Care.Com (NYSE:CRCM) is, in my humble opinion, arguably one of the leading horses in the DotCom Derby 2.0 as we near the halfway point in the year. Perhaps as importantly, it should be a candidate for one of the most tragically flawed IPOs of the Class of 2014.
It is eerily reminiscent of such vaunted 1999-2000 IPOs as eToys, which descended from a similarly hyped high flyer to defunct in roughly 24 months and only last September wrapped up litigation related to its financial belly flop. Another name that quickly springs to mind is Pets.com, the online purveyor of 50-pound bags of dog food and an infamous sock puppet "spokesdog" that went toes-up within months of foisting shares upon the marketplace. One would have thought the investing world had learned its lessons after the first tech meltdown...
I listened to the June 3 Bank of America/Merrill Lynch Q&A session with CRCM management in an apparently wasted effort to glean some semblance of insight into what this company actually does or, frankly, why it needs to exist. I must say that it was disappointing that neither the analyst/moderator nor the audience actually asked anything remotely resembling a tough question given the massive value destruction that has occurred since the IPO in January (approximately $114 million of public shareholders' cash as of June 18). On behalf of public investors who have witnessed 22% of their investment vaporized in a mere 4 months, I will raise some basic questions and issues that it would have been refreshing to hear explored/exposed.
For those who understandably don't wish to read the flood of questions demanding answers below, here is one of the key punch lines: the key poker tell as to management's and the inside investors' actual motives will be revealed in the near future by the following:
(1) The IPO lock-up expires in just about a month, in July, and the company's next earnings (or, more accurately, loss/cash burn) announcement won't occur until August. This is when you will learn how much more of your cash these folks have burned this year following the $4.1 million burned in Q1. This timing gap is actually quite key because it is the financial Maginot Line between you and your remaining initial investment; and
(2) If there is significant (or any) selling of shares by the management team when the lock-up expires in July (which, of course, will likely be justified under the premise of a 10b5-1 plan related to "estate planning" and "diversification"), you should understand that the "estate planning" and "diversification" to which they refer is simply code for the final step in the transfer of funds from the pockets of pension funds, endowments and individual investors to theirs.
To be clear, this is not in any way to suggest there is some sort of fraud or theft taking place here -- the concept of caveat emptor always applies and a perusal of the CRCM S-1 filing should have been sufficient to deter all but the heartiest of souls from stepping aboard a vessel of questionable seaworthiness bound for iceberg-laden waters.
Ok, for those still reading, let's peel the onion (as the CRCM folks apparently like to say):
I listened carefully to CRCM's June 3 Q&A session at the Bank of America/Merrill Lynch investor conference in San Francisco, hoping to find the analytical needle in the haystack -- perhaps just some scintilla of value inherent in the concept that I likely had missed in studying its public filings and prior media appearances since the highly publicized January sale of this concept to the public market. Alas, there was nothing.
Instead, the CEO and CFO unleashed a 40-minute cacophony of buzzwords and empty platitudes reminiscent of a first-year MBA marketing class from 1999 ("halo effect", "engagement," "re-market," "hair on fire moment," "cross-packaging," "repackaging," "growing the core," "stickiness," "white space," "verticalize," "peel the onion," "viral").
Of course, there was very little discussion of actual financial results that would seem relevant to most public companies (i.e., something other than metrics of questionable merit), aside from the stated lofty goal of getting to the point of being able to extinguish the cash bonfire and produce *zero* annual cash flow within the next "couple of years".
Interestingly, one of the few financial comments from management during the call indicated they have been focused on balancing top line growth and the bottom line -- which is actually disconcerting since it seems to imply that without this careful stewardship that has fueled the destruction of roughly $114 million of shareholder value, the losses and cash burn might be even larger.
In fairness, perhaps the CFO wanted to go into more specifics about the exorbitant cash burn rate, but the sellside analyst moderating the discussion didn't steer the discussion in that direction much (probably just coincidental that his firm was one of the lead underwriters of the IPO back in January, but I'm sure we certainly put all of that research and banking conflict of interest stuff behind us way back after the first tech debacle in 2000, right?). Of course, there's no reason to think any of the underwriting banks might be angling to handle the secondary offering or block trades when the management folks begin selling their shares, or perhaps the "restructuring advisory" work and/or DIP financing once the ship capsizes. No way.
Have we really set the bar this low in the equity market, folks? Do you think that perhaps a few more years in the incubator might not have been in order before CRCM was splayed on the pavement as a public company?
Yes, I have looked at CRCM quite closely over the prior few months as a curious potential investor, and CRCM has apparently indeed gone viral, if by "viral" they mean potentially inducing projectile vomiting.
A simple, cursory review of the Care.com prospectus might have led even a modestly diligent investor to wonder whether this document was not so much a disclosure statement as it was a discarded script for the television series "The Walking Dead."
With the aggregate short position in CRCM standing at about 10% of the outstanding public float (according to the Wall Street Journal) and the stock down 22% from the IPO (and 54% from its post-IPO high once the market started to digest what had been served up on the plate), let's take a peek under the hood at the fundamentals (or lack thereof) and give some thought as to whether CRCM is essentially the investment equivalent of a teetering Jenga tower:
1. It appears to be functionally equivalent to a Craigslist posting for babysitters dressed up in a slightly flashier interface. Where is the "competitive moat" or any semblance of a barrier to entry? Perhaps more importantly, shouldn't the prudent investor be asking, despite its noble intentions, "where is the necessity for this business to exist in the first place, let alone be a public company?"
Let us ponder the concept for a moment: I need to access a faceless website to find a babysitter or nanny because CRCM has supposedly "vetted" the "care provider" (a.k.a. a teenage babysitter or perhaps Mrs. Doubtfire)? To describe this as a "tech company" is laughable at best, unless by being a "tech company" you mean anyone who has a computer and sets up a website. The underwriters should be ashamed for having perpetrated the investment banking equivalent of the "Baby Ruth in the Pool" scene from the film "Caddyshack."
Ironically, during the June 3 analyst Q&A session, the CEO indicated her desire that Craigslist simply remove the "care vertical" from their website. This is quite a remarkable business strategy: instead of building a better mousetrap, I will try to convince one of my self-identified key competitors to simply get out of the way. I'm sure if you asked Coca-Cola, they would be quite pleased if Pepsi simply shuttered their soft drink operations.
It appears to be a solution in search of a problem that was solved decades ago by simply picking up the phone and talking to other friends with young children, or even grandparents. I'm sorry, but it is difficult to mute laughter at the notion that a babysitter suddenly morphs into a "daycare professional" once Mommy and Daddy decide they want a "date night" (see the business description in their 10-K and S-1 filings).
The company also purports to offer a "nanny tax" preparation service (excuse me?) and an online/mobile payment system (something wrong with PayPal or perhaps just handing the babysitter a couple of $20s?). In the same analyst session, management touted the high "ROI" from some of their businesses (B2B and payments) - there seems to be quite a bit of "I" and not much "R" in their ROI - would love to see the creative math behind that assertion on today's analyst call.
Moreover -- and this is actually rather disturbing -- the parents of a dead infant in Nebraska filed a lawsuit on May 22, 2014 against CRCM (and other defendants) because their infant was killed in February 2013 by a nanny that the parents allege they paid CRCM to vet and do a criminal background check on. According to the article on the situation (see below), the nanny was convicted of inflicting injuries that led to the death of the child and is now serving 70 years to life in prison. If the allegations in the civil suit are true, it would appear there is not a very robust vetting system for "care professionals" at CRCM, apparently.
Of course, CRCM also purports to be a problem-solver for such other intractable issues as pet care and senior care, although apparently for the last few centuries people, pets and seniors have somehow managed to survive and thrive without a robust and revolutionary resource such as Care.com.
Interestingly, their public filings mention a group of part-time CRCM "caregivers" they refer to as PIAP (Parents in a Pinch). Was this perhaps instead code for "Pig in a Poke"?
2. There is also curiously substantial executive pay for a company that, on average, torches slightly over $45,000 per day of cash (based on Q1 2014 data), which is a 66% year-over-year increase in cash burn from Q1 2013 (and this is just cash loss from operations and doesn't include spending on the trappings of whatever it is they do in their offices).
They would likely enhance shareholder value by simply shutting the doors and returning the cash to shareholders. Please turn off the cash-burning furnaces and put away the shovels, folks.
In comparison, consider that many public company managers, unlike CRCM managers, take/took literally $1 of annual cash compensation to demonstrate that their incentives were essentially fully aligned with public shareholders.
Now consider the comparative data for the CEO of CRCM for 2013 from their recently filed proxy statement: $1.8 million (for a business that has yet to generate a cent of cash flow), who by the way has also become quite the public figure (see, for example, the NYSE television ad campaign - I'm curious how low the stock needs to sink before they pull the commercials, if they haven't already...). In fairness, only about $280,000 of this amount was in cash, but you get the point.
Starting to round out the picture of what might be really going on here yet?
Please refer again to the "Greater Fool Theory" if the picture isn't quite sufficiently coming into focus yet.
There are virtually no tangible assets to speak of. Okay, to be fair, at March 29, 2014 there were total reported assets of $201.9 million, of which a massive $1.5 million were property and equipment - the bulk of the rest is (1) the cash transferred from private and public investors and that is now being burned each day; (2) goodwill - which is simply an accounting fiction that is created by acquiring other companies with public investors' money; and (3) "intangibles" (see #2). Perhaps they could just wipe the hard drives and donate the computers to local schools? Would this not be the more "caring" thing to do and halt the cash bonfire?
Most folks with access to Web.com or a modest amount of money to pay a high school tech nerd could probably replicate this site within a very short time span. And speaking of replicating the site, CRCM has also recently been sued by RecruitMe, LLC in Texas for having stolen a part of the technological interface for the Care.com website, which as far as can be discerned is nothing more than a glorified version of babysitter.com
3. There doesn't appear to be much scalability (unless you consider scalability the skill of burning increasing amounts of cash) or any path to becoming cash flow-positive. If I am missing something, I would be very curious to understand the operating leverage model that would ever turn this into a cash flow-positive entity. Essentially, this appears to be the equivalent of a charity/hobby being fueled using public investors' money.
Customer acquisition costs are high and likely not to slow down to any rational level anytime soon (translation: millions spent on advertising and gimmicks). It was quite amusing on the June 3 analyst Q&A call to listen to how the CEO danced around the issue of true customer acquisition cost by trying to "move the goalposts" on how investors should look at it.
Note, for example, the latest marketing gambit recently announced by CRCM with another "tech" darling, Uber (essentially a glorified taxi service that created an iPhone app - let's call a spade a spade), for Uber to shuttle parents around in cars with child seats during Mother's Day and CRCM to pick up much of the tab. Seriously? This is a business?
Let's also examine some specifics on what the real customer acquisition cost trend might actually be. CRCM breaks out "selling and marketing" as an expense line item, and then also breaks out "research and development" as a line item.
To begin with, exactly what sort of "research and development" is CRCM doing? Do they have a lab in their Waltham, MA headquarters where PhDs are conducting research on how to find better teenage babysitters or dogsitters? Which nursing homes are best? Developing a complex linear programming model to assess which nights are best for a "date night"? Or is it rather just folks sitting around in a conference room spitballing over a $5 latte (that you, the public shareholder, probably paid for by the way) about these obviously weighty matters?
Further, just to give them the benefit of the doubt, let's assume that a mere 10% of the G&A line item is potentially wasted, and that the other 90% is actually used to attempt to "grow the business" (i.e., shovel more cash into the furnace more quickly).
All of this equates to the following in terms of impact on the company's P&L (see their S-1 or 10-K):
Revenue: $26.0 million
Selling & Marketing + "R&D" + 90% of G&A: $31.3 million
Net P&L impact: Negative $5.3 million
Revenue: $48.5 million
Selling & Marketing + "R&D" + 90% of G&A: $55.9 million
Net P&L impact: Negative $7.4 million
Revenue: $81.5 million
Selling & Marketing + "R&D" + 90% of G&A: $84.0 million
Net P&L impact: Negative $2.5 million
Q1 of 2014
Revenue: $25.3 million
Selling & Marketing + "R&D" + 90% of G&A: $30.1 million
Net P&L impact: Negative $4.8 million
There doesn't appear to be any appreciable "scaling" going on here. Of course the company will shout from the rooftops that it has grown revenue and users (only a fraction of whom actually pay to use the site), and will "grow into" its earnings model. However, I would humbly submit: what good is "growing revenue" when what it really means, if you actually look at the facts, is simply that the furnace is now bigger and the cash continues to go up in flames. Secondly, the term "earnings model" implies that there are earnings, of which there are none.
That said, as many investors are well aware, the P&L is often a piece of fiction for many companies; they can shift around accruals and line items if that suits their purposes. Unfortunately, however, cash flow doesn't lie, so let's take a gander at reported cash flow from operations over the last three years as disclosed in their filings:
2011: Negative $9.6 million
2012: Negative $15.2 million
2013: Negative $12.7 million
And here it is for the most recent quarter (ended March 29, 2014) compared to the prior year's first quarter:
2013: Negative $2.5 million
2014: Negative $4.1 million
Full disclosure: My sixth grade newspaper route probably generated more profit and cash flow than CRCM, and that was in 1982. Perhaps I should have taken it public...
4. The imminent IPO lockup expiration (July) should be telling as to the true motives of the perpetrators of this financial disaster if they begin selling their shares at whatever price they can get (stock already down 22% from the IPO price in January, and 54% from the year-to-date high). If they are truly committed to this platform and believe it to be worth significantly more than what the market has resoundingly said it is worth, why jump off the ship when the stock is down 22% from the IPO price? They supposedly believed in the $17/share valuation when they traversed the country pitching the stock to institutions. If they do begin to bail (or bail completely), that should speak volumes about their true view of the business.
5. Arguably questionable ethical issues are also potentially at play here. The CEO/founder is on record as having perhaps pilfered this idea from another company (Sitters.com) that her VC firm employer was in discussions with while she was an "entrepreneur in residence" (whatever that is). She makes a delicate attempt in the emails cited in the article to deny that she may have stolen the idea; read the facts, and you be the judge. I would actually argue in agreement with her that it would be quite difficult to prove that she essentially stole the idea, but, again, the fact that this topic is even on the table should provide some caution to a potential investor. Moreover, aside from the potentially questionable ethics of allegedly stealing proprietary ideas, if one is going to steal an idea, steal a good one, not something as devoid of value as this.
6. Cash burn rate is massive and growing - simply do the math (given the utter lack of scalability) to estimate when the ship splits in two and comes to rest on the bottom of the Atlantic. The more "customers/users" they have and acquire, the more cash they burn. This is a prototypically nonsensical story where the company highlights bogus metrics to distract investors from the fundamental problem, which is that each day the doors to the company are open, another $45,000 goes up in smoke (at least that was the burn rate for the first three months of 2014; who knows what it is now - can't wait for the Q2 filings). If they turn down the marketing spigot of the emotionally touching television commercials featuring (in their own words on June 3) "babies, puppies and toddlers," what do you think happens to the top line?
7. This stock is essentially equivalent to a far out-of-the-money call option on a concept that has little prospect of ever producing a cent of profit or cash flow (again - take note of the imminent expiration of the lock-up restriction that could see the "visionary" founders bailing out of their holdings and leaving public shareholders to wonder why they are on a ship that is already on its side at a 45-degree angle in the water). It trades on very thin volumes and its volatility is enormous.
Of course, however, it has been designed to have a substantial chance of simply enriching the "founders" of the cash furnace that claim to be "entrepreneurs" if they bail out once the lock-up expires in July (note the Twitter lock-up expiration and insider share dumping in May and how that stock performed...). It may, in the end, turn out well for public shareholders (as unlikely as this outcome currently appears), but what it is much more likely is that the insiders at the helm of the ship stand likely to come out in significantly better shape financially as they depart the ship and leave the passengers behind. See this for what it is, people: a direct transfer of cash from public shareholders, pension funds, etc. to the "founders."
As of March 29, 2014, the company currently had $3.83 per share of cash (of course, all belonging to shareholders and not a penny of which CRCM actually generated on its own), which implies that the value of the actual going-concern value of the "business" is a mere $9.48 per share. As they continue to burn through public investors' cash on a daily basis, this would imply another potential 29% drop in share value from current trading levels.
One need not be Nostradamus to foresee how this movie might likely end. CRCM will burn cash until it sees the quickly approaching iceberg, and one or more of these three outcomes may occur: (1) insolvency; (2) a new equity raise from a vulture investor at a value that will massively dilute public shareholders; or (3) the incurrence of expensive debt for what would be easily rated as a "junk" credit if it were currently accessing the debt markets.
8. No amount of presentations at equity conferences hosted by some of the same sell-side firms and analysts who originally smeared the lipstick on the pig and pushed this spam onto the public market can conceal the truth that, once you strip away the veneer of puffery and expose the actual facts, this is truly awful and fetid.
9. By the way, as if all of that weren't enough to choke a horse, there is also a coming flood of employee options and pre-IPO investor warrants potentially set to pummel the shareholder base further --another 7.7 million shares, which includes 3.8 million options with an average exercise price of $6.50 -- enjoy the dilution, public shareholders, and thanks for playing!
10. The stock chart (or, what in some investing circles perhaps is referred to as the "trail of tears") speaks volumes about the market's perception of this "enterprise," despite the recent arguable "dead cat bounce" (Spoiler Alert: no need to be a skilled technical analyst to casually notice a trend/death spiral here).
I emailed CRCM's investor relations department seeking comment on these issues, and received no response.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have based this investment assessment and opinion on publicly available information, and I leave it to the reader to develop his or her own assessment. I am a long-time investor in both the equity and debt markets, and spent 14 years working in leveraged finance and mergers and acquisitions for Lazard, Credit Suisse, DLJ and Barclays, before turning to full-time investment management. My investing focus is centered around long and short equity positions, with a significant component of options-based positions to enhance returns.