Spark Networks SE
Q3 2014 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Greetings and welcome to the Spark Networks’ Third Quarter 2014 Conference Call. (Operator instructions) I would now like to turn the conference over to your host, Brett Zane, Chief Financial Officer of Spark Networks. Please go ahead.

[Brett Zane:]

Thank you for joining us today. I’m Brett Zane, Chief Financial Officer for Spark Networks. On today’s call with me is Mike McConnell, the Executive Chairman of our Board of Directors. 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 Web site at www.spark.net in both the Investor Relations and Media Center sections. In the press release and in our prepared remarks on this call we refer to adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation, asset impairments, non-cash currency translation adjustments for inter-company loans and non-recurring proxy contest costs and severance expense. Although adjusted EBITDA is a non-GAAP financial measure, we believe it may be useful to investors when evaluating the company’s current financial performance. However, investors should not consider adjusted EBITDA as an alternative to net income, cash flow from operations, or any other measure for determining the company’s operating performance calculated in accordance with GAAP. In addition, because adjusted EBITDA is not calculated in accordance with GAAP, it may not be comparable to similarly titled measures employed by other companies. A reconciliation of EBITDA and adjusted EBITDA to net income can be found in the “Consolidated Statements of Operations” included in our earnings release. I’d 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 Provisions 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 Mike.

[Mike McConnell:]

Thank you, Brett. Good afternoon, everybody and thank you for joining our conference call today. I will focus my comments on two areas this afternoon before turning the call back over to Brett who will walk us through the financials. First, I will discuss the actions taken over the last 75 days. Initiatives currently underway and our current quarter guidance. Then I will speak to our focus and priorities for 2015. Since assuming the Executive Chairman role in mid-August, we have focused on right sizing the corporate cost structure, driving efficiency particularly marketing efficiency for TV spend on ChristianMingle and improving our product and customer experience. These were the primary elements of the proxy contest undertaken by Osmium Partners and 402 Capital and form the basis of what I call a back to basics approach. As previously announced in mid-September, we implemented a plan to reduce our operating cost by approximately $5 million through reduction in force and expense reduction initiatives. These followed a comprehensive review of the organization, its people and our priorities. The implementation of these actions has been embraced well by the remaining organization and we are moving forward with a sense of urgency and focus. Please note, very little of the benefit of these savings are reflected in this quarter's numbers. This plan in not only about cutting costs. As importantly, it was about adopting an intense focus on our two core brands and communities they serve. A key element of the plan was to reduce excessive complexity, simplify activities and drive a sharpened intentional focus on JDate and ChristianMingle. To that end, the team has developed specific tactile initiatives between now and the end of the year targeted at improving our product and customer experience. I will mention three and it's not all-inclusive. First, in late August we made a commitment to have native mobile apps for both communities before the beginning of 2015. Our flagship JDate iOS app has been approved by Apple and the CM iOS app and CM Android app are on target for December launch. I encourage you to download the JDate app and experience the offering as it goes live over the next several days. It is a start and we are committed to creating a terrific user experience on mobile. It is a must today when one examines its rapid adoption of this platform across our industry. Second, we have approved new creative content, that means commercials ChristianMingle. The existing creative was old and a fresh perspective was long overdue. Production has commenced and we expect to be in market testing this new creative in early January. Third, we have developed enhanced training with a third party to build upon our customer service foundation in Utah. Our customer service interaction is more than simply solving a specific problem within a set period of time, or we would like it to be more than that. With a focus on creating an extraordinary customer experience, we can not only solve problems but also improve the quality of member interactions and ideally drive revenue and satisfactions. These are just several examples of the activities underway that are unrelated to reducing cost and important to our customer, our product and the experience we provide to our members. Next, we took a fresh look at the efficiency of our TV spend on ChristianMingle given where the business was at the end of August. In September and October, we did a live stress test on the marketing spend for Mingle. While gross registrations declined as was expected, we now have a better sense for a base line that is profitable while at the same time an understanding for how we would begin to build on a stabilized, profitable and responsible base. Going forward, this spend will be dynamic to take advantage of efficiency gains, new creative and benefits that hopefully accrue from improved product. I want to reiterate the metrics disclosed in mid-September [this September] (ph) for the fourth quarter. We continue to expect average paying subs for all networks in Q4 between 230,000 to 240,000, with a cash balance between $9 million and $10 million. Turning to 2015. First, we will enter the year having set a solid foundation. We are down to shortlist of candidates for a permanent CEO. We will make a selection shortly and I am confident that the new leader will be installed before the end of the year. Your board is excited about the potential for our assets under new leadership with a significant experience in developing industry leading product and utilization of data driven analytics for marketing decisions. The focus of the new CEO and the team for 2015, first and foremost, will be on product development. Given the competitive dynamics in our marketplace and historical under investment in this area at Spark, this board is committed to dedicating the resources to developing innovative products, functions and features to deliver a world class user experience. This is our business and we know that we need to raise our bar. Getting there is not a question of if, but when. A first step was the introduction of our native mobile apps. We are exploring ways to accelerate our development activities including possibly leveraging our presence in Israel, a know world-class environment for technology and technology development. With improved product, our marketing efficiency and effectiveness will improve. Injecting even greater utilization of data and analytics will further drive profitable customer acquisition and retention. Taken together, 2015 represents a year of fresh senior leadership, significant improvement to our products across both communities and all platforms, an enhanced marketing efficiency through better use of data driven analytics. Our goal since August has been to right size the business, to stabilize the customer base and put a plan and people in place for 2015 that drives future responsible and profitable growth. I believe that we have delivered on right sizing, have a line of sight to stabilization and we will by the end of the year the leader and a plan in place to deliver growth in 2015. One final comment. We the new board, once given the opportunity to sit on the inside, very quickly assessed the significant challenges and opportunities for the business. It faced some real problems. We have embraced the reality and operated with an appropriate sense of urgency. Finally, I want to offer a sincere thanks to the team here at Spark who have managed this period of significant change with professionalism and a commitment to creating a profitable growing future for the two terrific brands we have in JDate and ChristianMingle. With that I will turn it over to Brett.

[Brett Zane:]

Q3 revenue was $15 million, a decrease of 14% compared to the year-ago period. This decline can primarily be attributed to lower subscription revenue from our Christian and Jewish Networks segments. Christian Networks revenue was down approximately 14% year-over-year, reflecting a 15% decrease in average paying subscribers. The lower average paying subscriber base is a result of the affiliate-driven email deliverability challenges experienced in Q1 and the reduction and reallocation of our direct marketing investments, the latter of which resulted in lower direct marketing spend during the quarter. It should be noted that our ARPU was relatively flat year-over-year and increased 2% sequentially as we reduced the number of promotions offered in the third quarter of 2014. Jewish Networks revenue was $5.7 million, a decrease of 11% year-over-year. The decline in revenue was primarily driven by a 9% decrease in average paying subscribers over the prior year period. The decrease can primarily be attributed to the affiliate-driven email deliverability issues experienced in Q1 and softness in our international operations. Although we resolved the email deliverability issue in early March, we entered the third quarter with an average paying subscriber base 7% lower than in the previous year. Contribution in the third quarter was $9 million, a 90% increase compared to the year-ago period. Christian Networks was the primary driver behind the gains in total company contribution as its contribution was positive for the second consecutive quarter. The improvement in contribution was driven by a combination of improved returns on our marketing investments, growth in our winback and renewal average paying subscriber bases as a percentage of the total average paying subscriber base, and growth in Christian Networks advertising revenue. Our planned reduction and reallocation of direct marketing spend in the Christian Networks segment reduced the number of first-time paying subscribers entering our ecosystem, which put downward pressure on our average paying subscriber count. However, the return on investment has continued to meaningfully improve since the fourth quarter of 2013. Jewish Networks contribution was $5.1 million, a 9% decrease year-over-year. The lower year-over-year contribution is largely a result of the decline in Jewish Networks revenue. Total cost and expenses were $15.3 million, a decrease of 23% compared to the year-ago period. The year-over-year decline was driven by a 55% or $6.4 million decrease in Christian Networks direct marketing expense, offset by a $2 million increase in G&A costs. G&A expenses were $4.4 million, up 78% year-over-year. The increase can primarily be attributed to $1.2 million of cash compensation associated with the separation of our former Chief Executive Officer and General Counsel, and the reimbursement of certain dissident shareholder proxy contest fees and expenses, totaling approximately $509,000. Excluding onetime cost associated with the separation of our former Chief Executive Officer, General Counsel and general workforce reductions, and the reimbursement of certain dissident shareholder proxy related fees and expenses, adjusted EBITDA was $2.5 million compared to a loss of $1.8 million in third quarter of 2013. Net loss totaled $969,000 or a loss of $0.04 per share, compared to a net loss of $2.6 million or $0.11 per share in the third quarter of 2013. The year-over-year improvement in contribution drove the gains in that loss. For the quarter, weighted average shares outstanding totaled $24 million compared to $23.8 million in third quarter of 2013. Despite the $1.9 million of non-recurring cost associated with the separation of certain employees and the reimbursement for certain dissident proxy related fees and expenses, our third quarter cash balance only decreased $774,000. That concludes our prepared remarks. Thank you again for joining us for our call. Operator, we would like to open the call to questions.

[Operator:]

(Operator Instructions) Our first question comes from Ralph Schackart from William Blair.

[Ralph Schackart:]

First one for Mike. Mike, you talked about the new mobile apps that are rolling out. Any sense how this might be able to help reverse some of the recent sub trends and just maybe your perspective if you think mobile as a retention vehicle or perhaps sort of a new channel to drive subs for you.

[Mike McConnell:]

Yes. It's probably a bit of everything. Actually our view internally here is it's primarily an engagement vehicle that over time will help retention and win backs. You might actually, as you know, from a monetary sense with Apple we have to cough up some of the dollar to them. So it might impact revenue negatively initially. But look, it's a must in today's environment given the number of users that access our products and services via that medium. And so we have to be there and adopt our business model to the right place after where they are. I view it first as an engagement vehicle and then subsequently over a longer-term as a retention vehicle.

[Ralph Schackart:]

Great. And then just maybe as a follow-up on Christian. Now that you have pulled back the spend in the marketing and you have sort of a new creative, sounds like that you are rolling out. Can you just maybe give us a little broad perspective, how you are thinking about that sub base going forward and sort of the network effects of the business?

[Mike McConnell:]

Yes, sure. That’s sort of the big question here. And that’s a very good and important question. Let me give a little bit of a longer answer to that which I think will sort of address what you are getting at. Phase one of our focus here was as described, right size the cost structure and drive marketing efficiency. And there you know we mean specifically ChristianMingle. Phase two is to drive improvements in product, data analytics and of course installing a new CEO to lead all of that. All of which with an intense focus on our two core brands and the communities they serve. We have a number of initiatives under way, some of which I spoke to and all of which are part of what we call the second phase. And that is really enhancing our products from the delivery of mobile apps to the creative, we have got a bunch of what we call quick product wins around testing etcetera. And with that is background. And not yet having started our budgeting our process for 2014 because we would like the new CEO to be a part of that, what I will say is the following. It's my expectation that we stabilized our sub base in the 220,000 to 230,000 range of average paying subscribers in the first half of 2015. While at the same time, being profitable and spending efficiently and responsibly. These last two concepts are important as we actually control to a significant degree our sub count. Predicated on the spend we are willing to undertake and we are very mindful of the ecosystem health. This is a topic of significant discussion inside the company. And what I will tell you this, Ralph, is we have to find a spot where we can collectively spend in a value creating way and have a sub count that creates a healthy ecosystem. And we are finding our way to the spot. I have given a sense for what my expectation is for the first six months of next year. So it's a somewhat long answer to an important question. I hope I have answered it for you.

[Operator:]

Thank you. Our next question comes from George Askew from Stifel.

[George Askew:]

Congrats on a strong margin performance. Following up on Ralph's questions. In the quarter, you mentioned that you have largely accomplished marketing efficiency improvements, particularly at ChristianMingle. Does that mean that we should expect a contribution margin at ChristianMingle kind of around the third quarter level going forward?

[Mike McConnell:]

Yes, that’s a good question. The answer is -- the [big] (ph) answer there is no in the near term here. What we have done is we have driven it to a level where we can set a base line and walk forward protecting the ecosystem, developing products and initiatives that should help our retentions and sort of win back. And we are going to test in their George. And so I don’t want to commit to a specific margin percentage level other than we will be profitable as we walk forward here the next six months.

[George Askew:]

Okay. Thank you for that. It was in the, kind of the details of the release, it's clear that there is a large shift from six months plans to one month plans at ChristianMingle. Can you kind of describe how that happened, why that happened and are there incentives been in place for subscribers? How does it affect ARPU? What does it mean for your cohorts going forward? Just general questions about that?

[Mike McConnell:]

Yes. I am going to let Brett take that one. He is anxious to give you an answer.

[Brett Zane:]

Hey, George. It's a good question. It's really a byproduct of -- if you pull back on your promotional campaigns in the quarter because typically when we are promoting on our pricing it usually is incentivizing folks to buy our longer term plans, whether it's our three or six months plans. So as we reduce the number of promotions and steepness of the discounts that we had offered, that usually will incentive folks to gravitate a little bit more towards the one month plans versus the six month plans. I wouldn’t look at as a permanent shift. It's just something that happened in the period. What that does is, it helps push up the ARPU a little bit because the shorter term plans ARPU is higher. But the reality is, there is so much more of our subscriber base now that’s made up of win backs and renewals that that’s what's driving a lot of what our ARPU numbers look like. And so if we stay at this number or even if we, in the fourth quarter, shift back to some longer term plans as we are in during the holiday season, our expectation still is that our ARPU should move up just because you have more folks that are renewing at a higher ARPU price points.

[Mike McConnell:]

And George, the only thing that I would there is one of the elements of marketing efficiency that we took a look at, was the promotional activity. And we stress tested and live tested drawing that back, again to set a base line and try to find a optimal sort of balance of promotional activity ARPU and sub base. But there were a lot of promotions going on first six to seven months of this year.

[George Askew:]

Right. You know as you sort of describe all these efforts, I mean everything happened in the third quarter from the first board meeting of the new board to all the things you are talking about. Did you get kind of a half of a quarter benefit from the reduction in spending or was that something that happened in July 2. Kind of give us a sense of how much of the third quarter was impacted by all the new initiatives.

[Mike McConnell:]

Yes, sure. So let's take the ones that are most easily understood in terms of monetary. The TV spend on Mingle and the promotion only impacted September. I started mid-August, okay. So that only impacted September. The cost reduction initiatives were implemented on September the 15 largely. And so I would tell you very little of the benefit of those actions occurred in the quarter but all of the cost associated with them did. And likewise with respect to the other initiatives. I mean I was in the seat for 45 days during the quarter. And you are right, it was a very very busy period of time and we are just blocking and tackling our way forward every day. But very little of it would show up on the reported results of the third quarter except for, the most notable being this TV spend reduction in September.

[George Askew:]

Got it. Okay. Now if you will bear with me one more question. Just kind of big picture, ChristianMingle, I am sure you sort of reassessed the target market, addressable market there. How big is that market? How is the company's view changed in the last three months and what the opportunity is in for ChristianMingle?

[Mike McConnell:]

Yes. That’s is a very very good question and one that we are wrestling with. What I will tell you is, we are in the process of undertaking market research to answer that question more directly. I will tell you what my instinct is and we have made some decisions along the way. I think it is possible to expand it from what is a fairly narrow target today in our online and offline messages. But that’s just Mike talking here today. We need to do all of the work and see if the data and the analytics support that hypothesis.

[Operator:]

Thank you. Our next question comes from [Don Gardner] who is a private investor.

[Unidentified Participant:]

Hey, Mike, towards the end of your comments you indicated that you are planning to deliver growth in 2015. But I am looking at the seven metrics that you listed in the start of your press release today, and it seems like revenue will be down in '15 and paying subs will be down in '15. What of those other metrics, where will the growth come in the other five metrics. And then the second question has to do with the reimbursement of the $500,000 plus relating to the proxy fight. I was just wondering, just looking at the stock being down 12% I think since early March when Osmium announced that it was putting up a couple director candidates for board seats and down 26% since you guys won the vote. And of course that’s underperformance and pretty dramatic underperformance relative to the market. I was just wondering, what makes the board feel that they need to reimbursement $500,000 plus and if we will see any more acts of self dealing by this board going forward?

[Mike McConnell:]

Okay. Don. Thank you for your two questions. Let me take the first one. The growth that I speak to in 2015, it's an expectation we have not entered our budgeting process and essentially it is growth off of a stabilized base with a particular emphasis on ChristianMingle. And so we need to get to that point of stabilization. I talked about what my expectation is in the first six months. And then obviously the growth that I speak to comes off of that base. Okay.

[Unidentified Participant:]

(indiscernible) the growth in subs?

[Mike McConnell:]

Growth in subs and revenue. Yes.

[Unidentified Participant:]

Okay. Terrific.

[Mike McConnell:]

And then with respect to the proxy reimbursement, I guess I will offer a comment and then sort of an observation. I will tell you I don’t consider it self dealing and it is entirely customary for the winning party and a proxy contest to get reimbursed. So in my experience, there is nothing out of the ordinary of that. That was an action undertaken by the, I guess dissident sort of shareholders. And in this instance, over 90% of the people voting supported that slate and in the proxy materials it was indicated that that slate would seek reimbursement. Very transparent and very customary. The other thing that I would sort of tell you is, the company and the former board spent in excess of $1.3 million-$1.4 million in the contest that was paid by the company. Most of which was paid in the second quarter. And so what you are seeing here is, there is a cost to something called a proxy contest. And these expenses, while they are unfortunate, I can tell you in the reimbursement, in my experience, it's very customary.

[Operator:]

Thank you. (Operator Instructions)

[Mike McConnell:]

Okay. There being no further questions. Thank you very much for joining the call everybody. I want to let you know that after you have had a chance to reflect on these comments, the earnings release and the 10-Q, Brett and I are available to take any questions that you might have. Just give us a ring and we will do our best to answer for you. Thank you very much operator.

[Brett Zane:]

Thank you very much. Bye, bye.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.