Care.com Brings A Hugely Profitable Fragmented Market Together

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

Care.com has the infrastructure to further their place as the industry leader for care services.

Care.com is the "one-stop shop" of existing successful platforms.

Care.com will slowly become the "search engine" for care services globally.

Who is Care.com?:

Care.com, Inc. (NYSE:CRCM) operates an online marketplace for finding and managing family care in the United States and internationally. The company helps families to address their care needs, including child care, senior care, and special needs care, as well as other non-medical family care needs, such as pet care, tutoring, and housekeeping; and enables caregivers to find full-time and part-time employment opportunities. The company offers their services to families, caregivers, and employers, as well as care-related businesses, such as day care centers, nanny agencies, and home care agencies.

Tell me a little about the business of care in general:

The market for care in the US, we'll stick to the US market as the company being discussed in this article is in the VERY early stages of developing their penetration into the international markets, is huge. As written in CRCM's 10K, "According to IBIS research, in 2012, an aggregate of $243 billion was spent in the United States on care, including day care, in-home care providers, housekeepers, nursing care facilities, tutoring and pet care". Obviously, there are large portions of that market that will take time for CRCM to develop and may require concessions from the company to speed the strength and saturation of their opportunity in those markets, but the market in general is huge. The care market domestically also has several key factors working in its favor that will continue to contribute to growth: "significant percentage of dual-income and single-parent households with children, aging population with a high preference for in-home care, growth in employer sponsored care services, and consumers increasingly using the internet and mobile devices for important and highly personal decisions and transactions". The particular market that I referenced needing possible concessions is the in-home care for seniors or medically ill market, but we'll discuss that in detail later. The big problem up to this point, and it remains a challenge, has been how to bring the care market as a whole together under one large, profitable umbrella. Traditionally, an overwhelming percentage of day care, housekeeping, tutoring, and pet care providers have been "self-employed", and the same large percentage of the in-home care providers (senior and medical) and nursing home care providers have worked for an employer. Historically, these two highly separated markets have looked for employment, and those who employ the providers have also looked for applicants, in VERY separated ways. In a phrase, the care market currently resembles The Monster from Mary Shelley's Frankenstein, an inefficient, stumbling, pieced-together mess. That's where CRCM steps in.

CRCM's plan to bring synergy to the market:

So now that you're up to speed on the need for CRCM's services, let's talk about the existing platforms currently used by the targeted markets. We'll start with the platforms primarily used by the "self-employed" caregivers or those looking to hire a single caregiver from the list above.

The most popular platforms used by day care, housekeeping, tutoring, and pet care providers are word-of-mouth, job boards (indeed.com, monster.com, glassdoor.com), Craigslist.com, newspaper ads, and placement agencies. Each of these are somewhat effective as standalone platforms, but each also has obvious shortfalls that force the job seeker and employer to use multiple platforms from the list. The process for all parties becomes inconvenient and inefficient. It's slow, frustrating, and a waste of man hours. The process, or lack of process, places the most stress on full-time, dual-income families that are looking to hire one employee (especially if it's a full-time employee). The search for qualified candidates that meet the requirements of the individuals' needs, the vetting of the candidate, the interview process, and finally the negotiating of terms and payment is exhausting. Especially if the employee turns out to not be the candidate the family thought they were getting, and the process has to be started again. These are typically families with more income than time, which would normally allow the families to let the process and decision be made by a third party. However, what CRCM's data has shown is that the families would like to be completely involved in the process, but they would like the process to have a set procedure that makes things easy from an execution standpoint. The data also shows that the families, unless coming from a financial or legal background, would like guidance or complete direction when it comes to the payment method and tax reporting of their employee. The same process and platforms also greatly limit the exposure than any single care giver applicant has to an audience. So you have an equation that currently puts the fewest amount of applicants in front of the fewest amount of employers and that requires an incredible amount of work and stress for both parties. The methods work, but barely.

The platforms used by employers of scale are even worse. Now, the hiring done by "pre-schools" (oftentimes hard to separate from day care centers), nursing homes, companies that provide in-home senior and medical care, large companies that provide tutoring or maid services, and companies that provide pet care is done on an individual basis, and each may use different methods, but in general, the avenues consist of posting to multiple job boards, having applicants find their individual company websites, hiring an external recruiting service, or using existing employee referrals. Each one of these options and each additional option used adds to the expense of acquiring the talent and to the man hours of the employee in charge of acquiring the talent. It also, as stated above, becomes more and more inefficient as the applicant search becomes diluted across platforms. When you factor in the subtle, or sometimes not subtle at all, differences in listing algorithms used by the different job boards and search engines, it wouldn't be hard to argue that a person working in HR may not even fully understand how the applicants are being advertised to. The uncertainty, lack of clarity, and overall experience leave plenty to be desired from a standpoint of a large employer. Especially when considering that at the small and mid-sized employers, the person doing the hiring and managing the process may have dual roles at the company, and the companies oftentimes need to make every dollar stretch to reach profitability at these sizes. Again, it works, but only because there isn't another option. Well, there wasn't.

The limited reach, high cost, and complicated issues of tax and financial transactions are about to become a thing of the past.

So what can CRCM do, and have they shown they have a plan?

CRCM is that better option. What they have shown early success in doing, and what they plan on streamlining, is created a centralized market place, a search engine that not only answers the questions but provides smart suggestions for the care market. They have created a one-stop shop for both care givers and employers. Especially that hard-to-please single family unit looking for a single employee.

They have found an easier way to match both parties with each other, and have provided both sides with a process that is repeatable and scalable. Historically, there has been no proven, efficient, and cost-effective way for families to connect with care givers or for care givers to connect with potential employers. Just as important, they have provided the care givers who are coming from "pre-school" or other factory child care facilities (high turnover of children and employees) a way and a platform to professionalize their business. They have become essentially a joint venture partner with both the self-employed and the person doing the hiring (slightly different for employers of scale). CRCM's platform allows for the negotiating of terms to be done and managed through their website, including payments, overtime payments, health insurance benefits, paid holidays, and paid time off. Not only do they just provide the ability to use these services, they proactively educate the self-employed and the employer on the differences in the above services and the value-add to both parties that comes with using the services. By the self-employed care giver forcing their employer, or the employer doing it proactively, to use CRCM's services, the self-employed is ensuring themselves proof of work history and possible unemployment insurance coverage. All important additions that aren't available elsewhere in the market.

For employers of scale, CRCM has found a way to place a large pool of qualified applicants in one place, complete with filters and optional completed background checks to narrow down prospective employees. Conversely, they have also created a way for employers to advertise to a VERY targeted, VERY large market of qualified care givers looking for employment.

The synergistic nature of this "watering hole" has created a very engaged, very powerful network effect that is also helping contribute to exponential organic growth. The more care givers, the more employers. The more employers, the more care givers. We'll talk more about the growth at CRCM in our next section.

CRCM by the numbers: A look back and a look forward

So let's take a look at the most recent numbers released. The following were reported 02/26/14 and came from CRCM's Q42013 and FY2013 earnings releases:

Full-year 2013 revenue grew 68% to $81.5M from $48.5M in 2012 - a compound revenue growth rate of 94%/year annually since inception

Total members grew to 9.7 million at year-end 2013, a 46% increase from 2012 - a compound growth rate of 72%/year annually since inception

52% of member visits in the second half of 2013 were via mobile, representing a 61% increase over 2012

Full-year 2013 net loss was $28.3 million, compared to $20.4 million in 2012 - this is an absurdly low number based on the growth shown in the above figures

Full-year 2013 adjusted EBITDA was a loss of $17.2 million compared to a loss of $15.5 million in 2012 - up only $1.7 million, or roughly 10%, perhaps the most impressive statistic released

The numbers continue to suggest that CRCM is effectively and consistently increasing their penetration into each targeted market and successfully making entry into the new markets that become available as they have expanded their product portfolio since inception. What it also suggests, as I alluded to above, is that a sizeable part of the growth that they experience is organic, or coming from free sources. Actually, in 2012, according to the CRCM 10K, a majority of the paying "families" that used the service came from unpaid sources. You may want to read that again. The cost per customer rate is actually decreasing year-over-year when looking at a rolling two-year duration. What that means is that their existing customers are referring other customers and that their existing care providers are also doing the same. As a side effect of this process, developing the first generation of service users who have built a comfort level with the product, the care givers, who are currently in the 16-25 range, will soon become paying users of the services. The non-paying users currently using CRCM to find work will become, at least the data suggests, paying users who will hire the next wave of non-paying future users. Now none of this is guaranteed, and CRCM doesn't have the time sample to make extremely accurate predictions, but it isn't hard to see that at some point in the near future, if CRCM can continue to saturate and capture the targeted markets at similar rates, the amount of new users coming from unpaid sources will close the net and EBITDA loss gaps. They are getting new paying members from both sources that contribute to their "watering hole". This is not even factoring in the company's expected penetration into the large employer arena or the company's secondary line of products like "date-night" care, which should both serve to speed up the intercept point of breakeven.

So where's the trade?

I really like Care.com. I can see them becoming a huge brand name, a household name, in the near future. Just telling clients and friends who ask about the next big company, telling them about CRCM I get really excited, because this story is so easy to explain. Care.com starting out paying for every member they acquired. They did a good job satisfying that customer's needs, so that customer sent another customer Care's way, so did person the customer hired. Then those two people sent two more people, and so on and so on. This company found a need and designed an incredible, momentum-gaining solution that I believe in the near future will become an unstoppable force. I mean that. I think that they will get better at finding out how to market their payment solutions and some of their secondary and tertiary products, and all that will do is help build a fortress of trust and brand integrity around an already strong name. If you're unfamiliar with this industry or the prospects of Care, I would recommend you ask somebody with kids or somebody who provides care services about the struggle they're currently experiencing or the struggle they had before they discovered CRCM. The numbers add up, management is really strong, and I think Care's value proposition is easy for the target audience to understand. They are making the complicated simple.

I like CRCM shares for anybody looking for a long-term growth name that has a stomach for a bit of volatility. CRCM's shares have been volatile in the early going, but I expect that to flatten out over the next 12 months. I wish I could tell you to wait until the waters get less choppy, but I think in 12 months, this trade will be long gone. I like CRCM shares for the "set it and forget it" investor. Good luck.

Disclosure: I am long CRCM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.