In an article on Seeking Alpha on June 20, I posed some threshold questions that, to this date, I still have not heard a single sell-side analyst address with the management of Care.com (NYSE:CRCM). These questions pertained directly to:
- CRCM's fundamental viability;
- Whether the company has a coherent strategy, or, perhaps most importantly:
- Whether CRCM has a demonstrable and achievable path to ever producing a penny of profit or cash flow.
I want to be clear up front: I am neither long nor short this stock. I have never owned a single share of CRCM (which is insanely expensive to short given the tiny public float and borrowing cost) nor would I ever contemplate buying it. That said, if CRCM had listed options, I might consider shorting it and buying some out of the money call options to hedge my bet -- but, the fact is, there are no listed options for CRCM, even after six months as a public company (presumably there is little appetite for such instruments given its tiny trading volume and market capitalization).
I am simply an individual investor who was front and center as a former investment banker in the 1998-2001 original dot com v.1 meltdown who is now marveling at the fact that the market's collective memory is apparently so myopic that we are now in dot com v.2 with similarly insane valuations (not as egregious as dot com v.1, but the gap is closing) on companies that produce no earnings or cash flow and seem to have no demonstrable path to ever doing so.
As its share price has not surprisingly cratered even more alarmingly in recent weeks and days (down 30% in the last month and down 6.6% in the first trading day after its latest quarterly conference call on July 31), CRCM has clearly fired up its public relations machinery to full throttle with an avalanche of numerous (albeit predictably pointless) announcements, Facebook postings and events to counteract the groundswell of investor skepticism as to the credibility of this as a viable entity. Keep in mind the irony/circularity of this: this public relations spending is almost entirely funded with the money of public shareholders (i.e., you, if you are long CRCM).
On June 20 I posited that, given CRCM's complete lack of profitability and cash flow even after eight years in business, the company essentially trades as a long-dated, far out-of-the-money call option on whether this mousetrap will ever work. Additionally, I continue to believe that, as long as the cash furnace at CRCM keeps burning at full throttle (explored in greater detail below), the share price should naturally decline over time to what the market perceives to be the true intrinsic value of the business. As of August 1, cash represented $3.68 per share of value at CRCM. This implies that the market currently views the per share value of the actual operating business as just $5.18.
As I lay out in greater detail below, I estimate that this cash will almost entirely evaporate between mid-to-late 2016 to early 2017. At its worst, this is a mere 24 months from now, folks. Don't kid yourselves that this is something that is "way off down the road." If this plays out as I think it will (and common sense and some basic financial analysis validate this), it will leave public shareholders holding an empty bag consisting of simply a domain name, no meaningful tangible assets and an enterprise that will likely be in dire need of a cash infusion at a massively dilutive valuation relative to where ($17) it first foisted shares upon the investing public.
As CRCM continues its parade of analyst Q&A sessions in an attempt to perpetuate the "feel good" PR campaign and stave off a further freefall in the share price, I sincerely hope that some actual, substantive, probative questions that pierce through the buzzwords and nonsense from management are finally posed, instead of the litany of softball questions that have characterized most of these sessions to date since this debacle became a public company. Given that I am highly confident that no such questions will actually be asked, I will ask them here.
I would submit that a management team that has burned this much cash and destroyed such a staggering amount of public shareholder value (in both total dollars as well as in percentage terms) has some serious explaining to do. They need to be held accountable and forced to explain, in extensive, exhaustive and transparent detail (using no b-school platitudes and buzzwords), how it is that they believe they are "right" and yet the market and investors, who actually "vote" with real capital/dollars, have gotten it so "wrong."
Below is my current list of key issues about which investors must push for disclosure and which must have addressed properly and transparently by management (which they have yet to do in over six months since bellyflopping into the public pool). This list grows almost weekly as I continue to watch this financial train wreck in real time.
The sell-side analysts who host CRCM management's upcoming Q&A sessions and publish research on the company have pursued little to no meaningful discussion of the company's glaring weaknesses/problems, at the same time that the public market (i.e., people voting with actual dollars) has resoundingly rejected CRCM in dramatic fashion as a viable economic entity.
1. Let's Cut Right to Chase for Prospective CRCM Investors who Might Think it is a "Value Play" at CRCM's Ever-Decreasing Share Price - Where Can/Should the Share Price Go in Coming Months?
The math exercise at hand is simply to pencil out on the calendar where the potential financial impact point will be when CRCM ultimately burns through its cash and becomes insolvent.
As of June 28, CRCM had cash of $113.9 million (almost entirely from public investors, of course - they generate nothing on their own). Now subtract the $22.9 million in cash just paid by CRCM (largely with *your money*, public shareholders) to the owners of the recently acquired Citrus Lane. We're now at $91 million left. Let's assume Citrus Lane hits its ambiguous "milestones" in 2015 and 2016 that trigger the earn-out payments under the purchase agreement over the next 18 months. That's another $13.4 million in CRCM shareholder cash to be vaporized.
Further, let's assume that, going forward, CRCM continues its brilliant Marissa Mayer-esque strategy of bolt-on acquisitions (to find something -- anything -- that might rescue them -- too bad they don't have a large stake in Alibaba to prop up their valuation like YHOO does), and that CRCM "conservatively" blows roughly $15 million in cash on acquisitions in 2015, another $10 million in 2016, and another $5 million in 2017. As a sanity check on these numbers, note that over the last 3.5 years they have averaged cash acquisition spending of around $18 million per year, including Citrus Lane fully loaded for its potential earn-outs.
Now let's focus in on the organic, core cash-burn rate at CRCM. In the three most recent quarters, they have averaged $5.7 million quarterly in cash burned, excluding spending on acquisitions. Let's give management the benefit of the doubt and assume they can reduce this by 30%, down to $4 million per quarter on average going forward in the rest of 2014 and for 2015 (again, note that the actual recent cost trends fly in the face of this assumption, but we'll ignore this inconvenient truth for a moment). Further, let's assume they can reduce this in 2016 to $3 million quarterly, and to $2 million quarterly in 2017.
So, with our starting point as the $113.9 million on the books at June 28, 2014, we end up with the following projected insolvency scenario:
And here are the specific numbers, period by period and component by component, underlying this path to insolvency (of course you can tweak these assumptions as you wish, but no reasonable edits to the assumptions would move meaningfully away from the conclusion that this "enterprise" is, in all likelihood, going down in flames):
Now, even any modestly competent investor knows, the market is forward-looking and, as more and more quarters of charred cash are swept out of the oven at CRCM, the market will see the end coming and the impact point approaching. If management has any vision, they too will see the ground approaching at a rapid pace. At least one or two things will likely happen:
- Now that the lock-up has expired for senior management to sell their shares, you may see senior management and directors (and, most tellingly, perhaps some of the VC backers who have been vocally on CNBC lauding CRCM since its IPO) unloading shares in a desperate attempt to capture whatever value is left to be pilfered from public investors. This would complete the wealth transfer from public shareholders to their own pockets before impact, and will obviously crater the stock even further; and/or:
- CRCM will realize it needs to undertake some sort of new rescue capital raise at a massively discounted valuation to where the company initially sold shares to the public (i.e., $17). Perhaps it may take the form a convertible security sold to a vulture investor with a conversion price up 30+% from however far the shares have ultimately fallen by the time management recognizes the impending faceplant, but given how far CRCM has fallen thus far and looking at its cash-burn trajectory, even this would obviously still be massively dilutive to public shareholders.
My guess is these conversations with bankers begin in mid-2015 at the latest (again, unless management is so utterly incompetent that they blindly fly the plane into the ground). As word of these discussions inevitably leaks out, this will lead to rumors and speculation that CRCM may be approaching insolvency, further driving down the share price and complicating the solution. Bottom line: this movie does not end well for public shareholders.
Further, what sort of prospective investor would bite on this proposition (even a vulture investor)? Let's say the shares continue to plummet and trade down towards $5, around the current intrinsic value. A prospective investor will know the company is obviously desperate and that the only direction it is going is down - why buy it today when it will be even cheaper tomorrow?
The concept of a credit facility or debt issue (other than something with very harsh pricing from a vulture fund or other hard-money lender) seems highly unlikely for a company like CRCM, given that they have no cash flow and no real assets to provide a first lien on anything of actual value.
2. CRCM's Absolute Lack of Cash Flow and No Articulated Path to Future Cash Flow.
CRCM has been in existence since late 2006. The point being: this isn't some fresh-from-the-womb start-up with no track record. It has logged nearly 8 years of operations, and thus nearly 32 consecutive quarters of burning cash in the corporate furnace (although publicly available data only go back to 2010). To my knowledge, based on reviewing its S-1 and other public filings, CRCM has never produced a *single penny* of GAAP profit or -- more importantly -- any actual cash flow. Of course, I could be wrong regarding its pre-2010 results. That said, it would be somewhat strange to say the least if, say, somehow in 2007 or 2008 CRCM had generated any free cash flow with a much smaller revenue base. Further, this possibility (which is remote, at best) would betray all of its supporters' arguments that the company just needs 'more scale' to be relevant and a viable economic species in the public equity markets.
And, just to head off the inevitable criticism of, "Well, Facebook went public 8 years after its inception, and look at how poorly its shares initially traded." First of all, CRCM, you are no Facebook. Full stop; go home. In the three years prior to its 2012 IPO, Facebook generated $2.4 billion of operating cash flow. This is nearly 9 times greater than CRCM's entire market capitalization as of August 1. In the first quarter of 2012 just prior to its IPO, Facebook generated another $441 million of operating cash flow. So, let's dispense with the Facebook mumbo jumbo here and now.
The obvious and more relevant analogous grease fire is Angie's List (NASDAQ:ANGI), which was burning cash at a similarly prodigious rate in the years and quarters leading up to its November 2011 IPO. Not surprisingly, its shares are down nearly 50% since splashing down face-first in the public market (and down 47% year-to-date in 2014).
3. It's Been Nearly 8 Years Since CRCM was "Born." Once Again, Let's Ask: "Where is the Cash Flow?"
This strikes me as an amazingly lengthy gestation period for a company that, as of its January 2014 IPO, clearly didn't appear to be ready for prime time (for a variety of reasons) but was rushed out to market given the frothy conditions in the IPO market. Nonetheless, it was basically an irresistible PR-fest rife with hyped NYSE floor interviews on CNBC and Bloomberg TV, NYSE ad campaigns (which seem to have evaporated rapidly as the share price has vaporized so dramatically), vapid analyst Q&A sessions and, most recently, a highly touted White House summit visit by the CEO.
How quickly the bloom has come off the rose. Even King Digital (NYSE: KING), pathetic maker of Candy Crush Saga, is up 1% since its 2014 IPO as of August 1.
Of course, with CRCM, we're talking about babysitting and dog-walking, folks, not rocket science. Seriously? This isn't UNICEF. Investors and portfolio managers invest in businesses to make a profit, not to finance a pet project/'full employment act' for folks who have labeled themselves as "entrepreneurs."
4. The Market Has Now Had Ample Time and Data to See Through the Charade at CRCM.
While defenders of CRCM may stubbornly persist that public investors just don't 'get it', the market has spoken quite loudly and clearly as to what it thinks of this dubious gambit and its potential for additional value destruction for the pension funds, university endowments and individual investors who have endured staggering value destruction since the IPO in January. Bear in mind, these pension funds encompass the retirement benefits of teachers, firefighters, police officers, nurses, etc. - most of whom have the children, elder parents and pets to which Care.com claims to be so devoted.
The market has sifted through the buzzwords and figured out rather quickly that CRCM embodies a fundamentally flawed concept (if not a complete sham and simple transfer of wealth from public investors to the Company's VC backers and management - which will be abundantly clear if they start dumping their shares now that the lock-up has expired) and that growth for the sake of growth, especially without any actual cash flow or earnings, for a company that has been around for 8 years, means absolutely nothing when its flimsy facade of legitimacy is stripped away.
What is also truly disconcerting is that, as of March 31, one of the largest institutional shareholders of CRCM was USAA, which owned roughly 7% of CRCM at that date. USAA is, of course, a financial institution dedicated to serving military veterans and their families. It will be interesting to see in the next filing whether USAA has pulled the plug on what they must now be coming to think has been an investment debacle.
On June 20 (the day of my original article), the shares of CRCM closed at $13.13, down 23% from its January IPO price of $17, and down 55% from its post-IPO high of $29.25 that it hit just days later after being initially embraced by the Street as an amazing new tech "darling." Since the original June 20 article, CRCM shares are down another 33% (as of August 1) as the market has continued to unpack and digest the company's somewhat (to say the least) opaque disclosure on trends that actually matter in a real economic sense to public shareholders.
On August 1, in the wake of CRCM's second and most recent disastrous quarterly loss announcement as a public company (by the way, we need to dispense with their laughable use of the term "earnings," since there are none and don't appear to be any prospects for any after roughly 32 consecutive quarters of losses - if I am factually wrong on this and they have actually produced a cent of cash flow from operations, I would gladly print a retraction), CRCM closed at $8.86, which is down 48% from the IPO price and down 70% from its post-IPO high price.
5. Arguably the Worst IPO of 2014.
If this is not a failed IPO, I don't quite know what is. I would guess that Morgan Stanley (the lead underwriter on the deal) has probably either removed CRCM's logo and deal data from its current pitch books to prospective IPO candidates or relegated it to a remote footnote in an appendix. The equity capital markets groups within investment banks typically highlight "after-market" performance of the IPOs they have led - I am sure they have found a way to carve out CRCM from the data set. I would also speculate that Morgan Stanley's bankers have probably done some similar math and may be warming up for what is known as "rescue financing" in the forseeable future given the cash-burn trajectory that is taking place at CRCM.
Consider for a moment the magnitude of the value destruction that the management of this company has perpetrated on the investing public. As of August 1, just over $250 million in total shareholder value has gone up in smoke (from the $17 IPO price). It is obviously far worse if you consider the public investors who bought into the hype of kids, moms and dogs and the ambiguous notion of "care" and chased it all the way up to its $29.25 post-IPO high. From its $29.25 peak, approximately $632 million of shareholder value has been destroyed.
I am trying to envision the conversations that must be taking place between the institutional portfolio managers who bought shares in the IPO and their bosses (not to mention these funds' investors) as to what their thesis/thinking was in making this investment decision in the first place. Consider also that, even in light of last week's broad sell-off in the equity markets, the S&P 500 is still up 7.5% from the day of the CRCM IPO (i.e., the market is outperforming CRCM by a mere 56%).
6. Let's Get Back to Cash Flow. Even After Eight Years of Operations, CRCM Continues to Torch Cash at an Astonishing Pace.
Now let's take a moment to quantify the astonishing amount of actual cash burned at CRCM. From 2011 to 2013 (again, please recall this gambit was launched in late 2006 -- it is not exactly new to the scene), CRCM torched $65.6 million in actual cash (cash loss from operations plus cash consumed in investments and acquisitions of other presumably cash-burning gambits they acquired). Excluding acquisitions, the total conflagration of cash was a mere $39.7 million (bear in mind, this amount equals 14.5% of CRCM's current market capitalization of $275 million as of August 1).
Now let's fast forward to 2014. Total cash burn (excluding, once again in the interest of suspending reality for a moment, acquisition-related cash spending) for the first half of 2014 is $9.4 million. This is just for the first half of 2014. On a comparable basis, the largest amount of cash that management had previously torched in a full year was $15.6 million for *all* of 2012 (excluding acquisitions). Perhaps more disturbingly, Q2 2014 cash burn (excluding acquisitions) was $5.1 million, versus $4.3 million in Q1 2014, despite management's claims in its early June Bank of America analyst "Q&A" session that they were beginning to leverage the platform.
The cash burn rate is also increasing as a percentage of revenues. In Q2 2014, cash burn (excluding acquisitions) was 19.8% of revenues, versus 8.4% in Q2 2013. For the twelve months ended June 2014, cash burn (excluding acquisitions) was 19.5% of revenues, versus 17.3% in 2013.
Now, if you include acquisition-related cash burn for the first half of 2014, the total cash funeral pyre stands at a whopping $10.5 million. Notably, this figure does not even yet include the cash now out the door for their latest signature acquisition they announced on July 17 (see below) of a juicy little company called Citrus Lane (another dubious, likely cash flow-negative mom-friendly hobby masquerading as a business), which will total, at a minimum, another $22.9 million in cash out the door (this will hit the books in Q3 since the deal closed after the end of Q2).
And this doesn't even include incremental cash in potential earn-out payments to Citrus Lane in 2015 and 2016. Assuming the cash/stock mix of the potential $17.6 million of incremental earn-out payments reflects the same 76% cash / 24% stock mix as the initial purchase, and Citrus Lane actually hits these targets (whatever they may be -- of course the specific milestones are not publicly disclosed), that's another $13.4 million of cash out the door in the next 18 months, and I highly doubt CRCM will be generating any free cash flow of its own by that time. Given how CRCM apparently sets its executive compensation performance targets, I am guessing the bar was probably set rather low for the Citrus Lane earn-out milestones.
Now, if the milestones to which these earn-out payments are directly linked to whether Citrus Lane actually generates free cash flow of its own, that would obviously not be a bad thing for CRCM investors and shareholders should welcome this. However, given how these types of companies tend to be managed (i.e., with more emphasis on growth for the sake of growth and treating the corporate cash pile as their personal piggy bank), I would wager that the Citrus Lane earn-out milestones probably have little to nothing to do whatsoever with whether Citrus actually generates *real* cash flow in the next 18 months.
Bottom line: that's a total potential of another $36.3 million in cash up in smoke, or another $1.17 per share of CRCM vaporized. It never ceases to amaze me how these self-proclaimed serial entrepreneurs are so flippant with regard to spending other people's money. Perhaps a career in Congress is in order once this plane inevitably slams into the ground.
7. CRCM is not "Growing Into" its "Earnings" Model at any Measurable Pace.
One of the key arguments from management and its backers is that CRCM will "grow into" its "earnings model" as it gains scale and will be able to leverage its sales and marketing to drive further top-line growth and, eventually, profitability. If this were true, as it is for many start-ups (again, recognizing that CRCM is actually now in its eighth year of being a "start-up" - Peter Pan Syndrome, apparently), this would be fine. However, the actual trends belie this hollow argument.
First of all, it has been nearly 8 years since CRCM's inception - how long is this seriously going to take? Management will only publicly say: in the next "couple years" (see their last Bank of America Merrill Q&A session transcript from June).
Bottom line: there is not anything approaching a scintilla of actual cash flow or earnings (and nothing in sight before CRCM approaches insolvency).
Revenue has grown from just under $13 million in 2010 to $95.3 million for the twelve months ended June 2014. Before your jaw drops at this otherwise remarkable fact, keep in mind again that revenue does not in any way equate to producing free cash flow that can be reinvested in the business and/or distributed to shareholders. I could run a lemonade stand and sell cups of lemonade for 75 cents that have cost me $1.50 in fully-loaded production, marketing, real estate, etc. expense. But, apparently in this equity market this qualifies me as a high-flying "growth company."
From 2011-2013, CRCM burned a total of $39.7 million in actual cash simply from being in business, and this doesn't even take into account CRCM management spending another $25.8 million in total in 2012 and 2013 on acquisitions of other businesses that also likely burn cash on their own). I wasn't able to find a cash flow burn figure for 2010 - would love to see that number (perhaps I missed it in its filings).
That's a total of $65.8 million burned (just from 2011). That's nearly 25% of CRCM 's current total market capitalization.
Just through the first half of 2014, CRCM has burned another $10.5 million of cash on its own, and this doesn't yet even take into account the additional $22.9 million of cash (your money, by the way, public shareholders -- please pay attention) CRCM just paid for another "social commerce platform designed for moms" (i.e., Citrus Lane, that, in all likelihood, is probably also burning through cash quite ably on its own, thank you very much.)
This equates to another $0.74 per share of value (i.e., another 8.4% haircut) lopped off the CRCM share price - unless people believe that at some point soon Citrus Lane will actually be a cash flow-positive business. I would love to see Citrus Lane's actual detailed financial results. I guarantee that if Citrus Lane were generating significant free cash flow on its own, CRCM would have trumpeted this from the mountain tops in their press release on the acquisition.
So, as discussed above, we have to add the sweet lemony gem that is the Citrus Lane acquisition to the ongoing cash bonfire at CRCM. (And this doesn't yet even take into account the additional $8.1 million in CRCM shares also paid to Citrus Lane's management and other owners -- of course, shares that were issued at a massive discount to the $17 IPO price just six months ago - additional massive dilution to existing public shareholders).
Notably, according to CRCM, Citrus Lane reportedly has 400,000 members, of which only 45,000 actually pay anything - a percentage (11.3%) strikingly similar to that of CRCM (actually even higher than CRCM's percentage as of year-end 2013). Of course, CRCM's metrics are not exactly a high bar to overcome.
Sales and marketing at CRCM as a percentage of revenues is actually up meaningfully year-over-year versus 2013.
In Q1 2014, it was 80.9% of revenue, versus 71.2% in Q1 2013.
In Q2 2014, it was 69.8% of revenue, versus 64.4% in Q2 2013.
In the twelve months ended June 28, 2014, it was 71.8% of revenue, versus 67.8% in full-year 2013.
Where is the "leveraging", "optimizing" and "scaling"? [spoiler alert: nowhere]
Of course, management would likely say: well, we had the proceeds from the IPO and were ramping up our marketing spend by virtue of the new capital infusion into the company.
Perhaps more importantly, let's properly factor in R&D expense into the marketing cost calculus. I would strongly argue that R&D for a company like CRCM is simply an accounting line item allocation by management of money that is similarly spent like S&M to attract customers and drive revenue growth (to be clear - I'm not accusing them of some kind of accounting fraud; rather, simply that they likely have a high degree of latitude under FASB as to whether to book something as "sales and marketing" or R&D).
Seriously, exercise some common sense: what sort of R&D is CRCM realistically conducting? Perhaps something related to payments might make sense (i.e., getting more money out of customers' pockets), but that wheel was quite adequately invented years ago by companies that have vastly superior experience in payment processing - why should CRCM vertically integrate into payments when others (Paypal, Paychex, etc.) with much more experience and expertise can likely do it at much lower cost? In my view, it is properly all in the same expense bucket with sales and marketing, with the possible exception that something classified as R&D may take longer to result in revenues than something classified as "sales and marketing." Whatever the case - it's all the same to me (and should be to any thoughtful investor).
So, let's dispense with the accounting fiction that there is a distinction between S&M and R&D -- they are one in the same for a company like CRCM - let's call a spade a spade. S&M and R&D for Care.com are interchangeable and it is frankly just a question for their auditors as to how to allocate them within their P&L for accounting purposes.
When we combine CRCM's total sales and marketing with R&D expense (which, again, I argue the true measure of what they spend to acquire and retain customers -- and this doesn't even allocate anything from the corporate G&A expense related to roaming around the country touting this flying circus act that is so reminiscent of the 1998-2000 tech bubble that it is hard to muffle laughter) here are the actual trends that shareholders don't hear about from either the company or the sell-side analysts:
Q1 2014: 97.0% of revenue, vs. Q1 2013: 85.9% of revenue
Q2 2014: 85.5% of revenue, vs. Q2 2013: 79.5% of revenue
Latest Twelve Months: 86.9% of revenue; Full-Year 2013: 82.3% of revenue
I ask once again, where is the scaling and operating leverage? Nowhere.
8. Key Operating Metrics Also Reflect Malignant Trends.
From 2011 to 2013, the year-over-year growth rate in visitors to the site who actually pay (including both families and caregivers) grew at a substantially lower rate than total revenue growth. This is somewhat of a mixed signal (to say the least) in terms of assessing exactly how malignant the tumor is within CRCM.
And below are 48 months of data through year-end 2013 on the total percentage of the massive amount of "users" that management constantly hypes who actually pay a single cent to the company (i.e, you, the shareholder) - spoiler alert: the trends are not encouraging. By the way, after reviewing the actual data, I refer to them as "visitors" rather than "members" since so few actually ever pay a cent to CRCM.
On the one hand, this is obviously a negative as it implies there is an increasing percentage of tire-kickers who go on the site but don't actually pay for anything. On the other hand, in one of the lone areas where I do have to give CRCM credit, it means that the small and decreasing number of visitors to the site who actually do pay (down to 10.4% of families as of 2013), are paying more and/or sticking around longer as subscribers, and this is borne out in the data on revenue per paying member.
That said, it does raise a common sense question, however. If I am a parent who has found a nanny, elder care provider or dog-walker on Care.com, why do I need to sign up for a multi-month auto-renewed subscription, unless I simply forget to cancel it and not realize that I am being auto-billed monthly by Care.com? Are these families simply too complacent to cancel after they have found a nanny/grandma helper/dog-walker (given that they have better things to do with their time than discover they are being auto-billed each month by Care.com)? Of course, babysitters and nannies are by definition a high-turnover group - high school and college kids who are nannies go back to school, get full-time jobs, etc., and need to be replaced.
So, we have somewhat conflicting trends here on this point. On the one hand, revenue per paying member is increasing (whether due to satisfaction with the site or being duped into an auto-bill situation they don't realize for a few months is financially "photo-bombing" their credit card; anecdotal evidence on this issue is rather mixed but negative comments on it abound). On the other hand, we have the percentage of families that actually pay to use the site (versus those who simply visit it) declining at a rapid rate (i.e., down 440 basis points from 2010 to 2013).
What is not in dispute, however, is that the raw dollars spent per net customer addition has dramatically increased over time (again, this is *your* money being torched, public shareholders, not theirs - pay attention if you "care" about your investment, because this company apparently does not and this is *your* money at stake, not theirs) . From 2011-2013, the broadest data set I could find from public filings, here is the disturbing trend that seems to largely explain why the cash furnace continues to burn quite hot even after eight years of operations. Once it was clear the IPO was cleared for takeoff, the ramp up in sales and marketing and "R&D" went through the roof. Unfortunately, at the same, the net additions of paying customers declined by 14.5%. Ouch.
Are you beginning to notice any remotely distressing trends/divergences here?
Any lingering curiosity as to why management is so opaque in its calls and investor meetings about customer acquisition cost, churn, etc. and why, for example, in the last analyst Q&A session in early June with the submissive and suppliant Bank of America equity analyst, the CEO and CFO described themselves as having a "subscription model" that really doesn't measure churn, but rather "re-use rates." Excuse me? This means exactly what?
Interestingly, as pathetic as Angie's List is as a business and a public company, at least they have the integrity to disclose publicly rather detailed information about the fundamental trends within their business (churn, marketing spend, etc.) -- this is perhaps one lesson in humility and anti-narcissism that CRCM could take from ANGI.
9. Top Line Growth is Evaporating Despite Massive Continued Marketing Spending and the Company's PR Campaign -- a.k.a. The Death Knell for a "Growth" Company
In the last six quarters, year-over-year revenue growth has slowed dramatically, despite the fact that the sales and marketing plus R&D burn has been blazing at full force over the same period. Yes, of course as a company matures, its growth rate will decline. That said, CRCM has ceaselessly trumpeted itself as the "leader" in such a demographically attractive, massive and rapidly growing total addressable market and management (especially post-IPO, flush with public investors' cash - i.e., your money) has kept the pedal to the metal when it comes to marketing spending.
And, in recent days, CRCM has now hired a new chief marketing officer. This raises (at least) two immediate questions: (1) who was steering the marketing ship previously that produced such "stellar" financial results?; and (2) with an even greater apparent emphasis on marketing now, is spending in this area more likely to increase or decrease in coming quarters? My bet is on the former, not the latter. Perhaps this new dedicated person has an amazing track record of efficiency, or the company's much vaunted "Big Tent" mobile initiative will somehow reduce marketing spend. Time will tell, but this management team hasn't shown much in the way of spending discipline and public investors have obviously been casting their thumbs-down votes in large and increasing numbers.
As is common with many "Wall Street darlings" that originally trade at insane multiples (in this case, of course, the only measurable multiple is that of revenue since there are no earnings or cash flow), fading growth combined with utter lack of profitability and negative cash flow is a toxic combination as it relates to share price.
Once again, are you noticing any slightly disturbing trends here?
10. The Wrongful Death/Negligence Civil Suit Filed against CRCM in Late May Deserves Serious Examination.
On May 22, 2014, the family of a dead infant - hired by parents who claim they specifically paid Care.com to have the nanny "vetted" (which allegedly failed to uncover her rather obvious criminal history) - filed a civil suit relating to the killing of their infant child by this CRCM-vetted nanny (there are additional defendants, but Care.com is the primary and named defendant).
In criminal court, this nanny was convicted of literally shaking the infant to death, due to the nature of the infant's head injuries, tand is now serving 70 years to life in state prison as a result. The civil case is Christopher Bell v. Care.com, which receives *ZERO* attention or discussion in the wild parade of family-friendly PR and analyst lovefests with CRCM management.
According to the most recent court documents, on July 21, Care.com moved to stay (i.e., postpone) discovery relating to this case (presumably in conjunction with a motion to dismiss the case entirely). Given that this is a pending case, it is obviously difficult to assess the potential liability to CRCM.
That said, what would be logical for the otherwise fawning sell-side analysts to ask in the upcoming PR blitz by CRCM management is twofold: (1) what is the status of the case and please explain the factual background of it (which, of course, management likely won't answer); and (2) have you booked a litigation reserve (and, if so, how large is the reserve) relating to this case in the third quarter? If CRCM management can't even answer question #2 without its usual obfuscation and utter lack of transparency, this would be a truly pathetic chapter in the annals of corporate governance for public companies.
It interesting that, in its Q2 earnings call, the CEO emphasized "enhanced background checks" as one of its recent "monetization initiatives". Two quick questions: 1) why weren't the "enhanced background checks" in place when this infant was killed; and 2) where is the monetization of anything? In the most recent quarter, CRCM torched $5.1 million in cash, versus $4.3 million in Q1 - that's an 18% increase in just the last 90 days.
Conclusions (and these continue to evolve):
In light of the avalanche of value destruction that has occurred thus far at the hands of CRCM management since its January IPO, I now regard the cover of CRCM's IPO prospectus at the time as particularly curious. As would any other IPO S-1 filing, it boldly displays the company logo, along with CRCM's unique tag phrase, "There for you". As I look back on this debacle, the cover of its prospectus raises at least two immediate questions (among many others):
1. About whom does Care.com actually "care"? Themselves and lining their own pockets, or their public shareholders who provided nearly all of the cash for this gambit? It is clearly not the public shareholders that are front and central to their concerns. Management has torched and continues to torch public investors' hard-earned cash (and, believe me, they will likely torch it all if given the opportunity). If management and/or other insiders begin dumping shares, this view will be 100% validated; and
2. When management boldly emblazons the phrase "There for you" on the cover of their pitch materials, exactly what/who is the "you" to whom they are referring? Once again, it is clearly not the pension funds, USAA, university endowments and individual shareholders who piled into the shares, many of whom are still on this badly impaired plane that is rapidly losing hydraulic fluid, fuel and altitude on its way to becoming a steaming crater and a debris field that at some point will simply be another case study of how not to run a business.
What CRCM is essentially encountering here is the time-tested axiom that "you can't fool all of the people all of the time."
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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.