Spark Networks SE
Q4 2015 Earnings Call Transcript

Published: 3 Mar 2016

[Operator:]

Greetings and welcome to the Spark Networks' fourth quarter and fiscal year 2015 earnings conference call. 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 would now like to turn the conference over to your host, Rob O'Hare, Chief Financial Officer for Spark Networks. Thank you. Mr. O'Hare, you may begin.

[Rob O'Hare:]

Thanks for joining us today. I am 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 fourth quarter and full year 2015 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 executive severance and acquisition related expenses. Although adjusted EBITDA is a non-GAAP financial measure, we believe it may be useful to investors when evaluating the company's current financial performance. However, investors should not consider adjusted EBITDA as an alternative to net income, cash flow from operations or any other measure for determining the company's operating performance calculated in accordance with GAAP. In addition, because adjusted EBITDA is not calculated in accordance with GAAP, it may not be comparable to similarly titled measures employed by other companies. A reconciliation of adjusted EBITDA to net income can be found in the Consolidated Statements of Operations included in our earnings release. I would like to remind everyone listening today that any comments made on this call may contain forward-looking information on 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, March 3, 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 review of our fourth quarter and calendar year 2015 financial results. Starting with revenue. We ended the fourth quarter with total revenue of $10.7 million, a decrease of 25% compared to the year ago period and an 8% sequential decline. These declines were primarily driven by lower subscription revenue from our Christian and Jewish Network segments. Christian Networks revenue was $5.9 million, down approximately 28% year-over-year, reflecting a 12% decrease in average paying subscribers and a 13% decrease 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 investments. Average paying subscribers grew 2% from Q3, while paying subscribers at the end of Q4 grew 1.4% compared to the end of Q3. Jewish Networks revenue was $4.3 million, a decrease of 22% year-over-year. The decline in revenue was primarily driven by a 12% decrease in average paying subscribers over the prior year period and an 11% decrease in ARPU. Average paying subscribers grew 2% from Q3, while paying subscribers at the end of Q4 grew 1.3% compared to the end of Q3. Q4 was our second consecutive quarter of sequential subscriber growth on both the Christian and Jewish Networks and the first time we have achieved sequential growth in total average subscribers since mid-2013. Though our subscriber base grew in Q4, ARPU was lower as we made the strategic decision in both Q3 and Q4 to increase the proportion of longer-term but lower ARPU subscription in advance of the relaunch of our core brands, JDate and ChristianMingle. The resulting 9% sequential decline in ARPU was the primary driver of the 8% sequential revenue decline in the fourth quarter. We anticipate the stabilization in the proportion of our subscribers, utilizing these longer-term plans and thus ARPU in the early part of 2016, setting us up for revenue growth midway through the year. We are focused on continuing to optimize the balance between the size of our subscriber base, plan link, ARPU and customer lifetime value. Full year 2015 revenue was $48.1 million, a 22% decrease compared to 2014. The decrease was driven by a 22% decline in average paying subscribers reflecting a 26% and 15% declines in average paying subscribers for the Christian and Jewish Network segments respectively. Moving down the income statement. Contribution in the fourth quarter was $6.8 million, a decrease of 25% compared to the year ago period and a 6% decrease compared to the prior quarter. Jewish Networks contribution was $3.7 million, a 24% decrease year-over-year and a 9% decrease compared to the prior quarter. The declines in contribution are largely a result of the decline in Jewish Networks revenue. Jewish Networks contribution margin was 85%. Christian Networks contribution was $2.8 million, a 27% decline year-over-year and a 3% decrease compared to the prior quarter. The year-over-year decline in contribution is the result of the decline in Christian Networks revenue. Sequentially, we continue to see improvements in marketing efficiency and improved subscriber retention rate. Christian networks contribution margin reached 48%, an all-time high which is especially encouraging when coupled with continued growth in subscribers. Full year 2015 contribution was $28.4 million, a 9% decrease compared to 2014. Full year Christian Networks contribution increased to $10.7 million, up 18% from 2014. Jewish Networks contribution declined to $16.3 million, down 19% from 2014. For the fourth quarter of 2015, adjusted EBITDA excluding nonrecurring charges was $116,000. Adjusted EBITDA for the quarter excluding the operating impact of Smooch Labs was $341,000 compared to income of $4.1 million in the year ago period. Current period adjusted EBITDA excludes $79,000 of executive severance cost and $275,000 of transaction fees related to the acquisition of Smooch Labs which closed in October 2015. It is worth noting that our fourth quarter 2015 operating expenses included a $520,000 reserve for the settlement of two class action lawsuit and we have not added back this reserve in our calculation of adjusted EBITDA. Full year 2015 adjusted EBITDA excluding nonrecurring charges was $2.8 million. 2015 adjusted EBITDA excluding the operating impact of Smooch Labs was $3.1 million compared to income of $5.5 million in 2014. 2015 adjusted EBITDA exclude $240,000 of executive severance costs and $404,000 of transaction fees related to the acquisition of Smooch Labs. Our full year 2015 operating expenses included the afore mentioned reserve of approximately $520,000 for the settlement of two class action lawsuit as well as legal expenses of approximately $1.2 million related to the defense of the company's intellectual property. We do not expect future expenses for either matter though we have not added back the $1.7 million in our calculation of adjusted EBITDA. Turning to the balance sheet. Spark the fourth quarter with $6.6 million of cash and cash equivalents, compared to $14.4 million at the end of the prior quarter. Spark gave $6 million in cash consideration as part of the Smooch Labs acquisition which closed in October 2015. In closing, it's great to exit 2015 with positive momentum in our subscriber base. We are also excited by the initiatives that are already underway in 2016 to accelerate our growth while also driving improvements in profitability. I will now turn the call over to our CEO, Michael Egan, who will highlight some of our achievements and discuss our plan for 2016.

[Michael Egan:]

Thank you, Rob and thanks everyone for joining us on our call this afternoon. First off, I want to congratulate the Spark team on an excellent year. We set out at the beginning of 2015 to reinvigorate our underlying business, to bring the company to sustainable profitability and to begin to regrow our subscriber base. These were not easy tasks. Generally speaking, we had to rethink and reengineer how we did almost everything. The team's dedication to this cause and successfully executing our goals was fantastic and I am extremely honored to be working alongside them. As a company, Spark is in an entirely different place than it was 18 months ago. We are emerging from 2015 as a business that has a completely unique, sustainable and what we believe competitively advantaged position within our market. We have transformed our subscriber base from one that was declining steadily to one that has grown for two consecutive quarters for the first time in years. Our products have gone from old and one-dimensional forcing our users to access us via a desktop computer to contemporary and mobile driven. We have entered this period not able to on offer a mobile experience due to our legacy technology and we exited the year with 10 different mobile applications, a product development culture that is mobile first and the first redesign of our desktop sites in over eight years, built on our new API driven technology. I would like to take a second and talk a little bit about the core site redesigns that launched in late Q4, as they were major accomplishments for the team. We had three goals heading to these redesigns, improve user engagement through a more contemporary and streamlined user experiences, update our technology to make us more efficient with testing and product introductions and improve our organic traffic through better search engine optimization. Based on these goals, we cannot be happier with the performance of our new sites. We have seen double-digit improvement in activities like photo uploading and messaging and overall user engagement is up. Now that both JDate and ChristianMingle share the same front-end code base, we have been able to significantly improve the efficiency in launching new front-end code. More importantly, it has allowed us to integrate true A/B testing capabilities into our landing and subscription pages and we have become aggressive testers in the last two months, helping to really begin to optimize our marketing channels. Finally, in conjunction with the redesigns, we launched JLife on to JDate, which is a content rich area focused on dating in the Jewish world that is beginning to drive organic traffic. We expect to have a similar section on ChristianMingle soon. Moving to other accomplishments. Our unit economics on our Jewish Networks has remained excellent and we had our 11th year of over 85% contribution margin. The biggest transformation however, has come in the unit economics of our ChristianMingle brand. After suffering contribution losses on the brand for 14 consecutive quarters leading in the mid-2014 through significant improvements in how we measure our marketing attribution and optimizing our channels, we were able to end the 2015 year with not only quarterly subscriber growth, but with all-time high contribution margins of 48% and we are confident there is still room for improvement in that number. Finally, we were able to expand our user base by moving aggressively into the millennial market with two leading premium mobile application. Our acquisition of JSwipe and the integration of that team into Spark has been seamless and the team has just launched its first monetization features while still growing the usage of application. Also late in 2015, we launched CrossPaths, a unique mobile application that enables today's millennial Christians to meet and communicate in an environment that matches their faith and values. With all the stability and transformation we have created in the business in 2015, we are now poised for growth. To enable us to capture this growth and to take advantage of our unique position in the market as leaders in both the Jewish and Christian communities, we are focusing our efforts on three core areas. We believe we have the team in place and the platforms to execute on all these areas with minimal incremental investment. The first area is what we are calling our church program. I will speak to it as it pertains to ChristianMingle and the Christian community, but we are also pursuing it with synagogues within the Jewish community. So the programs will work for both of our key brands. Over the last few years, there has been a shift within many areas of the church in how they perceive online dating. As online dating has become accepted amongst the general population, pastors are recognizing that their congregations are using these tools. However, there is a concern over which tools are being used. As we have spoken with leaders, they are seeking a platform that embraces the values of their community. With our new redesign and the broadening of our ChristianMingle message, they are coming to us as that alternative. Starting in January this year, we set up a formal program to help churches with this effort. To date, we have signed two formal partnerships with churches that represent over 10,000 single adults. This is a very large opportunity for us and we anticipate signing a number of additional partnership agreements with churches in the weeks and months ahead. In exchange for them promoting ChristianMingle to their congregations, we are providing their members with a special discount on long-term subscription plans and identification as a member of their church within the ChristianMingle community, thus providing the church with extra awareness amongst our broad community. We expect to complement this partnership program with the development of content and curriculum that will help churches serve both their single and married adults with how to form and maintain happy and healthy long-term relationships. With our increasingly deep connections in the communities we serve, we are uniquely positioned to develop stability and superior unit economics in the shifting online dating industry. Our second key focus for 2016 is to grow and monetize our new millennial focused mobile brands, JSwipe and CrossPaths. The most rapid growth in the online dating customer base in the last two years has been with the under-30 demographic. The rise of free mobile applications been at the center of this, but the vast majority of these have been positioned at the casual end of the dating spectrum. For the communities we serve, this younger audience is seeking an alternative that matches their values and as such, JSwipe and CrossPaths have been very well received. Additionally, we see this user base as extremely complementary to our JDate and ChristianMingle brands as they have always resonated most with users over the age of 35. We believe there is going to be a significant shakeout in the number of free dating applications in the market for two core reasons. First, only a small handful have developed the necessary scale in terms of size of community to provide value to their users. And secondly you can't run a business for free forever. We are already seeing investment into this space slow dramatically and all the leading applications are moving to freemium models. With our consistent approach to providing unique solutions to our niche communities, we are once again in a differentiated position. With the development of JSwipe and CrossPaths, we are leaders in this younger demographic for the communities we serve and have developed the platform that will allow us to bring on board premium features and monetization capabilities. In fact, the JSwipe team has just launched the first of these features last week and we expect to launch a number more through the course of the year. Our immediate focus for both of these brands is to continue to grow the user base and the premium feature set, but ultimately we believe that they will directly complement and provide a gateway to our more established JDate and ChristianMingle brands. Our final initiative for the year and this will emerge later in the year, is the international and language expansion of our Christian products. Today, over 95% of ChristianMingle subscribers are within the United States. Obviously, the U.S. is not only Christian country in the world and we see excellent opportunities to expand the brand abroad. Our first focus will be in Spanish-speaking markets, both here domestically as well as in Latin America. This initiative is still in the very early days and I will be sure to update you on progress in the future quarters. We are excited by the prospects in front of us. The work we have put in over the last year, the dedication we have to helping people form lifelong relationships and our increasingly deep roots in the communities we serve has set us up to emerge from our turnaround as a stable, profitable and strategically unique company. Our focus going forward is to continue to drive growth in our subscriber base, continue to drive improvements in our unit economics and contribution margins and to continue to drive shareholder value. And with that, I will close up and we are ready to take questions.

[Operator:]

Thank you. [Operator Instructions]. Gentlemen, there are no questions in the queue at this time.

[Michael Egan:]

Okay. Thanks everyone.

[Operator:]

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