Spark Networks SE
Q3 2013 Earnings Call Transcript

Published: 14 Nov 2013

[Operator:]

Greetings, and welcome to the Spark Networks Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Zane, CFO of Spark Networks. Thank you, Mr. Zane, you may begin.

[Brett A. Zane:]

Thank you for joining us today. I'm Brett Zane, Chief Financial Officer for Spark Networks. On today's call with me is Greg Liberman, our 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 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 intercompany loans and the income recognized from non-cash 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, because adjusted EBITDA is not calculated in accordance with GAAP, it may not be comparable to similarly titled measures employed by other companies. A reconciliation of EBITDA and adjusted EBITDA to net income can be found in the consolidated statements of operations included in our earnings release. I would like to remind everyone listening today that any comments made on this call may contain forward-looking information within the meaning of the Safe Harbor 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 Greg.

[Gregory R. Liberman:]

Thanks, Brett, and good afternoon, everyone. We appreciate your continued interest and support and look forward to diving into our third quarter results with you on today's call. Q3 marked another terrific quarter, as we continue to execute against our strategic plans. Among the notable milestones during the quarter were our 11th consecutive quarter of year-over-year revenue growth, our best contribution performance since the first half of 2012. Continued progress on the product front, most notably in mobile, and a record quarter for our small but growing Christian ad sales business. Company wide Q3 revenue totaled $17.4 million, which represented an increase of 9% year-over-year. That revenue growth continued to be driven by the expansion of our subscriber base, as average paying subscribers increased another 13% to end the quarter north of 300,000 for the second consecutive quarter. In addition to our top-line performance, we also meaningfully improved profitability, with contribution increasing 22% and adjusted EBITDA hitting its highest level since mid 2012. Our third quarter performance continued to be powered by our Christian and Jewish Network segments, anchored by our category leading ChristianMingle and JDate brands. With respect to Christian Networks, the contribution we saw in the third quarter reflects the dynamic we have described in the past, namely an improvement in Christian Networks contribution does not require an absolute decrease in direct marketing spend. In Q3, our direct marketing spend actually grew on a year-over-year basis by 7%. But it was exceeded by 19% revenue growth. The net result was a 35% year-over-year improvement in Christian Networks contribution. In 2011, we grew our Christian Networks Marketing spend by nearly 300%. In 2012, we grew spend by just shy of 115%. So far, through the first 9 months of this year, Christian Networks marketing spend is up a little more than 20%. Although our marketing spend will continue to be lumpy as we take advantage of various new opportunities, we do not expect our spend for the remainder of the year to materially differ from the average of the first 3 quarters. To be clear, investing in and fortifying Christian Networks foundation for long-term, sustainable growth remains a key focus. And that investment continues to yield benefits. During the quarter, ChristianMingle's brand awareness reached nearly 80% in the general population, and even higher among our target audience. And it is a site Christians are most likely to recommend to friends who share their faith and values. And, as ChristianMingle continued to mature as a brand, it helped drive Christian Networks best contribution performance since 2011. And as we had anticipated, the positive mix shift momentum we discussed last quarter continued into Q3. A greater proportion of our members purchased multi-month plans than ever before. And despite lower ARPU, driven by the continued shift towards the higher ASP, higher lifetime value, multi-month plans, Christian Networks revenue exceeded $10 million for both the second consecutive quarter and the second time in our history. Revenue growth was driven by record average paying subscribers, which grew another 28% to hit more than 197,000. Our Q3 subscriber growth is a special -- especially notable, given the significant increase in multi-month sales we saw during the first half of this year which, by definition, means many of those subscribers were scheduled to come up for renewal for the first time in Q3 and Q4. And as we have discussed in the past, we experienced our lowest renewal rates from subscribers renewing for the first time, regardless of plan. Lower renewal rates create a large pool of lapsed subscriptions, which must be replaced by a significant number of new subscriptions, just to remain even. That said, our renewal rates consistently increase, as subscribers renew for their second and subsequent time. As our subscription mix stabilizes, the renewal base seasons, and a smaller proportion of our renewals are of the first cycle variety, fewer people will leave our ecosystem, creating greater stability. And we expect to see renewal rates improve over time, which would further enhance that dynamic. Finally, I would like to talk briefly about another opportunity for us to grow our Christian Networks business. And that is on a unit economics front. Christian Networks' growth over the past 3 years has been driven largely by the 700% increase in average paying subscribers we have seen over that time. But, as you can see, Jewish Networks ARPU is about 60% higher than that of our Christian Networks segment. While growing our Christian Networks subscriber base remains a key focus of ours, we have told you that over time, we would begin to shift more of our attention to price optimization or yield management. In Q3, one of the more significant back end projects we completed was to move ChristianMingle from its legacy payment engine over to the more dynamic and powerful payment engine we have built and enhanced for JDate over the past several years. We call that system UPS. With ChristianMingle now in UPS, we have the ability to improve yield on the front end, first time subscription and win-back side of the equation, and also optimize on the back end, the renewal side of the equation. Given the timing of the migration, we're in the very early stages of leveraging UPS for ChristianMingle, but are pleased with the results we have seen thus far. With our 2 leading brands now operating on our best of prepayment engines, we expect to start to demonstrate more progress on the unit economics opportunity in 2014, with the goal of increasing lifetime value and profitability over the long-term. Finally, we also remain focused on building and strengthening the Christian community through our outreach efforts and our portfolio of media properties. Believe.com, our Christian lifestyle brand, relaunched in August and has been gaining traction, with a meaningful portion of its audience coming from the most powerful online distribution platform in the Christian space, namely ChristianMingle. Christian Networks' advertising revenue, while still a relatively small proportion of our overall revenue, hit a record in Q3, and we remain excited about the potential of our non-dating businesses to be meaningful contributors for us in the years to come. Our Christian Networks segment is not the lone bright spot in our business, as our Jewish Network segment delivered another terrific quarter. On the top line, revenue grew for the second consecutive quarter, for the first time since 2008, behind a stable subscriber base and the segment's best ARPU performance in nearly 4 years. And contribution margins remain rock solid at the near 90% level we have come to expect. Suffice it to say, our Jewish Networks business and its cash flow remain core to our strategy. Before turning the call over to Brett, I want to talk for a moment about the continuing evolution of our mobile platform. On our last call, I spoke about both our native applications and mobile web strategies and specifically, several milestones we hit on the outfront. Native applications provide many interesting opportunities, and we will continue to evolve our strategy on that front. Looking at Q4 in particular though, we will shift more of our focus back to the mobile web. And operating system agnostic mobile web experience will always provide us the broadest reach to making sure that experience provides as much value as it can, to as many members as it can, is critical to our mission. Not surprisingly, mobile logins on both ChristianMingle and JDate are at all-time highs. During Q3, ChristianMingle mobile logins grew 58%, and now comprise nearly half of all ChristianMingle logins. And on JDate, mobile logins grew triple digits again, 116% to be exact. And now make up more than 30% of logins on JDate.com. Now I will turn the call over to Brett to run you through our financials at a more granular level. Brett?

[Brett A. Zane:]

Thanks, Greg. Revenue was $17.4 million, up 9% year-over-year. Once again, the growth in revenue was driven by a higher subscription revenue from our Christian Networks. Christian Networks revenue increased 19%, topping $10 million for the quarter, driven by a 28% increase in average paying subscribers, partially offset by a 7% decline in ARPU. As Greg alluded to earlier, our average paying subscribers base for both new and renewing subscribers has shifted to individuals on longer-term plans, resulting in downward pressure on ARPU. We believe that we will continue to experience this dynamic in our seasonally slower fourth quarter, but we anticipate the plan mix stabilizing in 2014, which will in turn stabilize ARPU. And importantly, subscribers who purchase longer-term plans generate higher lifetime value, and thus are more beneficial to the Company over time. Jewish Networks revenue increased approximately 1% to $6.4 million, the second consecutive quarter of year-over-year growth. The last time we demonstrated this type of growth was in 2008. Average paying subscribers remained relatively flat at 84,000, while ARPU increased by approximately 3%. The increase in ARPU is primarily attributed to higher ASPs. Total contribution was $4.7 million, up 22% year-over-year, reflecting Christian Networks revenue growth outpacing that of its marketing spend. Christian Networks contribution improved 35% year-over-year, despite marketing spend increasing 7%. Echoing Greg's earlier comments, we do not expect our spend for the remainder of the year to materially differ from the average of the first 3 quarters. Cost and expenses totaled $19.9 million, up 7% year-over-year. Driving this increase was a $739,000 increase in Christian Networks direct marketing expenses. In addition, G&A expenses grew $236,000, reflecting higher legal fees associated with some litigation matters, and an increased accounting fee associated with our Sarbanes-Oxley compliance. As of January 1, 2014, we are deemed an accelerated filer by the SEC, which requires our independent auditor to perform additional work, including a testing to our internal controls over financial reporting for our 2013 annual financial statements. Additionally, we anticipate our annual accounting fees increasing by approximately $150,000 in 2013 and remaining around these levels thereafter. Adjusted EBITDA was a loss of $1.8 million, an 11% improvement from the loss of $2 million in the prior-year period. Net loss totaled $2.6 million or $0.11 per share, compared to a loss of $1.7 million or $0.08 per share in the prior-year period. The year-over-year increase in net loss was primarily the result of a $1 million increase in our income tax provision. For the quarter, weighted average shares outstanding totaled $23.8 million, compared to $20.7 million in the prior year period. Thank you, all for your time today. That concludes our prepared remarks. Operator, please open up the call for questions.

[Operator:]

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

[Michael Graham:]

Just wanted to ask about the rollout in Christian Networks. Couple of thoughts. One is, Brett, you made the comment that there were a couple of positives things that might impact ARPU next year, one being, just a more stable subscriber base and two, being the new payments engine. And I just wonder, can you talk about like, should that -- should both of those things impact at once, will they be all year, or will they come in later in the year, and just -- are you willing to sort of, quantify at all, what to expect out of Christian Networks' ARPU? And then I have a quick follow up on that.

[Brett A. Zane:]

I think -- first of all, Mike, good to talk to you. I think, what we're anticipating is that, as our planned mix has shifted to the longer-term plans, and you have more of those subscribers that are digesting through the system, as of -- will happen in Q4, where you have more of your paying subscriber base, that's on the 3- and 6- month plans versus being on 1- and 3- month plans, for example, that, that's applied some downward pressure to the ARPU. However, we think that most of that kind of shift in mix should get digested through Q4. So rolling into 2014, we think ARPU's going to stabilize and then, there should be a lift in ARPU over time in 2014. It's not going to all happen at once, it'll happen over a period of time. Some of that has to do with our renewers, usually when our first time subscribers or win-back folks purchase, they may take advantage of some promotional pricing, but when you get into your renewal cycles, those renewing folks will actually renew at our list price versus a promotional pricing. So that brings a natural increase to the ARPU, on sort of our paying subscriber base. In addition to that, we have been doing a bunch of price testing, and we're going to continue to do some price testing. And we've seen some of those results actually manifest in sales in average selling price. I think I mentioned on our last earnings call, that our ASP was up 9%, and a portion of that was due to price optimization and some of it had to do with the shift to a longer-term plan. And so our expectation is that, as we go into 2014, there'll be more price optimization work that we're doing, that should increase the ARPU over time. And as Greg mentioned on the call, some of that actually is facilitated by our shift to our UPS system, and that allows us to do more dynamic pricing and price testing than we've done in the past. So I don't think -- the short answer is, it won't happen all at once, but it should happen throughout 2014.

[Michael Graham:]

Okay. No, that makes sense. The other thing I wanted to ask you about was just, going back to an idea that's been discussed before. But part of the reason, I think the Jewish Networks business is as stable as it is, is because it's geographically dense and it's concentrated in the -- that the subscriber base is concentrated in a few bigger markets. And I'm just wondering, has your thinking evolved at all, about, where you're marketing for Christian Networks and trying to grow particular markets, one at a time or several at a time, rather than just sort of blanket spending across the country, and can you give us any color on, are there markets, where you're starting to see the internal metrics improve, because you're getting more member or subscriber density there?

[Gregory R. Liberman:]

Mike, I'll jump in for a sec. So for us, I mean, the national marketing, when we look at marketing on a local basis, which we do to some degree, and there are some markets that are denser than others, but as I think I mentioned in the past, as we've grown ChristianMingle, we've seen several hundred percent increases in our member and subscriber bases, almost across the board. And the unit economics of marketing on a national basis are cheaper than doing it on a local basis. So even our national, I think what you called blanket spend, does hit on the local level and does improve individual markets. There is definitely times we look to do local stuff. I don't know that our -- well, I like to think that our thinking on this evolves constantly. And there are definitely some things that we're doing differently this quarter than we did last quarter. But within the markets, there are big markets for us. We've seen increased engagement, but I think what's really important, as we look inside of our subscriber ecosystem and engagement levels, not only have we increased the absolute numbers of logins, visits, messages, but on a unit basis, those have increased as well, which tells us that we're getting stronger across the board.

[Operator:]

Our next question comes from the line of Ralph Schackart with William Blair.

[Ralph Schackart:]

First on the contribution margin. It was better than we modeled in -- I think the lowest level in 6 quarters on the Christian side, while the stubs are slightly above our model. Can you talk about the marketing efficiencies that you're seeing, either on the direct response, are you starting to get some leverage to the brand campaigns that you ran historically? Just maybe a little bit more color, what's driving the out performance?

[Brett A. Zane:]

I think, it's a combination of things. There's definitely -- from quarter-to-quarter, there'll be some opportunistic buys that we'll do, that may not yield the efficiencies that we're looking for. And we saw some of that in Q2, where there may have been a few buys that weren't as efficient as we would have liked them to have been. In Q3, we hadn't jumped into as many of those opportunistic buys that can be less sufficient, and can create some downward pressure on contribution. So some of that was the elimination of just inefficient spend at the time, or looking at things that didn't seem as attractive to us as we would otherwise like them to be. So that's part of the equation. The other part is, and as we've mentioned before, as far as our business model goes, as the growth rate in our marketing spends slows down, which it did in Q3, you see the revenue start to catch up to the marketing spend. And in this particular case, even though our marketing spend has increased by 7%, that growth in the marketing spend is much lower than what we've had historically. And as a result, you have more revenue that's coming in from our win-backs and our renewals, in addition to our first-time subscribers, which is allowing the revenue to catch up to the marketing spend and create improvement in the contribution. And so, those are kind of the 2 dynamics that are out there.

[Ralph Schackart:]

And maybe, a follow up to that, if I could. So last quarter, we saw the dynamic where the subs shifted by your design, from 1 month to 3-6 months, and you're experiencing the same trends now. Without giving us specifics or the metrics around it, are you pretty happy with, sort of the way that the sub bases evolved, as you look at that, vis–à–vis, your marketing spend?

[Gregory R. Liberman:]

Yes. I mean, we are -- and for us, as we talked about last quarter, and reiterated on the call today, seeing people shift from the one month to what we call multi-month plans, which is our 3- and 6- month plans, makes for a much more stable subscriber base over the long-term. In the near-term, it puts a little bit of pressure on that base, because people coming up for their first renewal cycle, renew the worst on any cycle, and by definition, when we have a mix shift like we're seeing, a greater proportion of our longer term plans are of that first cycle variety. So while in the near term, you'll see some pressure, both on the southern ARPU front over the long-term. We're very happy with the way the mix is playing out.

[Michael Graham:]

Great. One more, and I'll turn it over, if I could. I think you provided the ASP lift that you saw last year, or I'm sorry, last quarter, as a result of the movement from 3- to 6- months, would you be willing to provide that again this quarter?

[Brett A. Zane:]

I think, it's something we don't want to necessarily get into the habit of doing, but it was 4 -- about 4%, Q3 this year, over Q3 last year.

[Operator:]

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

[George I. Askew:]

Regarding mobile real quickly, is there a correlation between your mobile logins and usage and your renewal rates? And as mobile continues to grow, or should that continue to -- within itself, help your renewal rates?

[Gregory R. Liberman:]

So you got garbled a little bit near the end, but I think I got the gist of it. I mean, I think one of the things that mobile does for us, is it increases engagement, which makes sense, because people can access our services anytime, anywhere. They'll login more frequently, we talked about the increase in proportion of logins from mobile devices. So that engagement helps drive renewals for sure, and over time, you'll see more of that. I don't think it's necessarily mobile people renewing better, although being able to access JDate or ChristianMingle whenever you want, wherever you want, knowing that it's always there. I think will have some impact. But those people's behavior, logging in, viewing profiles, sending messages, also impacts other people who may not be accessing on mobile as much. So we think mobile will have a positive long-term impact on renewals. But it's not necessarily just those folks on -- who are accessing us via mobile.

[George I. Askew:]

Okay. You mentioned ChristianMingle awareness at 80%, I know, it's obviously been very, very high in recent quarters. But do you anticipate at some level of brand awareness, that changing your advertising strategy, perhaps away from brand towards performance? Are you going to be opportunistic, and just look for the best advertising channels and opportunities, kind of regardless of where you're going at some point?

[Gregory R. Liberman:]

I mean, not a lot of the advertising that we do is brand-focused. In fact, I can almost -- I can't really think of any ads then, that we do that's solely brand-focused. We think, that our -- that the hybrid approach we have to -- mostly performance-based, and as we've talked about before, we measure the returns on our advertising spend, strictly on a performance basis. So we look at that lifetime value, relative to subscriber acquisition cost, for every dollar we spend everywhere. And so we may shift -- we constantly shift. But ultimately, we're trying to drive registration subscriptions renewals. I think one of the things that I'm particularly excited about as we had into 2014, you won't see as much of it this quarter, or we won't have has much with this quarter, is we're just building a foundation. But the tools that we are building and working with partners on, to help us with our attribution of our marketing spend that has the potential to profoundly change the way we approach our marketing spend, and identify new areas where -- new areas or existing areas, where typical direct attribution tools might tell us, aren't performing as well as they are. But when we look at it, on a more holistic basis, we actually may find meaningful opportunities in places that we're already spending, but potentially not spending enough.

[George I. Askew:]

Right. That's fair. I tend to think of television as having, a fairly material brand awareness component that [indiscernible] and certainly appreciate your interest in -- and have actually guided here. We think it's not going to tell how you're addressing your advertising strategy. Just one more, on the Believe.com relaunch, does that require to be [indiscernible] unique personnel as the company, and kind of, how do you think in terms of -- how does the relaunch impact your content and your sales strategy for that brand, and for your immediate properties overall?

[Gregory R. Liberman:]

So, let me address that, but let me -- we move back to TV, I mean, one of the things on -- just to reiterate on the TV front, we look at that really, on a cost per acquisition basis. So notwithstanding that we know there is brand impact, and TV clearly has had an impact on our brand, just as I believe, our online spend and some of our print and out of home stuff. We do measure that stuff on a direct response basis, so that's one piece. In terms of the Believe.com relaunch, the staffing -- and we will continue to add staff on the media businesses. We think there are -- we think that there are opportunities for us to improve on, both the content as well as the monetization of those businesses over time. And as I've said, both on this column before, we're really excited about the opportunity. And we've seen some of that benefit in this past quarter, we talked about it being our highest Christian Networks ad sales quarter on record, and we know from the advertisers that we worked with that our brands yield meaningfully better for them than other brands that they were buying from in the past, and may buy along side of us. So we're very excited about that and very focused on that and over time, that will mean, hopefully adding folks, adding folks to team in key, mostly, sort of content and product related areas.

[Brett A. Zane:]

And you'll feel a little bit of that uptick in our sales and marketing line item, on our P&L, as it relates to operating expenses, a portion of that increase is really related to the Media business, a little bit related to some of -- some folks that are facilitating our mobile effort, but a portion of that's also related to the Media business.

[Operator:]

Our next question comes from the line of Ralph Schackart with William Blair.

[Ralph Schackart:]

One more follow up, if I could, please. Just on the JDate side, it's showed a little bit more upside this quarter, as well as the last. And -- just curious if there's anything specifically, that's driving that, from your standpoint, and how we should think about the JDate business going forward?

[Gregory R. Liberman:]

So I would think about the JDate business going forward in pretty much the same terms that we've talked about historically. You've seen a little bit of an uptick, we're obviously, very pleased with the stabilization in over the past 2 quarters, little revenue upticks we've seen. The optimization and work that we do, continues to benefit us on JDate and a lot of the mobile stuff that we do. I mean, we're doing it on JDate, just as we are on ChristianMingle. So I think, we talked about the yield optimization -- or the yield management, and pricing optimization opportunity on the Christian Networks side of the equation. Clearly, less of that exists on the Jewish Network side. But we still there are opportunities and, the nice thing about having 2 large brands in this space as it that -- we can learn, one brand can learn from the other, and so there are number of different initiatives that they we're exacted about, but I wouldn't think of Jewish Networks differently than you have, or at least than we have historically, which is on the topline, it's not going to drive meaningful growth, but it'll continue to be a meaningful contributor to the business.

[Brett A. Zane:]

Just to put emphasis on that, I wouldn't start taking the last few quarters of performance and start extrapolating, starting to model out, meaningfully grow the business. I -- we're going to strive for that, but I wouldn't make that assumption.

[Operator:]

Thank you. That is all the time we have allotted for questions. This does concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.