Spark Networks SE
Q4 2017 Earnings Call Transcript

Published: 25 Apr 2018

[Operator:]

Good morning ladies and gentlemen and thank you for waiting. Welcome to the Spark Networks' Second Half and Full Year 2017 Earnings Conference Call. This call is being recorded and we are broadcasting live in listen-only mode. I would now like to turn the conference over to Mr. Rob O'Hare. Mr. O'Hare, you may begin the conference.

[Rob O'Hare:]

Thank you for joining us today. 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 2017 financial results. It is available on our company's website at www.spark.net in both the Investor Relations and Media Center sections. 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 sections of our website for a period of two weeks. With that, I will now turn the call over to Jeronimo.

[Jeronimo Folgueira:]

Thanks, Rob, and thank you everyone for joining the call today. It has been nearly six months since we closed the merger of Affinitas and Spark Networks Inc. to form Spark Networks SE and we are pleased with the progress we have made to integrate the two businesses and with the growth trajectory that we are expecting so far in 2018. Given this is our first earnings call since the merger closed, I want to open with a review of the strategic rationale for the merger before discussing our strategic priorities. I will then turn the call back to Rob for a discussion of our second half and full-year 2017 financial results. The merger created one of the top subscriber dating companies globally. Our portfolio of strong brands positions us as a leader in the serious segment of the dating market. Across these brands we have built a stable global base of nearly half a million monthly paying subscribers in 29 countries and across 15 different languages. The breadth and depth of our dating network gives us a platform that we can leverage to launch compelling offers quickly and efficiently that complement our existing brands. From a financial perspective, the merger added Spark Networks Inc. strong U.S. brands and consistent profitability to diversified and growing Affinitas portfolio. The result increase in scale created a merged entity that is larger and more profitable than the sum of the parts. Both Affinitas and Spark were just EBITDA profitable in 2016 and 2017 and on a standalone basis, before realizing any of the $5 million in cost synergies. Post merger we have reduced our dependency on outside fields [ph] significantly and have transitioned nearly all of the technological, marketing, and operational knowledge of Spark's Los Angeles based team to a highly skilled and lower cost teams in Berlin. We have done this very quickly and enter 2018 with an efficient operating structure and financial profile. Looking at our operations today, we have already fully realized all of the cost synergies that we originally anticipated. We also expect future M&A to be an accelerant for us going forward. We now have both the public currency and improved access to capital with a €25 million credit facility with Silicon Valley Bank that we closed in late March. €15 million was funded at closing with a provision for an additional €35 million available to fund any future accretive acquisitions. We have the industry experience, a highly scalable business model and the financial capital to be selective and opportunistic in our pursuit of acquisitions. We enter 2018 with three clear priorities all of which are aimed at positioning spark for sustainable, long-term, and profitable growth. First, we aim to build on the consistent growth momentum that Affinitas had achieved over the last several years driven primarily by the success of EliteSingles. Second, we are taking actions to stabilize and grow the Christian and Jewish brands that were added to the portfolio through the merger with Spark and finally we will launch and grow new complementary brands in key markets such as North America. Today, EliteSingles is our largest and highest growth brands growing in excess of 20% in 2017 and contributing nearly 60% of our consolidated revenues. EliteSingles have subscribers in 19 markets with North America represented roughly one third of our total revenues. Since launching in the U.S. in late 2015, we have grown Elite revenue significantly. With less than 1% share of the U.S. market there is still tremendous opportunity for us to grow this highly successful platform. We are driving our efforts to capture additional market share in the U.S. with improving unit level economics resulting from a combination of internal marketing optimizations and increased brand recognition with U.S. consumers. In addition to expanding EliteSingles in North America, we are working in parallel to stabilize and grow Spark Christian and Jewish brands. As soon as the merger closed, we began to apply the product and marketing tactics that have proven successful with all the brands. We are achieving positive early results and are optimistic that we can grow these brands in the future. The Jewish brands, JDate and JSwipe were stable from a revenue perspective in the second half of 2017 compared to the first half of 2017 and this stability has continued to 2018. Similarly, we have been very pleased with the Christian Mingle ability to profitably reach and convert potential customers throughout our winter high season which runs from Christmas through Valentine's Day. These marketing efforts resulted in a modest local currency growth in early 2018. There is still work to be done to return these brands to a consistent and sustainable growth trajectory, but we're encouraged by our recent performance. We now expect the Jewish and Christian sites to grow in local currency on a year-over-year basis by Q4 2018. This will be the first period of annual revenue growth in five years. In mid-December, we launched the SilverSingles brand in six key markets, the U.S., Canada, the UK, France, Germany, and Australia. SilverSingles targets serious daters over 50 years of age with a premium match-making product. The initial results exceeded our expectations and we have allocated more capital to growing this brand. The SilverSingles product is based on the same platform and feature set that powers EliteSingles allowing us to launch and optimize performance very quickly and efficiently in countries where we already have established customer base. Since launching in December 2017 SilverSingles generated approximately 15% of our registrations in the first three months of 2018 and we expect this new addition of the portfolio to be a meaningful contributor to our revenue growth in 2018 and beyond. The initial performance of this platform reinforces our confidence in the brand and our ability to deploy capital effectively with positive returns. We will continue to invest in scaling this brand as one of our key strategic priorities. As Rob will discuss, we expect this will negatively impact our [indiscernible] 2018 as we invest marketing dollars to help subscriber and recognize revenue growth. Growth is vital to our long-term success and we believe this investment positions us for stronger growth and higher profitability in 2019 and beyond. Effectively we are investing a single year worth of cost synergies to create a new long-term growth driver for the company. As I stated earlier, I am as excited as ever about our business and the plans we have for capitalizing on the tremendous growth opportunities in the online dating market. I look forward to providing you with updates as we execute our 2018 plans. Now I'll turn the call over to Rob to review our financial results and updated 2018 guidance. Rob?

[Rob O'Hare:]

Thanks Jeronimo. I am going to share some additional color on our second half and full year 2017 financial results. As a reminder, the results in both periods include only two months of Spark Networks Inc. results. Starting with revenue we finished the second half of 2017 with €43.5 million of total revenue an increase of 15% compared to the six months ended December 31, 2016 and a 3.3% increase from the six months ended June 30, 2017. The year-over-year and sequential increases were driven by growth in our average paying subscribers resulting from marketing efforts in North America and the addition of JDate and Christian Mingle following the Affinitas-Spark merger in November 2017. Full-year 2017 revenue increased 16.5% to €85.6 million as compared to €73.5 million during the year ended December 31, 2016. The increase was attributable to the 19.6% growth in our average paying subscribers resulting from the aforementioned marketing efforts in North America and the addition of JDate and Christian Mingle following the Affinitas-Spark merger in November 2017. Revenue in both the six and 12 months ended December 31, 2017 includes €2.7 million of post merger revenue from spark net of a €603,000 write-off of deferred revenue relating to the Affinitas-Spark merger. Moving down the income statement contribution was €17.5 million for the six months ended December 31, 2017 an increase of 19.7% compared to the six months ended December 31, 2016 and 19.9% increase from the six months ended June 30, 2017. Our contribution margin contribution margin increased to 40.3% from 38.7% in the six months ended December 31, 2016 and from 34.7% in the six months ended June 30, 2017. The margin expansion was primarily driven by revenue growth in North America. North America contribution margin increased to 11.1% from 3.1% in the six months ended December 31, 2016 and from 4.2% in the six months ended June 30, 2017. Full year 2017 contribution was €32.2 million an increase of 28.1% compared to the year ago period. Our contribution margin increased to 37.6% from 34.2% in the year ago period. The margin expansion was primarily driven by growth in North America following the Affinitas-Spark merger. North America contribution margin increased to 7.7% from 1.3% in the year ago period. Contribution in both the six and 12 months ended December 31, 2017 includes €2.2 million of post merger contribution from Spark net of a €603,000 write-off of deferred revenue relating to the Affinitas-Spark merger. For the second half of 2017 adjusted EBITDA excluding nonrecurring charges was €4.2 million, a decrease of €118,000 versus the six months ended December 31, 2016 and an increase of €1.9 million for the six months ended June 30, 2017. For the full year 2017 adjusted EBITDA was €6.6 million, an increase from €5.9 million in the year ago period. Adjusted EBITDA in both the six and 12 months ended December 31, 2017 includes €509,000 of post merger adjusted EBITDA from Spark. As Jeronimo mentioned, we've made great progress on our post merger integration plans. On a run rate basis we have already surpassed the $5 million of cost synergies that we had identified when we announced the merger last spring. We enter 2018 with an improved cost structure that will allow us to invest in growth initiatives while minimizing operational overhead. Turning to the balance sheet, Spark ended 2017 with €8.2 million in cash and cash equivalents compared to €8.1 million at the end of 2016. At year-end the group had €5.9 million of debt outstanding which was fully repaid in March 2018. As Jeronimo mentioned, we closed a €25 million credit facility in late March with a four-year term and a cost of borrowing that is currently below 3% per annum. This facility allowed us to terminate a higher cost €6 million loan and fulfill a €6 million payment obligation that was negotiated as part of the 2017 merger. Our net cash position did not change materially as a result of this loan as we used the €15 million of funded proceeds to repay the aforementioned pre-existing near term obligations. Today we have an additional €10 million of undrawn committed capital and an incremental €35 million on committed acquisition facility. With access to €45 million of additional capital we have improved our ability to execute accretive acquisitions should we identify attractive opportunities. Now let's move to our 2018 guidance. As we look to 2018 it is worth noting that about one third of our revenue comes from the U.S. and the euro has strengthened versus the dollar by nearly 10% so far in 2018 relative to the 2017 average rate. This will create a headwind for us in terms of reported growth in euros in 2018. When we announced the Spark-Affinitas merger nearly a year ago, we set targets for 2018 results of $118 million to $122 million of revenue and $18 million to $22 million of adjusted EBITDA. Our core brands are on pace to exceed the 2018 goals we set 12 months ago and we now see an opportunity to invest in additional marketing to build SilverSingles to become a meaningful part of our portfolio. This strategic decision is informed by a detailed review of our marketing performance and is in line with our long-term growth strategy. Given that the marketing investments for growing a new brand are recognized upfront while the resulting revenue is recognized over the life of the subscriptions we add, we are lowering our adjusted EBITDA guidance for 2018 while simultaneously raising our revenue guidance. For the year we now expect to generate revenue of $127 million to $133 million and adjusted EBITDA of $13 million to $18 million. We are maintaining our long-term EBITDA margin target of 30% to 40%. In conclusion, 2018 is off to an exciting start at Spark. The entire team is focused on executing the plan we have set for the year and we have great assets and a strong balance sheet to support our growth. That concludes our prepared remarks. We will now open the line up to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Kara Anderson with B. Riley and Company. Please proceed with your question.

[Kara Anderson:]

Hi good morning.

[Rob O'Hare:]

Hi Kara.

[Kara Anderson:]

Can you provide any period ending subscriber metrics?

[Rob O'Hare:]

Yes, we can give period endings for the year, so we ended the year with about 465,000 paying subs.

[Kara Anderson:]

Are you able to further break that out between North America and International?

[Rob O'Hare:]

Yes, it was 158,000 in North America and 307,000 in international.

[Kara Anderson:]

Got it. And then with respect to the launch of the JDate and Christian Mingle in Europe is there any brand awareness in that space and what’s the incremental costs for doing something like that?

[Rob O'Hare:]

Sorry Kara, can you repeat the question?

[Kara Anderson:]

So Christian Mingle and JDate I believe you guys announced you'd be launching them in European markets, just wondering if there's some brand awareness already in this space for those brands and then what kind of cost is associated with doing something like that?

[Jeronimo Folgueira:]

Sure, so the answer is no, there is no large brand awareness of these brands outside of North America and we added those languages to have a platform to grow in those brands, but in the near term we are not planning to deploy a lot of marketing capital to growing those. So most of the growth initiatives we have for JDate and Christian Mingle are focusing on North America. In international markets we're basically building our platform, so we can start scaling them up at the right time, but for the time being we will not really deploy marketing capital and therefore there will not be a lot for investment of growing those businesses outside of North America yet.

[Kara Anderson:]

Got it. And then with respect to sort of effective marketing strategies taken from I guess the Affinitas team and deployed to JDate and Christian Mingle in the U.S. or in North America can you talk about sort of maybe just elaborate give a little bit of color around that and what specifically you’re seeing success in?

[Jeronimo Folgueira:]

Yes, so effectively on the EliteSingles side, we continue to scale both and acquire more users every year and the unit economics keep improving, part of that is because we are increasing brand awareness in the North American market. So part of our budget for North America is in TV advertising, so we are building doing brand building activities that helps basically the overall performance of the brand. So with EliteSingles we do see an ability as the brand gets more known and bigger to keep spending more and keep acquiring more users at better unit economics. In the case of SilverSingles, we have been very pleased with initial results, so we have been able to scale up SilverSingles in North America much faster than we did at with EliteSingles back in 2015. So we are very, very happy with the initial results. And we have been able to deploy capital in different performance marketing channels profitably already from a lifetime perspective. Therefore we feel very comfortable with our ability to build the second strong brand basically replicating the EliteSingles success now with SilverSingles.

[Kara Anderson:]

Okay and what about JDate and Christian Mingle, I mean they're largely well known here in the U.S. but have seen some subscriber pressure over the years. What do you think you can effectively take from what you've learned with EliteSingles and what you're doing with SilverSingles and apply it towards those brands?

[Jeronimo Folgueira:]

For those brands as we said are finally starting to stabilize, so part of the decline over the last years has been also driven by a reduction in marketing spend. We are now starting to spend some money on these brands again and we see especially at the beginning of 2018 we're very pleased with the growth in initials that we see in these brands and therefore we now expect that we can bring these brands back to growth on a local currency basis by the end of this year. So we are basically starting to be able to deploy capital and therefore start growing them but also profitably.

[Kara Anderson:]

Got it and then Rob, did I hear you say that or maybe Jeronimo, as you incremental cost of launching SilverSingles is about a year of the savings so $5 million?

[Jeronimo Folgueira:]

Yes, so the marketing spend will probably exceed that, but obviously will generate revenues already in 2018 out of this investment. Of course the revenues recognized over the lifetime of the subscriptions and we sell a long time subscription so on average six months or longer, so the revenues will start coming but we will have to spend upfront. So we suspect on the whole year the impact will be one year worth of cost synergies, but we will probably invest a bit more, but part of that will be already recovered this year and then the bulk of that will come in 2019.

[Kara Anderson:]

Got it and then with respect to the $5 million in savings how much of that was immediately recognized in the two months in 2017 and what’s incremental I guess in the 2018 guide?

[Rob O'Hare:]

Yes, I think we were fortunate in some ways to have six months between announcing the deal and closing it. So we were able to put a very detailed operational plan together and we were able to recognize I would say 100% of the $5 million in savings within calendar 2017. We had a couple large contracts that we were able to terminate and that drove a lot of the savings along with some of the reductions in staff.

[Kara Anderson:]

Okay, all right.

[Jeronimo Folgueira:]

But the cost saving will come really in 2018.

[Kara Anderson:]

Right, so I guess from a year-over-year perspective, how much should we include in ‘18 is savings?

[Rob O'Hare:]

I mean, I think we will be able to get the full $5 million for sure in terms of operating expense savings.

[Kara Anderson:]

Got it. Thank you. That's helpful and then, I guess last one from me on the full year ’18 outlook, what exchange rate are you assuming?

[Rob O'Hare:]

The current guidance assumes $1.23 per euro.

[Kara Anderson:]

Okay, sorry one more from the guide, can you provide any color around the assumptions for subscriber growth or ARPU embedded in that?

[Rob O'Hare:]

I think there will be probably a modest headwind pushing ARPU down slightly just because the full year impact of the Spark brands will be a headwind for the overall ARPU. So I would assume that most of the revenue growth will come from subscribers.

[Kara Anderson:]

Got it, thank you.

[Rob O'Hare:]

Thanks Kara.

[Operator:]

[Operator Instructions] Our next question comes from Steve Cole with Mangrove. Please proceed with your question.

[Steve Cole:]

Good morning guys. It's nice to hear your voice after such a big gap. Thank you very much for the update. I wanted to ask two questions. Could you speak a little bit obviously congratulations on SilverSingles and I guess I'm just curious if you could lay out kind of progression of EliteSingles and what we could expect at a SilverSingles going forward. So obviously you guys are excited thinking this is going to follow us somewhere type maybe, I'm assuming a similar type of growth trajectory, but I'm just curious on the return hurdles and what should we look for look let's say over the next few years because I presume you are making these investments more than just looking at a few months return you're looking out over several years.

[Jeronimo Folgueira:]

Of course, so on the topline we do expect that Silver will become a meaningful part of our revenues, mostly at the end of this year and especially into 2019. It's just the way that we account for revenues in subscription. And what we already said is, we've seen 15% of our registrations coming from SilverSingles in the first quarter of 2018, so that gives you a meaningful hint of the size that SilverSingles is getting relatively quickly and how meaningful this will become especially next year. When we look at the impact on profitability, there I think we have a good example with EliteSingles North America, which you can see the historical numbers on our results that we published. So in 2015 and 2016 when we launched we had a negative EBITDA especially at the beginning, then the first year was negative because we spent marketing upfront building the brand. Then the second year was mostly breakeven and then the third year became a substantial meaningful contribution to our bottom line and we do expect SilverSingles to follow a very similar path.

[Steve Cole:]

That's EliteSingles okay. And one question for Rob, obviously the keying in on the long term and now target on EBITDA 30% to 40%, how do you, obviously the challenge for that target is that new things can come up and change priorities if you get opportunities like we saw here, but what timeframes is the idea to manage the business to a certain level of probability and see some sort of trajectory or how important is kind of hitting, kind of this longer term target and generating cash from the model?

[Rob O'Hare:]

Yes, it's a great question. I think we're fortunate to have some really great growth opportunities that we need to evaluate and then allocate capital against or decide not to allocate capital towards. And so, I think with the new guidance, you'll see that we're going to pretty heavily be within double digits from an EBITDA margin perspective, so I think that's a step in the right direction. And so, to be growing and scaling profitability I think is where we want to be and I think ultimately how quickly we scale profitability beyond 2018 is really going to be a function of growth. And so I think we're committed. We'd love to find ways to grow this business double-digit percentages going forward and so if we have opportunities to do that and we're able to generate marketing returns with those investments then I think you're going to see as do that. But I think given the operating leverage that's inherent in the business, we should be able to keep operating costs low and expand margin slightly. It just won't be quite as rapid if we're growing at healthy rates.

[Steve Cole:]

Okay and last question from me, when you look at, congratulations by the way on JDate and Christian Singles stabilizing those businesses, do you expect to see I guess I'm curious, what has been the bang for the buck on marketing expense? I know you guys mentioned that you've been redeploying some money in that area, are you expecting to accelerate that spending in those two brands as we look out into the balance of ’18 into’19 and what type of progression is realistic for actually growing those brands again as we look in the next few years?

[Jeronimo Folgueira:]

Sure, so basically the way we manage our marketing approach is we want to have healthy marketing returns. So we spend marketing money where we feel strongly that we can get good returns and therefore we invest when we have opportunities to grow profitably. And the way we manage our portfolio is basically we have a portfolio approach where we push our different brands. But we usually deploy capital to the ones that we feel that has the highest returns. So it's not that we will specifically push for example Christian Mingle if we get higher returns on Elite we will probably push that first and then Christian Mingle or the other way around depending on the returns. So what we currently do is invest in the product, try to get the product to perform quite well and then deploy capital in the places where we feel we seen our portfolio that will give us the highest return. So there's no specific plan to push a single brand for particular regions we overall look at the portfolio approach to optimize our returns.

[Steve Cole:]

Very good. Thank you very much guys. I appreciate the responses.

[Jeronimo Folgueira:]

Thanks Steve.

[Operator:]

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

[Rob O'Hare:]

Great, thanks everyone for dialing in. We appreciate it. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.