Care.com. Second Quarter 2016 Earnings Call. July 27, 2016

Transcription

1 Care.com Second Quarter 2016 Earnings Call July 27, 2016

2 C O R P O R A T E P A R T I C I P A N T S Denise Garcia, Investor Relations, ICR Sheila Lirio Marcelo, Founder, Chairwoman and Chief Executive Officer Michael Echenberg, Executive Vice President and Chief Financial Officer C O N F E R E N C E C A L L P A R T I C I P A N T S Kerry Rice, Needham & Company Lina Rudashevski for Doug Anmuth, JPMorgan Justin Post, Bank of America Merrill Lynch Mason Anderson for Mitch Bartlett, Craig-Hallum Capital Group, LLC Brian Nowak, Morgan Stanley Blake Harper, Loop Capital P R E S E N T A T I O N Greetings and welcome to the Care.com Second Quarter 2016 Earnings Results Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms Denise Garcia, Investor Relations. Thank you. You may now 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 These may include, among other things, projected financial results or 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 1

3 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 forwardlooking 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. This measure represents pretax net loss less depreciation and amortization as well as certain other non-cash adjustments and certain unusual expenses such as stockbased comp, M&A and restructuring costs. We 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 provided in the tables in the press release and 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 on an Adjusted EBITDA basis unless otherwise noted. Today's call is available via webcast and on a telephone replay and 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 it over to Sheila Lirio Marcelo, Founder, Chairwoman and CEO of Care.com. 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 questions. I m excited that we beat our Q2 guidance on both revenue and EBITDA. Specifically, both the $38.2 million of revenue and the positive $1.0 million of EBITDA exceeded the guidance we shared. We have 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 have the highest unaided brand awareness among families seeking child care, 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 Q to 49% in Q2 2016, and an improvement in our unit economics. The unit economics for our US Consumer business the combination of US Matching and Payments continued to improve as we drove LTV up by 7% through gains in ARPU and length of paid 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 ve improved leverage across every cost line in the business. 2

4 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 US alone are key factors that attracted the interest of Google Capital. Last month, we announced that they had 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 used part of the proceeds to purchase shares from one of our earliest investors, Matrix 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 through building out community and continuing 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 in engaging content and have seen yearover-year growth in organic search traffic of about 65% across the first half of 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-intent segment, while increasing engagement of the lower-intent visitors. Our second strategic initiative is to further monetize our matching product by improving mobile conversion rates, while also complementing our subscription business model with transactional 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 on mobile web and native apps on ios and Android. We believe this will improve mobile conversion rates, which continue to be less than half of desktop. Moving onto 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 greater 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 US alone. With the combined impact of mobile conversion and our diversion of traffic to test new transactional models, paying members in our US 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 professionalize caregiving 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, 3

5 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 formerly known as Workplace Solutions. Q2 was another strong quarter for with revenue growth versus prior of 47%, following 44% growth in Q1. In the first half of 2016, we again saw revenue retention over 100% as clients such as Facebook, Twitter, Putnam Investments and Tufts University chose to renew. This was driven by our industryleading mobile innovation including our back-up care app and Enterprise HR reporting dashboards; and our continued strength in backup care fulfillment of above 90% and Net Promoter Score of greater than 70% year-to-date. In addition to renewals, we continued to add new clients in a range of industries including sports & entertainment, pharma and technology. We expect growth in our Enterprise business to continue to accelerate in the second half of 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. 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 Q revenue of $32.9 million. Our US 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 our businesse, which led to our exceeding the top of our revenue guidance. 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 This is on top of the 15 percentage points of improvement we saw from Q2 of 2014 to Q2 of While we have 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 are the result of our continued focus on managing the pace of expenses through general cost discipline and the flow-through of the larger cost-savings initiatives that we ve discussed on past calls. 4

6 We also get the benefit of 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 mid-year update, I ll focus on the first half of 2016 relative to the first half of The headline is that ROI is up to 3.4X from 3.2X over this time period. Lifetime revenue is 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 yields the improved ROI. 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 paid time for payments rose by about 1%. While the metrics will evolve with our business models 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 Operations was negative $0.11, up from negative $0.17 in Q2 of Net income from Continuing Operations for the quarter was a loss of $3.4 million as compared to a loss of $5.4 million in the second quarter of 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 the Matrix 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 Matrix Partners at a 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 re-affirming 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 5

7 continue to expect that Q4 will be our quarter of highest profitability with EBITDA margin in the mid-teens, a function of the seasonality that has us 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 would 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 a penny 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. Five percent 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 re-valuing 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'm 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? Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. If you would like to ask a question, please press star, one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star, two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Kerry Rice with Needham & Company. Please proceed with you question. Kerry Rice: Thank you. Just mostly a clarifying question. So, on the US Consumer Matching business, the paying members declined slightly. 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 it's seasonality. The second is on length of paid time for payment. I thought you said that it was up 1%; it seems like it's down a little bit, and maybe better understand that. 6

8 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'd call it material, 10% of revenue? Any kind of thoughts about maybe as that grows, kind of what you're expecting through the second half of 2016? Thank you. 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 shares that are by the end of year, it would 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. 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. Those are sort of the key drivers expected in our models, and so that 6% year-overyear growth in Q2 was what we were expecting. So turning it over to length of paid time, Michael? Yes, just very briefly, the measure that we're comparing is the first half of 2016 versus the first half of 2015 for the unit economics generally, and then specifically for payments LOPT. The numbers in question are 35.4 months cycling against If you were to look perhaps at quarters, you might see some flux. The reason why we focus at the level of a full half year is to chase out seasonality impacts. 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 Q it says 35. So is that 40 am I looking at it wrong? Am I misunderstanding that? We are let me come back to you on that. Sheila will pick up the last part and we'll come back to it. Kerry Rice: Okay. 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 a less meaningful metric as transactional revenue becomes a growing share of our business longer term. 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

9 Yes, and the short answer is, 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 equivalent, sort of churn-based calculation, that's that 35 number in the first half of 2016; 35.4 unrounded would be 34.9 in the first half of '15. So we'll plan on clarifying that definitional issue going forward on the supplementary materials. Thanks for that. Kerry Rice: Okay. Thank you, Michael. Thank you. Our next question is coming from the line of Doug Anmuth of JPMorgan. Please proceed with your question. Lina Rudashevski: Hi, this is Lina (phon) on for Doug. We were wondering, 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, now that this category is growing and is larger than your payment business? Thanks. Yes. 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. Lina Rudashevski: All right, thanks. 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? Are there other technical things they can help with? The second thing is regarding your Enterprise business. Maybe walk us through the economics a little bit. Is this a profitable business? Does it have better or worse margins than the Consumer business? Thank you. Sure. Good morning, Justin. Justin Post: Morning. 8

10 Yes, with the Google relationship, what we're super excited about is that we've 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. Turning it over to Michael for Care@Work. Yes, 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 salespeople 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 US Consumer business. To tie both of your questions together, I mean one of the reasons that Google Capital actually invested was their our Board members' own personal experience of having had the enterprise solution since 2011, and having sort of a great user experience overall for employees. Justin Post: Thanks. Then, if you chose to lower the return, the 3X return you're getting out of your Consumer business, could you potentially accelerate your Consumer subscribers? So, if you changed the ROI threshold, could you reaccelerate next year if that's one of your priorities? It's a great question and I'd say, look, based on what you heard Sheila describe, what all of our key strategic initiatives have in common is they're 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 we're innovation-led as a business. 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: Great. Thank you. 9

11 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 question. First, just on hoping you can talk a little bit about what the pipeline for that looks like. Is there still more penetration to be had in the large Fortune 500 type companies, or are you starting to see smaller players in that? Then I have a few more after. Yes. So when we think about the Care@Work business, it's a pretty wide-open space in the opportunities area. We estimate about 10,000 companies in the US with more than 1,000 employees, and we're still in the single-digit penetration, so it's still early for that business. As Michael shared, 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. Then as far as transactional goes, maybe you can talk a little bit about how you see that ROI shaping out against your current MROI and LTV of the Consumer business? Yes, the way we see, actually, 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 products. The second is 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 US alone. 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 a subscription product. I think it lifts overall ROI is our expectation. Mason Anderson: Perfect, that's awesome. Final one from me, and this kind of relates to the question I just asked. On post-match product, is that kind of a similar thinking there? Do you think that's a big revenue opportunity, or is it just kind of incremental to having new product for customers with a small attach rate? Yes. The reason we actually internally even 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 premium subscription products on background checks. 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. 10

12 The one bit of color that I'd add is some of these products are available to people irrespective of where the match was made, on Care.com or elsewhere. That's obviously, our HomePay business, we added worker's compensation, access to healthcare starting in January, and we'll be announcing more later this year. Mason Anderson: Awesome. That's it for me. Thanks so much, guys. 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, and I have three. The first thing is just, as you're thinking about the paying member growth throughout this year, are you expecting it to accelerate at all, in your guidance? My second one is just on kind of the longer-term view around this transaction toward a transaction model. Do you see a time where you could look to fully move away from subscription and kind of try to pivot more of these users toward a transaction model? Is that a better long-term way to inflect the revenue? Then I have one follow-up. 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. 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 subscriptions, and that we believe that we can enhance our offering to meet the different idiosyncratic needs of families. Brian Nowak: Great. The last one I had, in the second quarter, what did gross additions and churn look like, and how does that compare to a year ago? Thanks. Thanks for that question. We don't share those metrics as it stands right now. We're constantly evolving our thinking with respect to how we describe the business, but for now we aren't in the practice of sharing gross adds and churn like that. Yes, and because of the definition of the business, Brian, in terms of there's a re-use component that increases length of paid time so these members don't actually necessarily churn out. For every thousand 11

13 members that join within a year, about 10% leave after the year because we have a high overall match rate for the service, and once they match, they downgrade and then they come back to re-use the service, which is one of the key drivers of length of paid time. On the general question of gross adds, I'll just refer back to the general way that we've framed out the moderated growth and end of period paying members. We've talked about the shift to mobile with its lower conversion rates, and desktop and the resulting tempering of growth in new signups. Brian Nowak: Great, thanks. Thank you. Our last question is coming from the line of Blake Harper with Loop Capital. Please proceed with your question. Blake Harper: Hey, good morning. First question, for Michael. You had talked in the remarks about the fixed cost level. Just wanted to see what you think is an adequate fixed cost level for the growth you've had in the business right now and when you would expect to have to increase that, as far as your guidance you've had this year, or basically how far can you grow with the level of fixed cost that you have right now? 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 those things where you want to be now, or you could make some more changes to that in the future, or just be focused more on the product and member side going forward. Thanks. 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, in 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. 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 are 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. 12

14 Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to move the floor back over to Ms Lirio Marcelo for her concluding comments. 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. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time. 13