Spark Networks SE
Q2 2016 Earnings Call Transcript

Published: 10 Aug 2016

[Operator:]

Greetings, and welcome to the Spark Networks' Second Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Robert O'Hare, Chief Financial Officer for Spark Networks. Thank you. Mr. O'Hare, you may begin.

[Robert W. O'Hare:]

Thanks for joining us today. I’m Rob O'Hare, Chief Financial Officer for Spark Networks. On today's call with me is John Lewis, Spark’s Board member and Managing Partner of Osmium Partners. Before we begin, there are a few items I need to cover with you. Today, we issued a press release announcing our second quarter 2016 financial results. It is available on our company's Web site at www.spark.net in both the Investor Relations and Media Center sections. In the press release and in our prepared remarks on this call, we refer to adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation, asset impairments, non-cash currency translation adjustments for inter-company loans and executive severance, restructuring, and acquisition-related expenses. Although adjusted EBITDA is a non-GAAP 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 GAAP. In addition, because adjusted EBITDA is not calculated in accordance with GAAP, 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 Securities and Exchange Commission. Forward-looking statements are based on the company's beliefs as of today Wednesday, August 10, 2016. The company undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as is required by law, even if new information becomes available or other events occur in the future. The information on this call shall not constitute an offer to sell or the solicitation of an offer to buy our securities. This call is being recorded. I will now move to a review of our Q2 2016 financial results. Starting with revenue, we finished the second quarter with total revenue of $9.1 million, a decrease of 26% compared to the year-ago period and an 8% sequential decline. Contribution in the second quarter was $7.6 million, an increase of 10% compared to the year-ago period and a 58% increase compared to the prior quarter. These increases were driven by our decision to reduce paid marketing efforts. Net income was $329,000, an increase of $424,000 versus the year-ago period and a $3.7 million increase from the prior quarter. During Q2, 2016, the company released a prior period tax reserve after agreeing to settlement terms in a state tax matter, resulting in $719,000 of non-cash tax benefit in the period. Adjusted EBITDA, excluding non-recurring charges, was $1.4 million in the quarter. Adjusted EBITDA, excluding the operating impact of Smooch Labs was $1.7 million compared to $621,000 in the year-ago period. Current period adjusted EBITDA excludes $367,000 of severance costs related to the workforce reduction that occurred mid-Q2. Turning to the balance sheet, Spark ended the second quarter with $3.1 million of cash and cash equivalents compared to $4.1 million at the end of the prior quarter. Finally, the company yesterday issued and sold to PEAK6 Investments 5 million shares of common stock at $1.55 per share resulting in $7.8 million of cash proceeds. Additional terms of our agreement with PEAK6 are outlined in the press release and 8-K filed today and also within our most recent 10-Q filing. I’ll now turn the call over to Spark Board member, John Lewis.

[John H. Lewis:]

Thanks, Rob, and good afternoon. My name is John Lewis. I’m a Director at Spark Networks and also Managing Investment Partnership called Osmium Partners. As you may recall, Osmium led a proxy contest two years ago and won approximately 89% of shareholder support to right-size the business in several key areas. Let me start by emphasizing three points. First, the company has considerably improved the ChristianMingle brand after detailed research on how to best serve the Christian community’s needs. The successful brand re-launch over a year ago has resulted in a much greater appeal of the ChristianMingle brand in the Christian community. In fact, over the last several months, some of the largest mega-churches in the U.S. are eagerly endorsing the ChristianMingle brand for their congregants and our new church platform channel. In addition, nearly 70% of ChristianMingle subscribers come organically from recommendations from friends and family. Second, returns on direct marketing spend have substantially improved. For example, in the second quarter of 2014, direct marketing spend on ChristianMingle was 7 million to generate 9.2 million in revenue or a ratio of every dollar spent on direct marketing returned only a $1.30. As of the second quarter of 2016, this ratio has improved by approximately 285% where in the second quarter of '16, every dollar in direct marketing spent has resulted in nearly $5 in revenue in the Christian network segment. With the power of two strong brands in the second quarter of '16, Spark achieved $6 in revenue for every dollar in direct marketing spent. In short, we believe this success can be attributed to leveraging the significant market share in the niche communities we serve that result in successful matches and marriages and in turn drive very high word-of-mouth referrals to both the Jewish and Christian brands. Third, we’re pleased with the ongoing development of our mobile brands which include CrossPaths, JSwipe, and several other mobile applications. Just over the last few months, JSwipe began selling paid subscriptions and in short order now represent 3% of total Jewish network’s paid subscriber base with corresponding ARPU that is slightly above the company average at approximately $19 a month. These results speak to the power and the potential of the brands inside of Spark Networks. But the company has a lot more to do to even begin to reach its potential. Today, we took another aggressive step that we believe will drive shareholder value through a substantially stronger balance sheet, a new leadership team that has worked together for years and have solved complex problems with the right mix of entrepreneurialism, total focus on few but needle moving initiatives and a deep bench of resources to draw on from the PEAK6 organization. The Board believes with a new executive team in place and a stronger balance sheet, the company is well positioned for the future.

[Operator:]

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Kara Anderson from B. Riley & Company. Please proceed with your question.

[Kara Anderson:]

Hi. Good afternoon. I’m wondering if you could go over the history of PEAK6 and Spark and how long they’ve known Spark Networks and sort of the nature of that relationship there heading into this new deal.

[John H. Lewis:]

Hi. This is John Lewis. I’d leave that to PEAK6. I believe that from memory that they followed the company out of the corner of the eye, but we went to them probably six or eight weeks ago first to look at an opportunity to potentially strengthen our balance sheet. And as they dug into the opportunity, they brought an outstanding mix of the skill sets that we needed to transform the company from technology, marketing, leadership, and a strong view point as a one-stop-shop with capital, leadership, and strategy. And as time went on, we found the opportunity frankly to be a no-brainer in our opinion. So, that’s the short answer of why we partnered with PEAK6.

[Operator:]

Our next question comes from the line of George Askew from Stifel. Please proceed with your question.

[George Askew:]

Yes. Good afternoon. Thanks for taking my questions. You indicate in the release the potential to expand the company’s brands to much larger audiences. Can you kind of give us a sense of your vision of what that audience is like and how much greater it could be?

[Robert W. O'Hare:]

Hi, George. This is Rob.

[John H. Lewis:]

You want to take that one, Rob, or I’ll take it?

[Robert W. O'Hare:]

Yes. So I think initially we’re going to stick to our knitting. I think PEAK6 was attracted to the two strong franchises we have in JDate and ChristianMingle and I think they see opportunities for improvement there. So I think we’ll focus there initially and if there’s other brands that have similar dynamic, I think we’ll explore those too; but obviously very early into the relationship.

[George Askew:]

Right. So if you got by far a dominant share of the Jewish online dating market, I mean – when I read that I thought perhaps you had a strategy of expanding that and going perhaps internationally or something in that nature. Is there anything you can share with us there? It sounds like it’s still in the early stages?

[Robert W. O'Hare:]

Well, I – go ahead, John.

[John H. Lewis:]

One thing; since – I don’t know the exact year if it’s 2010, but basically $185 million in direct marketing has been invested into ChristianMingle and there’s been an enormous amount of profiles that have been filled out. And when you look at the paid subscriber base today and you look at the engagement from the newly launched church channel, we think that there’s a very large Christian market that would like to engage with the newly re-launched ChristianMingle brand. And we think that there’s a lot of opportunity to move that. And to answer your question, yes, we’re looking at ChristianMingle Spanish I think was recently launched and we’re also looking at other international opportunities. And I think the new management team will be in a much better position to get into a more detailed answer in November.

[George Askew:]

Okay, that’s fair. Thank you. With the agreement you guys actually obviously have additional resources in the form of both talent and treasure and it appears you’re focused on growth. And you also talk about a deeper focus on customer experience in technology in the release. What kind of investments should we expect there? Are there marketing investments that need to happen? With technology, we know the company has done things already although certainly there are new technologies around mobile that perhaps you could pursue. But just a little detail around that would be great.

[Robert W. O'Hare:]

Yes, the new team is going to be tasked with kind of evaluating everything we’re doing and I think we’re going to take a fresh eye to all areas of the business. And so I think we’ve got talent across technology and marketing joining the company and we may look to invest more deeply after the team’s concluded their review.

[George Askew:]

Okay, super. And then just lastly, what key metrics should we focus on going forward? Is it growth, is it contribution margin, et cetera?

[Robert W. O'Hare:]

Yes, I think it’s going to be a balance of making sure that we grow profitably, right. I think that’s why we’re all here. Growing the top line I think is integral to the leverage that’s inherent in our model and I think that will really allow us to expand EBITDA margins and cash flow. So, yes, I think it’s going to be a mix of profitable growth. We want to continue to maintain healthy contribution margins but we also need to grow the top line.

[George Askew:]

Okay. Thank you.

[Robert W. O'Hare:]

Thanks, George.

[Operator:]

Our next question comes from the line of Patrick Retzer from Retzer Capital. Please proceed with your question.

[Patrick Retzer:]

Hi, guys. I just wanted to congratulate you on continuing the strive to look for a solution. Obviously, it’s been kind of a long, tough road but you certainly can’t be faulted for continuously trying to fix things and preserving cash and in this quarter even generating positive EBITDA and positive net income. But more importantly I’ve got a little bit of knowledge of PEAK6 and it looks like they’ve been wildly successful in just about everything they do. So I think your teaming and selection of a strong partner is to be commended, so thanks for that and good luck with it.

[Robert W. O'Hare:]

Thanks, Patrick.

[John H. Lewis:]

Thanks, Pat.

[Operator:]

[Operator Instructions]. Gentlemen, it appears there are no other questions in the queue. I’d like to hand it back to management – no, we did just get another question. Our next question comes from the line of Zac Puget from SMI Group [ph]. Please proceed with your question.

[Unidentified Analyst:]

Yes, thanks for taking my question. Just curious, have you quantified the transition costs and I guess the old management team leaving and now there are agreements in place to protect intellectual property or non-competes, that kind of stuff?

[Robert W. O'Hare:]

Yes, we enter into pretty standard I would say employment agreements with executives. Our preliminary estimate is that it will be about $450,000 of kind of cash severance costs for the three departing execs, and we’ve made a similar disclosure in the 10-Q.

[Unidentified Analyst:]

Okay, perfect. Thank you.

[Robert W. O'Hare:]

Which will come out later today.

[Unidentified Analyst:]

Great. Thanks.

[Operator:]

Gentlemen, there are no further questions in the queue. I’d like to hand it back over to you for closing comments.

[Robert W. O'Hare:]

Great. Thanks everyone for joining. We look forward to sharing more in November.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.