Spark Networks SE
Q2 2020 Earnings Call Transcript

Published: 27 Aug 2020

[Operator:]

Hello, ladies and gentlemen, and thank you for waiting. Welcome to Spark Networks' conference call to provide the company's results for the first half of 2020. This call is being recorded, and we are broadcasting live in listen-only mode. I would now like to turn the conference over to Chris Camarra, VP of Investor Relations. Mr. Camarra, you may begin your conference.

[Chris Camarra:]

Thank you, operator, and thank you, everyone, for joining us this morning. On this call are Spark's Chief Executive Officer, Eric Eichmann; and Chief Financial Officer, Bert Althaus. As a reminder, this morning, we published our first half 2020 financial results, which can be found on our Investor Relations section on the company's website at www.spark.net. Before we begin, I'd like to remind everyone that in the press release and in the prepared remarks on this call, we refer to adjusted EBITDA, which is defined in our SEC filings. A reconciliation of adjusted EBITDA to net loss can be found in the consolidated statements of operations included in our earnings release. Additionally, I would 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 can cause actual events or results to differ materially from our statements or projections. Additional risks, uncertainties and factors that cause actual events or results to differ materially from these forward-looking statements may be found in the company's filings with the SEC. Following our prepared remarks, Eric and Bert will conduct a question-and-answer session. This call is being recorded and will be available for playback on the Investor Relations section of our website. With that being said, I will now turn the call over to Mr. Eric Eichmann, CEO of Spark Networks. Eric, please go ahead.

[Eric Eichmann:]

Thank you, Chris, and many thanks to everyone for joining us on the call today. Let me begin by saying that our thoughts are with individuals and businesses around the world impacted by the COVID-19 pandemic. At Spark, we are focused on executing our strategic priorities. Our Berlin employees have returned to the offices in a limited capacity while our staff in the U.S. continues to work from home. We remain connected as a team and productivity and morale are strong. We believe our business has proven to be COVID-19-resilient. In this pandemic, Spark's products will fill people's needs to connect with others and forge new and meaningful relationships at a safe, total business. We have a very clear road map for success. After having grown through meaningful ties with the Zoosk acquisition, we are now focused on maximizing our dating brands to take advantage of the meaningful organic growth opportunities. 2020 is a stabilization year by getting the fundamentals right to prepare for future top line growth. And the signs of progress are very clear

[Bert Althaus:]

Thank you, Eric. As a reminder, the first half of 2020 will be our first full reporting period to include Zoosk's financials, which now represents more than 50% of our top line. Starting with the top line. We reported first half 2020 total revenue of €103.4 million, an increase of 110% compared to the same 6-month period ended June 30, 2019. For half year, the increase in revenue is attributable to the Spark Networks/Zoosk merger, which closed in July 2019. On a pro forma basis, first half 2019 revenue was €819.8 million with €70.6 million attributable to Zoosk and €49.2 million to existing Spark brands. Our average paying subscribers increased from 0.45 million in the first half 2019 to 0.92 million during the same period 2020. This represents an increase of 106% in the year-over-year growth. Our first half 2020 end-of-period paying subscribers were stable at 0.94 million compared to end of year 2019. For our first half 2020, we stated total number of registrations of 7.7 million compared to 4.5 million in the first half 2019, reflecting a growth of 71%. The monthly average net revenue per user, or ARPU, increased from €18.4 to €18.9 due to an increasing share of revenue in North America. Contribution for the 6-month period ended June 30, 2020, was €51.9 million. This represents an increase of €31.6 million or 155% when compared to the same 6-month period in 2019. This change is attributable to the acquisition of Zoosk and the efficiency in marketing spend. In terms of our balance sheet, Spark continues to operate with an asset-light business model. More than 84% of our total assets are represented by intangible assets and goodwill. We are also reporting that Spark ended the first half 2020 with €12 million in cash and cash equivalents compared to €12.5 million at the end of the first half 2019 and €15.5 million at the end of December 2019. As of June 30, 2020, we are reporting equity of €144.4 million compared to about €14.0 million as of the same day 2019 and €142.1 million at the end of December 2019. As of June 30, 2020, we are reporting our results, the company's debt position at €88.8 million. Cash flow generation from operating activities was €12.2 million in the first half 2020 compared to €4.6 million during the same period 2019, an increase of 165%. COVID-19 has resulted in an increase in charge-backs across all sectors, including online dating. We continue to work on mitigating actions to reduce the impact of charge-backs on our business. Now turning to our 2020 guidance. Earlier this month, we increased our previous estimates to both revenue and adjusted EBITDA. The primary reasons driving this guidance are

[Eric Eichmann:]

Operator?

[Operator:]

Yes. Eric, your line is live.

[Eric Eichmann:]

Good. Okay. Great. One quick correction to everybody. I mentioned in the script that operating cash flow after interest payments grew. Obviously, that was wrong. It is operating cash flow before interest, not after. Sorry about that. All right. Ready to take questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Kara Anderson with B. Riley.

[Kara Anderson:]

So first, just can you discuss the trends in the total paying subs kind of throughout the first half? And then second piece of the question is how we should read into the decline for the registration in the first half versus, I guess, 2H 2019?

[Eric Eichmann:]

Hey sorry, Kara, can you repeat the first part of the question?

[Kara Anderson:]

Yes. The first part was just whether you could discuss some trends on paying subs throughout the first half, if you've got any sense. And then the...

[Eric Eichmann:]

Great. Got it. Well, thank you very much, Kara, and thank you for waking up early. I know it is early in the West Coast. So look, on the first question, what we saw, and this was reflected in our comments that we made in April when we talked about 2019 results and provided guidance, is we have seen a bit of a slowdown as soon as the pandemic hit in the U.S. in a big way. So towards the end of March, and when people sort of went a bit crazy to go and buy toilet paper and other sort of goods at the store there, we were a bit more cautious. And as you remember, we have mentioned in our first -- at that time, that we have seen a low double-digit sort of dip. And so that had us worried a little bit, what happened afterwards, and this was good news, we have seen engagement go up. So that was good. And that was followed with subscription optics. And so as you can see from the results that we talked about in the first half of 2020, it's been a good first half for us. I think a big part of that came not just from a sort of, I would say, a generally good environment with people staying at home. But more importantly, we made significant improvements to our products. Zoosk, in particular, was the area that sort of required more work. We implemented a matchmaking algorithm that sort of led to results and onboarding flow that was simpler. We also had a full sort of marketing tracking that didn't exist before. And so we were now able to optimize marketing and scale the things that were working well and sort of limit the spending on things that we're not working well. So those things, I mean, it's hard to know how much was the environment becoming a bit more positive with people staying at home and how much was product and marketing enhancements. But at least, we could measure product and marketing. And I would say that, that was a big part of it. So that's that. The decline in total registrations, a couple of things that I would mention on that. First is that if you look at the total number of registrations, the majority of the decline is in international, not in North America. And it really follows from a decline that existed from Zoosk. I think Zoosk was a brand [indiscernible] North America that was in decline. It was very clear to us that when we acquired Zoosk, it was to reach a certain size. And we also believe it was a very strong brand that needed some revival, if you will. And we're in the process of doing that. I think we have a number of proof points that show that, that process is working well. And so I would say, when you look at the decline in North America, I'm trying to do the quick math, it's $100,000 from the end of 2019 to the end at the end of June or the first half of 2020. That's out of $5 million. So what is that, like 2%, I guess, right, something like that? So it's not significant. And our hope, obviously, as I've said, 2020 for us is a year to reach stabilization. And the idea of it is to prepare ourselves for future growth. So we are not obviously focusing as much on the international segment. We have said North America is the key market that we're focusing on. And so I would look at the metrics there more than the overall metrics.

[Kara Anderson:]

Okay. Got it. And then can you talk about expectations for the second half? I know you provided some guidance on that. [Indiscernible] pretty sharp declines on the first half for both revenue and EBITDA and even includes the margin erosion at the time [indiscernible], right? So I just want you to just give us some color there.

[Eric Eichmann:]

Yes. I think that's another great question, Kara. Thank you. So look, we feel quite optimistic and quite bullish about how the business is going. And so all of that is good. But as we think about guidance for the future, we're also thinking about some of the potential mitigating risks. And as you're seeing now, it seems like a second wave seems it's happening. It's happening already in the U.S. It seemed to have reached another peak and now are coming down. And in Europe now, it seems to be picking up again. So I mean, we're in unchartered territories here in terms of the pandemic and what it means. And it's not necessarily clear -- though we are optimistic, it's not necessarily clear that what happened in the first wave might be what happens in the second. So that would be the most likely scenario, but again there's some risk and then there's also the effect of a potential recession. So I guess the answer to that is we're being appropriately cautious when we think about the guidance, given still some of the uncertainty in the sort of times that we're living with but not anything related to our belief in the core operations or our ability to continue to improve the product and drive marketing for us.

[Kara Anderson:]

Got it. And then on the tech integration with Zoosk, I think that was the final piece that we were all waiting on. And sort of when did that happen? And is there any savings related to that the [indiscernible] in the guide?

[Eric Eichmann:]

Yes. So the last people that were part of Zoosk, the company out of San Francisco, left the company, I think it was early Q3 or late Q2. And so the integration is completely done. All of the products in tech is being done out of Berlin now. And so all of that is done. And any synergies that we'll get from that are included in the guidance that we provided for the rest of the year.

[Kara Anderson:]

Got it. And just one last question, with respect to the direct marketing spend, I think you called it out that you did see a significant improvement in the contribution there. Can you talk about what you think is the biggest driver behind that improvement? And is that kind of the level of performance we should expect going forward?

[Eric Eichmann:]

Yes. So I think probably the biggest factor is us being able -- two things. One, taking on Zoosk and being able to improve the tracking capabilities and allowed us to drastically sort of improve the ROI and the spending there. And so just understanding which channels work, how they work and then scaling those to their full extent was probably one of the big areas. The second one, I would say, which is fully related to marketing is the ability to improve the product. When you improve the product, obviously, you get better conversion, better engagement. And particularly, the onboarding flow was big area there. And that generally leads to better marketing spend, right? Because if you have a conversion that's 20% better, then just that 20% better than your ROI or marketing gives you more room to spend. So I would say those are the probably the 2 biggest things. And then the third has to do with the improved engagement that we've seen with people staying at home. And it's hard to know exactly what that means for the future. But my belief is that the staying at home has led to a step-up or a step increase in penetration of online dating. That's something that's very good. And it's not going to change in the future. So that's a very positive area. The last thing I would say, and we mentioned in the script, is that we saw some prices decline from a media perspective, particularly in pay social and in TV. And obviously, we took advantage of that. And in terms of marketing contribution for the future, I think very much the idea that we have and what we intend to do is continue to improve that. That's one of the key metrics we look at all the time is how well our marketing contribution is doing. Our guidance obviously sort of imply that we compete to do well on that front.

[Operator:]

Your next question comes from the line of Austin Moldow with Canaccord Genuity.

[Austin Moldow:]

The first one is on ARPU. I understand that the total ARPU line is improving from a mix shift towards North America. But can you talk about the North American ARPU segment and the kind of mix shift that might be happening there and the relative ARPU level of different brands, given that you're seeing growth in some [indiscernible] I imagine sort of different price points?

[Eric Eichmann:]

Yes. So a couple of things and then I'll sort of pass on also to Bert if there are any comments. But if you look at the ARPU from our press release, it's improved from €16.37 in the second half of 2019 to €18.85. There's a couple of things there and maybe more relevant in the first half of 2019, the increase is not as big, €18.44 to €18.85. And so what you should know from that is that there is a seasonality to our business. Q4, end of Q4, after Christmas to Valentine's Day are sort of high season. And so we see generally higher ARPU because of it and so that's reflected in these numbers. So the seasonality is there. But the other thing you see in North America, you have an increase in ARPU that sort of has to do with the different brands. And we've seen growth in those 3 brands that we talked about, the Top 3 and the pricing associated with those. In particular, SilverSingles and EliteSingles carries higher ARPU. So that's a bit of a mix shift. But the difference is not that big if you look at it, but I would say that's the majority of the driver. And Bert, I don't know if you have any other comments to that?

[Bert Althaus:]

Yes. Well, one thing to add is the second half of 2019 is hardly comparable due to accounting effects out of the purchase price allocation that we had. So that has an impact on the Zoosk part. So I think that's not comparable. I think that, as Eric explained, the first half of 2019 to compare to the first half of 2020 is more appropriate but adding that the shift increases to the North American revenue significantly and by that, improving our overall ARPU.

[Eric Eichmann:]

And the last thing I'll comment on, Austin, is we haven't implemented any sort of significant new premium features or additional revenue-enhancing features, like advertising, potentially video and things like these. These are things that we're looking at but obviously from a priority perspective, we're trying to bring product improvements that have the highest ROI. And most of those have led to engagement and to subscription revenues, which is obviously very positive. But those things are things for the future to additional revenue drivers, if you will.

[Austin Moldow:]

Got it. And just a quick follow-up on Zoosk. Considering Zoosk is sort of different from the rest of the portfolio, where does that ARPU level fit within the portfolio? And also, should there be an expectation of some sort of mix shift down as sort of it becomes a big piece of the total [indiscernible]?

[Eric Eichmann:]

Yes. I mean, so if I understand, Austin, you're asking if the ARPUs are different for different brands and you have a mix shift in terms of the registrations. And then does that lead to a different shift? I mean I would say a couple of things. One, we expect that we can sort of, over time, provide and drive new revenue initiatives. And so those should all contribute to ARPU. And as we've mentioned, the Top 3 or 3 of our Top 4 brands are growing in North America, Christian Mingle, SilverSingles and EliteSingles. And just in general, Silver and Elites have higher ARPU than Christian and they're growing a bit faster. And so those would probably sort of end up driving ARPU a little bit up. And as we sort of start seeing growth in Zoosk again, I think that would stabilize. So I don't know that we would sort of point to a particular trend. I would think it's fairly stable. But let me turn it to Bert. Bert, any comments on that?

[Bert Althaus:]

Yes. Thank you, Eric. There's no particular trend towards Zoosk or a differentiation in the way we are pricing Zoosk compared to others. It is really the optimization on the pricing that we have on overall our brands.

[Eric Eichmann:]

And obviously, we like to see ARPU up. But if ARPU goes down while volume is going up and our contribution and our revenue is going up, we like that too. So ARPU in itself is not a metric. So when we think about new revenue initiatives, we obviously want to make sure that, that is contributing to ARPU once you exclude all the factors, like mix shifts and things like that. But at the end, we're really trying to drive contribution as the main metric in revenue.

[Austin Moldow:]

Okay. Got it. And my last question is on product innovation. You mentioned Zoosk several times. So can you talk about product innovation outside of Zoosk and what kind of features maybe have been implemented recently that you're thinking about? And I think you just mentioned that you were evaluating video in the previous answer. So can you talk through some of those new features outside of Zoosk on the horizon?

[Eric Eichmann:]

Yes. So a couple of things. One of the things that is important, in particular within our segment of online dating, is how you present yourself in an online dating platform is important and so an overall refresh of our brand is important, including Zoosk. It's one of the things we're working on and so that's something we think will have meaningful impact on our users. So that's positive. In addition to that, we also have, and we talk about this, we're also working on consolidating a number of global services to serve the different front-end platforms and we've done great work from a CRM, data warehousing. The tracking we talked about with Zoosk really comes out of a global service that we're providing all brands. And so it allows for shared expertise, if you will, around all brands with one marketing team. But we're also working there on billing. Billing is an important part of us being able to have different pricing structures, different test that we launch on all the brands. And so that's one of the areas that we're excited about. It takes a little bit longer. It's obviously a more complicated area that involves third parties, but that's an area that we're excited about. And the other area we're excited about over time is just fraud and safety and security are areas where we're implementing a number of features for users to feel safer within our platforms and have meaningful interactions with people that have been fully vetted. And so some of the things that we're doing there are things that we're putting in place now. And obviously, that's not just necessarily features but also the ability operationally to address issues as they come. So we're facing all of that, the other thing that I would say is, as I mentioned, we are testing our Spark app in Canada. It is targeted at the younger demographic. It is currently just an iOS app. And the idea is to have it on Android. We've seen sort of initial good feedback from users. So we're excited about that. And it's a very distinct, differentiated proposition for consumers. So that's a little bit of the rainbow of things that we're doing around product.

[Operator:]

Your next question comes from the line of Roger Barry [ph], Private Investor.

[Unidentified Analyst:]

And this is Roger from the U.K. So we're in the afternoon here. And just three questions actually. First question is on the revenue line compared with the pro forma 2019. I wonder if you could explain that drop of €16-and-a-bit million. Next thing is probably a cheeky question. When do you might expect the net loss line to turn positive in your best guess based on the current trajectory? And finally bearing in mind that the 50-somethings and above a much more adept now as a result of lockdown with Zoom and various other platforms, probably a move into video for that market is more than necessary at this point in time. When can you put that in place? And how far down the line do you expect it to be available? End of question.

[Eric Eichmann:]

Great. Thank you very much, Roger from the U.K., appreciate your question. All right. So first off, you asked about revenue versus performance. There is a decrease. So I think a few factors. There's a mix of factors, obviously, some positive, some negative. But the biggest factor is we had a declining brand in Zoosk. And so that decline is now being worked on. And our hope is that we will stabilize all of that and start growing again in 2021 and beyond. And so what we're seeing is really good sort of proof points that we're able to start turning the corner around that. The second thing that's important in that line is that we decreased marketing expenses the second half of last year. Because we're a subscription business, obviously, that affects future revenues. We did that to comply with

[Unidentified Analyst:]

That's why I said it was a cheeky question. That's fine. Don't worry.

[Bert Althaus:]

No. But let's take the opportunity on that question, saying let's wait providing guidance on adjusted EBITDA and we expect the EBITDA to develop. And our focus is really on investing into our products and to our marketing scale to turn the company into further growth. And this is a priority for us to set the base. This year, we said it's a transition year, and we want to turn into the growth. So that will be our focus going forward.

[Unidentified Analyst:]

Great. Going forward, if you could combine, say, your platform with Deliveroo, Eat or any of the food providers to actually take someone out on a date virtually, to sit and chat to them on video. And I hope that, that sort of thing will develop going forward, particularly bearing in mind the old crusties like me are much more video-enabled than they were before we had this virus.

[Eric Eichmann:]

Got it. Yes. So that was your last question on video. And so video is an area that is developing. And we talked a little bit about this in our last call. And we think it's an important feature that will become an inherent part of the most dating platforms in the future. What we found from talking to our subscribers and users is that they believe it's important that sort of the benefit or the incremental from having it fully integrated within your platform or them using a Zoom or a FaceTime mechanism is less than we originally thought. There is some benefit but not as significant. And so as we thought about prioritizing our product initiatives, there were higher ROI items. But we think that this is going to be something in the future. Having said that, it doesn't stop people today on our platforms to meet, to make the contact and then to use different video platforms, communicating, and that's what's happening. That's what we learned. We were concerned that people were worried about using FaceTime because of their phone numbers being sort of disclosed at that point with whoever they're connecting with. But we found out that, that wasn't the case. So we will be looking at this. But again, we had other priorities that we thought had a higher ROI. And so since this wasn't as pressing, then we will be looking at that in the future.

[Operator:]

[Operator Instructions]. You next question comes from the line of a Vollmann, Christian with Mercutio.

[Christian Vollmann:]

Christian Vollmann here from Germany calling. I'm one of the founders and a shareholder. My question, concerning the debt refinancing that you mentioned. And I would like to know whether you can talk about what the strategy there is, what the progress is and give a little bit more color on the timing, et cetera. Yes.

[Eric Eichmann:]

Yes. Thank you, Christian. A couple of things there. We've engaged with an external third-party to help us with that process. I think COVID-19 has had sort of a stop-and-go-type effect on debt markets. And so it's been a longer process for us. What we've said and we continue to believe that we will -- for this is the 2020 priority, and it's something we're looking at this year. And so we'll have hopefully more news on this front by the end of the year. And I mean [indiscernible] December 31, but I think just right now, there's not a lot of information that we can provide, except for saying that we're making good progress in terms of sort of putting a process and contacting different parties and having different conversations.

[Operator:]

The next question comes from the line of John Lewis with Osmium.

[John Lewis:]

Eric and Bert, I guess, a quick question. Could you give an update on where you are in terms of progress with the Spark app, how that's progressing?

[Eric Eichmann:]

Sure. John, thank you very much. So we're excited about the Spark app. The Spark app is intended for a younger demographic, being 18 to 30. What we've seen to date is there's quite a bit of engagement. And just as a reminder, the Spark app may [indiscernible] fun and easy to use. And so if you go to the Toronto App Store or to the Canadian App Store and download it, you can create a profile and you have a number of different, what we call, frames that describe you as a person. And then to just give you an example, in addition to the standard thing you would have in any dating platform, like your picture and maybe a bit of a description of who you are, you have things like the ability for you to show out of a nine picture frame, which ones are your three favorite vacation spots or sports. And then when somebody sees your profile, they can interact with those nine pictures and choose their own 3 favorite things. And if they match, then we have an instant match. And so what we've seen is that individuals or people that are signing up for the app are putting up or sort of building a robust profile with different frames. And so we're excited about that. And then the interaction is happening within those frames. Most recently, we launched a frame that allows you to pose an interesting question, like, for example, "Should pizza ever have pineapple on it?" And then you can post your own response as the profile maker saying, "Absolutely not, that's not what Italians intended when they created pizza." And then people can come in and respond by creating a video of themselves sort of responding to that. And that's sort of going to be seen, obviously, by the person that made the profile. So that's an example of video being used in a very interactive way, where people can sort of safely talk about a subject and get to know each other a little bit better. So net-net, we're excited about the progress on it. I think having an Android version of it is important to reach the full audience, of course. And that's one of the things we're working on. And we're also working on making sure that we get sort of more information about the usage that people have. But all in all, it's doing well. And assuming all goes well, we'll make a decision about sort of the broader launch by year-end.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.