Year: 2017
Care.com: A Linked In For Family Care
With trailing twelve month sales of $165 million, a market cap of roughly $555 million, $96 million in cash and no debt, Care.com has become the leading online destination for finding and managing family care in the US. Like LinkedIn, which matches job seekers with prospective employers, Care.com is focused on matching the needs of families and caregivers creating in essence a one-stop shop for family services throughout the lifecycle of a family or individual household.
Led by founder and CEO Sheila Lirio Marcelo, and Michael Echenberg, EVP of finance and CFO, Care.com targets a large addressable market, as evidenced by the fact that US consumers spent $300 billion on family care services last year, including child day care, housekeepers, nursing care facilities, tutoring, and pet care services. The market remains highly fragmented, served by traditional family care agencies, as well as brick and mortar chains that provide a variety of services.
Last year in the US, consumers spent over $300 billion on family care services, including child day care, housekeepers, nursing care facilities, tutoring, and pet care services. Services providers include nanny agencies, child day care centers, elderly care services, including in- home services and nursing care facilities. Specialized service providers for tutoring and pet care, as well as other online destinations provide a wide variety of competitors in this highly fragmented market.
Family care decisions often reside with a female head of a household, the primary audience targeted by Care.com. Decisions for services providers are often based on word of mouth stemming from personal networks. Decisions must be made with regard to the preference for in-home services, or brick and mortar facilities outside of the home.
Care.com identifies its primary target market as the roughly 46 million US households with income greater than $50,000 per year with either a child under the age of 18 and/or a senior aged 65 and over. The company also includes an estimated 15 percent of households with incomes under $50,000, with similar dynamics. Care.com’s in-home consumer services remain in the early phase of market growth, yet benefit from some compelling demographic facts and trends, which include the rise in single parent households, the prevalence of dual income households, an aging population, and increasing trust in the internet as a destination to help make decisions relating to family, home and health.
In just 10 years, Care.com has carved out an enviable internet presence, which features more than 26 million registered users, comprised of nearly 15 million families, and more than 11 million caregivers. At the end of the most recent quarter, 320,000 paying families purchased a subscription to the company’s caregiver listings, and/or the company’s service for household payroll and tax preparation services.
Key swing factors that will determine Care.com’s ability to rise or fall over the next 12-18 months include it ability to:
- Grow its core US consumer business through continuous improvement to its core matching platform, as well as targeted initiatives to grow senior care, housekeeping, and pet care, leveraging its registered community of more than 26 million members.
- Develop awareness as a trusted source for families and caregivers, through both its own accreditation, as well as the halo effect provided by corporations, non-profits, and potentially insurance plan providers that adopt and promote its services.
- Drive additional revenue growth from three key growth initiatives: employer-sponsored family services for employees, overseas expansion, and marketing programs for daycare, nanny, and elderly care agencies.
For more information on Battle Road’s 24 month assessment of Care.com, please contact [email protected].
Spotlight on Social Media
Spotlight on Social Media: Twitter’s Registration Policies Under Review
Recognizing the rising influence of social media networks on the spread of junk news and unfiltered opinion, Facebook and Twitter have been called recently to testify before Congress to discuss their policies to monitor illegally registered and anonymous users, as well as advertisers. A wide range of concerns are under examination, including the use of social networks by foreign governments to influence the outcome of the 2016 presidential election, as well as foreign governments and hate groups seeking to inject invective into the discourse on current affairs.
Unlike Facebook, which purports to have policies in place to vet the identity of those who purchase ads and post opinions, Twitter has a looser policy as it pertains to posting opinions, one in which a user need not provide details of his or her identity to post messages.
Twitter announced on September 28th that Russia Today, a media organization with strong ties to the Russian government, purchased $274,000 in US ads in 2016 and promoted over 1,800 tweets targeted to the US market. The company also detailed some of its efforts to root out misinformation on its sites, as well as ongoing efforts to eliminate false or spam accounts, which the company estimates as less than five percent of its monthly active user base, which totals 328 million.
In light of prior concerns expressed by US and European regulators, Twitter already has policies in place to root out terrorist postings, hate-related violence, and child pornography from its web sites. Partly in response to calls for Twitter to police its user community, the company recently announced that it has suspended nearly 300,000 user accounts with links to terrorism in the first half of 2017, 95 percent of which were unmasked by the company’s automated spam-fighting tools. 75 percent of the accounts were suspended before the account could fire off its first tweet.
With regard to hate speech, Twitter and Facebook last year pledged to European authorities that they would respond to violent, xenophobic, or racist comments within 24 hours. European authorities have recently requested that the companies respond even faster in cases of suspected terrorist postings.
Twitter has, however, chosen not to be an arbiter over political views or the veracity of news sites espoused by users, in keeping with its policy to allow the free exchange of ideas and opinions, no matter how crudely expressed. This policy has placed it at odds with various national governments over the years, including the US government. Twitter has sued the US government over Twitter’s desire to publish in its transparency reports the precise number of requests sought by government authorities and FISA court orders.
Our overall sense is that government authorities will keep the heat on Twitter to suspend and remove terrorist postings on the platform, but that authorities will be less able to restrict political opinions and regulate foreign news sources, both of which would be anathema to free speech advocates.
ASC 606: Accounting Controversy on the Horizon
A new accounting standard relating to sales expense recognition is likely to create controversy in the world of software earnings quality, particularly given the recent trend toward multi-year contracts associated with software subscriptions.
ASC 606, jointly issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on May 28, 2014, provides guidance for revenue recognition as well as the accounting for certain sales expenses. The rule allows companies with revenue contracts extending beyond a single year to capitalize and then amortize the incremental cost of the contract acquisition over the life of the contract. Therefore, certain sales commissions can be deferred, even though the commission is paid at the time the contract is approved. This is significant for any software company whose average contract length is more than a year, for it allows the company to defer a certain portion of its sales commissions, reduce its reported sales expense, and boost earnings in the process.
Though FASB and the IASB originally envisioned adoption of the guidelines to occur after December 15, 2016, or, for practical purposes, during the first calendar quarter of 2017, an update provided by FASB last summer deferred the effective start date for one year for public entities reporting under US GAAP. Thus, companies are not required to comply until the first calendar quarter of 2018.
ASC 606, if adopted, will have a significant impact on companies which pay out the bulk of their sales commissions in a particular quarter as part of a yearly incentive structure. For companies with multi-year contracts the reduction in sales expense could be significant in the year-end quarter. It will therefore be important to evaluate the earnings performance of a company as if the accounting guideline had been implemented in the prior year, in order to ensure an apples to apples earnings comparison, and to determine whether a company’s reported earnings may have been artificially stimulated as a result of adopting ASC 606.
Proponents of ASC 606 assert that the capitalization and subsequent amortization of sales expense better matches a company’s ratable revenue recognition pattern for subscriptions. We believe that ASC 606 distorts the P&L by systematically under-reporting expenses incurred by a company at the time of payment. Another argument in favor of capitalizing commissions is that sales expense represents an incremental cost associated with a sale. Yet, so are marketing and promotional costs, as well as R&D expenses, since market awareness and the addition of new product features can directly impact the purchase decision.
In terms of historical precedent, one recalls the enactment of FASB 86, an accounting edict proclaimed in August of 1985, which enables companies to capitalize –rather than expense— certain software development activities between the point of establishing commercial feasibility and “completion” of the product. Upon review of the ruling, Francis (Frank) J. Gaudette, the late great CFO of Microsoft, who helped orchestrate the company’s IPO in 1986, refused to recognize as legitimate any interval between feasibility and product completion, with the view that research and development costs should be expensed entirely in the period in which they are incurred.
By taking a hardline stance against capitalization of R&D under any circumstance Gaudette set a precedent among software companies with conservative accounting practices, whose earnings multiples—like Microsoft’s—have been rewarded over time. As ASC 606 comes into effect, and a spotlight shines on the sales and marketing expense line of subscription software companies, one should take with a certain grain of salt the considerable operating margin improvement that some companies will claim as a result of adopting the new guideline.