Spark Networks SE
Q4 2021 Earnings Call Transcript

Published: 14 Mar 2022

[Operator:]

Good afternoon, and welcome to Spark Networks Fiscal 2021 Fourth Quarter and Yearend Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I'd now like to turn the Conference over to Mr. Todd Kehrli. Please go ahead, Sir.

[Todd Kehrli:]

Thank you, operator. Good afternoon, and welcome to Spark Network's fiscal 2021 fourth quarter and yearend earnings conference call. With me on today’s call are Spark’s CEO, Eric Eichmann; and Chief Financial Officer, David Clark. Before I turn the call over to Eric, I’d like to cover a few quick items. This afternoon, Spark Networks issued a press release announcing its fiscal 2021 fourth quarter and full year financial results. This release is available on the company’s website at spark.net. Additionally, this call is being broadcast live over the internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that on today's call, management will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long term prospects and market opportunities should be considered forward-looking statements. These forward-looking statements may include comments about the company's plans and expectations of future performance. Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to different materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K and 10-Q for a complete description of these risks. Our statements on this call are made as of today, March 14, 2022, and the company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein whether as a result of new information, future events, changes in expectations or otherwise. Additionally, throughout this call, we'll be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on form 8-K, describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release. With that said, I'll turn the call over to Eric Eichmann, CEO of Spark Networks. Eric, please go ahead.

[Eric Eichmann:]

Thank you, Todd. Good afternoon, everyone and welcome to our fiscal 2021 fourth quarter and yearend earnings conference call. Thank you for joining us today. Before I recap our progress in 2021, let me tell you why we are excited about the future of Spark Networks. Currently, our family of brands serve roughly four million page views per day of single searching for serious relationships and millions of paid subscribers per year, making Spark the fourth largest online subscription-based dating company across North America and Europe. With this scaled platform, we have a large growth opportunity ahead of us and with our new credit facility in place, we now have the financial flexibility to begin to execute on a strong and well developed roadmap of strategies and investments that we believe will drive growth in 2022 and beyond. With the right talent in place, the right product strategy, scalable technology, and financial flexibility, we are now well positioned to return to growing our revenue. Now let me provide some background on Spark for those of you that are new to the company. Spark is a leading social dating platform for meaningful relationships, focusing on the 40-plus demographic and faith based affiliation. The segment of the online dating market is large and underserved and one of the fastest growing segments of the online dating market or top five properties, Zoosk, Elite Singles, Silver Singles, Mingle, and Jdate provides Spark a significant opportunity for growth as users are looking for apps that deal in long term relationships, instead of casual dating. Four of the five properties Elite Singles, Silver Singles, Christian Mingle and Jdate are focused on more specific segments within the meaningful relationship market. Elite Singles and Silver Singles are aimed at a more mature demographic that is growing rapidly while Christian Mingle and Jdate are targeting meaningful relationships with faith based affiliations. These four brands made up close to half of our total revenue in 2021, and collectively grew the revenue 5% and subscribers 3% year-over-year in 2021. With these strong brands and limited competition in this growing market segment, we are confident that we can continue to grow these brand's revenue in 2022. Zoosk is our fifth and largest brand and target a broader demographic within the meaningful category. With 40 million members worldwide, Zoosk is designed to forge meaningful relationships with other singles using big data insights from its vast membership base to deliver highly accurate and tailored matches and to provide social features, to make the dating journey as seamless as possible. While Zoosk revenue declined year-over-year in 2021, we have been making the necessary product improvements to return Zoosk to revenue growth in 2022. In the fourth quarter, we launched a new feature Zoosk Great Date to complement Zoosk Live or free live streaming service that is available 24X7 on our iOS and Android apps. Available on demand with a subscription Zoosk Great Date allows you and your match to access interactive video dates designed to inspire fun conversation and avoid awkward silences. This first of its kind feature is perfect for a low impact first date. Today, subscribers can go on interactive virtual dates to four exciting destinations Athens, Naples, Kyoto and Paris, which we launched on Valentine's Day, with more new locations coming soon, including New Orleans and Las Vegas. Now more than ever, we are providing our community of singles, new seamless ways to connect virtually and Zoosk Great Dates is part of our commitment to help people build more meaningful relationships. Users that have experienced Zoosk Great Dates so far, have provided strong positive feedback on this new feature. With these new innovation, as well as several other products and user experience upgrades delivered during the year, we have reduced Zoosk's revenue decline and for the second consecutive quarter, we saw new Zoosk's organic registrations grow. In the fourth quarter, Zoosk's organic traffic grew 8% sequentially and 74% year over year. We are confident that the improvements we make to Zoosk in 2021 and will continue to make in 2022 are enhanced our competitive differentiation and will drive increased engagement resulting in a return to revenue growth for Zoosk in 2022. As a matter of fact, so far in 2022, we have seen a significant acceleration of Q4 to Q1 billings growth versus last year. Looking ahead, we are investing in product, technology, marketing and talent to capture the large market opportunity for Spark. On the product and technology front, we are working to further improve our properties, features and functionality. First, we are putting in place a number of revenue generating enhancements, such as an improved first time user experience, new matching technology and optimization of payment pages. Second, we are revamping our apps significantly improving the app user experience and app monetization capabilities. Finally, we are planning, simplify our technology platforms complexity by integrate our top four non-Zoosk brands on to one platform. These should lead to better platform stability, reduced technology costs and an increased stability to launch new features and functionalities on all brands. On the marketing front, we plan to continue to optimize our marketing efforts and increase our overall marketing spend during the year. For example, we have introduced fully automated customer relationship management campaigns, allowing us to increase their frequency, which has already resulted in higher billings. Additionally, with our new debt agreement in place, and it's less restrictive covenant, we expect to invest in excess of $110 million in 2022 marketing spend and are exploring additional opportunities to expand our marketing efforts. Much of these increase in marketing spend will be on our renewed focus on brand building capabilities, ensuring our portfolio of brands clearly communicate our unique and differentiated brand propositions, which ultimately ensures our community of singles find their ideal matches on our platforms. Lastly, we believe there are opportunities to further increase our performance marketing spend profitably in 2022 beyond 2021 levels. One of our most important strategies for growth is investing in talent to capture Sparks significant future potentials, adding to our hired CFO and head of brand marketing, we are excited to welcome Ken Chin our new Chief Product Officer who will start in early Q2. Ken comes with over 20 years experience in product leadership for online marketplace, eBay and and e-commerce, Farfetch and World Travel. Also Ishant Patel our new Head of Corporate and Business Development started in February and comes with extensive experience in strategy and business development in the media and online travel industries. So to recap, both parts of the Spark business today are addressing the fast growing meaningful dating segment of the dating marketing, representing an over $2.3 billion addressable market. The first part of our business, includes four brands that make up close to half of our business that grew collectively both their revenue and subscribers for the full year 2021. We plan to continue to invest marketing dollars and product resources in 2022 to increase these brand's share in the markets they serve. The second part is Zoosk, which is also addressing the meaningful market segment as well as the emerging category of social discovery, the new features and upgrades we make to the platform in 2021 have been well received and we are starting to see leading indicators of growth. Growth of organic registrations and increase in conversion rates and an acceleration of quarter on quarter growth are clear signs that the Zoosk turnaround is working. We are confident in our strategy and execution for returning Zoosk to revenue and subscriber growth in 2022. For the first time under my tenure, we have the financial flexibility to begin to execute on a strong and well developed roadmap of strategic investments, which should further our ability to scale. We believe these investment in talent, product technology and marketing in 2022, as well as our position in the market will allow us to capture the significant market opportunity we have in front of us and return the company to total revenue growth in 2022. This is why I am excited about the future of Smart Network. With that, let me turn the call over to David, who will take us through our financials in more detail, and then we'll take any questions you may have. David?

[David Clark:]

Thanks, Eric. Good afternoon, everyone. I will jump right into the view of our recent financial results. Revenue for the fourth quarter of 2021 was $52 million compared to $58.1 million in the fourth quarter of 2020. And for the full year revenue was $216.9 million compared to $233 million for the full year of 2020. Four of our five largest brands, the Elite Single, Silver Singles, Chris Mingle and Jdate, collectively grew 5% during the year and represented nearly half of total company revenue for the full year. Decrease in total revenue during the year and the fourth quarter is directly attributable to the decrease in Zoosk revenue and lower marketing spend due restricted debt covenants in our old debt agreement. Adjusted EBITDA was $14.3 million in the fourth quarter of 2021 and that compares to $13.1 million in the fourth quarter of 2020. $33 million for the full year compared to $38.9 million last year. The year over year increase with fourth quarter was due to expense management and lower marketing cost due to covenant instructions while the year on year decreased for the full year was primarily due to the Zoosk revenue decline and our increased product investment during the year. For the quarter, average paying subscribers decreased to 858,975 in the fourth quarter of 2021 compared to 929,503 for the same period in 2020. The decrease is primarily a result of constraints on marketing spend and the tough comp to the fourth quarter last year, which saw higher engagement due to the COVID lockdown. Spark's monthly average revenue per user or monthly ARPU decrease slightly to $20.17 in the fourth quarter of '21 compared to $20.82 in the same period of 2020. The decline in ARPU was a result of us emphasizing longer duration subscriptions. Net loss was $9.9 million in the fourth quarter of 2021 compared to a net loss of $45.1 million in the fourth quarter of 2020. The decrease in net loss was primarily due to a Zoosk impairment charge that was taken in a year ago quarter. Fourth quarter operating loss decreased $33.6 million year over year to $11.5 million. For the full year, net loss was $68.2 million compared to $46.6 million for 2020 and the increase in net loss for the year was driven by a non-cash gap related increase income tax expense for the full year. Tipping to the balance sheet, the company ended the fourth quarter with $16.1 million of cash and outstanding debt of $82.1 million or net debt of $66 million. We continue to improve our balance sheet having reduced our debt by nearly $17 million, beginning 2020, including a $2.6 million reduction in the fourth quarter. As I stated in the last call, one of my primary objective since joining the company in August of 2021, was to explore debt refinancing opportunities to allow us to invest in growing our businesses and our share of the fast growing market. We were able to successfully refinance our existing debt facility to better fund our growth initiatives in 2022. Under the new $100 million debt facility with MGG Investment Group, we've extended our maturity dates and improved our covenant flexibility, which will allow us to invest appropriately in growing our business in 2022 and beyond. Turning to guidance, with half of our business already in growth mode and the other half showing signs are positive turnaround, we are confident in our ability to return to total revenue growth for the full year 2020. Additionally, we see improving COVID environment that's having less of an impact on our results this year versus 2021. Accordingly with our new debt facility in place and ability to invest, we expect to grow our top line this year and deliver stable adjusted EBITDA margin. We expect strong EBITDA cash conversion based on the expectation of low legit millions in CapEx and software capitalization and the fact that we have collectively over $100 million in tax net outing loss. As the year progresses, we'll provide investors with more specific expectations. In conclusion, we believe Spark represents a very attractive investment opportunity with upside potential given its positioning is one of the four global online dating platform scale with strong brands and a large growing market. And with that, we're happy to take your questions. Operator?

[Operator:]

Thank you. We will now begin the question and answer session. And the first question will come from Raj Sharma with B. RileyRaj. Please go ahead.

[Raj Sharma:]

Hi. Good afternoon. Thank you. I wanted to understand there's great news on the debt refinance or the interest rate differential is pretty significant. Plus you've paid down some debt and can you give some more color on how the refinancing makes it less restrictive for you on what you need to do in terms of the covenants and in terms of your marketing restrictions?

[Eric Eichmann:]

Yeah. Raj, thank you for the question. It's good to hear from you. So I'll, give just a high level and then I'll pass it on to David to provide some more of the details. But basically if you look at our old debt agreement, we had very strict net leverage covenants which pushed us to generate profitability in the easiest way for the company as we are a subscription business and we incurred the marketing cost before the revenue comes in, was to cut marketing and so as time went by, the covenants became tighter and tighter all the way to a 1.75 net leverage covenant and so that limited our ability to grow the business and invest. The new covenants that we have in the agreement are much more flexible and I'll let David talk through the specifics of the agreement, but overall it will allow us, as we said in the call to invest in the carers that we need to invest namely product technology and marketing.

[David Clark:]

Yeah. Raj, while there is some savings in the overall interest expense, the important thing is what Eric just described in terms of the flexibility to invest in the business, including in user acquisitions, but also the other way the old agreement was kind of constraining is almost all, in fact, all of the excess cash generated by our business was going to our lender, in this case, the way the amortization schedule is set up, there's actually no principle amortization in the first year of the loan. And then it steps up to about 5% per year and then eventually 10%. So it really brings us flexibility, not just on a covenant perspective, but also on the ability to carry higher cash balance to be opportunistic in the business going forward.

[Eric Eichmann:]

And just maybe to compare the net leverage numbers that we have in the old agreements were about 1.75. Now in the new agreement, I think 4.5, it's a 4.5. So it's a dramatic difference and the dramatic difference in terms of flexibility for the business and the MTG guys also know our business well, they're growth oriented. I think they're going to be good partners going forward.

[Raj Sharma:]

Got it. Thank you for that. And so just related to that, I guess your statement is that you want to spend $110 million on marketing. Is that -- so that is basically after new restrictions have been lifted. That's how much you want to spend. Can you talk about marketing efficiency? And we ought to assume that this brings in greater revenues, but does it also maintain sort of similar EBITDA margins?

[David Clark:]

Yeah. So let me talk about maybe divide the question into three answers. One is, if you look at what we did last year, there were several times during the year where we could spend profitably at similar margins where we couldn't, or we didn't because we had limitations from our debt covenants and so that's an area where we expect to see some growth that will happen in our spending. The second area is brand building capabilities. So we haven't really spent because that was the first area that we sort of reduced our marketing spend in terms of brand building. And it's not just sort of running ads that are top of the funnel, but much more sort of building the capabilities on research, about positioning our brand in social marketing, which we haven't done in the past. And so that's another area of investment that's very important for the company and it's harder to gauge the exact return, but generally over time that's a very high return. And the third area I would say is, we haven't tested as much new channels in our ability to grow our marketing spend goes to making sure we test new channels and then as we see things that work, we scale those things. And again, in the past, that's an activity that we didn't run. So all in all, we expect that marketing spend will grow and we mentioned 110 that's where we think at least we will be, but if there are more opportunities, we'll continue to look at obviously always with the parameters that we have in place around profitability that are important to us.

[Raj Sharma:]

Right. Thank you. So just a couple more questions on more administrative, did you report a contribution margin and contribution dollar amount for the quarter for the year and also am I missing there's some direct marketing costs in sales and marketing etcetera sort of a breakdown on that. If you could just address the contribution and what do you think that the contribution would stay? The contribution margin would stay stable in fiscal '22.

[David Clark:]

So you're asking what the contribution margin was for full year,

[Raj Sharma:]

Yes. And then would it stay stable slash or increase in '22?

[David Clark:]

So in 2021 for the full year gross margin on a dollar basis and gross margin would also include cost for deducted for credit card fees and app store fees and also data center fees. So the gross margin in the aggregate was dollar amount about $86 million or -- doing this in real time.

[Raj Sharma:]

I can also get these numbers offline.

[David Clark:]

Yeah 40%. So I think, we anticipate that that's yeah. You heard Eric say that as we look at dialing up spend, we're going to be also evaluating against profitability and lifetime customer value. So yeah, I would think our expectation would be stable, maybe even hopefully improving gross margins going forward, especially as the year it lapses. We've got a number of product improvements we're implementing heavily in the second half of the year.

[Raj Sharma:]

Right. And then just lastly, on Zoosk you stated that organic growth that organic growth at Zoosk is up 70% year on year, the traffic growth, obviously is not been monetize yet and indications, your social discovery, your live streaming or doing well. And they convert at some point, if these were to convert at your historical rates or at your expected rates, what sort of a year on year revenue increase would that translate to for Zoosk. I just -- perhaps more sort of qualitative color would be great.

[David Clark:]

Yeah. I think -- there's a couple things that are exciting about Zoosk in terms of thinking about the turnaround for it. One is we mentioned is organic registrations going up and so that's the key indicator. Why, because as you know, know, our marketing spend has been going down and so non-organic registrations have been going down, but seeing that there is interest in Zoosk and there's more and more organic registrations is a good indicator. The second thing that we mentioned is normally from Q4 to Q1, you have growth just because Q1 is more of the high season quarter in the industry. And this year we've seen an acceleration of that growth versus what it was last year. So those two things are, are good indicators of growth. We're not yet providing guidance for Zoosk revenue growth, but we expected to be healthy growth that would happen sometime in we crossed this threshold if you will in the middle of the year. So that's a good indication of where we should be going.

[Raj Sharma:]

Great. Thank you for answering my questions. Again yeah, I'll take it offline from you. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Eric Eichmann, for any closing remarks. Please go ahead, sir.

[Eric Eichmann:]

All right. Thanks everyone for your interest in Spark Networks. And thank you for joining our call. Have a great day.

[Operator:]

This concludes our conference call for today. You may now disconnect.