Spark Networks SE
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Hello and thank you for standing by. Welcome to the Spark Networks’ Third 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 would like to turn the conference over to Robert O’Hare, CFO of Spark Networks. Please go ahead.

[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 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 third 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 from 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 and transaction 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 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 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 Tuesday, November 3, 2015. The company undertakes no obligation or responsibility to public 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 review of our financial results from Q3. Q3 revenue was $11.7 million, a decrease of 22% compared to the year ago period and a 5% sequential decline. These declines were primarily driven by lower subscription revenue from our Christian and Jewish Network segments. Christian Networks revenue was $6.6 million, down approximately 24% year-over-year, reflecting a 27% decrease in average paying subscribers offset by a 7% increase in ARPU. The year-over-year decline in the average paying subscriber base is a result of the reduction and reallocation of our direct marketing expenses. Average paying subscribers were down 4% from Q2, while paying subscribers were up 4/10th of a percent at the end of Q3 from the end of Q2. Jewish networks revenue was $4.6 million, a decrease of 19% 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 2% from Q2, while paying subscribers were up 2% at the end of Q3 from the end of Q2. It is encouraging to see both our Christian and Jewish Networks grow over the course of Q3. We are excited to carry this momentum into Q4, which is typically a strong seasonal quarter for the broader dating industry. We feel well positioned to achieve sequential subscriber growth in the fourth quarter of this year, driven by the launch of the redesigned sites and the continued traction and efficiency of our marketing efforts. Contribution in the second quarter was $7.3 million, a decrease of 19% compared to the year ago period and a 5% increase compared to the prior quarter. Jewish Networks’ contribution was $4 million, a 22% decrease year-over-year and a 3% decrease compared to the prior quarter. The declines in contribution are largely a result of the decline in Jewish Networks revenue. Contribution margin remains strong at 87%. Christian Networks’ contribution was $2.9 million, a 14% decline year-over-year and an 18% increase compared to the prior quarter. The year-over-year decline in contribution is the result of the decline in overall Christian networks revenue. Sequentially contribution improved as we saw an increase in marketing efficiency from television advertising and improved subscriber conversion rates. Christian Networks contribution was positive for the sixth consecutive quarter and contribution margin reached 44%, an all time high which is especially encouraging when coupled with the modest growth in subscribers. Excluding direct marketing expenses, cost and expenses in the quarter were $7.9 million, a decrease of 15% compared to the year ago period and an 11% increase from Q2. The year-over-year decrease is a combination of lower sales and marketing expenses and general and administrative expenses primarily reflecting the impact of the company’s expense reduction program announced late in the third quarter of 2014. The sequential increase was driven by personal additions on our marketing and technology teams and increased legal expenses of approximately $950,000 related to litigation protecting the company’s intellectual property and closing the acquisition of Smooch Labs. Both matters were resolved in October of 2015. Net loss in the quarter was $882,000, or negative $0.03 per share, compared to a net loss of $969,000 or negative $0.04 per share in the year ago period and net loss of $95,000 or $0.00 per share in the prior quarter. Adjusted EBITDA excluding non-recurring charges was $309,000 compared to income of $2.5 million in the year ago period and income of $621,000 in the prior quarter. Current period adjusted EBITDA excludes $129,000 of transaction fees related to the acquisition of Smooch Labs which closed early in the fourth quarter of 2015 but it does include approximately $820,000 of aforementioned litigation cost. Turning to the balance sheet, the company had cash and cash equivalents of $14.4 million at quarter end, a decrease of 1% from $14.6 million on June 30, 2015. As of September 30, 2015, the company had no outstanding debt. Our primary objective at Spark is to drive profitable growth. We have made significant investments thus far in 2015 to build the foundation necessary to achieve this goal and we are encouraged to see sequential growth in both subscribers and contribution this quarter. I'll now turn the call over to our CEO Michael Egan to provide some commentary on our results and our Q3 activities.

[Michael S. Egan:]

Thanks Rob and thank you everyone for joining us today. As we’ve mentioned on previous calls, 2015 is all about turning Spark Networks around. Focusing our attention on our core brands of JDate and ChristianMingle, and building a foundation for returning the company to profitable growth. Our achievements in Q3 give us a tremendous amount of encouragement that we are on the right path and have made fundamental shifts in the business. Many of these shifts have not yet been reflected in our financial results. We are not showing the revenue and EBITDA growth that we strive for. But our operating metrics and activities are pointing in the right direction. As I mentioned in our press release today there are four key areas what we are extremely proud of. Our subscriber growth, our ChristianMingle marketing efforts, our product development work, and finally the recent acquisition of JSwipe. I’d like to provide a little more color to each of these beyond what was stated in the press release. When we began the year with a new management team and a lot of hard work ahead of us, we believe that it would take us until the fourth quarter to demonstrate sequential profitable subscriber growth. As we recently announced we are very encouraged by the fact that we achieved this growth in Q3, one quarter ahead of plan. The number of subscribers for both our Jewish Networks and our Christian Networks were greater at the end of the quarter than they were at the beginning, and this represents the first time in two years that Spark has achieved this. Even more importantly however are some of the underlying metrics associated with this growth. Our Jewish Network subscribers grew 1.8% over the course of Q3, again the first time in two years that JDate has grown. Most encouraging however is that our U.S. property JDate.com which is the largest and most profitable entity within our Jewish networks had the best quarterly growth since 2009. We were able to achieve this growth even before launching fundamental changes to our product which I’ll speak to in a minute, by taking a more strategic look at how and to whom we price our subscriptions. In early Q3 we started to adopt a slightly more sophisticated segmentation of our customer base and identified cohorts where their likelihood to subscribe with diminishing rapidly. Through a series of experiments we identified price points and messaging that resonated strongly with these cohorts and thus we are able to attract a significant number of incremental customers, albeit at lower price points. It was exciting to see the dramatic uptick in product adoption at these discounted prices. We were able to significantly increase the number of six month packages, and although we will see a downward impact on ARPU in the fourth quarter as a result, we believe there are larger and longer tendered subscriber base is good for the health of the network especially as we are leading into our high season with a new product and a series of new up sell opportunities just around the corner. Like our Jewish Networks, we also ran similar experiments with ChristianMingle and -- the results, growing the subscriber base by 0.4% during the quarter. More encouraging however is our success in Q3 of continuing to drive efficiencies in our marketing spend for the brand. In Q3 our contribution margin for ChristianMingle moved to 44%, which is the highest margin the brand has ever seen, and one we believe is not only sustainable but still has room for improvement. We accomplished this in a couple of key ways. First, we continued to eliminate marketing channels that we believe have no chance of succeeding to meet our threshold. This represents a small portion of our efficiency gains. Secondly, and most importantly, we continued to optimize our dominant channels, specifically our television spend. In Q3 we moved our television buying to a new partner and together we have begun to identify a number of optimization opportunities. Thus far we've already seen a double-digit improvement in our TV-based subscriber acquisition costs and we are confident that there is more to come. We've also just started to execute against some grass root initiatives that we believe will be a major role for us in the 2016 year. Our third achievement was our ability to bring vibrant, new, innovative product to market. Most of the team continued to focus on our redesign and re-architecture of JDate and ChristianMingle front-end customer experiences. We're days away from launching a brand new JDate into beta, and this will be that represents the first redesign of the site in over eight years. Our aim is not only to provide a more elegant and engaging user experience so that our community members can more effectively find and communicate with each other, but also to create the infrastructure that will enable us to be much more nimble on how we test and bring new features to market. Once JDate comes to market, we expect to follow with a new, completely redesigned ChristianMingle just a few weeks later. Our ChristianMingle redesign represents a more fundamental shift for the brand, as we seek to broaden the base for that business. I would encourage you all to visit christianmingle.com\allnew to have a peek at our new branding and redesign. We've already tested our new logo and design with a number of large Christian consumer audiences and their reaction has been very positive. Alongside these fundamental changes to our customer experience, our mobile team has also brought two new mobile dating applications to market during Q3. The first, called Spark is a general dating application that adds a new twist to how people evaluate potential matches, asking them to choose one of two choices and using our patented mutual-match technology to keep people’s choices anonymous. Upon launch we were featured in the Apple App Store and adoption has been quiet strong. The second app we brought to market is called CrossPaths, and we believe it satisfies the core need for the millennial Christians as they seek to meet others that share their faith and their beliefs in what dating should be about. The app is primarily a free application today and though the launch of CrossPaths is very recent, we've already received strong support amongst our target audience. We have a great deal of confidence in this application and we are committed to growing this community so that we can provide a much needed solution to our younger Christian customer base. When I think back a year ago, Spark Networks did not have a single standalone native mobile application. Today we have nine different applications across five different brands, and have demonstrated that we can bring new app-based brands to market. On any given week we are now seeing almost twice the number of subscriptions come through our native applications as come through our mobile-optimized websites. The final accomplishment I want to talk about today is our October acquisition of Smooch Labs, the owners of the very popular millennial Jewish dating application JSwipe. As many of you know we were in litigation with Smooch over our intellectual property. As we finally sat down together and got to know each other’s management teams, we recognized that we both had the same general mission in mind, grow the Jewish community by helping people form life-long relationships. We've been doing this for 18 years with JDate and have traditionally had more success with people who are over 35 years of age, whereas JSwipe on the other hand has resonated very strong in – with the under 30 crowd. By combining forces and keeping the two brands distinct, we as a company can service the entire spectrum of Jewish Singles. We’ve structured the relationship with the Smooch Labs founding team in such a way that they will stay on with the business, growing the subscriber base, and building additional features for the platform. They already have a series of premium features that they plan to bring to market over the coming months that will add monetization of the platform. Q3 was a benchmark quarter for us. We knew coming into this turnaround that our most important priority was to execute on our plans. At the beginning of the year we were quite aggressive in the amount of change we wanted to make with the organization and our core brands. We have successfully made a great deal of this change. The broader Spark team is a strong mix of institutional knowledge and new thinking. Our executive team is completely new and it truly is Spark 2.0. We still have a lot of work to do. We recognize there are still room to improve our financial performance both at the top and bottom lines. However we believe we now have the team in place, they are hitting their stride, and are demonstrating that if we remained focused and simply execute we will succeed in truly transforming this company. It is fun to begin to see the fruits for our labor. The small growth we experienced in Q3 is just the start. Again thank you all for your continued support and commitment. We are now happy to answer a few questions. So I’ll open up the call.

[Operator:]

[Operator Instructions]. The first question comes from Kara Anderson of B. Riley & Co. Please go ahead.

[Kara Anderson:]

Hi, good afternoon. I am wondering if you can comment on the contribution margin for ChristianMingle and if we can expect a similar contribution going forward?

[Michael S. Egan:]

Yes, sure thanks so much. So we do believe that we have really stabilized how we are marketing for ChristianMingle and as we see our performance going forward we expect to see that contribution margin continuing.

[Robert W. O’Hare:]

This is Rob, with some of the re-launches of the sites coming out in Q4 you may see a spend a bit more of marketing dollars kind of below the contribution line, but in aggregate it should be directly in line with Q3.

[Michael S. Egan:]

I guess it is good to point out that Q4 and Q1 are seasonally stronger quarters for us where we reduced and to spend a little bit more and that can be reflected in short-term contribution but fundamentally we are acquiring customers at a very different profitability than we were a year ago.

[Kara Anderson:]

And then were there any one time promotions or otherwise type events that might be behind the sequential subscriber growth we saw at either of the networks in the quarter?

[Michael S. Egan:]

Yes, as I tried to explain, let me try to explain a little more detail. What we have been doing is segmenting our customer base in a more granular ways and starting to really experiment with pricing across those different segments. And if you think about when people subscribe or sorry, when people join our networks become a member, there is sort of a curve of diminishing returns. After a period of time if they haven't taken that next step to subscribe, the likelihood of them subscribing starts to diminish pretty rapidly. And so we have started to identify places on that curve where we can be a little bit more sophisticated, a little bit more creative with pricing and that helped us tremendously in Q3. I think we’ll continue to do things like that because we see that as truly incremental acquisition, we’ve already brought them into our network. And if we price accordingly we should be able to bring them on as subscribers so it is not one off but we have become a lot more granular in our pricing scheme.

[Kara Anderson:]

Great and then also can you talk about the magnitude of increase in direct marketing cost or operating expenses that we might expect to come from JSwipe, maybe discuss how large the team is, whether you'll be able to realize any leverage with regards to corporate and technology cost maybe some decent color on that would be helpful? Unidentified Company Representative

[Kara Anderson:]

And then with regards to the monetization strategies, I think you talked about them being in the works over the next couple of months. Are we talking about testing over the next couple of months or more of a bigger rollout of those strategies?

[Michael S. Egan:]

No, no. The aim is to roll those features out. They’ve done a phenomenal job of building a user base. They’ve had north of 450,000 downloads of the JSwipe application. And they feel very comfortable that as they start to roll premium features out, that will work on adoption and have that sort of be fully available to that user base.

[Kara Anderson:]

Great, thank you.

[Michael S. Egan:]

Thanks.

[Operator:]

[Operator Instructions]. The next question comes from David Wells of Hanson Wells Partners. Please go ahead.

[David Wells:]

Hi, good afternoon everyone.

[Michael S. Egan:]

Hi, David.

[David Wells:]

Well can you talk a little bit about the mobile user, kind of, cohort and any metrics you can give around, I guess the market share opportunity there from a conversion perspective, is that – the majority of folks who are already paying, who have lived in or these folks that we see convert, any color around kind of that opportunity from the engagement perspective?

[Michael S. Egan:]

Yes, I think generally speaking when we first launched our apps because we were a little bit late to market, earlier in the year when we first launched apps specifically for JDate and ChristianMingle, what we saw was a good chunk of the new users coming onto the apps were actually existing subscribers. But today we're actually finding that, that has leveled out and what we're seeing is -– and we're seeing a steady pace of adoption for our mobile applications overtime. And the folks who are adopting today are new subscribers. We're actually doing marketing for specifically mobile app subscribers and it’s starting to pay off.

[David Wells:]

Great, and I guess any sense from the app itself of how engaged they are in terms of, kind of, I guess percent of our daily users versus the kind of cohort overall, any kind of metrics you can provide around that?

[Michael S. Egan:]

Yes, I think generally speaking we're seeing quite solid – so if you think about – we've got three different ways that a user can access us. We've got our –- now our native mobile applications. We've got a website that is optimized if you reach it by a mobile device, and then we've got a website that’s our, sort of, core foundation, historic, traditional application which is a desktop website. When we look at mobile users there’s actually a pretty big difference between those who are using our native apps versus those that are using a mobile-optimized website. And what we see is that by bringing the apps -– the native apps into our portfolio, we've actually seen a nice increase in engagement with those users. It’s a much more engaging, intuitive user experience. And so the folks who are adopting us from an application, utilizing their mobile device, adopting us from an application standpoint, we're seeing a really strong engagement in activity. It actually starts to run similar to our more traditional desktop activity, but better than what we had been offering as a mobile opportunity.

[David Wells:]

Okay, that’s very helpful. On the -– I guess on your better -– on the segmentation work that you’ve been doing within JDate, can you help us understand I guess the IRR difference of that cohort versus the traditional -– your traditional sub? And I guess if I put on my most skeptical hat, I mean price is always the easiest lever to pull, so I guess what gives you confidence that these are high quality – this, I guess that these folks are additives to the overall revenue base and not necessarily diluting the strong, I guess, I mean truly the strong branding and reflective price premier that JDate has traditionally commanded versus peers?

[Robert W. O’Hare:]

Yes, I think David we've gone to pretty great lengths to make sure that we're running the segmentation in a way that you need to clear a couple hurdles before these kind of promotional prices are offered to you. So we don’t really think about it in terms of an IRR per say because there is really no capital outlay for us. As Michael mentioned, we’ve already spent the marketing dollars to acquire the user and get them to register. It is really they just haven't gone into a paid subscriber user state. So we do though keep pretty strict rules around who is able to receive the promotional pricing. And we’ve also run a fair number of AB test and kind of done more of this overtime as we’ve seen consistent results with the AB testing showing that kind of net dollars sold, total dollars sold versus the control have been higher.

[David Wells:]

Okay, that’s very helpful and then lastly on my end, if I look at the ChristianMingle base I know prior to the current management team there were some discussion that at some point we would see some Winback volume accelerate as users who rolled off that first -- that first subscriber period came back to the product, are you seeing any benefit from existing users coming back to the platform and that’s helping the contribution margin or is it truly just more of a spend adjustment that’s going on there?

[Michael S. Egan:]

Yes, I think there maybe some of that. Generally speaking win backs are an important part of our business both on JDate and ChristianMingle. I think some of the work that we did as we talk about pricing and segmentation, we’ve applied that both to first times subscribers. So people who had registered but had never decided to subscribe but we also did very similar activities for Winback customers. Because we see again if you go for an extended period of time from your last subscription the likelihood of you coming back starts to diminish pretty rapidly. And so we’ve done similar exercises of mapping out that curve and adjusting prices accordingly. And so you do see a little bit of movement in improvement in Winbacks on ChristianMingle.

[Robert W. O’Hare:]

And you can see in the table that we disclosed in the press release David that we have seen some growth in terms of the mix of subscribers attributed to Winback.

[David Wells:]

Okay. Great, thanks for the time I appreciate it.

[Michael S. Egan:]

Absolutely thank you.

[Operator:]

There are no more questions at this time. Ladies and gentlemen this concludes today’s conference call. You may now disconnect your lines.

[Michael S. Egan:]

We got one actually, George just jumped in there.

[Operator:]

Sorry, please excuse me. The next question comes from George Askew of Stifel. Please go ahead.

[George Askew:]

Thank you, I am a late entrant I apologize.

[Michael S. Egan:]

Alright, good to have you George.

[George Askew:]

Thank you. Two questions, can you just and again I was lagging on, what is special about CrossPaths exactly. I mean why is the MobileApp that we should be thinking about?

[Michael S. Egan:]

Good questions George. Generally speaking as we’ve gone out and really done diligence in within the Christian community we identified and its very similar to JDate and the JSwipe situation. What we found on our end is that typically our products resonates quite well with people who are a little bit older, sort of that 35 plus crowd. And on the JDate side, on the Jewish Network side JSwipe has come in over the last couple of years and has done a very good job of providing a service to that younger audience. There really isn't anything, there hasn’t been anything on the Christian side of this space. And we’ve got a number of millennial Christians in the team here and they were saying hey there is nothing for me. And as we went out and spoke with Pastors and others, leaders in the Christian Church they were all encouraging of the fact to give younger Christians an environment that they feel represents both their faith as well as what they see as the purpose of dating. And so really as an application its very similar to other things that are out there in terms of the technology and the user experience. With the exception of we’ve added in a face spectrum that allows people to really identify with and explain where they sit on sort of the level of development which then allows others to find people like that and to determine whether or not that individual matches sort of their level of faith. But it’s more importantly around the community itself and the idea of providing an environment for younger Christians sort of that 18 to 30 year old group to find others that have the same ideals and faith in values. We’ve just started launching it and we’ve shared it with a number of people across the Christian community in terms of leaders and sort of thought leaders and others. We’ve just recently launched it and we are focusing right now on the Los Angeles area and we’re seeing nice adoption.

[George Askew:]

Got it, thank you for that. That’s good, essentially in theory you said focused on the LA area are you trying to take sort of a geographic, density strategy in other words, build the given market then build the new one and build another one or --

[Michael S. Egan:]

Absolutely I think as we’ve spoken in the past you know we’re strong believers that the dating game is a local game and so we really do want to build density into specific geographic areas I don’t think as we build LA will probably get our feet underneath us and be able to launch more markets at once following this so it won't be like one market at a time but we wanted to start with a single market.

[George Askew:]

Okay, good deal and then secondly you’ve retained the financial advisor to kind of help you think through participating in the consolidation of the space two things on that one the reference changing your strategy from 3,6, 9 months ago and secondly has it been influenced by for example JSwipe and that acquisition?

[Robert W. O’Hare:]

Good questions there. So one, I don’t think it’s a change of strategy. I think fundamentally when we started out a year ago we recognized that we needed time to really rebuild the foundation of this company, sort of rebuild the engine. And we’ve done a lot of that work over the course of this year. We brought in a new team, a lot of new people into the organization. We feel like we got a really strong team now that understands what they need to do and how to do it. We replaced a lot of the technology, we’ve become a lot more adept at bringing product to market. And we fundamentally feel that we now have the foundation that we can scale up of. And ultimately this business is a scale business, you really start to excel in your financials when you reach points of scale, and JSwipe as an acquisition is part of that idea and that strategy. We think that we now have really strong scale in the Jewish market across the aged demographics there and so as we look forward we know that we want to continue to grow organically with the brands that we have. But we also want to be participants in the consolidation of the industry and really focusing on bringing scale to the platform that we’ve built as a company.

[George Askew:]

Got it, super. Thank you very much for taking my questions. Thanks.

[Michael S. Egan:]

Thanks George.

[Operator:]

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