Spark Networks SE
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Greetings, and welcome to the Spark Networks Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Kreinberg, General Counsel of Spark Networks. Thank you, Mr. Kreinberg. You may begin.

[Joshua A. Kreinberg:]

Thank you. And thank you, everyone, for joining us today. I'm Josh Kreinberg, General Counsel for Spark Networks. On today's call are Greg Liberman, our President and Chief Executive Officer; and Brett Zane, our Chief Financial 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, noncash currency translation adjustments for intercompany loans and the income recognized from noncash assets received in connection with a legal judgment. 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, as 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 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 provision 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 our Chief Executive Officer, Greg Liberman.

[Gregory R. Liberman:]

Thanks, Josh. Good afternoon, everyone, and thank you for joining us on today's call. We appreciate your continued interest and support and look forward to sharing our second quarter results with you today. Among the highlights from the quarter were new records for revenue and subscribers; demonstrable progress on the product front, especially in the key area of mobile; and the successful follow-on offering that allowed us to diversify our stockholder base, increase our profile with the investor community, and as a result, improve our trading liquidity. In addition, 2 research analysts initiated coverage on us during the quarter. The second quarter also reflected sustained investment, both in the form of marketing spend and human resources, as we continued to fortify our foundation for long-term growth. Q2 revenue totaled a record $17.6 million, an increase of 17% year-over-year, marking our 10th consecutive quarter of revenue growth. That revenue growth was driven by the continued expansion of our subscriber base as average paying subscribers increased another 20% to end the quarter north of 300,000 for the first time in our history. Towering our results were the performances of our dual engines, the Christian Networks and Jewish Networks segments, led by our category leading ChristianMingle and JDate brand. Despite a decrease in ARPU, driven by the continuing shift to higher ASP, higher lifetime value, long-term plan, Christian Networks set new records for both revenue and average paying subscribers, delivering double-digit percentage increases on both fronts. And while much of the excitement over the past several quarters has been appropriately focused on the ChristianMingle phenomenon, we continue to be pleased with how well our Jewish Networks segment is performing. For only the second time since 2008, Jewish Networks grew both revenue and subscribers while maintaining its typical near-90% contribution margin. Looking a little closer at Christian Networks, revenue grew 37% year-over-year to crest the $10 million mark for the first time, totaling $10.3 million while average paying subscribers grew another 43% to end the quarter at $197,000. Our Christian Networks thesis remains unchanged

[Brett A. Zane:]

Thank you, Greg. Revenue was $17.6 million, a 17% increase from the $15 million reported in the second quarter of 2012. The increase was driven by higher subscription revenue from the Christian Networks segment. Christian Networks revenue increased 37% to $10.3 million compared to $7.5 million in the second quarter of 2012. The higher Christian Networks revenue reflects a 43% increase in average paying subscribers, which was largely driven by a 40% increase in year-over-year direct marketing investments and an increasing number of win-back and renewal subscribers. As a result of the continued shift in our paying subscriber base from 1 month to 3- and 6-month plans, our average selling price increased 9% and ARPU decreased 3% on a year-over-year basis. Although the mix shift has a near-term impact upon ARPU, and derivatively, revenue, we believe the change in mix is in the best interest of the company as we collect more dollars per transaction, garner a higher lifetime values from those who purchased long-term plans and build a solid foundation for the future. Jewish Networks revenue increased slightly to $6.46 million in the second quarter of 2013 compared to $6.45 million in the second quarter of 2012. As Greg mentioned, this is only the second time since 2008 that our year-over-year Jewish Networks revenue increased. The revenue growth was primarily driven by a stable subscriber base and slightly higher ARPU. Total company contribution was $3.8 million, a 23% decrease from $4.9 million in the second quarter of 2012. The decrease was driven by lower Christian Networks contribution. Christian Networks contribution decreased to a loss of $2.6 million from a loss of $1.7 million in the second quarter of 2012, reflecting a 40% increase in our marketing spend. As Greg mentioned earlier, the magnitude of the year-over-year increase in direct marketing spend is due to the combination of the record direct marketing spend in Q2 of this year and last year's uncharacteristically lower spend. Jewish Networks contribution decreased 2% to $5.7 million from $5.8 million in the second quarter of 2012, reflecting a 20% increase in direct marketing. The higher direct marketing is driven by an increase in both our online and off-line marketing investments. Costs and expenses increased 28% to $20.8 million, compared to $16.2 million in the second quarter of 2012. The increase was primarily attributable to a $3.8 million increase in cost of revenue, a $304,000 increase in sales and marketing and a $222,000 increase in G&A expenses. Cost of revenue increased 35% to $14.8 million from $11 million in the second quarter of 2012. The increase was driven by a $3.7 million increase in direct marketing investments for the Christian Networks segment. Sales and marketing expenses increased 31% to $1.3 million compared to $983,000 in the second quarter of 2012, reflecting higher compensation expense and consulting fees. Compensation expense increased by approximately $187,000 and consulting fees increased by $108,000 as we continue to build out our Christian Networks business. G&A expenses increased 11% to $2.3 million compared to $2.1 million in the second quarter of 2012, reflecting higher compensation and rent expense. Compensation expense increased by approximately $74,000, reflecting 2 new hires for positions vacant in Q2 2012 and 1 incremental new hire. Rent expense increased by approximately $76,000, reflecting the straight line costs associated with our former corporate office lease and our new corporate office lease. The recognition of rent expense from our former corporate office ceased in July of this year. Adjusted EBITDA was a loss of $2.3 million compared to a loss of $592,000 in the second quarter of 2012. Net loss was $3.3 million or $0.15 per share compared to a net loss of $1 million or $0.05 per share in the second quarter of 2012. Weighted average shares outstanding for the second quarter of 2013 were $22.5 million compared to $20.6 million in the second quarter of 2012. As Greg mentioned, in May, we completed a follow-on offering raising approximately $12.3 million in net proceeds through the issuance of 2.1 million primary shares. Capital expenditures in the second quarter of 2013 were $698,000 compared to $552,000 in the second quarter of 2012. Approximately $334,000 of the capital expenditures recorded in the second quarter of 2013 relate to our new corporate office tenant improvements, all of it which will be reimbursed by our new landlord. The reimbursement has already been recorded on our balance sheet in other assets. That concludes our prepared remarks. Now, operator, if you would, please, open the call to questions.

[Operator:]

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

[Ralph Schackart:]

Couple of questions, if I could. First, can you sort of walk us through -- sounds like you had some extra marketing opportunities in the quarter for Christian, in particular. Can you walk us through sort of the mix between direct response and brand and was there any sort of skewing perhaps towards brand this quarter more so than maybe you've seen in the past?

[Gregory R. Liberman:]

Well, as you know, we don't, for competitive reasons, don't tend to break it out too granularly. But I will tell you it's probably that we saw more interesting opportunities on the brand side this quarter than we have in the past. So it probably skewed a little bit more that way than we've seen in some of the past quarters.

[Ralph Schackart:]

Great. And maybe just kind of broader and qualitatively speaking, can you talk about the efficiencies that you saw in Q2 this year and sort of were you happy with them and maybe some things that worked and some other things that you may try to experiment with as well going forward?

[Gregory R. Liberman:]

One of the things that we worked very hard on is testing day in and day out. So some of these tests, like I said, we're in with new partners in new channels. So some of that efficiency pays out over time. As you know, our lifetime values come in over a period of a couple of years, 2, 3 years. So we will know better over time. So if you ask me that next time, I will actually probably have a much better sense for you than I do this time. But the decisions that we made were the right decisions to make and we were pleased with the opportunities we saw and hopefully we'll continue to see them in this quarter, as well.

[Ralph Schackart:]

Great. Just in terms of sort of the level of spend, is it fair to say that maybe you saw some opportunities in Q2 and then you pulled forward some dollars or some campaigns that you normally were targeting on, say, Q3 or Q4 in the back half of the year?

[Brett A. Zane:]

Maybe a little bit, not much. I would say, in general, that the spending levels will probably be somewhat closer to Q2, Ralph. I think that there may be a little bit of it, but not a lot. Not like we had last year, for example.

[Gregory R. Liberman:]

So I think the answer as you're looking at it, Ralph, I think the answer is yes.

[Ralph Schackart:]

Great. One more and I'll turn it over, guys. Brett, you're talking about Christian ARPU and the trade-off between longer-term duration contracts and higher lifetime value. Can you sort of walk us through what's driving that and why you're able to sort of stretch out those longer duration subs in the Christian side, please.

[Brett A. Zane:]

So the way that we have our promotions running, folks are tending to skew towards the 3- and 6-month plans, which we've seen in our analysis that the lifetime values of the 3- and 6-month purchasers tend to be higher than those in the 1-month plan, which is helpful to us and they stay around a little bit longer. So we think long term this is beneficial to us, but we take a short-term hit in the form of revenue as a result of that because we're spreading the sales out over a 3- or 6-month period. So we're usually not recognizing the benefit from those purchasers until later on whether it be fourth quarter or next year, you'll see a little bit more of that benefit come through.

[Gregory R. Liberman:]

You can see also some -- sorry, Ralph, I just wanted to layer on one more thing then we'll let someone else on the line. But I think you can see some of those dynamics, too, relative to the increase we saw in ASP during the quarter, I think Brett mentioned that ASP was up 9% even though ARPU was down 3%.

[Operator:]

[Operator Instructions] Our next question comes from the line of Michael Graham from Canaccord.

[Michael Graham:]

A couple for you. One is your Christian subscriber performance was really strong, can you talk a little bit about the geographic density. I'm just wondering like are you targeting particular markets to try to grow the base in Christian Networks more aggressively in certain markets to increase the network effects in those markets, or is it more really just national campaigns and you take the subscribers wherever they come?

[Gregory R. Liberman:]

Well, I think it's a combination -- I mean, we do -- we definitely do some locally targeted stuff. I can't get too granular because obviously there are some other competitors who would love to know exactly where we're targeting our subs, but I think it's a combination of national and local and we've seen efficiency with both types of spend.

[Michael Graham:]

Okay. Do you think it's important, though, to focus -- I mean, I understand that you don't want to talk about particular markets, which is fine. But is there a focus on like trying to get particular markets built up, or is it really just more widespread. Is it important to you?

[Gregory R. Liberman:]

Well, it's important. I mean, at the end of the day, dating is inherently a local business. So having scale in individual markets is important. There are not -- I think there are some specific markets where we're more penetrated than others. But one of the things that we've seen as we've grown ChristianMingle over the last 3 years is our penetration rates in almost every market where we have a presence, which is almost every market, has gone up 300%, 400% or 500%. So there are clearly markets that have more people in them, and creating more density in a market with more people creates more subs. But we focus on trying to build a network in all the markets that we can.

[Michael Graham:]

Okay. And then my other question was just on the longer-term subscriber plans. Like when the 3- and 6-month people come up for renewal, do they have different churn behavior than the 1-month people? I mean, I understand that obviously if they sign up for longer term, they're going to be around for a little bit longer than the 1-month people. But what is the churn rate like for the longer-term guys relative to the 1-month guys?

[Brett A. Zane:]

Mike, this is Brett. I think we can tell you kind of directionally what happens without the specifics behind it. But typically, what happens is our longer term -- people have initially purchased longer-term plans whether it's a 3- or 6-month plan. They'll tend to on their first renewal, renew not as strong as a 1-month initial purchaser would. But after that, we end up getting more months or more renewals out of the longer-term subscribers. So the first cycle, there's a little bit of a drop-off. But in our renewal cycle system for JDate and ChristianMingle, in particular, people that buy a 3- or 6-month plan will then renew for a like term. So if you buy for 3 months, you renew for 3 months. And so it starts to actually accumulate and extend the paying months over time with the 3- or 6-month purchaser. But initially, you take a little bit of a hit because the 1-month folks usually renew at a little bit of a higher renewal rate on what we'll call the first cycle, the first time they come up for renewal. But after that, the 3- and the 6-month are starting to catch up and over time what we've seen when we run our tests is long term we're better off with the 3- and 6-monthers, which provide long-term stability for the business.

[Gregory R. Liberman:]

And just to layer on one more thing, in case that wasn't complex enough for you, is that as people get into their renewal cycles, later renewal cycles tend to renew better than earlier renewal cycles. So the first renewal cycle will tend to have the highest lapse rate. The second renewal cycle will churn less. The third will churn less.

[Operator:]

Our next question comes from the line of George Askew from Stifel, Nicolaus.

[George I. Askew:]

What kind of trends did you see in the cost of media or CPCs during the quarter? I recognize you had incremental spending on the incremental opportunities. But just on pure costs, were there any changes there?

[Brett A. Zane:]

We can't necessarily talk about the specifics behind it. It bounces around, George. In general, it's kind of staying in the zone of what we've experienced. Certain tasks, especially with different partners, may come in a little bit higher, some come in a little bit lower. So it's kind of a mixture of stuff actually at the end of the day.

[Gregory R. Liberman:]

And when you look at our portfolio of media investment, I mean there are ebbs and flows so what we tend to see is not one channel that's always necessarily more expensive than others, but there are times of year or even times of month or times of day when certain channels will yield better on the cost side than others.

[George I. Askew:]

Right, okay. And then, on marketing opportunities you mentioned, were they all at ChristianMingle or were some of those new marketing opportunities with JDate, for example?

[Gregory R. Liberman:]

We saw opportunities across the board, but the majority of our focus from a marketing perspective is ChristianMingle. That obviously drives most of the costs.

[Brett A. Zane:]

We did a little bit on Jewish, but just on a relative basis. Most of it was on the Christian side.

[George I. Askew:]

Okay. Is there -- can you give us some kind of more granularity around the mobile launches and what you saw as far as an impact on your business? I know you didn't have a whole lot of time during the second quarter with the new apps, but any kind of metrics you can provide or trends and what you might be seeing and expecting for the rest of -- for this quarter, next quarter, et cetera, just in terms of the momentum behind the mobile apps, specifically.

[Gregory R. Liberman:]

So I mean, I think -- so the apps, to your point, are pretty new. We haven't even done much marketing behind them. But if you take Quick View, which is a ChristianMingle app that we launched earlier than JPix, we've had over 100,000 downloads without much marketing behind that. So we're excited about that. We're also continuing to focus on the mobile Web experience, so it's not necessarily app specific. But on the mobile website, things like I mentioned earlier, we saw on both ChristianMingle and in JDate, a significant increase in logins via mobile. So that's important. In addition, mobile as an acquisition channel is becoming steadily a bigger and bigger acquisition channel. But one of the things I'm most excited about on the app front is having the native apps gives us an opportunity to acquire customers more effectively through in-app marketing that's a little bit harder to do on the mobile Web when you're advertising an app. So I'm pretty excited about that.

[George I. Askew:]

Got it. And then just one last question. Any kind of -- incremental or unusual sort of competitive trends going on in the industry that kind of surfaced in the quarter?

[Gregory R. Liberman:]

I don't think anything unusual. I mean, there's always -- people are trying to knock you off when you're #1 and we have the 2 leading brands in the Christian and Jewish space, so we saw what we would expect to see when we have a business that's building like ours.

[Operator:]

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