Spark Networks SE
Q4 2018 Earnings Call Transcript

Published: 30 Apr 2019

[Rob O'Hare:]

Hello everyone. I'm Rob O'Hare, Chief Financial Officer for Spark Networks SE. On today's call with me is Jeronimo Folgueira, Spark's Chief Executive Officer. Before we begin, there are a few items I need to cover with you. Today, we issued a press release announcing our second half and full year 2018 financial results. It is available within the Investor Relations section of our company's website at www.spark.net. In the press release and in our prepared remarks from this call, we refer to adjusted EBITDA, which is defined in our SEC filings. Although adjusted EBITDA is a non-IFRS financial measure, we believe it may be useful to investors when evaluating the Company's current financial performance. However, investors should not consider adjusted EBITDA as an alternative to net income, cash flow from operations or any other measure for determining the Company's operating performance calculated in accordance with IFRS. Further, because adjusted EBITDA is not calculated in accordance with IFRS, it may not be comparable to similarly titled measures employed by other companies. A reconciliation of adjusted EBITDA to net income can be found in the consolidated statements of operations included in our earnings release. 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 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. Following our prepared remarks, Jeronimo and I 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 for the next two weeks. With that, I will now turn the call over to Jeronimo.

[Jeronimo Folgueira:]

Thanks, Rob, and thanks everyone for joining the call today. 2018 was a very productive year for Spark and I am happy with both our results and with the work we are doing to build the foundation for a larger and more diversified business. We made good progress in 2018 across a number of different initiatives and it is apparent in our results. In the second half of the year, we demonstrated our ability to drive profitable growth across our portfolio and this growth led to significant margin expansion. On a like-for-like basis and pro forma for definitive Spark merger, total revenue grew approximately 4% in the second half of 2018 relative to the prior year period. This close represents a meaningful improvement in comparison to the nearly 4% year-over-year pro forma decline in the first half of 2018. Our advanced growth was driven by investments we made in early 2018 through the product launch of SilverSingles, the continued expansion of elite singles within North America and by the stability we have been able to bring to the JDate, Christian Mingle and JSwipe brands that we acquired in the Spark deal in late 2017. Our revenue growth also drove improvements in overall profitability in the second half of 2018 with adjusted EBITDA growing to €8.5 million and adjusted EBITDA margin of 16.5%. EliteSingles, SilverSingles and the Spark portfolio are predominantly focused on North America and the improvements we have made with these brands helped achieve nearly 25% annual growth in that region in the second half of 2018 relative to our pro forma combined with that in the prior year period. North America is a larger geographic market for data revenues and we exited the year with over half of our total revenues coming from this region. It is important to note that our profitability in North America is scaled with revenues. SilverSingles North America grew over 10% in 2018 driving an increase in our 2018 report in North America contribution margins to 43%. Similarly SilverSingles North America ended 2018 with over 35,000 paying subscribers and this growth helped our newest brand achieved positive contribution and cash flow in the fourth quarter. It is exciting to see the success of our organic and inorganic growth initiatives as we continue to capture market share in this critical region. Of course our pending merger will significantly increase our presence in North America and we are looking forward to adding another strong U.S. focused brand to our portfolio. Integrating Zoosk will be our top priority for 2019 and we have assembled our broad cross functional team within Spark to ensure that we transition all facets of the Zoosk business. One of the Spark's key competitive advantages is our low cost centralized operating model in Berlin and we expect Berlin to continue to be the hub for long term. We have learned a great deal through the integration of the Spark merger and we look forward to an equally successful and highly accretive combination with Zoosk. Lastly we're making good progress to secure the German and US approvals necessary to close the merger and we continue to expect the deal to close early in the third quarter of 2019. With that, I'll now turn the call over to Rob.

[Rob O'Hare:]

Thanks Jeronimo. I am going to share some additional details on our second half and full year 2018 financial results. As a reminder, the Affinitas-Spark merger closed in early November of 2017, so the prior year periods only include two months of Spark Networks Inc. results. Starting with revenue, we finished the second half of 2018 with €51.5 million of total revenue, an increase of 18.4% compared to the six months ended December 31, 2017. The year-over-year increase was largely driven by the inclusion of Spark Networks Inc. for the full six months in the second half of 2018 versus only two months of Spark Networks Inc. activity in the second half of 2017. Full year 2018 revenue increased to 22.2% to €104.6 million as compared to €85.6 million during 2017. As with our second half results, the annual increase was primarily attributable to the full year impact of the Affinitas-Spark merger which closed in November 2017. Moving down the income statement, contribution was €24.2 million for the second half of 2018, an increase of 38.1% compared to the second half of 2017. Our contribution margin in the second half of 2018 increased to 47% from 40% in the prior year period. Full year 2018 contribution was €44.7 million, an increase of 38.8% compared to the year ago period. Our contribution margin increased to 43% from 38% in the year ago period. For the second half of 2018, adjusted EBITDA excluding non-recurring charges was €8.5 million, an increase from €4.2 million in the prior year period. Our second half 2018 adjusted EBITDA margin was 16.5% up nearly seven points from the prior year period. Full year 2018 adjusted EBITDA was €11 million, an increase from €6.6 million in 2017. Our 2018 adjusted EBITDA margin was 10.5% up to nearly three points from 2017. Turning to the balance sheet Spark ended 2018 with €11.1 million in cash and cash equivalents compared to €8.2 million at the end of 2017. At year end the Group had €12.1 million of debt outstanding. I'll close with a few points on our financial outlook. As we outlined in greater detail in our annual report, Spark adopted a new revenue recognition standard IFRS 15 in 2018. With the application of this new standard, Spark does not recognize revenue following a customer chargeback. The revenue guidance range is provided by Spark on August 30th, 2018 were based on the expectation that revenue would be recognized gross of charge-backs and were therefore inconsistent with IFRS 15. At the time we expected revenue for the second half of 2018 and full year 2018 to be €53.5 million to €56.5 million and €106.5 million to €109.5 million respectively. Excluding the application of IFRS 15, revenue for the second half of 2018 and full year 2018 was €54.1 million and €107.2 million respectively. Going forward the merger with Zoosk will significantly transform our business and as Jeronimo mentioned, the Zoosk's post-merger integration will be our top priority in 2019. We believe that the operational and strategic fit between Spark and Zoosk is very strong and we remain confident that we can achieve at least $50 million of adjusted EBITDA in 2020 once the businesses are fully combined. That concludes our prepared remarks. We'll now open the line up to questions. Operator?

[Operator:]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Austin Moldow with Canaccord Genuity. Please proceed.

[Austin Moldow:]

Hi. Thanks for taking my questions and congrats on the results. I want to ask the first few about the couple of the brands in particular. Would it be able to elaborate a little bit on how SilverSingles did in the period and maybe what the trajectory was like exiting the year?

[Rob O'Hare:]

Sure. I guess it's a little hard to compare SilverSingles to the prior year in terms of growth just given that the business or the brand was launched in mid-December of 2017, but we saw the business - we saw the brand continue to grow throughout the year and I think an important milestone that we had set internally was to have the brand be cash flow positive in the fourth quarter and so as you saw in the prepared remarks we achieved that and so that was a big milestone for us. Some of that to be fair is slightly seasonal and so we did invest heavily again in Q1. And so we weren't cash flow positive in Q1 but I think we've grown the brand to a point now where it's over 50,000 monthly paying subscribers and it's basically self-sustaining absent a few seasonal changes like Q1.

[Austin Moldow:]

Got it. And I know in the past you said you had remarks about Christian Mingle and JDate flipping to positive growth possibly in Q4. Can you update on what actually played out?

[Rob O'Hare:]

Yeah. We did see those brands. They grew, they were basically flat but modestly positive. So we hit that internal milestone as well.

[Austin Moldow:]

Okay. And last brand related question but can you update on how EliteSingles is doing and in particular how it will affect your marketing budget going forward? I think in the past it was basically the bulk of the marketing budget. Can you just update on your thoughts versus how the traction has been in North America.

[Jeronimo Folgueira:]

Yes this is Jeronimo. So in terms of EliteSingles and marketing spend, so EliteSingles continues to be our largest brand and that's also supported by the largest part of our marketing budget being allocated to EliteSingles. What we have seen is that a solid growth and maturity especially in international markets, we are starting to cut marketing on Elites to make it more profitable. So we are improving the profitability profile of Elite in exchange for growth and we continue to push for growth in the North America market. So as we continue the evolution of those brands and also we feel we're seeing Singles growing, we are moving some of our marketing around. And so we would continue to see on a standalone basis Elite to keep the bulk of our marketing spend, but that spent will probably continue to shift towards North America and some of that eventually also to SilverSingles and make Elite more profitable.

[Austin Moldow:]

Got it makes sense. And my last question is and previous one kind of relates, international declined a little bit faster than I had anticipated. I know it's a nonstrategic geography. So can you help us - can you help us maybe think about the pace at which we should expect it to decline going forward.

[Jeronimo Folgueira:]

So if you look at the decline on the international part and you also look at the marketing spend on the international part, you can really see that the decline is really driven by us cutting marketing in that region. And the reason we are doing that is because we believe it strategically and for the future is better value for us to be invested than grow our North America market. So we have been shifting our focus from international to North America and that region has shrunk partly as a result of continued to cut marketing budgets and also when we look at the future, with the combination of Zoosk and a substantially larger top line, we're seeing some of the especially eastern European markets and smaller international markets that we are in they become less critical for us and they still consume a lot of resources. So we will probably focus more on English and French markets and less on other goes and other languages than we have done in the past. So that shift will most likely continue.

[Austin Moldow:]

Okay. Thanks very much and congrats again.

[Jeronimo Folgueira:]

Thank Austin.

[Operator:]

Thank you. Our next question comes from the line of Marc Wiesenberger with B Riley FBR. Please proceed.

[Marc Wiesenberger:]

Thank you. Good afternoon. You provide a breakout of the ending paying subs with regards to our North America and international?

[Rob O'Hare:]

Yes ending paying subs at the end of 2018. It was, sorry bear with me one second. It was roughly - it was roughly 276,000 in international and 182,000 in North America. So about 458,000, 459,000 in total.

[Marc Wiesenberger:]

Great. Thank you. And can you talk about some of the factors that reduced ARPU in the second half of '18 and then maybe your outlook across the different brands going forward.

[Rob O'Hare:]

Sure. I mean so part of the - part of the ARPU is a function of the Spark Inc. brands coming online for the full year. Those brands when we acquired them had a lower ARPU than the rest of the portfolio and so now that they've been in all month of 2018 relative to some of the prior year periods, you're seeing that mix shift. The other thing that would have happened is with the adoption of IFRS 15 you would have seen a reduction in revenue and so that reduction in revenue would flow through the ARPU metric as well.

[Marc Wiesenberger:]

Okay. And then I guess maybe you previously were expanding some of the more religious brands into Europe that had less brand awareness. It sounds like that you are going to be deemphasizing that. Is that correct and then maybe kind of if you can elaborate on what you're seeing with those trends that maybe are causing you to exit or not has put as much emphasis on those markets and then that's it for me.

[Jeronimo Folgueira:]

That is correct. We're not focusing on expanding right now at the international - in international markets. They're religious brands. We have added additional languages to Christian Mingle and JDate and have done some tests in those markets. But what we have seen is that the return on those investments was slower than the company that we're currently running for Elite or SilverSingles. So it made more sense for us to keep pushing our current brands in the current market. So we have and also to grow those brands in new markets we will first have to build a substantial critical mass of users and that will require substantial investment which at the moment we don't think is something good for us to do especially in light of having Zoosk coming on board in Q3. So we decided not to focus on international life and the religious brands any more.

[Operator:]

Thank you. Our next question comes from line of John Lewis with Autism. Please proceed.

[John Lewis:]

I guess just a couple quick questions off the top, you guys have been working on the global Ash platform for quite a while I guess and I think your guidance was you're hoping to release it sometime in the second half of 2019 or something along those lines. I guess how does the Zoosk merger impact this at all if at all and then I guess what are the big takeaways you hope this new platform will deliver in terms of functionality and you know bringing out new potential apps for the brand?

[Jeronimo Folgueira:]

Great question, John. So we're making very good progress with our new logo tech platform and actually we have migrated one of our brands already to the new platform. So Single is already running on the New Tech platform and we will be migrating one of the large evolving countries to our new global platform within the next few weeks and based on results, we will continue then a migration path where we will start moving more and bigger countries into the new platform basically starting around summer this year. So we are on track to start basically migrating part of our business to the new platform until we are fully there. The advantages of this new platform is that it will allow us to iterate on that platform and build new features and rollout features much quicker than in the old platforms. It will allow us as well to basically once we do a new feature or an improvement to roll that out to old brands and all countries and it will also allow us to run old brands with a global pool, so we can basically expand all of our brands everywhere in the world. So for example, SilverSingles is currently only available in six countries in the world and once we migrated to Global S [ph], we will be able to immediately launch it in their remaining countries where we already have a presence and these are pools that we currently do not have that brand. So those are the main advantages that we see coming from global but those advantages will probably also start kicking in mostly in 2020. We first need to fully migrate the majority of our business into the new platform which is going to happen within the next couple of quarters.

[John Lewis:]

That's very helpful. I guess the other question I was going to ask you about is on the affiliate channels between now Zoosk and the Spark brands. I think you also have a pretty large share of the market on North America affiliate networks, is that right?

[Jeronimo Folgueira:]

We believe that is the case.

[John Lewis:]

Well that get you anything that you don't have today.

[Jeronimo Folgueira:]

We will basically explore all synergy options and of course being a much larger player with a much larger spend, obviously helps and we would hope that being a large spender in a particular channel will give us more negotiation power eventually. So - but that's something that we haven't really count on for 2020 EBITDA target.

[John Lewis:]

Just one more I guess if I could. One of the things you guys talk about is a $150 million customer acquisition budget spend for 2020, is that right.

[Jeronimo Folgueira:]

That is about correct.

[John Lewis:]

And you guys I guess if I look at the valuation, you guys were about $400 per subscriber matches $2300 and obviously there's some differences of being subscale on that scale. And so I guess the question is Spark's really been a slow motion IPO with Affinitas and now Zoosk and I guess you know when you look at what type of synergies you could get you said in your forecast will exceed $50 million it does not have any synergies on marketing. What opportunities do you think would present itself by having $150 million budget.

[Jeronimo Folgueira:]

Well we think that having more spend and more scale overall will really help us especially because they think it's an industry where scale really makes a difference because a lot of the product experience is about not just the target itself but having to critical mass in terms of users in your platform. There's a lot of network effect. So we believe that having a much larger user pool and a much larger marketing budget and also being able to move budgets around to follow basically the brands and countries that gives us the highest contribution will overall help us. So that's part of the strategic rationale of pursuing Zoosk and consolidating this segment of the market.

[John Lewis:]

That makes a lot of sense. If I could - can I get one more or do you have more questions?

[Jeronimo Folgueira:]

Go ahead, John.

[John Lewis:]

I guess if you guys could just talk a little bit about what you're seeing in the macro industry overview I think I read somewhere that North America is about a $3 billion market in terms of paid premium subscriptions. There's about 100 million new online daters coming on a year globally. The industry continues to consolidate with the eHarmony deal. But I guess could you guys give us any macro color in terms of what you're seeing for the overall industry and how - any color on that front.

[Jeronimo Folgueira:]

Yes. So our view is that dating is definitely growing. It's becoming more and more popular everywhere in the world. It's growing mostly in the younger segment and also in the older segments of the population. And it's really becoming mass market. So the amount of people using online dating continues to grow. What we do see is that basically in such a market the large players with large budgets can compete more. So they can invest more in tech to have better product, they can invest more in marketing to have larger user pools to give that better user experience and that's also why the industry has consolidated and continues to consolidate. And that's also why we believed at this point that doing a deal with Zoosk made a lot of sense because basically the largest players will have a substantial edge in this consolidating market and that's part of the rationale for us to pursuing a scale transaction but the market continues to be very dynamic and growing. What we do see though is that people and especially different demographics you see from products and different business models and one of the things at Spark is that we are currently fully focused on subscription models and going forward, we will probably start looking more and more into premium apps and explore that part. So the same way much testing there or Bumble but who has Bumble will basically need to start getting our foot into that part of the market and segment as well going forward. So that will probably be part of our strategy now that we have fully consolidated our segment of the market.

[John Lewis:]

Great. Thank you. I'll jump back I have two more but I'll let you guys don't hug the call.

[Operator:]

Thank you. We have no further questions in queue at this time. I beg your pardon. We had a question from the line of John Lewis with Autism. Please proceed.

[John Lewis:]

I guess couple other quick ones, are you guys have any plans of getting the story out before the close in terms of road shows?

[Rob O'Hare:]

We're planning to go to a couple investor conferences John. Throughout the summer we'll be at the B Reilly Conference in May. We're also doing the Cowan Conference and the Canaccord Conference. So those three are on the list right now and we may kind of add on a couple of non-deal road shows in some cities that we haven't visited in a while as well.

[John Lewis:]

Got it and Zoosk is supposed to close what in early July or July, something like that?

[Rob O'Hare:]

Yeah. We would expect it to close early in Q3. So lately July.

[John Lewis:]

Okay. And then the last thing is, is you guys have talked about at scale 30% to 40% EBITDA margins and obviously you're at something like 20% low 20s for 2020. I take it you feel like there's a lot more you guys are scratching some of the surface on synergies, but you feel that the real synergies will come not necessarily all in 2020 but really figuring out where you can gain a lot more leverage in marketing in some of these other key parts over time, is that the reed in there?

[Jeronimo Folgueira:]

That is correct. So we will aim - our 2020 target is around 20% plus and we want to achieve higher margins. However, as I said, we might actually want to invest in some strategic initiatives like pushing for premium apps or to continue to invest in our Global S initiative. So that's why we feel that there is potential in margin improvement going forward, but we might want to take one or two years to have some room to keep investing in some growth initiatives as we continue to scale out.

[John Lewis:]

And so what where would be the earliest we'd see anything on the mobile apps something like the back half of '19?

[Jeronimo Folgueira:]

We will announce something when we have something to announce.

[John Lewis:]

Okay. Fair enough. Thanks guys. Good luck and nice work.

[Operator:]

Thank you. We've reached the end of our Q&A session. Allow me to hand the floor back over to management for closing remarks.

[Rob O'Hare:]

Thanks everyone. I really appreciate you dialing in and we'll be back with updates lately in August. Thanks.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.