited to bring a robust mobile community experience to our members to accelerate organic growth.

We are also driving organic growth by expanding our SEO footprint. For example, we are segmenting our search results to meet specific consumer needs, such as 'after school care' and 'date night babysitters.' As a result, we have seen significant gains in our SEO channel, including an increase in organic search traffic of 85% over last year. We will continue to invest to drive growth through this and other unpaid channels.

Overall traffic was strong in the quarter, with 6.3 million average monthly unique visitors, an increase of 8% over Q1’14, which is a peak period. Mobile continued to be a significant factor in the quarter, with over 50% of total traffic via mobile device.

Our mobile innovation is being noticed. Apple showcased the Care.com app at its worldwide Developers Conference as an example of best-in-class feature design and featured the app in the iTunes store over Father's Day weekend. We believe these product and user experience investments are driving members' length of paid time as we continue to see gains in this area.

We have previously shared the progress of our 2010 cohort, as an example of strong growth. That cohort's average length of paid time has increased from 6.9 months, as shared during our IPO roadshow, to 7.4 months as of Q4 2013, and 7.7 months, as we shared on our Q1 earnings call. We continue to see increased traction across our member base as demonstrated by the historical average length of paid time experience for each of our annual cohorts, which is now detailed in the presentation posted today to the Investors section of our website.

Turning to our Payments business, our consumer payments solutions provide families several options to manage their financial relationship with their caregiver through the use of household employer payroll and tax services, as well as electronic convenience payments. In Q2, Payments revenue grew 35% to $3.3 million. Member growth continues to accelerate with nearly 13,000 paying members at the end of Q2, up 28% over last year.

Payments member economics continue to be very strong, with ARPU of $88 in Q2. This is a highly recurring, highly profitable business, with historic EBITDA margins over 50%. We recently completed the full rebranding of our Payments business to Care.com HomePay, including a mini-site, and co-branding initiatives with nanny agency partners. Now integrated in both our market presence and our internal operating model, we believe we are well positioned to drive even more growth in this high-ROI channel.

In summary, both U.S. Matching and Payments are on track and doing well. We are executing successfully on cross sell initiatives, growing members and revenue with strong member metrics. As we have shared, we have begun to integrate our U.S. Matching and Payments businesses from a marketing and product perspective, including bundled product offerings and user experience initiatives, such as our 'Free Time' promotion, which typically features a free hour of care for members using our Payments product.

In addition, we introduced integrated marketing campaigns earlier this year, including our top performing TV ad that includes both Matching and Payments components, and also our Cost of Care campaign, which put a spotlight on this all-important topic while demonstrating solutions offered via our Matching and Payments platforms, as well as our employer program. This approach is paying off, as demonstrated by increased cross sell of Matching members to Payments, with 42% of new HomePay members coming from Care.com in Q2, compared to 26% in Q4 2013, just after we acquired the business, and 31% in Q2 of 2013.

As a result of cross selling Care.com paid members the HomePay product, we grow lifetime revenue in two ways: 1, increasing LTV via the HomePay product; and 2, increasing core matching length of paid time with members that have a HomePay subscription. In the latter, Care.com length of paid time is 50% longer than other U.S. paid matching members without a HomePay account. Given our integration of the U.S. and Payment businesses, measuring our members’ lifetime value and the return on our direct marketing investments on a blended basis is a better way to measure our progress and evaluate our business. On an annual basis, we are targeting ROI in the 4.0 to 5.0 X range.

We are the leader in a 'Winner Take All' market, and we are constantly looking for ways to leverage our core platform for additional monetization opportunities, particularly in the areas of building community and content as we shared in our IPO roadshow. Our recent acquisition of Citrus Lane is consistent with this core strategy, and brings exciting additional cross-platform monetization opportunities.

Based in Mountain View, California, Citrus Lane is the leading subscription-based social commerce service, selling curated products to families on a monthly basis. In 2013, Citrus Lane had $6 million in recurring, subscription-based revenue and is on track to double revenue this year. Revenue growth has been driven by the Company’s successful results in growing its membership over the past three years, which is currently 400,000 members and 45,000 monthly paying subscribers. Similar to our acquisition of Breedlove, which is now Care.com HomePay, Citrus Lane members have a similar demographic profile to Care.com members. They are overwhelmingly female; they have an average of 1.5 children ages 0 to 5, their average household income is over 100,000 per year; and they are highly educated, with more than 75% with college degrees.

And here is how Citrus Lane works: For a monthly fee, members receive a curated box with branded, developmentally appropriate products selected for the age of their child and for Mom. Subscription lengths range from 1 to 12 months. The Company sources and reviews every product it sells, while also encouraging parents to share feedback on their favorite product discoveries. This creates a rich social community of moms, a natural fit with Care.com’s Everyday strategy. Citrus Lane’s vibrant, social Mom community has a robust experience for both paying subscribers and basic, non-paying members. All members can access Citrus Lane’s Web site, mobile application, and Facebook community. On average, Citrus Lane members engage 60 times per year, or five times per month. Members vote on products and the Company has received over 2 million product votes. In addition, they share parenting advice, family moments and thousands of photos.

Overall, Citrus Lane members’ high level of engagement translates into strong and growing lifetime value. For 2014, we are targeting Citrus Lane's lifetime revenue of approximately $325; LTV on a gross margin basis of approximately $75 and CAC in the $30 to 35 range. John will further discuss financial details regarding Citrus Lane in a few moments.

We expect to drive even higher lifetime value across our membership base, via cross sell. Having regular interactions with moms is a powerful, hard to achieve position, and by adding Citrus Lane to the Care.com family, we plan to further increase the frequency of these connections.

Similar to what we have seen in our acquisition and integration of Breedlove, now rebranded HomePay and Big Tent, we believe that more frequent engagement across multiple Care.com platforms will drive higher overall length of paid time, thus extending LTV even further.

We are also targeting efficiencies in marketing investments across the core Matching and Payments business and now Citrus Lane, and plan to develop integrated campaigns such as those we launched earlier this year that combine Matching and Payment elements.

Finally, we are thrilled to welcome the entire Citrus Lane team, of 25 employees, to our Care.com family. Citrus Lane will continue to operate from Mountain View, where we will also locate the core of our Big Tent Community Team. We are delighted to now have a presence in the Bay Area, and look forward to updating you on our integration progress in the coming months.

And now, I’ll hand the call over to John to take you through the financial details of the quarter.

John Leahy

Thank you, Sheila. I’ll now review our second quarter financial results, share details of our recent acquisition of Citrus Lane, and provide financial guidance for the third quarter and full year 2014. First, I’d like to highlight the expanded disclosures we are providing this quarter. These include: end of period paying members for US Matching and Payments; ARPU for Matching and Payments; length of paid time for all U.S. Matching cohorts and direct marketing spend for U.S. Matching and Payments. We plan to report each of these to you on a quarterly basis. Additionally, we will provide LTV and CAC for our U.S. Matching and Payments businesses on a blended basis annually. We believe that these metrics will be helpful to you in understanding our business performance.

Q2 Revenue was $25.8 million, an increase of 35% from $19.1 million in the same period last year. Adjusted EBITDA was a loss of $6.6 million in the second quarter compared to a loss of $3.6 million in the second quarter of last year. Non-GAAP EPS was a loss of $0.27 and GAAP EPS was a loss of $0.32, based on 31 million weighted average basic shares outstanding. GAAP EPS was negatively impacted by $0.02 as a result of transaction costs related to the acquisition of Citrus Lane. Q2 Gross Margin was $20.1 million, or 78% of revenue, compared to 76% of revenue in Q2 of last year, up due to increased operating efficiencies.

We continue to be very focused on leveraging sales and marketing. For the quarter, total sales and marketing was $18.0 million, or 70% of revenue, compared to $12.3 million, or 64% of revenue in Q2 of last year. This higher percentage of revenue is driven by our planned front loading of direct marketing spend tied to our businesses’ seasonal peaks, as was the case in Q1, as we indicated last quarter, we expect that through Q3 we will spend approximately 85% of our full year direct marketing investment, consistent with 2013. Therefore, we expect to demonstrate year-on-year leverage in Q3 and in Q4.

Our total direct marketing for U.S. Matching and Payments was $11.9 million in Q2, 62% above Q2 2013, representing a reduction from the 92% increase in Q2’13 over Q2 2012. TV spend grew 56% in Q2, compared to 150% growth in Q2 last year. We are also shifting some of our spend to social advertising, such as Facebook and Pinterest. And as Sheila shared, we are increasingly leveraging unpaid organic channels, such as SEO.

R&D expense in the quarter was $4.1 million, or 16% of revenue, compared to 15% of revenue in the second quarter of 2013. We are continuing to invest in high priority areas such as community, mobile and overall member engagement. G&A expense was $6.6 million, or 25% of revenue, compared to 22% of revenue, in the second quarter last year. This includes $575,000 in transaction costs related to the acquisition of Citrus Lane. We expect to leverage G&A as a percent of revenue below prior year in the second half.

Subsequent to Q2, on July 17, we closed our acquisition of Citrus Lane. Consideration paid at closing was $22.9 million in cash and $8.1 million in equity. As part of the transaction, we issued 478,000 shares, and converted Citrus Lane employee options into 380,000 Care.com options. In addition, Citrus Lane shareholders can earn an additional $17.6 million in earn out payments of cash and equity, subject to Citrus Lane’s achieving specific, performance-based milestones in 2015 and 2016.

Citrus Lane’s revenue in 2013 was $6 million, and the business is on track to double this year. We expect Citrus Lane to add roughly $5 to $7 million in revenue to Care.com this year, post-acquisition. We expect EBITDA to be negatively impacted by $3.5 million to $2.5 million in 2014 and the business to breakeven in 2015. The Citrus Lane transaction and financial results from July 18th forward will be reflected in our consolidated financials beginning in Q3.

I’d now like to provide guidance for the third quarter and full year 2014. We are reporting and providing guidance for EPS on a non-GAAP basis in order to demonstrate the performance of our business excluding the impact of stock-based compensation and non-recurring items such as M&A and IPO expenses. We calculate non-GAAP EPS using weighted basic shares for periods in which we have a loss. Reconciliation between GAAP EPS and non-GAAP EPS is provided in the press release.

For the third quarter, we expect revenue for Care.com to be between $29 million and $30 million. We expect Citrus Lane revenue of $2 million to $3 million and total revenue for the Company to be between $31 million and $33 million for the quarter.

We expect third quarter adjusted EBITDA loss from Care.com to be between $9 million and $8 million. We expect Citrus Lane adjusted EBITDA loss of $2.5 million and $1.5 million and adjusted EBIT loss for the Company to be between $11.5 million and $9.5 million. We expect non-GAAP loss per basic share for the Company to be between $0.44 and $0.38 in Q3. In Q3, we expect to have 31.7 million weighted average basic shares outstanding.

For the full year 2014, we expect revenue for Care.com to be between $109 million and $112 million. We expect Citrus Lane revenue of $5 million to $7 million and total revenue for the Company to be between $114 million and $119 million. We expect full year adjusted EBITDA loss for Care.com to be between $23 million and $(20) million; We expect Citrus Lane adjusted EBITDA loss of $3.5 million and $2.5 million and full year adjusted EBITDA loss for the Company to be between $26.5 million and $(22.5) million. We expect full year 2014 non-GAAP EPS loss to be between $1.17 and $1.04, based on approximately 29.2 million weighted average basic shares outstanding.

For full year 2014, we expect stock based comp to be approximately $5 million, and depreciation & amortization for the year to be approximately $6 million. We anticipate an effective tax rate of approximately 3%. Our cash balance was $113.4 million at the end of the second quarter. We expect a year-end cash balance of approximately $75 million, including the impact of Citrus Lane.

Overall, our Q2 results demonstrate strong revenue growth while our previous investments in sales and marketing and R&D are paying off. We are well positioned for continued growth and increased operating leverage through 2014 and beyond. We expect that the addition of Citrus Lane will enhance shareholder value, and we look forward to updating you on our progress.

And now I’d like to turn the call back to Sheila.

Sheila Marcelo

Thank you, John. Before we close, I would like to welcome two important additions to the Care.com management team. We have named Mauria Finley SVP and GM of Citrus Lane. Mauria was the Founder and CEO of Citrus Lane and previously a product innovator with tenures at eBay, PayPal, AOL and Netscape. Also, we recently announced that Caroline Sheu has joined us as Chief Marketing Officer. Caroline’s extensive experience includes launching numerous number one iPhone apps for Disney as well as digital content across Sony’s various channels. Both Caroline and Mauria will report directly to me. They join a seasoned and passionate Care.com management team, each of whom is committed to our mission of being there for families, providing the best care solutions, services, advice and support.

As we have shared with you this morning, we are continuing to drive strong growth in our core matching and payments businesses, including success in monetizing across our platforms through integrated investments in marketing, product and user experience. We are building out our community offering as a way to extend engagement and drive Care.com Everyday strategy with all of our members. And we are thrilled to now add Citrus Lane to the Care.com platform. We are strongly positioned as the leading marketplace for families and moms, and we look forward to continuing to update you on our progress in the coming weeks and months.

And now, we’ll be happy to take your questions.

Question-And-Answer Session

Operator

Thank you. We'll now be conducting a question and answer session. (Operator Instructions). Thank you. Our first question is from the line of Justin Post with Bank of America Merrill Lynch. Please proceed with your question.

Justin Post - Bank of America Merrill Lynch

Let's just start with the marketing spend, clearly a strategy to spend more in the first half. As you've upped that, what have you learned about the ability of the market to take the spend and the returns on that marketing and do you feel confident that the added spend has really driven the results you've been looking for?

Sheila Marcelo

Yes, we continue to be very confident with our investment in sales and marketing, and as John will describe in a little bit more detail, we're actually already starting to experience the efficiencies in that, and expect leverage in Q3 and Q4 as we continue to grow our membership base. John?

John Leahy

Justin, we give a bit of an indication of this in the script, but clearly we've tried to be very clear on the last call and now again that we've consciously shifted spend into the first half to take advantage of the seasonal peaks of both payments and matching, but now we expect significant leverage in the back half. So to give you an example, our total direct marketing spend in Q2 grew about 62% year-over-year, and that was down from 92% growth in Q2 of last year. In Q3 and Q4, I won't give you specific numbers but we expect very significant deceleration in growth year-over-year in total direct marketing spend. Of course that's being heavily driven by TV. TV has been very successful for us over the years, and we did heavy up on TV in the first half, but we will also decelerate growth in TV in Q3 and Q4. So overall for the business, you will see significant sales and marketing leverage in the second half of the year.

Justin Post - Bank of America Merrill Lynch

Great. Then on the Citrus Lane acquisition, maybe talk about the synergies between your two businesses as you bring them in. Do you think you'll be able to improve their ROI or their membership growth leveraging Care.com? And then I think you said on the prepared remarks, it will be break even next year. How you are going to get that business to break even?

Sheila Marcelo

Sure. Justin, we're super excited about it. We continue to go after a massive opportunity obviously, 42 million households, and we’ve got very similar demographics as we mentioned. High-income moms, highly educated with younger kids, and as we shared in our IPO, we're very focused on engaging our moms through community and content. Just to give you an example, and I mentioned this also on the call, is that Citrus Lane is 60X per year in terms of visits of their members. That's five times per month.

And just what we've done in our payments platform, we'll continue to monetize the strong relationships that we have with those moms. If you recall, HomePay was only growing organically at 12%. We obviously took advantage of the synergies, addressing your question. That is now 35% in terms of revenue growth and 42% of the subscribers are coming from the Care.com channel. So we see applying the same marketing set of learning and tactics and optimization.

What makes Citrus Lane really exciting is it's a two-sided marketplace. We've got moms overlapping on one side, which I just explained, then we've got merchants on the other, but similar to HomePay where we have this great set of household payroll tax experts in Austin. In Austin we now have a very experienced team with Mauria’s background at eBay, and she developed a simple subscription-based social commerce model. She uses less than 20 SKUs per month that they send out to 45,000 monthly subscribers as a subscription business in a box. And so from a standalone business, and John will talk about the financial metrics, it's very exciting. We’re very excited about it. But now let’s layer in the synergies to address your question further. We're looking to cross-sell to this common target, driving increases in revenue, similar to what don’t in payments. We are very excited about the marketing leverage, reducing CAC and giving immediate exposure to Citrus Lane to our 5 million families, and Citrus Lane has incredible expertise on social and mobile and how they've grown, and we want to add that to our organic growth strategy to support core matching and payments. And the third is LTV growth, with increasing length of paid time because of this increasing engagement. So our focus on Care is to continue to grow our core matching platform, drive overall engagement in organic growth and continue to target that 42 million households with now the combination of our core matching, payments, and Citrus Lane.

John Leahy

Just to finish the second part of the question, in terms of breakeven next year, just one of the things that attracted us to the company is we evaluated citrus from a financial standpoint. Obviously it's a high growth business with revenue expected to double in 2014, and we actually expect revenue to likely double again in 2015. And the business was already heading towards breakeven in our view in 2015, along with the fact that, as Sheila mentioned in the script, already solid unit economics, even though it's a young company. It's a lean working capital business, even though product is involved because of it being subscription based, and so therefore, funds are being collected up front. It allows the business to run pretty lean from a working capital standpoint. And then combining all of that with some of the factors Sheila mentioned, particularly the high engagement of those users, we felt overall the company was just a terrific opportunity for us.

And being more specific to your question about breakeven, as I said, the Company was heading towards profitability in our view, but now layering in the benefit of leveraging the overall marketing of that business on the Care.com platform, we expect to see a fairly significant leverage in sales and marketing starting in 2015. Also we're expecting -- although the business is fairly lean, we are expecting that we will be able to improve gross margins somewhat in 2015 as the business continues to scale. So leveraging sales and marketing and improved gross margins will help that business get to break even in our current view, and all of those factors make us feel really good about adding that company into Care.com.

Operator

Thank you. (Operator Instructions). The next question comes from the line of Douglas Anmuth from JPMorgan. Please go ahead with your question.

Douglas Anmuth - JPMorgan

Two things I wanted to hit on, first you mentioned you expect profitability in the U.S. Matching business this year. Can you talk about what gives you that kind of confidence? Then also what metrics that's based on, what kind of profitability you're talking about? And then just thinking about the marketing campaigns, can you give some more detail just on how you're thinking about the efficacy of the cross-marketing that you've been doing in particular and then also some color on what you think Caroline is going to be most focused on as CMO as she comes in? Thanks.

Sheila Marcelo

Let me turn over in terms of the profitability for U.S Matching to John.

John Leahy

Sure. Doug, as you may recall for quite some time, all the way back to last year, we were targeting profitability for the U.S. Matching business in 2014. And we still are on track for that. So that's on a contribution base. It's the way we look at our business units. Obviously all of their revenue in the direct costs are in their P&L, and all of the costs directly associated with that business. So any specific marketing, any specific R&D, and obviously G&A that is tied to that business goes into that P&L, and that's the case across each of our business units. And then we do have a bucket for corporate spend such as Finance, HR, Legal, that we do not allocate out. But it's pretty much a fully loaded P&L. And again, we've been targeting break even and that still is -- that's still looking to be reasonable this year.

Sheila Marcelo

In terms of the marketing cross sell, what we've seen successful, and as John pointed out earlier, is taking advantage of the seasonal campaigns that we hadn't done in previous years. So taking advantage of the peak season for taxes for payments. And in fact, we tested -- in Q1 62% of our TV ad spend actually went into an ad that is now our winning ad, that has a combined creative of both matching and payments, and continue to do that. So that was very successful.

Then we did Valentine's Day, Mother's Day campaigns that were very tied together, not only bringing in TV, Pinterest, other social channels so that we continue to leverage that spend in creative ways, taking advantage of the seasonality. And then another example is bringing in product together as well for Matching and Payments by developing a free time promotion campaign, and that was really giving a free hour of care as people used our payments platform, and that continues to be successful as a great converting promotion.

So we're doing quite a bit around marketing and product integration of the two products, and given that, we feel very confident, successful in our ability to market to moms. And so turning to your question around Caroline, what I loved and the whole team loved about Caroline's background is for years she's been very focused on Moms and family, given her background in Disney, focused on mobile, and significant growth through mobile marketing, which is where we're headed, because over half of our traffic now is on mobile. So it's a lot of really planning ahead as we think about where our membership is using the service and where we want to go.

Douglas Anmuth - JPMorgan

Okay, great. Can you also just update us on how you're thinking about some of the other categories, progress in things that are non-child care, elderly care, tutoring, some of the other buckets.

Sheila Marcelo

Sure. We're continuing to invest in those areas. We are planning to launch and will be announcing some product initiatives specifically focused on verticals. We just went through that with a strategy with our Board and in our product road map for the next upcoming year. But we continue to see significant growth and progress across all our verticals and creating diversity of our offering.

Operator

Thank you. (Operator Instructions). Thank you. It appears we have no additional questions at this time. I would like to turn the floor back to Management for closing comments.

Sheila Marcelo

We'll now wrap up the call. Thank you for joining us today and we look forward to speaking to you in the coming days and weeks. Thank you.

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time and we thank you for your participation.

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