Spark Networks SE
Q3 2016 Earnings Call Transcript

Published: 11 Nov 2016

[Operator:]

Greetings, and welcome to the Spark Networks' Third Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode and 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, Mr. Robert O'Hare, Chief Financial Officer of Spark Networks. Thank you, Robert. Please go ahead.

[Robert O'Hare:]

Thank you for joining us today. I’m Rob O'Hare, Chief Financial Officer for Spark Networks. On today's call with me is Danny Rosenthal, Chief Executive Officer for Spark Networks. Before we begin, there are a few items I need to cover with you. Today, we issued a press release announcing our third quarter 2016 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 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 one-time executive severance, financing 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. Further, 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 Thursday, November 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 Q3 2016 financial results. Starting with revenue, we finished the quarter with total revenue of $8.4 million, a decrease of 28% compared to the year-ago period and an 8% decrease compared to the prior quarter. Contribution in the third quarter was $7.2 million, a decrease of 1% compared to the year-ago period and a 6% decrease compared to the prior quarter. The relative stability in contribution in comparison to the larger declines in revenue was driven by our decision to significantly reduce our direct marketing efforts in Q3. In the quarter, total direct marketing expenses decreased 72% to $1.2 million as compared to $4.4 million in Q3 of the prior year period. We expect comparable year-over-year declines in direct marketing expenses in the fourth quarter of 2016 as we develop, implement and refine our direct marketing strategy. Net Loss was negative $94,000, a $728,000 improvement versus the year ago period and a $423,000 decrease 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 year-to-date period. Adjusted EBITDA excluding non-recurring charges was $1.5 million in the quarter. Adjusted EBITDA excluding the operating impact of Smooch Labs was $1.7 million in the quarter compared to $309,000 in the year ago period. Current period adjusted EBITDA excludes $803,000 of severance cost related to changes in the executive team and legal cost stemming from the financings completed in Q3. Turning to the balance sheet, Spark ended the quarter with $11.3 million of cash and cash equivalents compared to $3.1 million at the end of the prior quarter. I will now turn the call over to Spark’s Chief Executive Officer, Danny Rosenthal.

[Danny Rosenthal:]

Thanks, Rob. Good afternoon everyone and thank you for joining our call today. The Company has undergone a great deal of change in the last three months with new leadership and priorities across our Product, Technology and Marketing teams. On today’s call, I would like to outline our approach to improving the company and maximizing Spark’s potential. One quarter into my tenure at Spark, I wanted to share initial observations and our approach. We have a better understanding of structural problems the business has faced. These have been driven by problems with technology and product that have prevented investment in modernizing our brands. Some of these challenges have been overcome in the short-term through marketing spend, but that is not a sustainable approach that will enable the company to thrive and grow. Our strategy to improve operations and maximize long-term potential is founded in fixing these core issues and doing fewer things in a better way. More specifically, we have made the decision to narrow our focus on holistically improving our core JDate and Christian Mingle offerings, part of narrowing our focus means saying no to non-core initiatives. Accordingly, we have paused work in areas that do not support this objective. For example, we are not currently prioritizing some of the previously announced growth initiatives mainly the Christian Mingle Church Partnership Program, the expansion of Christian Mingle into Latin America and the CrossPaths mobile application. While our focus is narrow, our improvement efforts will not be limited to direct marketing or product improvements, but rather the desire to grow our business through communications and interactions that are built upon a deep understanding of customer needs and to support this growth with a highly-scalable technology platform. As you can see from our Q3 results, we have continued to significantly reduce paid marketing efforts. The biggest reductions resulted from our decision to completely exit television advertising in the later half of Q3. These reductions have helped us identify inefficient marketing channels, and will give us a baseline against, which to measure as we ramp our paid marketing efforts in November and continuing through Valentine's Day. Spark's strong and iconic brands have been hampered by a technology platform that is, at its core, over 15 years old. The Technology and Product teams are now aligned around the development of a single new, scalable, shared platform to support our customer-facing sites and applications. It is important to note, that this platform will also serve as the foundation for new internal systems and tools that will drive much-needed efficiencies within our Customer Service and Marketing teams. Driving efficiency and empowering data driven decision making will be core to our success. I am firm believer that positive outcomes are a result of doing many small things well. So improving our operational efficiency will be as important to our future as any customer facing improvements. We expect our development and product work to result in the launch of new versions of JDate and Christian Mingle in Q2 and Q4 of 2017, respectively. We will also work to migrate our other existing brands onto this shared platform by the end of the first quarter of 2018. Once complete, this transition will allow us to further rationalize our broader cost structure while also improving our ability to test and optimize new product features and marketing strategies. While the last quarter has allowed us to identify and prioritize areas for improvement, the real work is still ahead of us. We are confident that we possess the resources, team, and capital to complete the ambitious plans we have for the next five quarters and position Spark for future growth. We are excited to complete the work necessary to effect positive change at Spark, and we look forward to sharing our progress with our customers and shareholders over the upcoming months. Thank you. And we will now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Kara Anderson with B. Riley and Company. Please go ahead.

[Kara Anderson:]

Hi, good afternoon. You state that you expect to see a similar year-over-year decline in direct marketing spend in Q4. Would you expect that to translate into a similar subscriber decline as well?

[Robert O'Hare:]

Hi, Kara. It’s Rob. We’ve intentionally stop sort of providing guidance, but I think in terms of the trajectory of the business, I think you’re thinking about it the right way. We’re really not focused on managing kind of – to a quarter end subscriber number. We’re focused on fixing the business and we have a lot of work in process there, but I think that the trend that you’re seeing with the pullback in spend are probably a good guess.

[Kara Anderson:]

Okay. And then how should we think about the outline development in product work in terms of impacting your profitability over the next five quarters or so?

[Robert O'Hare:]

I will give my view and then may be Danny can add some color. I mean I think from a spend perspective, starting with the product and technology side, I don’t see any kind of large discrete additions. I think it’s really about prioritizing the work and using the staff that we have here today to kind of go execute against the plan. So it’s not something while there are some roles we probably want to hire for over the next 12 months. It’s not going to be kind of a step function increased in our cost structure. On the marketing side, I think again, we’re heads down and we’re doing a lot of work there and the research that we’re doing today will inform how we spend. And again I think we would love to find a way to invest in the business broadly. I don’t think the contribution margins that we posted for the last two quarters in the mid 80s. I don’t think those are sustainable long-term for us to be a growth business. So, again, a lot of this is around unlocking new channel and coming up with a strategy that we think is really scalable in the marketing side.

[Kara Anderson:]

Okay. And then since you purchased Smooch Labs or JSwipe for $7 million a year ago, I think it was – how does that factor into your core focus, if you could just update us on that and then also maybe provide some contribution metrics to the quarter.

[Robert O'Hare:]

Sure, in terms of Smooch, yeah, they continued to execute against their own roadmap. And so, they're very much a part of our product portfolio. Today, I think the team is just a little bit unique in that. They are somewhat self-contained at this point. So no, no real change there in terms of their importance to our overall product portfolio and especially how we address the Jewish community. Can you remind me the second part of your question?

[Kara Anderson:]

I was just wondering if you could provide any contribution metrics in terms of monetization or subscribers or downloads, anything you can give us.

[Robert O'Hare:]

For JSwipe specifically.

[Kara Anderson:]

Yes, JSwipe.

[Robert O'Hare:]

Yes. So I think what we said publicly was that they're about 4% of the overall Jewish subscriber base. So that gives you a sense for kind of the number of users that they're monetizing. We continue to see kind of good growth in terms of total downloads. They're quickly approaching kind of the million download figure cumulatively, so again still seeing really good progress there. And I think we’ve given some numbers around ARPU. The ARPU is in the neighborhood of the other sites that we have within The Jewish Networks. So, again, I think everything we're seeing. We're really happy with their progress in terms of the both the proportion of their users that they're monetizing, but also their contribution to our overall business.

[Kara Anderson:]

Okay, great. Thank you.

[Robert O'Hare:]

Thanks

[Operator:]

[Operator Instructions] Our next question comes from the line of Mr. Patrick Retzer with Retzer Capital. Please go ahead, sir.

[Patrick Retzer:]

Hi, guys. Do you have any idea of when we might see a pick-up in revenue for a change. I mean you look at your own chart, revenues fall in every quarter, paid subscribers decline every quarter. So now we’re reducing marketing spend, somehow we want to grow the customer base despite that we're also pausing the Church program, which about a year and nine months ago was the whole plan to save the company. I mean where are we going here specifically?

[Danny Rosenthal:]

Hi, Patrick. This is Danny. We have – kind of as we state like we need to do fewer things better there where the new management came in, there were a lot of initiatives going on. They were narrow and broad. And we don't believe that there was traction or near-term traction in most of that. And meanwhile the core fundamental businesses are not operating on all cylinders maybe to put it nicely. So until we can get our core brands operating well like we don't want to get distracted from kind of the assets we have. So I think you're going to see us focus on those core brands. We talked about a couple milestones to but they aren’t really – they put us in a place where we believe we can scale this business, but there's a bunch to be undone and there's a bunch of work to be done and until that work it starts getting traction. I don't think you'll see us spoke like our goal is to get to that place where we can build the company.

[Patrick Retzer:]

So when do you anticipate that will be done? I mean revenues falling 8% a quarter. We can do the arithmetic and see how close or how soon we get to zero.

[Robert O'Hare:]

This is Rob. I think to be fair while revenue had declined and it's not an outcome that anyone here is happy with. I think we have seen a bit more stability at the contribution line and ultimately that's what we used to kind of fund the operations. So I think sitting here with over $11 million of capital and a new team in place. I think we're taking 2017 as an investment year to any point and set the business up for success. And so, I think we have ample capital to execute on that strategy. And again, I think, we have some stability at the contribution line that we can manage to.

[Danny Rosenthal:]

And to be clear what the company was doing wasn't working, right. So we can’t just keep doing more of that. This decline is not new. It's not something that like just started. This is kind of an ongoing decline. So in order to fix problems that are fairly coir to the business have to rethink. And so that's really what we're doing is the band-aids haven’t worked, the inefficient marketing spend hasn't worked. So we need a new plan and our plan is to kind of focus on the core assets, build out the platform that allows us to kind of run a modern digital online business. And at that point kind of towards the end of the next year is when we're really going to start focusing on kind of the forward-looking growth plan.

[Patrick Retzer:]

So you think it will be until the end of next year before you get to that point?

[Robert O'Hare:]

Again, I don't think we're in a position to commit to kind of 2017 or 2018 guidance at this point.

[Patrick Retzer:]

Well I'm not talking about guidance. You're talking about making the sites run the way they should. I mean this is nuts and bolts operational stuff, right. How long do you think it will take you to do that?

[Robert O'Hare:]

So we did mention that the JDate platform will re-lease in the second quarter. And the Christian Mingle platform, we will release in the fourth quarter. So those are the expectations that we're setting that's what we're marching to. This is not just tweaking something, right. We are starting over and kind of building a coherent business here.

[Patrick Retzer:]

So we should look for four to six more quarters of declining revenue and maybe a declining marketing expenses, so that contribution doesn't shrink too far, but revenue and users continue to. And that's what you guys see as the solution?

[Robert O'Hare:]

Yeah, again, I think we're heads down and focused on doing the work that needs to be done to set up that for growth and we're not necessarily solving for growth or short-term answers in 2017. I think the only one that I would give on the scenario you outlined is that we do view Q1 as really important to our general strategy. So you may see increases in direct marketing spend in Q1 as we capitalize on what’s historically been a busy season for the dating industry generally.

[Danny Rosenthal:]

And to be clear like we – the marketing spend coming in the door was fairly inefficient. So we feel like we have a baseline. We have brought, it’s been way down. We've cut the TV as we stated. But we don't intend to leave it at zero. As Rob said, we have expectations of ramping our marketing spend into the first quarter, but until we have kind of a platform and data that informs our spend, so that we can be smart and efficient in a world that’s smart and efficient like we aren’t going to try to solve the problem by throwing dollars at it.

[Patrick Retzer:]

Okay. It's just hard to understand why this is so difficult. I mean Match continues to grow very nicely, MeetMe continues to grow extremely well and somehow we're at the only online dating firm that’s still struggling to figure out how to run the business. So good luck with that.

[Robert O'Hare:]

Thank you.

[Danny Rosenthal:]

Thank you.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I'll turn the call back over to management for any closing remarks.

[Robert O'Hare:]

Okay, thanks everyone for dialing-in. We'll talk to you next quarter.

[Operator:]

Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.