Spark Networks SE
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Greetings and welcome to the Spark Networks’ First Quarter 2015 Earnings Conference. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Robert O’Hare. Chief Financial Officer for Spark Networks. Thank you, Mr. O'Hare. You may begin.

[Robert O’Hare:]

Thank you for joining us today. I’m Robert O’Hare, Chief Financial Officer for Spark Networks. On today’s call with me is Michael Egan, 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 first quarter 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 severance expense. 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 EBITDA and 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 within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such information is subject to the risks and uncertainties described in the company’s news releases and securities filings. 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. At this time I will turn the call over to Michael.

[Michael Egan:]

Thanks, Rob. First off, I want to thank all of you for joining us today. It is great to be on the call with everyone. Before Rob review the financial performance I wanted to provide an update to the crawl, walk, and run strategy we talked about in our last earnings call. The first quarter of 2015 was all about getting Spark Networks back in shape and starting to walk again. We are making very solid progress on our goals for the year. And I really want to congratulate the team for the efforts they put in while also absorbing a great deal of change. As I discussed in our last call, our top priority was to fill key holes in our marketing organization. I am very excited to announce that we've accomplished that. And I am particularly excited about two key hires that we've made in the last couple of weeks. First and foremost, John Volturo has joined as our new Chief Marketing Officer. John brings an incredible amount of experience and analytical shots to the row [ph] and will play a critical role and us reinvigorating our two key brands, ChristianMingle and JDate. Secondly, Jessica Koterneck [ph] has joined the team as Vice President of lifestyle marketing. Jessica will be responsible for all of our marketing activities associated with our registered members and will be leading us in becoming much more relevant, personalized and ultimately impactful with our customer communications. With these hires together with others we've made in our marketing team, we are now in a much better place to really drive improvement in our customer acquisition, customer development and customer retention activities. Along with these key hires, we've also made progress on our initiative to make our technology stock more nimble. We've made important update to our mobile applications with both JDate and ChristianMingle. And the technology that drives them. And we have also kicked off major efforts to consolidate our platform and re-architect our front end website. Both of these latter two projects are initiatives that will last through the 2015 year. And will enable fundamental improvement in how quickly and efficiently we can launch product improvement. On the marketing front, we've begun to make stride in both creative testing as well as improving our acquisition attribution. Early in the quarter we launched new television creative for ChristianMingle and broadening the brand's message and providing a very new look and feel. This new creative perform well enough to take over ad vacation and we are now in a process of releasing round shoe the new messaging. We've also worked hard with our marketing partners to bring more accuracy to our tech television attribution modeling. There are still works to do here but I am very pleased with the progress. That is starting to enable new levels of decision making around channel and spot mix. Finally, we've kicked off a handful of initiatives in our customer service area that aim to improve our relationships with our customers, their relationships with each other and ultimately their ability to succeed in finding a long-term partner. As you will notice, our efforts and initiatives are quite foundation on nature. They are aimed at giving us the right foundation to first stabilize the decline in our subscriber base, but ultimately we will be able to lean on them to really take the business to new and exciting levels. And looking at the current state of the business that our Q1 performance, we are right where we believe we would be coming into the year. From a subscriber count perspective, we are seeing two slightly different trends across our JDate and ChristianMingle brand. JDate has not experienced a dramatic loss of subscribers that has been afflicting ChristianMingle, but instead has seen a slow, steady decline stretching back almost two years now. The primary reason for this slow decline rest in our outdated and stale user interfaces. We are well aware that the company is not invested enough in keeping JDate relevant and up to date. We recognized the urgency here and our confidence that our technology and product initiatives will help. We understand that the level of efforts is not insignificant though and it will take the couple of quarters before these initiatives show results. So in parallel, we are working on a number of other shorter term initiatives aimed at helping to stabilize the slow decline. ChristianMingle on other hand is a better position. In 2014 with the significant drop in marketing spent, we saw subscriber numbers declined precipitately. In Q1, we've been able to market a profitable level and also stabilized the subscriber base. From the beginning of Q1 to the end, we've essentially remain stable and the number of paying subscribers on the platform. We now anticipate the business to run on a much more traditional, seasonal pattern as we continue to acquire customers at incrementally profitable basis and begin to build improvement in acquisition efficiency and customer lifetime value. We believe we are now operating on a much more stable base and that we expect some seasonal fluctuation in our traditionally lower Q2 and Q3 quarters. We remain confident that we can demonstrate growth coming out of the year. The first quarter has been very exciting for the team here in Spark. We've been able to accelerate the pace of change that started last year. We remain completed focused on our largest priorities and we are making solid progress on some very difficult foundational improvement in the business. We are still walking and expect to continue to walk for the next few quarters, but we are getting healthier and more in shape everyday. I'll now pass it back over to Rob so he can take you through the detailed financial performance of the business.

[Robert O’Hare:]

Thanks, Michael. I'll review our first quarter 2015 performance in more detail and then Michael will conclude with a few closing remarks before we open the call to your questions. As we stated last quarter, our plan for 2015 is to focus on efficient and profitable member acquisition and I am pleased to share results to see that it demonstrate progress against that plan. Revenue in the first quarter of 2015 was $13.5 million, a decrease of 19% compared to the year ago period and a 5% decrease from the prior quarter. The year-over-year decrease was primarily driven by a 25% decrease in average paying subscribers reflecting a 31% and 13% decreases in average paying subscribers for the Christian and Jews network segment respectively. The decline in average paying subscribers were partially offset by a 7% year-over-year increase in ARPU to $19.77 driven by 11% increase Christian network ARPU to $18.01. The highest level since mid 2011. The 5% sequential decrease in revenue was primarily driven by 7% and 5% decreases in average paying subscribers for the Christian and Jews network segments respectively. The sequential decline in average paying subscribers will partially offset by a 2% sequential increase in ARPU driven by a 3% sequential growth in Christian network's ARPU. Direct marketing expenses in the quarter were $6.1 million. A decrease of 47% compared to the year ago period and 18% increase compared to the prior quarter. Christian Networks accounted for the sequential increase reflecting our decision to invest more heavily but still on a profitable basis in Q1 which has traditionally been a seasonally strong quarter for new subscriber acquisition. As a result, contribution in the first quarter was $7.4 million, an increase of 42% compared to the year ago period and a 19% sequential decrease. The year-over-year growth in contribution was driven by our Christian Networks which saw contribution of $2.5 million representing both a $2.8 million increase from the first quarter of last year and also our fourth consecutive quarter of positive Christian Networks contribution. Excluding direct marketing expenses cost and expenses in the fourth quarter were $6.5 million, a decrease of 19% compared to the year ago period. The decrease is the combination of lower sales and marketing expenses and general and administrative expenses primarily reflecting impact of the company's expense reduction program announced in the third quarter of 2014. Net income in the quarter was $723,000 or $0.03 per share compared to a net loss of $2.9 million, or negative $0.12 per share in the year ago period and income of $3.9 million, or $0.16 per share in the prior quarter. Adjusted EBITDA excluding non recurring charges was $1.8 million compared to a loss of $2.1 million in the year ago period and income of $4.1 million excluding nonrecurring charges in the prior quarter. Here are few final metrics detailing our subscriber base at the end of Q1. Total average paying subscribers in the first quarter were 213,445, a decrease of 25% compared to the year ago period and a decrease of 6% from the prior quarter. Christian Networks average paying subscribers were 130,860, a 31% decrease compared to the year ago period and a 7% decrease compared to the prior quarter. Jews Networks' average paying subscribers were 69,632, a 13% decrease compared to the year ago period and a 5% decrease compared to the prior quarter. Turning to the balance sheet. The company had cash and cash equivalent of $13.5 million at quarter end, an increase of 16% from $1l.7 million on December 31, 2014. As of March 31, 2015 the company had no outstanding debt. I'll now hand it back over to Michael for some closing remarks.

[Michael Egan:]

Thanks, Rob. I will conclude by reiterating where we are in our current strategy to rebuild and grow our two core brands, ChristianMingle and JDate. We still believe strongly that both of these brands remain powerful respected platform within their relevant community. After speaking with the number of our customers over the last quarter and continuing to see emails and phone calls coming into us, thanking us for helping them find their long-term companion. It is very clear that we as a company are making transformable changes in people's lives. It is also clear however that our underlying products and in some cases our underlying processes haven't successfully kept up with the time. We know that. But what is encouraging is that we now have the team and capabilities to change that. What is also encouraging and speaking with our customers is that they want us to succeed. They are cheering us on. They recognize the important service we provide their communities and want that to continue. We still have a lot of work to do. We are only walking so far. But we have clear priorities in our product and technology area, in our marketing area and in our customer service area and remain confident that the foundational changes we are making today will enable us to really innovate and grow, run if you will in the near future. Thanks.

[Operator:]

[Operator Instructions] Our first question comes from the line of Ralph Schackart from William Blair. Please proceed with your question.

[Ralph Schackart:]

Good afternoon. Mike, two questions for you. First on Christian. So in a seasonally quarter declines were little bit faster than we are modeling and I know you talked about CMO coming in which is great and sounds like the new TV creative is I guess get attractions as well but just curious sort of what are you seeing that's going to give you the confidence that this brand -- it is going to resonate with the community and you think it would be sort of growth driver for them. Thanks.

[Michael Egan:]

Yes, thanks, Ralph. The major confidence that I have is how we performed within the quarter. And so if we look at the numbers and I think I mentioned in my prepared remarks, if we look at the numbers at the starting of the quarter and end of the quarter, we were essentially flat from a subscriber basis. And that's very encouraging. We've also started to dig in with customer research and understanding how we can start to improve that. And certainly our marketing team is really just on board, coming in April so being able to accomplish that and now have a really strong team on board, I am very, very encouraged.

[Ralph Schackart:]

Great, and then just turning to JDate, you talked about some sort of need a product development that's obviously going to take few quarters to work through. But just curious what you are going to be able to do in the near term stabilizes can be sort of marketing campaign that we should look for, I am just curious on that.

[Michael Egan:]

Yes. So we are experimenting all of over the place to be honest with you. And we are experimenting both across acquisition marketing, we are now with the lifecycle marketing team and we are going to experiment around the lifecycle marketing, we are experimenting around pricing, around promotion, sort of all over those area. The challenge that we have is we know fundamentally that the issues are product. And we know that really until we fix that we are not going to see great gains anything. But we are certainly, we've got long series of experiments to run to try to provide stability before that new product comes out.

[Operator:]

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

[George Askew:]

Thank you. Two quick questions. Do you expect to maintain ARPU growth throughout the balance of the year as you start the transition towards positive subscriber growth towards the end of the year?

[Michael Egan:]

ARPU growth, so thanks George. I think we will probably playing around with that. I think to a degree in Q1 we are probably a little bit conservative historically especially in JDate side for instance, we didn't run as many promos has historically been run for that audience. And I think as part of our experimentation we may see some. Slight degradation in ARPU but it is not going to be significant.

[George Askew:]

Okay. And then company wide, similar trend what we've seen in the last couple of quarters?

[Michael Egan:]

Yes. Yes, I think so. I think also I'll just add that we are also experimenting on the upside. And so we are looking at ways to provide additional services. We are still very early days there but there is opportunity there as well. I don't think you will see any dramatic shifts in ARPU through this year.

[George Askew:]

Okay, thank you for that. And secondly ChristianMingle subscribers, they are obviously down 31% year-over-year, 60,000 people roughly, how has the demographic profile for ChristianMingle changed over that period? [Multiple speakers]

[Michael Egan:]

To be honest not much. The decline is sort of -- you have to remember ChristianMingle, a lot of that is around purely our marketing bringing new customers in the door. And as we've shifted that marketing back it affected all the demographics in our sort of age cohorts, DMA cohorts because we run national TV advertising. And so it's been, it remains fairly consistent to be honest with you.

[George Askew:]

That mean in many ways online dating is a local business. You need critical mass in a given market. Have you seen specific markets, take Atlanta which might be an important market for example? Have you seen the critical mass of women on one hand, men on the other change to affect -- the effectiveness of the network -- in that city or any city?

[Michael Egan:]

It's a great question. And it's actually sort of foundational with the ChristianMingle crowd. When you look at ChristianMingle membership it's really spread across the United States and equal to the population. And to be honest there is --were well actually one of our experiment is how do you really propel growth within micro market because we think there are other -- you are absolutely right, there is a local network affecting. And historically the ChristianMingle marketing has not been geared towards that. And some of the things that we are looking to do are to get more micro targeted with our geographic marketing. But to date we are not seeing, again because our marketing spend was nationwide and we cut it at a nationwide level. There is nothing that props up that says, oh, this particular market suffered as a result.

[Operator:]

[Operator Instructions] There are no further questions in a queue. I'd like to hand the call back to management for closing comments.

[Michael Egan:]

Thanks, everyone. We appreciate you dialing in. I'll see you next quarter.

[Operator:]

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