Care.com's (CRCM) CEO Sheila Lirio Marcelo on Q2 2016 Results - Earnings Call Transcript

| About: Care.com, Inc. (CRCM)

Care.com, Inc. (NYSE:CRCM)

Q2 2016 Earnings Conference Call

July 27, 2016, 08:00 AM ET

Executives

Denise Garcia - IR

Sheila Lirio Marcelo - Founder, Chairwoman, and CEO

Michael Echenberg - CFO

Analysts

Kerry Rice - Needham and Company

Leena - JPMorgan

Justin Post - Merrill Lynch

Mason Anderson - Craig-Hallum Capital Group

Brian Nowak - Morgan Stanley

Blake Harper - Topeka Capital

Operator

Greetings, and welcome to the Care.com Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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

Denise Garcia

Thank you. Good morning, and welcome to Care.com's financial results call for the second quarter of 2016 which ended on June 25.

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, our 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 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, including adjusted EBITDA, which we refer to as EBITDA throughout the presentation. These measures represents pretax net loss, less depreciation and amortization, as well as certain other non-cash adjustments and certain unusual expenses, such as stock-based comp, M&A and restructuring costs.

We will also refer to non-GAAP EPS, which represents net loss less certain unusual expenses such as stock-based comp, M&A and restructuring 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 provide in the tables in the press release and the Form 8-K filed today.

We will also be referring to profitability on this call. When we refer to profitability, we're referring to it in 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 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 and thank you all for joining us today. On today’s call, I’ll share financial highlights for the second quarter and discuss our notable activities during the quarter. I'll then turn the call over to Michael who will provide more detail on financial performance and guidance for Q3 and the full year. Following our prepared remarks, we’ll open the call to question.

I’m excited that we beat our Q2 guidance on both revenue and EBITDA specifically both at $38.2 million of revenue and the positive $1 million of EBITDA exceeded the guidance we shared. We’ve built the largest two sided network for finding family care in the home with 9.1 million caregivers and 11.6 million families. We continue to grow and believe we have a sizable opportunity ahead of us.

We've the highest unaided brand awareness among family seeking childcare, approximately 41%, which is roughly 5X that of our nearest competitor and are coming off our sixth quarter in a row of solid improvements in sales and marketing leverage.

In Q2, we experienced an 11 percentage point improvement versus prior in EBITDA as a percentage of revenue. This was primarily driven by the leverage we saw in our sales and marketing spend from 55% of revenue in Q2 2015 to 49% in Q2 2016 and an improvement in our unit economics.

The unit economics for our U.S. consumer business the combination of U.S. matching and payments continued to improve as we drove LTV up by 7% through gains in ARPU and lend to pay time to improve our overall ROI while keeping CAC flat over prior. Michael will discuss this further in his financial remarks as well as share how we improved leverage across every cost line in the business.

We are committed to continuously innovating and improving our user experience for our consumers and enterprise clients, while driving shareholder value through sustained profitable growth and we remain comfortable with our long term EBITDA margin target of 20% to 25%.

Our strong business fundamentals, our leading online family care platform and our large estimated market opportunity of $44 million households and nearly $20 million providers in the U.S. alone are key factors that attracted the interest of Google capital.

Last month we announced that they’d invested about $46 million in care.com preferred stock at a premium of $10.50 per share, their first investment in a public company. They are now our largest shareholder. We use part of the proceeds to purchase shares from one of our early investors, metrics partners at $8.25 per share.

The net impact of the Google Capital investment and the repurchase was share dilution at 2% at the close of the transactions and a net increase to our cash balance of $13.5 million.

As part of the investment, Google Capital has joined our Board of Directors. We now have access to some of the world’s leading experts at Google and Alphabet, to help us continue to grow our business and differentiate our products and efforts are already underway as we continue to focus on our four key strategic priorities.

The first strategic priority is to increase overall organic traffic to our platforms, one of the key drivers of further sales and marketing leverage to building out community and continue to grow our search traffic. This past quarter we successfully integrated the Kinsights platform, our recent tuck-in acquisition into our care.com community product.

We continue to invest and engage in content that’s seen year-over-year growth in organic search traffic of about 65% across the first half of 2016. We have seen a mix of high intent and low intent traffic and are focusing our efforts on improving paid member conversion of the high intense segment while increasing engagement of the lower intent visitors.

Our second strategic initiative is to further monetize our matching products by improving mobile conversion rates while also complementing our subscription business model with transaction revenue. On the last call, I referenced our revamped enrollment flows on iOS to enable in-app subscription.

Early results are promising with the app consistently ranking in the top three paid applications in the lifestyle category of the iOS App store. We continue to observe the overall unit economics of this channel and plan to update you on this later in the year.

In addition, we continue to invest in our matching product to improve the user experience and mobile web and need of apps on iOS and android. We believe this will improve mobile conversion rates, which continue to be less than half of desktop.

Moving on to our testing of transactional models, we have two goals with this initiative. One to monetize a meaningful subset of the roughly 85% of families who sign up for our free service, but don't upgrade to our paid subscription product; and two, to significantly expand the top of the funnel to realize a great share of our large total addressable market.

Although we expect to remain in the pilot stage of this test into 2017, we believe this initiative provides us the opportunity to capture more of the $280 billion spent on care services each year in the U.S. alone.

With the combined impact of mobile conversion and our diversion of traffic to test, new transactional models, paying members in our U.S. matching business were up 6% over Q2 of 2015 as we expected.

We continue to forecast end-of-period paying members for the full year to be up versus prior by less than 10% as we've shared previously. We also expect growth in end-of-period paying members seeking care will become a less meaningful metric as transactional revenue streams become a growing share of the business longer term.

Our third strategic priority in 2016 comprises our post-match initiatives that are focused on two goals. The first to help professionalized care giving by providing more services to our millions of caregivers, one of the largest groups of gig workers on a single platform in this growing on-demand economy.

And the second to develop products and services that help families manage their providers regardless of whether or not the match was made on Care.com. We plan to share our progress on these new initiatives later this year.

Finally our fourth strategic priority is Care@Work, formerly known as Workplace Solutions. Q2 was another strong quarter for Care@Work with revenue growth versus prior of 47% following 44% growth in Q1.

In the first half of 2016, we again saw revenue retention over a 100% as clients such as Facebook, Twitter, Putnam Investments and Tufts University chose to renew. This with driven by our industry-leading mobile innovation including our back-up care app and enterprise HR reporting dashboards and our continued strength in back-up care fulfillment of about 90% and net promoter score of greater than 70% year-to-date.

In addition to renewals, we continue to add new clients in a range of industries including sports and entertainment, pharma and technology. We expect growth in our enterprise business to continue to accelerate in the second half of 2016.

In summary, we remain committed to further top line growth, sustained profitability and product innovation to drive shareholder value. We believe that improving our unit economics while increasing long-term growth of paying customers in our consumer and enterprise businesses will continue to position us as the leading care platform serving families and caregivers.

Now I’ll turn the call over to Michael.

Michael Echenberg

Thanks, Sheila. I'm pleased with our Q2 performance, as we continue to focus on revenue growth and sustained adjusted EBITDA profitability. I’ll now provide additional color on our results starting with revenue.

In Q2, revenue grew to $38.2 million a 16% increase over Q2 2015 revenue of $32.9 million. Our U.S. consumer business grew 13% to $30.7 million as the transition to mobile and our testing of new transactional models continued.

Our other businesses which include international, Care@Work and Marketplace, delivered $7.5 million in revenue or 28% growth versus prior. Care@Work grew 47% and international grew 19%. We did slightly better than expected across businesses, which led to our exceeding the top of our revenue guidance range.

Now EBITDA; Q2 marks our third quarter in a row of EBITDA profitability. For the quarter, EBITDA was positive $1 million compared to a loss of $2.7 million in Q2 of 2015, a margin improvement versus prior of 11 percentage points, driven by scale and continued cost discipline.

Before turning to net income and EPS, I'll provide some color on the major cost lines, beginning with sales and marketing. We drove sales and marketing as a percent of revenue down 6 percentage points from 55% in Q2 of 2015 to 49% in Q2 of 2016. This is on top of the 15 percentage points of improvement we saw from Q2 of 2014 to Q2 of 2015.

While we've maintained our ROI target of roughly 3X, this nevertheless allows for experimental spending on new acquisition channels, such as social and mobile video advertising. We expect that this in combination with our organic activity and our R&D spending on community will help us achieve further leverage gains down the road.

Moving to the other cost lines, we expanded gross margin versus prior by about 20 basis points in the quarter. We also saw increased leverage on the G&A and R&D lines. They fell versus prior as a percentage of revenue by 200 basis points and 210 basis points respectively.

These gains in operating leverage as a result of our continued focus on managing the pace of expenses through general cost discipline and the flow-through of the larger cost saving initiatives that we've discussed on past calls.

We also get the benefit and leverage from relatively fixed costs like those related to occupancy against a growing top line and where we can reduce or offset fixed costs, we do that too.

A key part of this EBITDA picture is the continuing improvement in our unit economics. For our midyear update, I'll focus on the first half of 2016 relative to the first half of 2015. The headline is that ROI is up to 3.4X from 3.2X over this time period.

Lifetime revenue was up 5% to $539 on the back of gains in both ARPU and length of paid time and gross margin is up 140 basis points taking LTV to $455, a 7% improvement. With CAC flat at $135 this yield will improve ROI dollar line.

A little more color now. The total ARPU increase of 4% comes from a 3% gain in matching and a 6% gain in payments. We're seeing the benefit of effective price increases along with the impact of our premium background check products.

Length of paid time rose 1.5%, driven primarily by a 7% gain in matching or roughly 2.5 weeks. The key driver of the matching increase is our ability to observe a longer time horizon, with the first half '16 metric measured over five years as compared to four years for the first half of '15. Length of pay time for payments rose by about 1%.

While the metrics will evolve with our business model as we've described, our goal going forward is to drive up the length of engagement and the effective price realization, more to come on future calls.

Moving now to EPS, Q2 non-GAAP EPS was negative $0.03 as compared to negative $0.12 in Q2 of last year. This improvement versus prior in non-GAAP EPS is mainly the result of flow-through from our EBITDA improvement versus prior.

Relative to our Q2 guidance of negative $0.04 to negative $0.02, the impact of our better-than-expected EBITDA is offset by negative $0.02 associated with a timing change in the recognition of our federal tax provision.

For the benefit of clarity non-GAAP EPS for the quarter would have been negative $0.01 had it not been for this timing change, which moved the relevant tax impact from Q4 to Q2.

Q2 GAAP EPS from continuing operation was negative $0.11, up from negative $0.17 in Q2 of 2015 and net income from continuing operation for the quarter was a loss of $3.4 million as compared to a loss of $5.4 million in the second quarter of 2015.

Regarding cash, we started the quarter with $52.3 million in cash and ended with $55.6 million. Key drivers here were the $1 million of EBITDA and changes in working capital, mainly from timing around accrued expenses and accounts payable. The Q2 ending cash balance pro forma for the Google Capital investment and metrics repurchase is about $69 million.

I'll now provide a little more color on these transactions. Google Capital, a growth equity fund backed by Alphabet made a $46.35 million investment in Care.com at the end of June. This transaction will be recognized in Q3.

Under the terms of the agreement Care.com has issued a newly authorized series of convertible preferred stock to Google Capital at an initial conversion price of $10.50 per share, representing a 21% premium to the 30-day volume weighted average trading price ended June 27 of $8.68. Dividends on the preferred stock accrue at 5.5% annually during the first seven years and are payable in kind.

We also repurchased 3.7 million shares of common stock from Metrics Partners at price of $8.25 per share, representing a 5% discount relative to that same $8.68. We funded the $30.5 million share repurchase with a portion of the proceeds from the investment by Google Capital.

At the close of the two transactions, we saw share dilution of approximately 2% from a net increase of about 700,000 shares with the buyback offsetting most of the dilution impact of the investment.

Turning now to guidance, on revenue we're reaffirming our full year guidance from our last call of between $158 million and $162 million. For the third quarter, we're guiding to $39.5 million to $40.5 million.

On EBITDA, we're raising the floor by $1.5 million, taking full year guidance to positive $9.5 million to $12 million and for the third quarter, we're guiding to positive $0.5 million to $1 million.

Consistent with my comments on the last call, this puts Q3 in the same neighborhood as Q2. We continue to expect that Q4 will be our quarter of highest profitability with EBITDA margin in the mid teens, a function of the seasonality, but has our spending less on sales and marketing than in other quarters.

The raised floor in our EBITDA guidance contributes to a raised floor in our non-GAAP EPS guidance. Absent any change to share count, we will be changing our guidance from $0.09 to $0.19 on the last call to $0.13 to $0.19.

However, as a result of the Google Capital investment, the relevant share count is increasing, which takes our guidance range down $0.01 to $0.12 to $0.18. Specifically, this is based on an expectation of about $37 million weighted average diluted shares outstanding for the year, up from our expectation on the last call of $34.5 million.

Because of the timing of the buyback, the share count for the purposes of non-GAAP EPS guidance for the balance of 2016 increases by more than the 700,000 share net increase I referenced a moment ago.

For the third quarter, we're guiding to non-GAAP EPS of between negative $0.03 and negative $0.01 with an expectation of about 35 million weighted average diluted shares outstanding and about 28.5 million basic shares outstanding.

A note on FX, for the balance of the year, we're expecting the euro to average $1.13 and the pound to average $1.30. 5% in either direction for both represents about $350,000 of revenue, a little less than $100,000 of adjusted EBITDA and about $0.02 of non-GAAP EPS. The EPS sensitivity includes the impact of revaluing balance sheet items denominated in foreign currencies. Note that we have limited Brexit-related currency risk.

Finally cash, beginning with the $69 million pro forma balance at the end of Q2, our EBITDA guidance range for the remainder of the year and changes in working capital get us to a range of $73 million to $77 million at year end.

Let me wrap up before we open this to Q&A. I am pleased to report that we are on track with our expectation of sustained profitable growth. And we continue to focus on our key strategic initiatives to drive long-term growth and position Care.com to capture a greater share of our large addressable market.

With that, I'll open the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of Kerry Rice with Needham and Company. Please proceed with your question.

Kerry Rice

Thank you. Just mostly clarifying questions. So, on the U.S. consumer matching business, the paying members declined slightly. And again I don’t know if that was just related to the higher ARPU or if you could maybe just clarify the downtick because I don't think its seasonality?

The second is on length of paid time for payments, I thought you said that it was up 1%, it seems like it's down a little bit and maybe better understand that?

And then the final question is, you talked about the transactional revenue growing. When do you kind of think of that becoming, I don't know if you call material 10% of revenue, any kind of thoughts about maybe as that grows, what you're expecting through the second half of 2016? Thank you.

Sheila Lirio Marcelo

Good morning, Kerry. Yes, so let me take the first one and then Michael can do the length of paid time and I'll come back to the transactional questions you had. With regards to end of period paying, we did see a 6% year-over-year growth in Q2.

As we shared, it was as we expected because we moderated our growth expectations and shared that our -- by end of year it will be less than 10% increase in end of period paying primarily driven by three things; one, the ongoing traffic shift to mobile and we know that it’s -- conversion is less than half of desktop.

The second is we’re expecting and we have been driving and diverting traffic away from subscriptions to test different types of business models that started earlier this year. And then the third is rather than offsetting this lower conversion rate specifically on mobile with higher spend, we're choosing to keep our ROI target within that 3X range and those are sort of the key drivers and is expected in our models.

And so that 6% year-over-year growth in Q2 was what we were expecting. So turning it over to length of paid time, Michael.

Michael Echenberg

Yeah, just very briefly, the measure that we're comparing is first half of 2016 versus first half of 2015 for the -- for the unit economics generally and then specifically for payments lofty. So the numbers in question are 35.4 months cycling against 34.9.

If you were to look perhaps at quarters, you might see some flocks, the reason why we focus with the level of a full half year is to chase out seasonality index.

Kerry Rice

Michael, maybe just a follow-up on that, I’m just looking at the Q2 results supplement and maybe I’m looking at this wrong, but under length of paid time under Q2 2015, it says 40 and then under Q2 2016 it says 35. So that 40 am I looking at it wrong or am I misunderstanding that?

Michael Echenberg

We are -- let me come back to you on that. Sheila will pick up the last part and we’ll come to that.

Kerry Rice

Okay.

Sheila Lirio Marcelo

So actually the third question you had in terms of transaction revenue and timing is related to the first in that our expectation is that the growth in end of period paying members will become of a less meaningful metric as transactional revenue becomes a growing share of our business longer-term.

And so our expectation with the pilots that we’re testing now and the core experience specifically in part-time childcare, we expect to share that sometime next year as we continue to test into 2017.

Michael Echenberg

And the short answer, it's just a definitional thing, that 40 that you're looking at in the supplemental materials is a different historical cut at the metric, the equivalence sort of churn based calculation that’s 35 -- that’s our 35 number in the first half of 2016.

35.4 unrounded would be 34.9 in the first half of '15 and so we'll plan on clarifying that definitional issue going forward in the supplementary materials. Thanks for that.

Kerry Rice

Okay. Thank you, Michael.

Operator

Thank you. Our next question is coming from the line of Doug Anos with JPMorgan. Please proceed with your question.

Leena

Hi, this is Leena on for Doug. We're wondering so the $7.5 million revenue figure, which consists of Care@Work international and B2B, can you just give us a sense of the revenue split here by business line out of this categories growing and is larger than your payments isn’t it? Thanks.

Michael Echenberg

Yeah, what we’ve said typically is that the other business category, which in total is about 19% of total revenue splits roughly evenly between B2B and international and then B2B in turn splits between Care@Work and marketplace with Care@Work being slightly larger than marketplace right now.

Leena

All right, thanks.

Operator

Thank you. Our next question is coming from the line of Justin Post with Merrill Lynch. Please proceed with your question.

Justin Post

Thank you. I have two questions. First, can you talk about the Google relationship and how that can help your business? Will it help you in search results or are there other technical things they can help with?

And then the second thing is regarding your enterprise business maybe you walk us through the economics a little bit, is this a profitable business that will have better or worse margins in the consumer business? Thank you.

Sheila Lirio Marcelo

Sure. Good morning, Justin. Yes, with the Google relationship, we're super excited about is that we got access to hundreds of experts at Google and Alphabet and that includes helping us in a lot of different areas in terms of organic, enterprise, operational scaling, learning from the expertise that they have. So it really is across the Board and that’s why we're excited about that strategic investment. I’m turning it over to Michael for Care@Work.

Michael Echenberg

Yeah, with respect to Care@Work generally the business is among our fastest-growing segments. Growth versus prior in the first quarter of 44% up to 47% versus prior in Q2 with an expectation of further acceleration in the back half of the year.

The unit economics for that business are attractive to us with sales people more than paying for themselves relatively quickly and over time generating very attractive ROI. As this business grows, we intend to provide a little bit more color on its unit economics as we already do for the U.S. consumer business.

Sheila Lirio Marcelo

And to tie both of your questions together, one of the reasons that Google Capital actually invested was our Board Members own personal experience of having had the enterprise solutions since 2011 in having a great user experience overall for employees.

Justin Post

Okay. And then if you chose to lower the churn three times the churn you're getting on your consumer business, could you potentially accelerate your consumer subscribers so if you change the ROI threshold, could you reaccelerate next year that's one of your priorities?

Michael Echenberg

It’s a great question and I would say look, based on what you hear -- what you heard Sheila describe, what all of our key strategic initiatives have in common, is there are around changing the shape of the top line trajectory. And so that obviously is what we're focused on with urgency.

With respect to the specific question around, could we spend additional sales and marketing dollars, we continue to be focused on the appropriate balance between growth and profitability. And we believe that those incremental dollars to drive customer acquisition are better spent on our product initiatives, R&D specifically being that were innovation led as a business.

Sheila Lirio Marcelo

And to add to that I think a combination of seeing growth as well as continued sales and marketing leverage is the investment in organic traffic and continue to innovate there Justin.

Justin Post

Okay. Great. Thank you.

Operator

Thank you. Our next question is coming from the line of Mitch Bartlett with Craig-Hallum Capital Group. Please proceed with your question.

Mason Anderson

Hey guys. This is Mason on for Mitch. Thanks for taking the questions. So first just on Care@Work hoping you can talk a little bit about what the pipeline for that looks like, is there still more penetration we had in the large Fortune 500 type companies or you’re starting to see smaller players in that and then I have a few more after.

Sheila Lirio Marcelo

Yes. So when we think about the Care@Work business, it’s pretty wide open space in the opportunity there. We estimate about 10,000 companies in the U.S. with more than 1,000 employees and we're still in the single-digit penetration.

So it’s still early for that business and as Michael shared, last year we saw, in Q1 we saw 44% year-over-year growth, Q2 47, and we expect further acceleration for the second half of the year for that business.

Mason Anderson

Great. Thank you. And then as far transactional goes, maybe you can talk a little bit about how you see that ROI shaping out against your current ROI and LTV of the consumer business?

Sheila Lirio Marcelo

Yeah. The way we see actually the piloting, the transactional user experience is potentially additive to the existing subscription. The reason is because we believe we can monetize a meaningful subset of the roughly 85% of families who sign up for our service, but don’t actually upgrade to the subscription product.

And then the second is to expand the top of the funnel to capture a greater share of the 44 million households that is a pretty big camp for us in the U.S. alone.

And so we believe that continuing to manage a 3X ROI in the existing subscription business allows us to attract continued members and then transitioning them also to transact even though they may not be interested in the subscription product. So I think it lifts ROI is our expectation.

Mason Anderson

Perfect that’s awesome and then final one for me, just -- and this kind of relates to the question I just asked on post-match products that kind of similar thinking there, obviously you think that’s a big revenue opportunity or is it just kind of incremental to having new products or customers with small attach rate?

Sheila Lirio Marcelo

Yeah. And the reason we actually in turn and call that post-match is because it's really designed to not necessarily depend on a match on the platform and we're starting to see that in our ARPU gains where we can sell our premium subscription products on back on track.

And so we're continuing to add those other value-added services that’s also reflected in ARPU and so as we continue to add benefits that families can purchase for their caregivers or caregivers can purchase on their own, we do believe that will be additive to the overall business and continue to improve our unit economics.

Michael Echenberg

And the one color that I would add is some of these products are available to people irrespective of where the match was made on Care.com or elsewhere.

Sheila Lirio Marcelo

And that’s obviously our HomePay business, we added Workers Compensation, access to Healthcare starting in January and we'll be announcing more later this year.

Mason Anderson

Awesome. That is it for me. Thanks so much, guys.

Operator

Thank you. Our next question is coming from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Nowak

Thanks for taking my questions. I have three. The first one is just thinking about the paying member growth throughout this year, are you expecting it to accelerate at all in your guidance?

And my second is just on kind of the longer term view around this transition toward a transaction model, do you see a time where you could look to fully move away from subscription and pivot more of these users toward a transactional model. Is that a better long-term way to inflect the revenue and I've one follow-up?

Sheila Lirio Marcelo

Right. So with regards to paying members, I think we're maintaining pretty much our expectations of less than 10% increase in end-of-period paying member growth by the end of the year. So we're maintaining that.

And then with regards to the overall transactional model, we see it actually as potentially additive to the subscription business and as I mentioned earlier in my answer to Mitch that, it is focusing specifically on targeting the 85% who don’t convert to subscription and that we believe that we can enhance our offering to meet the deferred idiosyncratic need to families.

Brian Nowak

Great. And the last one I had, could you just -- in the second quarter, what did gross additions in churn look like and how does that compare to a year ago? Thanks.

Michael Echenberg

Thanks for the question. We don’t share those metrics as it stands right now. We are comfortably evolving our thinking with respect to how we describe the business, but for now we aren’t in the practice of sharing gross ads and churn like that.

Sheila Lirio Marcelo

Yeah. And because of the definition of the business Brian, in terms of there is a reused component that increases length of pay time. So these numbers don’t actually necessarily churn out, for at least out in members that join within a year about 10% leave after the year because we have high overall match rate with the service and once they match, they downgrade and then they come back to reuse the service, which is one of the key drivers of length of pay time.

Michael Echenberg

And on the general question of gross ads, I’ll just refer back to the general way that we framed out the moderated growth and end of period paying members as we've talked about the shift to mobile with its lower conversion rates in desktop and the resulting tempering of growing new sign-ups.

Brian Nowak

Great. Thanks.

Operator

Thank you. Our last question is coming from the line of Blake Harper with [Topeka] Capital. Please proceed with your question.

Blake Harper

Good morning. First question for Michael. You had tucked in the remarks about the fixed cost, I was just wondering to see what you think is an adequate fixed cost level for the growth you have in the business right now and when you would expect to have to increase that as far as your guidance you have this year or basically how far can you grow with the level of fixed cost that you have right now?

And then secondly for either you Michael or Sheila, you made some changes with the capital structure and the Board here in the past quarter. Just wanted to see if you think that, that is sufficient and you have that where you want both listings where you want to be now or you can make more changes to that in the future or just be focused more on the product and member side going forward? Thanks.

Michael Echenberg

Thanks Blake. And welcome to your new gig at loop. Look, with respect to cost, we haven’t given specific color on absolute levels of fixed cost. We have talked and reflecting on our performance over the last few quarters about our satisfaction with driving up leverage.

In the case of the quarter just ended, we had improved leverage on every cost line and we continue as a team to be focused laser like on managing the pace of expenses because profitable growth is the name of our game and so you'll continue to hear us describe it that way and you'll continue to see us opportunistically taking cost in the right direction.

With respect to the financing events, I would say look, we're comfortable with the level of cash that we have. We believe it's more than sufficient to help us get where we need to be with respect to evolving the platform and just as you suggest, the focus of the team is on our aggressive software development plan to build out this platform and go after the enormous total addressable market that sits in front of us.

Blake Harper

Great. Thanks a lot, Michael.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back to Ms. Lirio Marcelo for her concluding comments.

Sheila Lirio Marcelo

Thanks to everyone for joining us today. We appreciate your questions and support. We remain on track with our product roadmap and strategy to drive long-term profitable growth. We believe we're on the right path with the right team and we're excited about the resources and expertise that Google Capital brings to the table.

We look forward to speaking to you on future calls.

Operator

Ladies and gentlemen, this does conclude today teleconference. We thank you for your participation and you may disconnect your lines at this time.

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