Spark Networks SE
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Welcome to the Spark Networks’ Second Quarter 2015 Earnings Conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Robert O’Hare, CFO of Spark Networks. 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 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 second 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 or projections regarding future results of 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 statement 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 5, 2015. The company undertakes no obligation or responsibilities to public update any forward-looking statements for any reason except as is required by law 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 review of our financial results from Q2. Q2 revenue was $12.3 million, a decrease of 22% compared to the year ago period and 9% sequential decline. These declines were primarily driven by lower subscription revenue from our Christian and Jewish Network segments and $194,000 of Christian Networks invoice advertising revenue related to a single customer Beanstock Media, which was deemed unlikely to be collected. This amount is not under dispute and the company intends to continue to pursue collection. In addition to the $194,000 of invoice but unrecognized Beanstock revenue, we also took a reserve against approximately $94,000 of Beanstock revenue that was previously recognized in Q1. This reserve is recognized in the general and administrative expense line of our income statement. Christian Networks revenue was $6.9 million, down approximately 25% year-over-year reflecting a 30% decrease in average paying subscribers offset by a 12% increase in our ARPU. The year-over-year decline in the average paying subscriber base is a result of the reduction and reallocation of our direct marketing investments. Average paying subscribers were down 4% from Q1 driven by seasonality and a sequential reduction in direct marketing expense. To note, this is the lowest decline in Christian Networks paying subscribers since making significant adjustments to our acquisition strategy in early 2014. Jewish Networks revenue was $4.8 million, a decrease of 18% year-over-year. The decline in revenue was primarily driven by a 17% decrease in average paying subscribers over the prior year period. Average paying subscribers were down 6.5% from Q1. We attribute these subscriber declines to the current state of our products and our continuing to execute against our longer-term redesign plans while also launching new mobile offerings in the US and Israel. We continue to expect sequential subscriber growth in the fourth quarter of this year driven by the launch of the redesigned site and the continued traction and efficiency of our marketing efforts. Contribution in the second quarter was $6.9 million, a decrease of 12% compared to the year ago period and a 7% decrease compared to the prior quarter. Jewish Networks was the primary driver of the declines in total company contribution. Jewish Networks contribution was $4.1 million a 21% decrease year-over-year and 10% decrease compared to the prior quarter. The declines in contribution is largely a result of the decline in Jewish networks revenue coupled with slight increases in direct marketing campaigns focused on testing specific local market acquisition programs. Christian Networks contribution was $2.5 million, a 16% increase year-over-year and 1% increase compared to the prior quarter. The year-over-year growth in contribution is the result of the reduction and reallocation of our direct marketing investments. Sequentially, contribution improved as we reduced direct marketing investments from our seasonal highs in Q1. Christian Network’s contribution was positive for the fifth consecutive quarter, despite the $194,000 of lost advertising revenue. Excluding direct marketing expenses, cost and expenses in the quarter were $7.1 million, a decrease of 20% compared to the year ago period and a 9% increase from Q1. The year-over-year decrease is the result of lower sales and marketing expenses and general and administrative expenses, primarily reflecting the company’s expense reduction program announced in the third quarter of 2014. The sequential increase was driven by personnel additions on our marketing and technology teams, the aforementioned $94,000 related to being stocked and increased legal expenses of approximately $300,000 related to litigation, protecting the company’s intellectual properties. We expect to maintain this level of legal spending as we continue to pursue our claims. Net loss in the quarter was $95,000, or $0.00 per share, compared to a net loss of $1.1 million or negative $0.05 per share in the year ago period and income of $723,000 or $0.03 per share in the prior quarter. Adjusted EBITDA excluding non-recurring charges, was $621,000 compared to income of $1.1 million in the year ago period and net income of $1.8 million in the prior quarter. Turning to the balance sheet, the company had cash and cash equivalents of $14.6 million at quarter end, an increase of 8% from $13.5 million on March 31st, 2015. As of June 30, 2015, the company had no outstanding debt. The company resumed share purchases in the quarter, with repurchases totaling 288,284 shares at an average purchase price of $3.07. In closing, Spark is currently investing heavily in new product innovation, new team members, updating our technology platform, testing various new marketing channels and strategies and defending our brands and intellectual property, all with the end goal of returning to revenue and subscriber growth. We have a highly scalable business and we expect future revenue growth to drive significant operating leverage. We remain focused on achieving the long term adjusted EBITDA margin target of 20% to 35% that we highlighted in our June 2015 Investor Day presentation. I’ll now turn the call over to Michael Egan to provide some commentary on our results and turnaround progress.

[Michael Egan:]

Thanks, Rob and thanks all of you for joining us today. First off, I wanted to thank the team for a very solid Q2 effort. We are right on pace with our crawl, walk, run strategy to turn Spark Networks around and reenergize and grow our two core brands. Although the second quarter is typically the slowest of the year, I’d like to discuss the progress we’ve made to date and importantly some of the results of our work that began to materialize late in the quarter. This tangible progress validates to me that we are absolutely on the right path as we continue to transform this company. Our effort to revitalize both the JDate and ChristianMingle brands with new front end technology as well as a new user experience is progressing very well and we have hit every one of the intermediary milestones and goals we’ve set. This represents a major improvement to the foundations of our product and is a very complex project. We’ve recently completed the design phase and believe that both sites will be seen as innovative for the online dating space and more importantly really help our users succeed. We remain very much on pace to deliver these to our customers in the fourth quarter of this year. While this has been going on, we’ve also been able to deliver a number of additional product improvements. First, we continue to improve our core mobile applications across both brands and it’s exciting to see that over a third of our new customers in the second quarter came through these channels. Recently, we were able to upgrade our subscription engine to provide the full range of single and multi month packages to our JDate customers, subscribing on our mobile applications, whereas up to this point, we were only offering single month subscriptions. Additionally, we launched a Hebrew version of our JDate iOS application for the Israeli market. And we also upgraded and consolidated our communications platform used by all of our front end technologies and upon doing this, we’ve essentially doubled our customers’ interactions. Finally, we will be launching our JDate mobile application on the Android platform next week, which will significantly improve the user experience for that segment of our JDate customer base. Outside of mobile, we’ve also made significant upgrades to our fraud detection and protection technology. Unfortunately, the dating world does have unscrupulous individuals, sometimes trying to take advantage of people. With our new technology in place together with our expert fraud detection team, we now believe we are best in class in this area and will continue to do everything in our power to provide our customers with a safe environment. Along with our technology and product initiatives, we now have a full marketing team in place and they’ve hit the ground running and are demonstrating meaningful improvements to how we acquire, retain and win back our customers. On the ChristianMingle acquisition front, we’ve begun to test new buying strategies with our television spend as well as new online acquisition channels and though, it is still early days, we have already been able to improve our subscriber acquisition costs by about 10% in July over last quarter. Most encouraging on the acquisition front however is the early traction we started to see with our business development and community relations teams and their ability to formulate the relationships with leaders in both the Jewish and Christian communities. On the Jewish side, not only did we launch our RamahDate product which is a co-branded experience with Ramah, a leading Jewish summer camp organization but we’ve also started discussions with a number of similar organizations who share our interest in growing the Jewish community through marriage. As JDate is responsible for more Jewish marriages than all other online dating sites combined, we have a lot to offer the community, and it’s exciting to see key organizations get behind our mission. With respect to the Christian community, I previously mentioned our goal to revitalize the brand by becoming more relevant and authentic to Christians across the country and to work directly with local organizations in doing so. To help us with this, we’ve reached out to a wide spectrum of leaders in the community and have asked their advice and help. The response has been overwhelmingly supportive. A few years ago, online dating was not really part of the vocabulary of many of the leaders of the largest churches but that has changed and a number have reached out to us to help their congregations find success through this medium. As an example, we will be sponsoring a panel later this month of T.D. Jakes MegaFest in Texas, one of the largest Christian events in the country attended by over 75,000 people, where we will be supporting their singles ministry and helping people learn how to navigate online dating. As we aim to truly impact the communities we serve and build grassroots acquisition channels, I’m encouraged by the range and depth of conversations we’re having. In addition to all the positive momentum we’re seeing on the acquisition front, our lifecycle marketing programs have also started to hit their stride. We’ve begun to integrate a new marketing platform that will significantly improve our ability to segment and message our customers throughout their journey with us with relevant and personalized communications. In advance of this, we’ve placed large emphasis on our winback programs for both brands and we’re seeing winback rates for recent cohorts improve 10% and 20% for JDate and ChristianMingle respectively versus last year. This effort is really just a start of improving our lifecycle program which we believe will be world-class by the end of the year and generate significant benefits for us as a result. We knew coming into this crawl, walk, run strategy that we would have to execute on a number of different fronts all at once. When we set out to transform this organization, we did not expect to see the fruits of our labor until the end of the year. However, I’m pleased to report that by the end of the second quarter and particularly in the first month of this quarter, July, we’re seeing solid improvement in many of our underlying metrics. July was really an outstanding month for us, particularly on the JDate front, our JDate registrations were the highest they’ve been since early 2014 and we achieved monthly subscriber growth for the first time in over a year. Similarly on ChristianMingle, we’ve seen a step function improvement in our subscriber acquisition costs in our largest marketing channels and our subscriber base remained flat relative to June. While there is a lot of work left to do, we continue to see numerous opportunities for greater improvement in the business. The teams we’ve put in place across the organizations are working well together and it’s exciting to see the energy and motivation being brought to bear on the many projects we are tackling as we drive to return to subscriber growth in Q4. That’s it for our prepared remarks. We have time for a couple of questions and so I’ll ask the operator to open up the line now. Thanks.

[Operator:]

Thank you. And we’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Kara Anderson with B. Riley & Co. Please go ahead.

[Kara Anderson:]

Hi guys, thanks for taking my question. I guess, I just wanted to ask about the lawsuit with Jswipe, I guess if you knew that was -- it really picked up on this and I’m wondering if you’ve seen any impact on JDate or its reputation in the Jewish community as the result of the litigation?

[Michael Egan:]

Thanks Kara, this is Michael. To be honest it’s been going on for a while now, the litigation has been going for -- since back in November, I know that media has picked up recently on this case, and though I can’t correlate it, we had our best month in a long, long time in July and so, I don’t think in the short-term here it’s having any affect at all on us. We are very, very cognizant that the JDate brand, the trademark associated with JDate and the technology that we invented is important to us and it’s an important aspect that we feel that we really need to protect. So we’re going to still be aggressive on protecting that intellectual property.

[Kara Anderson:]

And then, last quarter, you talked about doing some short-term initiatives at JDate to sort of stabilize the decline and I see that July was an outstanding month for JDate. Just wondering if that is a result of shorter term initiatives or other things in play there?

[Michael Egan:]

Yeah. So, we -- with a new marketing team in place, we’ve been able to really ramp up our experimentation and in Q2, we did a number of different experiments. Some of them worked and some of them did not. But as we learned through those experiments, we were able to actually implement a number and sort of scale out a number of them in July, which was really what helped to a large extent us to hit some really solid numbers in July.

[Kara Anderson:]

And then, are you guys able to quantify on how much of the subscriber declines from Q1 is due to seasonality?

[Michael Egan:]

It’s tough, it’s tough, because the Company over the last number of years was either growing through seasonality as a result of their marketing spend or as we pulled back declining through seasonality. It’s really hard to parse that out. We know that Q2 is the low watermark for the year for us, but it’s almost -- we have not parsed out how much is seasonality and how much is other things.

[Kara Anderson:]

Great. That’s it from me. Thank you.

[Operator:]

The next question is from George Askew with Stifel. Please go ahead.

[George Askew:]

Yes, thanks for taking the questions. On your advertising loss, exactly what part of your business is that in? I mean, obviously it was ChristianMingle segment, but -- and there is a change in sort of how you think about advertising as a business for the Company?

[Robert O’Hare:]

Hi, George, thanks for the questions. This is Rob. So, the part of the business that it’s in is really related to our -- we have three media sites, DailyBibleVerse, Believe.com and Faith.com and so, we were using Beanstock to fill some of the remnant inventory we had on those sites and for those on the call not familiar with remnant inventory, we do have a small team focused on selling that inventory directly through relationships with direct advertisers and then any inventory that isn’t filled through those relationships, we give up to Beanstock, which was acting as an ad network. In terms of how -- it’s not a -- it’s not really a focus for us today. Advertising in total is less than 5% of our total revenue. So, it’s not a huge focus for us. I don’t think there is any -- there is no long-term or strategic changes that we’re making as a result of the delinquent customer. We continue to expect to fill that inventory through a different ad partner going forward.

[Michael Egan:]

Yeah. I would just jump in and add just to be -- make sure we clarify that we’ve replaced Beanstock now, obviously, with another partner. So, you’re not going to see that big of a dropdown in revenue on our advertising line as a result.

[George Askew:]

Got it. Okay, good. Thank you. And then on the -- your defensive intellectual property lawsuits, are there other targets or maybe the better word is violators that you’re pursuing? I mean, your technology is -- the patents as described appear to be quite broad and would affect the lot of other players. Are you -- is it just one lawsuit or are there more than one or are they domestic or international?

[Michael Egan:]

No. We only have one at the moment. Other major dating companies have already licensed this technology and our patent from us, including IC [ph], which is the owner of tender and so, we’re comfortable and we’re going to go after when we feel it’s necessary to protect our intellectual property.

[George Askew:]

Okay. And then the last one. How do you think about market density for ChristianMingle? I mean as you -- as your subscriber base is changing and obviously shrinking for now at least, have you been able to sort of support market density in certain markets and see a greater level of attrition in less dense markets? I mean, obviously, at the end of the day, you want the singles in one place if at all possible.

[Michael Egan:]

Yeah, yeah, it’s a great question. So, when we look at our network effects across both JDate and ChristianMingle and as you know in the dating space, really the network is geographically bound and it’s based off of relatively tight geographical areas. On JDate, we feel that we have a number of geographic areas where we do have what we would call a network effect that helps us with generating organic renewals and traffic back into our site. When we actually did the analysis on ChristianMingle and we shared this a couple of months ago at our Investor Day, when we did the analysis, we actually found that we didn’t -- we don’t have that network effect anywhere. And so, we have taken a very strategic approach back into our marketing strategy to start to focus in on key metropolitan areas, so that we can, because we feel like we’re just a bit under the line of sort of triggering some of those really beneficial network effects. So, we’re going to focus in as we move forward with our marketing efforts into geographic areas so that we can start to rise above that minimal line there. But generally speaking, we haven’t had it on ChristianMingle and so, as the decliners have -- as subscribers have declined, we haven’t seen any major impact as a result.

[George Askew:]

Okay, great. Thank you.

[Operator:]

Next question is from David Wells with Hanson Wells Partners. Please go ahead.

[David Wells:]

Hi, good afternoon everyone. First of all, just looking at the broader space this quarter, I think obviously one of the big data points was the Plenty of Fish deal. How did – to the extent that you’re familiar structurally with that business versus what you’ve laid out your long-term margin targets, anything that we should be thinking about just because the valuation on that deal, the implied valuation -- implied is kind of a $1,500 to $1,700 per sub number, which would obviously be significantly higher than the equity value of Spark right now. So just trying to get a sense of, if that’s even a clean comparison to your business.

[Michael Egan:]

I think it’s a little bit different. When I look at the Plenty of Fish deal and I look at – I’d see that they are really at the moment going after building eyeballs in many respects. So there – obviously when you look at tender, currently they are monetizing through some form of subscription, but I think they really see the big upside with advertising and helping to really promote advertising, you also see that on OkCupid. And certainly Plenty of Fish has been doing that for quite some time. And as you really move towards more of a media strategy that scale helps a lot. So I’d imagine that they have looked at Plenty of Fish and seen that there is opportunities for them to grow the monetization on an advertising basis and there maybe also opportunities on a subscriber basis. But I think you have to compare both of those. We are as we mentioned before, predominantly a subscriber business, and so I think it’s slightly different.

[David Wells:]

Okay, that’s helpful. And then secondly, if I look at the amount of share repurchases in the quarter, it looks like you were roughly 5-ish percent of the flow traded during the quarter. So can you walk me through the puts and takes around stepping up share repurchase versus, I guess – I was just kind of intrigued by the language in the press release around exploring M&A opportunities and so just – I guess, how do you all think about the priorities of buying shares back right now versus bolt-in, tuck-in type deals right now.

[Robert O’Hare:]

Yeah, I think we talked about that a little bit at the Investor Day, but we do have obviously like any company, we have hurdles in terms of the return on capital we are looking for with our cash and so I’d say, given where the stock traded last quarter, we felt like there was a great return in buying back our shares and it was the one that was immediately actionable for us that we pursued it. In terms of the M&A, those things can take a bit longer to come to fruition and so, we are doing everything we can to pursue attractive opportunities there and we think will also generate a return on cash for us. But they are not – I don’t think they are necessarily usually exclusive given the amount of cash we have today.

[Michael Egan:]

I think, I’d just jump in really quickly on the acquisition front. I think it’s – when we entered this year, we knew we had a lot of things on our plate at the moment and there was a lot of work to really transform this organization. I am more comfortable today than I was three months ago to start to look at ways to leverage the great work that we have put in to start to leverage our platform and our teams. And so really acquisitions wasn’t an option three months ago for us because we had so much on our plate. But today, as we continue to see improvements in our business, I think it becomes more and more of an option. And we are always going to be very cognizant of shareholder value and thinking about acquisitions in a very accretive manner, and how do we use our capital in the most accretive manner and so we will weigh those at all times.

[David Wells:]

Great, thank you for the feedback.

[Operator:]

There are no more questions at this time. This concludes today’s conference call. You may disconnect your lines. Thanks for participating. Have a pleasant day.