Spark Networks SE
Q3 2021 Earnings Call Transcript

Published: 15 Nov 2021

[Joo-Hun Kim:]

Thank you, operator. Good afternoon, and welcome to Spark Networks Fiscal 2021 Third Quarter Earnings Conference Call. With me on today’s call are Spark’s CEO, Eric Eichmann; and CFO, David Clark. Before I turn the call over to Eric, I’d like to cover a few quick items. This afternoon, Spark issued a press release announcing its fiscal 2021 third quarter financial results; the release is available on the company’s website at spark.net on the Investor Relations page. Also, this call is being recorded and will be available for playback on the Investor Relations section of Spark’s website. I’d like to remind everyone listening today that any comments made on this call may contain forward-looking information or projections regarding future results or events. We caution you that such statements are, in fact, predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially from our statements or projections. Additional risks, uncertainties and factors that could cause actual events or results to differ materially from these forward-looking statements may be found in the company’s filings with the SEC. Spark undertakes no obligation to update or revise any forward-looking statements. With that, I will now turn the call over to Eric Eichmann, CEO of Spark Networks. Eric, please go ahead.

[Eric Eichmann:]

Thank you, Joo-Hun. Good afternoon, everyone, and welcome to our fiscal 2021 third quarter earnings conference call. Thank you for joining us today. Jumping right in, we are excited about the future of Spark Networks. Today, we are a leader in social dating platforms for meaningful relationships focusing on the 40 plus demographic and faith-based affiliations. These segments of the online dating market happens to be one of the fastest growing segments of the online dating market and provides Spark with significant opportunities for growth. Our top five properties that address a meaningful relationship segment of the online dating market are Zoosk, Silver Singles, Elite Singles, Christian Mingle, and Jdate. Four of these, Silver Singles, Elite Singles, Christian Mingle, and Jdate are focused on more specific segments within the meaningful relationships market. Silver Singles and Elite Singles are aimed at an older demographic that is growing rapidly while Christian Mingle, and Jdate are targeting meaningful relationships with religious affiliations. These four brands make up nearly 50% of our total revenue and have been growing their revenue and subscribers collectively year-over-year for the past five quarters. With strong, leading brands and limited competition in growing market segments, we are confident that we can continue to grow these brands revenue in the future. Zoosk is our fifth and largest brand that targets a broader swath of the meaningful relationships category. With more than 2.4 million monthly active singles using the platform worldwide, much of Zoosk’s popularity rests on its unique approach to online dating. Zoosk uses big data insights from its vast membership base and behavioral matchmaking technology to provide users with highly accurate and tailored matches. Zoosk is one of the top grossing dating apps in the Apple App Store. Recently, we have focused on upgrading the Zoosk product and user experience, including fixing issues with fraudulent users, enhancing user access and optimizing our pricing. Today, we are in a much better place as we are letting in more good users without seeing any increase in fraud. We have also focused on launching new offerings that we believe will drive higher engagement and an increase in subscribers. One of those features is Zoosk Live! a new live streaming service that we introduced last quarter, on our iOS and Android apps. We are seeing good signs of traction as the number of Zoosk Live! users has doubled since last quarter. While these changes have taken time to implement, we have reduced Zoosk’s revenue decline, and in the third quarter, we saw new Zoosk organic registrations growth for the first time since we have owned them. In fact, Zoosk’s organic graphic grew 50% sequentially and its conversion improved over 10%. This means we are converting better and without the extra direct marketing expense, leading to a more attractive customer acquisition costs. In the fourth quarter, we expect to launch a new virtual dating travel experience for Zoosk, Zoosk Great Dates. We believe Zoosk Great Dates will drive an increase in user engagement and subscribers. This first of its kind offering will allow subscribers to go on interactive virtual dates in exciting destinations such as Athens, Naples, and Kyoto, with new locations coming in 2022. We are confident that the improvements we are making to Zoosk will result in a return to subscriber and revenue growth. As we look ahead, we are laying the groundwork to start investing in brand marketing for all of our brands. We brought on Bridget O’Lone, our new VP of Global Brands in September, and she and her team are putting in place the infrastructure to enhance our brand’s value proposition, expand our social marketing initiatives and increase our brand’s marketing spend. I am excited to have Bridget on board and look forward to her and her team’s contributions. In conclusion, both parts of the Spark business today are addressing fast-growing segments of the online dating market, representing an over $2.7 billion addressable market. We have the resources to drive sustainable growth going forward. Strong brands, unique and improving user experiences and $100 million plus marketing budget to drive higher awareness, engagement and subscribers. The first part of our business includes four brands that make up nearly half of our business and our collectively growing revenue and subscribers. We plan to continue to invest marketing dollars and product resources to increase these brands share in the market. The second part is Zoosk, which is also addressing the fast-growing meaningful market segment as well as the emerging category of social discovery. We are currently in a turnaround effort and are confident in our strategy and execution for returning Zoosk to revenue and subscriber growth. Sequential quarterly growth of organic registrations and an increase in conversion rates are positive results and a clear sign of the turnaround working. With that, let me turn the call over to David, who will take you through our financials in more detail, and then we’ll take any questions you may have. David?

[David Clark:]

Thank you, Eric, and good afternoon, everyone. Revenue for the third quarter of 2021 was $53.3 million compared to $60.8 million in the third quarter 2020. Four of our five largest brands, Silver Singles, Elite Singles, Christian Mingle, and Jdate collectively grew revenue 3% during the quarter and represented nearly half of the total company revenue. The decrease in total revenue during the quarter is directly attributable to the decrease in the number of average paying subscribers, specifically driven by Zoosk. We also had a tighter unusual advertising market for customer acquisition in the third quarter, likely due to increased spending post-pandemic by large advertisers. Adjusted EBITDA was $5 million in the third quarter of 2021 compared to $7.6 million in the third quarter of 2020. The year-over-year decrease was primarily due to the Zoosk revenue decline and our increased product investments. Marketing contribution for the third quarter of 2021 was $25.3 million compared to $29.3 million during the same three month period in 2020, a 13.5% decrease was a direct result of the Zoosk revenue decline. Turning to our key performance indicators for the quarter. Average paying subscribers decreased to 865,752 in the third quarter of 2021 compared to 952,704 in the same period of 2020. Spark’s monthly average revenue per user, or monthly ARPU decreased slightly to $20.52 in the third quarter of 2021 compared to $20.27 in the same period of 2020. Net loss was $2.7 million in the third quarter of 2021 compared to a loss of $100,000 in the third quarter of 2020. This increase in net loss was driven primarily by an increase in loss from foreign exchange rates year-over-year. For the third quarter, our operating income increased $100,000 year-over-year to $3 million. Shifting to the balance sheet. The company ended the third quarter with $12.4 million in cash and outstanding debt of $84.7 million. We continue to improve our balance sheet, having reduced our debt by nearly $14.4 million at the beginning of the year, including a $3 million reduction in the third quarter. As I stated on the last call, one of my primary objectives is to explore debt refinancing opportunities, which will allow us to invest more in growing our business and our share of this fast-growing market. Turning to guidance. We are reiterating our expected annual revenue of between $219 million and $223 million and adjusted EBITDA in the range of $27 million to $30 million, and that equates to EBITDA per share of $1.03 to $1.15. As a subscription business, we have high visibility into our revenue and adjusted EBITDA for the remainder of 2021 and for the fourth quarter, we’ll expect both revenue and adjusted EBITDA grows sequentially. In conclusion, we believe Spark represents a very attractive investment opportunity. With upside potential given it’s positioning with strong brands in a large and growing market. And with that, we’re happy to take your questions. Operator?

[Operator:]

Thank you. And we’ll take our first question today from Raj Sharma with B. Riley.

[Raj Sharma:]

Hi, good afternoon. Thanks for taking the question. Could you expand a little bit on the non-Zoosk growth year-on-year? And it has come down from the last quarter, what are sort of the kind of trends you’re seeing relative to the other sites out there?

[Eric Eichmann:]

Yes. Hi, Raj, thank you very much for the question. Good to hear your voice. Yes, so we had a little bit of a decrease in terms of the revenue growth that we saw from those brands. Most of that is attributable to a tighter than expected Q3 advertising market. And even though we can tell exactly what we’re hearing is that, that was due to a lot of advertisers that were not allowed to or didn’t expense to advertising in Q3 last year in 2020 in the middle of the lockdowns. Starting to advertise this year in Q3, and that made it a bit tighter. Normally, Q3 is an advertising market that opens up. And this year, it just didn’t open up as much as we expected.

[Raj Sharma:]

Got it. And then on the Zoosk side, I know in the last call, you had talked about the social discovery and the live streaming efforts that were kind of stalled in Q2, but you’re saying that you’re seeing a quarter-on-quarter pickup in the revenue and the organic revenue growth. Do you still see an overall or do you still expect an overall Zoosk pickup in the first half or the first quarter, could you talk about that, please?

[Eric Eichmann:]

Yes, of course. So two things. One is Zoosk Live! which we launched at the end of Q2. And I think it was a slow start, but what we’ve seen and we mentioned on the call is that we’ve seen an acceleration of users being in the Zoosk Live! experience. And so that’s encouraging. And so we’re watching and doing a lot of things to increase the engagement that users have with that product, and we feel quite excited about what we’ve seen in the last quarter. So that’s one. And then regarding organic growth, we saw a pickup as we mentioned, of organic growth for Zoosk. So that’s people coming to Zoosk in general, not just to describe, right? But we saw about a 50% increase in organic growth. We think even though we didn’t sort of run an A/B test to know exactly what drove that. We think there was a couple of things that drove it. Obviously, we have more exciting things talk about when it comes to Zoosk to Zoosk Live!. But we also did quite a bit of work in terms of providing access to users and sort of decreasing fraud. And we think some of that sort of contributes to the organic growth.

[David Clark:]

The only thing I want to make sure you’re clear on, Raj, is that the organic growth is actually in users, not yet in revenue.

[Eric Eichmann:]

Correct. And then you mentioned – sorry, Raj, I forgot to answer your point. And yes, we still expect...

[Raj Sharma:]

I mean you’re expecting a pickup in first half. Are you still expecting that? Is that still on track?

[Eric Eichmann:]

Yes, we do. So just as we said in the last quarter, we expected that we would see initial. As you know, we’re a subscription business. So the best indicator, the leading indicator of the health of Zoosk with subscribers and the number of revenue that we get from initials is what we call it. And we still expect that to pick up in Q1 next year and that overall to result in new growth in the first half next year.

[Raj Sharma:]

Got it. And then lastly, with all the recent talk and the actions by Google and Apple App Store fees, do those have much of an impact on you guys and can you talk a little bit about that?

[Eric Eichmann:]

Yes. So let me – I’ll answer the first part of the question, and then I’ll get David also talk a little bit about this. But what Google and Apple have said is that they’re decreasing fees on the Apple Store for products that make less than $1 million in app fees. And obviously, we make more than that. So it doesn’t really apply directly to us. However, however, this is a sign in the right direction from our perspective. And so obviously, that could lead to something that applies more broadly. So that would be interesting for us.

[David Clark:]

Yes. And Raj right now. The RF piece right now, Raj, run at a rate of around $10 million a year. So if they were to take further steps and raise that threshold, it could be meaningful savings for us. But right now, we don’t qualify.

[Raj Sharma:]

Got it. Okay. Thank you. I’ll take the question on offline.

[Eric Eichmann:]

Thank you.

[Operator:]

Our next question will come from Austin Moldow with Canaccord.

[Austin Moldow:]

Hi, I wanted to ask about Zoosk Live! monetization. Is there any of that factored into your Q4 outlook? And what’s the overall gift and behavior of your users? Are they sending gifts to Zoosk streamers? Or do they spend mostly on your partnered streamers? What’s kind of that behavior like?

[Eric Eichmann:]

Great. Thank you, Austin. It’s good to hear you. So Zoosk Live! you – as I have mentioned, it’s a completely new product for our users. And what generally happens is that you need to get engagement going and once people are familiar with the experience and start watching streamers, they start looking into gifting. So there’s a bit of a delay between the engagement and the revenues. However, what we’re seeing is that people that are buying on Zoosk gifts sort of shows some of the similar behavior that we get from the broader meet group’s live experience. So you have a number of super users or super gifters that end up appearing and over time, they end up sort of becoming a big part of the revenue stream. We would expect that this as we’re making improvements in the Zoosk Live! experience in getting more users engaged as we mentioned, we doubled the number of users engaged in that experience that the revenues would continue to follow. All of that obviously is included in any sort of forecast or guidance that we provide in the future.

[Austin Moldow:]

Got it. That’s helpful. And then last question. Can you speak a little bit about any competition you’re starting to see in the sort of niche or religious dating landscape?

[Eric Eichmann:]

Yes. So I think not surprisingly, some of the other big actors, remember, were four big actors and there hasn’t been really new people entering that represent a significant change in the competitive landscape. So which really continues to be matched because obviously, a lot of properties, and they’re the ones that we find investing a bit more in this area. And so when you think about mass the upward in some of their properties, but sort of competition remains limited to a couple of players. So we still think dynamics in those markets are great. And as the market has matured, those segments have become more important and are growing faster than the rest of the market.

[Austin Moldow:]

Got it. Thanks very much.

[Operator:]

And at this time, there are no further questions, and that will conclude today’s call. Thank you for your participation. You may now disconnect.