Spark Networks SE
Q4 2014 Earnings Call Transcript

Published: 6 Mar 2015

[Operator:]

Greetings and welcome to the Spark Networks’ Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Robert O’Hare. Thank you Mr. O’Hare, you may begin.

[Robert O’Hare:]

Thank you for joining us today. I’m Robert O’Hare, Chief Financial Officer for Spark Networks. On today’s call with me is Michael Egan, Spark’s 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 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 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 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 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 Michael.

[Michael Egan:]

Thanks, Rob. First of all I want to thank everybody for joining us today. I’m excited to be here with Spark Networks and excited to be on my first earnings call with all of you. Let me start by talking a little bit about the significant changes the company has made over the last six months. Following the proxy contest a new board of directors was put in place with Mike McConnell serving as Executive Chairman. In that capacity Mike made important moves to ensure that the company became profitable. First, we refocus the team efforts on our two core brands, ChristianMingle and JDate. We also completed a reduction in workforce in September and revamped the company’s marketing investment for ChristianMingle based off its efficiency and profitability. Finally, the team worked quickly to launch our first mobile applications, a great first step towards filling a gap in our product offering. The impact of these changes show in our fourth quarter results which included the company’s highest contribution and adjusted EBITDA performance in years. I want to thank Mike for the commitment and leadership he has given his organization. So at the end of the fourth quarter we have continued the pace of change, most predominantly with the addition of key new players to our senior team. In January, I joined the organization as CEO. Since that time we’ve added Alex Westerman as our new Creative Director joining us from Guthy-Renker, Ben Meyer as our new Head of Product coming from the Tribune Company and Rob O’Hare previously at Square as our new CFO. We are also deep into the recruiting of a new Chief Marketing Officer as well as filling additional key marketing and data positions. Everything that has happened in the organization over the last six months has helped to create an excitement across the team and an enthusiasm for the future Spark and its two key brands. Let me now talk a little bit about the future, especially the 2015 year. Further in their plans we began implementing late last year, our efforts in 2015 will be focused around stabilizing and then growing the business by creating a nimble, innovative, profitable and customer driven organization. In doing so, we will be reinvigorating growth into our two core brands, ChristianMingle and JDate. There is a lot of work to do and as we’ve pulled back our marketing spend we are going to be swimming upstream against the natural life of the wave of members that came to us when the company was marketing at much higher levels. This wave is expected to stabilize in early to mid 2015 and then our goal is to demonstrate sequential subscriber growth for both brands by the end of the 2015 year. To accomplish this goal of becoming more nimble, innovative and customer driven we have identified four key priorities for the team. First, we still need to fill a couple of key positions in the senior team and our aim is to do as soon as possible with the right talent. Secondly, our product and technology team will be undertaking an intensive effort to make our technology stack more nimble. By becoming more nimble, we’ll be able to bring new features and services to market more efficiently with the key aim of helping our members succeed while also increasing their life time value. Our third initiative is focused on improving our marketing efficiency by incorporating deeper and more precise data into both our acquisition attribution models as well as our life cycle communications programs. We want to ensure that we are optimizing our marketing spend, but also providing our members with communications that take into account their individual needs. Our goal here is to continue to profitably acquire our members and to do so in an increasingly efficient manner. Finally, we will be implementing a handful of programs to ensure we as a company are providing the right level of service to our members. We know that our members are looking to find long term partners that share their particular set of value. We also know that online dating can be confusing and intimidating to many. Our purpose as a company to help people succeed in finding a compatible long term partner and so we’ll be testing and adopting new ways to provide this help and in the course new channels for the company. 2015 is emerging as an exciting year for the company. The company has gone through a significant change in the last six months and we are already beginning to see results. It is an exciting time to be working with such fantastic brands and I look forward to working alongside this team as we aim to take ChristianMingle and JDate to new places. I’ll now turn it back over to our new Chief Financial Officer Rob O’Hare who will walk you through the 2014 results.

[Robert O’Hare:]

Thanks, Michael. I’ll review our fourth quarter and full year 2014 performance in more detail and then Michael will conclude with a few closing remarks before we open the call to your questions. From a high level perspective the message we are delivering today is a simple one. In the fourth quarter we focused on efficient and profitable member acquisition and we will continue to do so throughout 2015. Revenue in the fourth quarter of 2014 was $14.3 million a decrease o 17% compared to the year ago period and a 5% decrease from the prior quarter. The year-over-year decrease was primarily driven by a 22% decrease in average paying subscribers reflecting a 27% and 12% decrease in average paying subscribers for the Christian and Jewish Network segments respectively. The decline in average paying subscribers were partially offset by a 5% year-over-year increase in ARPU to $19.47 in the fourth quarter driven by a 9% increase in Christian Network ARPU to $17.57, the highest since the third quarter of 2011. The 5% sequential decrease in revenue was primarily driven by 15% and 4% increases in average paying subscribers for the Christian and Jewish Network segments respectively. The sequential decline in average paying subscribers were partially offset by a 6% sequential increase in ARPU driven by a 10% sequential growth in Christian Networks ARPU. Full year 2014 revenue was $61.6 million an 11% decrease compared to 2013. The decrease was primarily driven by a 12% decline in average paying subscribers reflecting 12% and 8% decreases in average paying subscribers for the Christian and Jewish Network segments respectively. Direct marketing expenses in the fourth quarter of 2014 were $5.1 million a decrease of 60% compared to the year ago period and a 15% decrease compared to the prior quarter. Christian Networks accounted for the majority of the decrease reflecting the company’s strategy to reduce direct marketing investments to profitable levels in the segment. Full year 2014 direct marketing expenses were $30 million, a decrease of 41% driven primarily by a 44% reduction in direct marketing expenses for the Christian Networks segment. Contribution in the fourth quarter of 2014 was $9.1 million, an increase of 113% compared to the year ago period and a 2% increase compared to the prior quarter. Christian Network was the primary driver with improved marketing efficiency and a better mix within our paying subscriber base. Full year 2014 contribution was $31.2 million an 80% year-over-year increase reflecting a $16.9 million increase in Christian Networks contribution. Christian Networks contribution for the quarter and full year were positive in 2014 for the first time since the third quarter and full year of 2010 respectively. Excluding direct marketing expenses costs and expenses in the fourth quarter of 2014 were $5.9 million a decrease of 24% compared to the year ago period. The decrease is a combination of lower sales and marketing expenses and general and administrative expenses primarily reflecting the impact of the company’s expense reduction program announced in the third quarter of 2014. Excluding direct marketing expenses and non-recurring items, full year 2014 cost and expenses were $28.9 million a decrease of 2% compared to the prior year. During 2014 the company incurred onetime expenses totaling $3.3 million comprised of approximately $1.3 million of severance cost and $2 million of proxy contest cost. Net income in the fourth quarter of 2014 was $3.9 million or $0.16 per share compared to a net loss of $3.5 million or negative $0.15 per share in the year ago period and $969,000 or $0.04 per share in the prior quarter. In the fourth quarter we had an income tax benefit of $882,000 primarily reflecting the write off a [Indiscernible] tax reserve. Full year 2014 net loss was $1.1 million or negative $0.05 per share compared to a net loss of $12.4 million or negative $0.54 per share in 2013. Adjusted EBITDA in the fourth quarter of 2014 was $4.1 million compared to a loss of $2.8 million in the year ago period an income of $2.5 million excluding non-recurring charges in the prior quarter. Excluding onetime expenses associated with the separation of the company’s former CEO and general counsel the severance associated with a general reduction in workforce and the reimbursement of proxy contest cost. Full year 2014 adjusted EBITDA was income of $5.5 million, compared to a loss of $9.1 million in 2013. As Michael mentioned, one of our top goals for 2015 is to achieve sequential growth in subscribers while maintaining our focus on profitable and efficient marketing channels. Here are a few final metrics detailing our subscriber base as of the end of 2014. Total average paying subscribers in the fourth quarter of 2014 were 227,874, a decrease of 22% compared to the year ago period, and a decrease of 12% from the prior quarter. Christian Networks average paying subscribers were 141,188 in the fourth quarter of 2014, a 27% decrease compared to the year-ago period and a 15% decrease compared to the prior quarter. Jewish Networks average paying subscribers were 73,429, a 12% decrease compared to the year-ago period and a 4% decrease compared to the prior quarter. Other Networks average paying subscribers were 13,257, a 23% decrease compared to the year-ago period and a 7% decrease compared to the prior quarter. For the full year 2014 average paying subscribers were 261,734, a 12% decrease compared to 2013. As of December 31, 2014, the company had cash and cash equivalents of $11.7 million, an increase of 26% from $9.3 million at September 30, 2014. For the year, cash and cash equivalents decreased 21% from $14.7 million on December 31, 2013. As of December 31, 2014 the company had no outstanding debt. I will now hand it back over to Michael for some closing remarks.

[Michael Egan:]

Thanks, Rob. As you can see we are in the midst of a crawl, walk and run strategy to reinvigorate profitability and growth here at Spark. The last four months of 2014 were our crawl phase, where significant changes were made to realign our cost structure and focus the team and our core businesses of Christian Mingle and JDate. The results of this are demonstrated in the profitability we experienced in the fourth quarter. The first three quarters of 2015 are expected to be a walk phase. We are rapidly bringing in successful talented executives whose breadth of experience will help transform the organization. In addition, we’ll be making investments to rework our product and technology infrastructure incorporates deeper data to improve our marketing efficiency. We expect we emerge from this phase a much more nimble, innovative and customer driven organization. By Q4 of 2015 we expect to start running again. By providing our customers with products and services that truly meet their needs and beginning to innovate on a continuous basis in this exciting and dynamic industry we expect to return to sequential subscriber growth whilst maintaining our profitable state. We’ll now open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Ralph Schackart with William Blair. Please go ahead with your question.

[Ralph Schackart:]

Good afternoon, a couple if I could please. Michael just curious in terms of the first question if you could give us your assessment of sort of the brand portfolio that you’ve inherited more specifically between Christian and JDate, do you think that those brands really resonate well with the community and how would you say they are sort of differentiated? And maybe a follow up to that is as you get to your I think you talk about sort of your walk stage and you think about reinvesting in the business in terms of marketing, how are you thinking about sort of direct response, some of the channels there and some potential brand campaigns? Thanks.

[Michael Egan:]

They do resonate with their respective audience and I think they have got great positions and it affords us the opportunity to really sort of build on that awareness and respect that they have within the customers. When I think about the investments going forward in terms of marketing, really what we need to do is become a lot of efficient and data driven associated – drive data associated our attribution, understanding of marketing and also be much more data driven associate with our live cycle marketing. There's a lot opportunities now to become a lot customize and how were communicate and help, guide them through their product working with our websites and Mobile App to really help, them find their long term partners. So I'm very optimistic that we can do that. As I've dug in there's certainly opportunities to improve and we're digging into that right now.

[Ralph Schackart:]

Great. Maybe one more if I could follow-up, just I know you only here a couple of months , but curious sort of what do thing some for the major sort of channels are kind of narrow and medium term for you in terms of what you're planning for and then what are some of the opportunity that we sort of pleasantly surprising to you since you've joined?

[Michael Egan:]

Yes. Let me start with the pleasantly surprising, it's always good to start in good news. So, one of the things that I found here, stepping in I was worried that, stepping into the company that's going through the type of changes, that this company has gone through over the last few months. I was worried about the moral and the focus of the team itself. And what has been just fantastic is that the team has really oriented toward succeeding. There's an excitement within the team to really concentrate and prioritize our efforts on these two brands because we know how strong they are and we know how they resonate with their audience. And so there is just a buzz around the company which is very exciting to see. In terms of opportunities the biggest one and really another reason why I took this job was the opportunity to really improve our product. There has been a lot of investment over the year in terms of raising awareness especially in the ChristianMingle space towards the brand. But honestly our product needs improvement. And we all recognize that both here in the company and we are oriented to making that happen. It's going to take some effort and some time to get that done. And that's what I talked about in terms of investment around our technology stack. That is going to be one of our key priorities this year as to get to a place where we can be a lot of iterative with our product launches and much which allows us to be a lot more innovative with what we're providing our customer base.

[Ralph Schackart:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line George Askew with Stifel. Please go ahead with your question.

[George Askew:]

Great. Thank you. Good afternoon. Congratulations on the strong profitability. First, would you – and welcome to the Board Michael. Would you please share with us what kind of changes you have made or are making in your analysis of marketing efficiency. Are there new metrics, new processes that you're implementing that and how do they differ from the past? Thank you.

[Michael Egan:]

Sure. So, I'm digging into that now. It is one of our key things. Really one of the first thing that we're doing is becoming a lot more precise in how we are attributing the response that we receive with the dollars of spend that we are making, specifically in the TV area. We spent a lot of money on the TV area, specifically in the ChristianMingle side. And our attribution has not been as precise as it can be. There has been a lot of evolvement in the market as to how do you become more precise with television attribution. It still not as precise as for instance, online spend and digital spend, but there is better tools, and so we're starting to investigate those tools. We started to work very, very closely with our ad agency to experiment with new methodologies to gain greater insight into our attribution on our TV spend. So that's one key example. Ultimately, we'll have probably the largest impact given the size of the spend there.

[George Askew:]

Got it. Thank you for that. And secondly, what – you have given the changes in the marketing spend and what not, what are you seeing in terms of consumer awareness particular in the ChristianMingle brand, it kind of gets to part of Ralp question, but what – are you measuring that on a very, very frequent basis and what are you seeing there?

[Robert O’Hare:]

Yes. We haven't – it hasn't picked up on our radar seeing that its drop dramatically to be honest with you. We think that we actually probably oversaturated the market earlier on the 2014 timeframe and so we don't think we've seen a negative decrease in awareness. We actually are undergoing a pretty in-depth customer survey right now which we should have towards end – actually towards the beginning of Q2, which will help us understand that better. But we haven't really seen radical negative impacts in of awareness. Certainly as our spend decreases quite substantially the number of new registrations coming into the top of the funnel has decreased and you see that in our subscriber numbers. But that's starting to level out and we're actually seeing the bottom of that now. So, I feel like we're in good shape to start to achieve our goals, sequential subscription growth by the end of the year.

[George Askew:]

Okay. Super. And then kind of one last year, as you entered the walk phase and ramp up investments, how should we think about margins. Clearly, it sounds contribution margins will hang in there, but as far as the non-marketing expenses, how dramatically will they change over the next few quarters?

[Michael Egan:]

Yes. I'll give Rob a chance to answer that one.

[Robert O’Hare:]

Sure. Hi, George. We do expect to see a pretty significant uptick in what I would consider kind of cash operating expenses, so outside of our direct marketing spend. I think you should expect to see double-digit increase there from the current Q4 run rate?

[George Askew:]

Okay. Great. Thanks very much.

[Michael Egan:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Patrick Webster with Webster Capital. Please go ahead with your questions.

[Patrick Webster:]

Hi, guys. Congratulations on a profitability quarter.

[Robert O’Hare:]

Thank you, Patrick.

[Patrick Webster:]

Could you talk a little bit about what you're starting to do from a market basis perhaps the type of success you've started to see that gives the confidence that in a second half of the year, you'll have sequential subscriber growth numbers?

[Michael Egan:]

Sure. And you said that better than I did. So, that's congratulations, I couldn’t get that out. Yes, so there's two things that are happening. One, is we're trying to improve the efficiency of how we are spending money. And we've started to even test – we've started to do both in our data analytics as I talked about before, but we've also stated experiment with new creative. We launched a new television commercial camp creative earlier in Q1 of this year, and it’s doing quite well. And so, that's going – though the combination of activities around that will help us. The other thing it's going to help us Patrick is just the dimension of the subscriber base itself and the registration base itself. It's important to remember that a lot of our subscribers come from historic registration. Not just the people that we market to any given month or a quarter. And as the wave of subscribers that were gained a year ago when marketing was at a much higher level starts to suicide. It will make it a lot easier. We'll be swimming upstream little bit less of a current coming against each and we can start to see growth coming out of that, because our marketing right now it quite efficient from a profitability standpoint point. We're actually doing it on an incrementally profitable basis and we know now what that means in terms of new subscribers in the door. We actually can see where the bottom is and where we're going to start to emerge from that.

[Patrick Webster:]

Okay. Where have you been running that?

[Michael Egan:]

There's a wide spectrum of channels and timing. We were constantly test across channels, across time of day, across formats in terms of 15 seconds to 60 seconds. To be honest, I couldn't list out the exactly media plan right now?

[Patrick Webster:]

Okay. Thanks

[Operator:]

Thank you. Our next question comes from the line of [indiscernible] please go ahead with your questions.

[Unidentified Analyst:]

Hello guys. Congratulations on the profitable quarter. Few questions for you and some of them might be really full upon [Indiscernible] ready. It sounds like you are experimenting guys a lot with our marketing expenses and running different distribution analysis So are you guys trying – could you elaborate a little bit, what they are trying do what is different from what your predecessors did, though that sounds like even no one in the organization before ran those type of analysis or you are running similar analysis by doing something very different. So if you could help us understand what is really different, that would be pretty helpful?

[Michael Egan:]

Yes. I think without getting into because this starts to become a little bit of a competitive nature. I want to be look careful on how much we disclose there. Without getting in a too much detail, it's about becoming stronger partners with our partnering organizations. And so we, our ad agency for instance has started their own ability to drive analytics and we've been working very closely with them about sharing data more frequently, more in-depth data which then allows their team and they're buying team to become a lot more savvy to have data at their figure tips when they are making decisions, whereas in the past that didn't happen. There was a little bit of a divide between where the data was getting shared much data was getting shared. And so, things like that and to be honest there is a whole wide, we are constantly testing and constantly experimenting every single day is something different and so that sort of hopefully gives you a little bit flavor of that.

[Unidentified Analyst:]

That's definitely helpful. Thank you. And I definitely appreciate that there are lot of considerations of competitive nature which you cannot elaborate further, thank for that. Another one is about you would seem and I understand that you're still trying to fill some important positions. Is there some sorts of team for all those hires in terms of looking for people with specific background, because what you have mentioned some of the new hires, people are coming from variety of places and some of them are really coming from the internet, but it’s not that some of them are not as a federal based businesses, it doesn't sound that many of that come from other big websites or that type of experience, or corporate turnarounds. So like what they think there? What type of team? What the ideal team which you are trying to assemble?

[Michael Egan:]

Yes. Great question. So there is a couple of things that I am looking for. One is a sense of energy. And so, we are brining on people with a high degree of energy who are really excited about just as I was when I stepped in here. Excited about doing something with these really fantastic brands, and so there's that sense of energy and sense of excitement to really evolve [ph] them. The second thing is the pool really what I'm trying to do is bring in a wide range of experience sets, so that we can have a lot of ideas at the table. And so, if you look at the backgrounds of the various people that are coming in, it really is as you point out. It’s a wide range of past experience in terms of corporate history, but also they typically come from fairly innovative online spaces where they've been taking products and thinking about product and how do you align that with customers’ needs. And so, when you get those that energy and that difference of experience, I feel like we're building a culture here where no idea is too outside the box for us to consider and start to think about. And then also figure out how do you do that quickly and test it quickly and determine whether or not it works. And so all the people I'm looking at sort of have those really too strong characteristics.

[Unidentified Analyst:]

Okay. That's great. That's kind of make sense in terms of assembling the right team and get’s on to everyone one on the box. During the proxy campaign, the active shareholders complained in my view reasonably about poor disclosure or – by the company of mainly accurate [ph] to metrics and one of such metric and subscription business is [Indiscernible] which has never been disclosed. Are you planning to improve the disclosure now when you are the captain of the ship?

[Robert O’Hare:]

Yes. I want to be transparent as it makes sense to be obviously we're in sort of an interesting positioning that this is a pretty competitive industry. There's a lot of new players in this industry coming up and trying to build businesses within the online dating space and we are really the only pure play, player out that would be disclosing key metrics around this and so we're conscious of that as regarding the competitive nature of thing. But I will – we didn't have time as I just came in here to really think through all the metrics right now. But we will be thinking through how do we give a better picture so that the trajectory of the business is clear to the investor base.

[Operator:]

Thank you. Our next question comes from the line of Shahid Beheshti with DCM. Please go ahead with your question?

[Shahid Beheshti:]

HI. Thank you for taking my call or my question. I notice that the Facebook page for JDate has a summer camp theme and there is a posting date of January 16 introducing [Indiscernible]. I'm curious the status of the project and any information you could share on the scope and the addressable market size please?

[Robert O’Hare:]

So, I think, thanks for the question, to be honest I don't have those kind of details. I know it is a partnership that we have planned with them, but to be honest I just don’t have the details on hand.

[Shahid Beheshti:]

Okay. I notice that Spark Networks is currently hiring for a -- the job is called strategy, now this job is called Senior Director of Conversion and Retention. I'm curious if you have any metrics you could share on the current conversion rates and what standard rates would be across industry, please?

[Robert O’Hare:]

Yes. So we don’t' disclose our conversion rate, because that is one of those metrics that we think is highly competitive in nature.

[Shahid Beheshti:]

I mean as Public data that you have some profiles based on the television commercials, is that a – would that be useful data point to understand to kind of start getting it that data set to look at the…

[Robert O’Hare:]

I don't – explain that again, I don't quite.

[Shahid Beheshti:]

Sure, so the television commercials they took so many million profiles on the ChristianMingle website network. So that won't mean that there are so many people who have free accounts and so many people who are paying. So that's a ratio of some kind…?

[Michael Egan:]

So it is to a degree, though in the dating space what you find is that it’s a constant flow of individuals coming through the pipe. As you can imagine people don't become a member of a dating site forever. What our goals is to get them lifelong partners actually as quickly as possible, and so there is this constant flow of people going through. So at any given time, those numbers will vary and so it could be – that could mislead you it in some ways if you use that just very generic number.

[Operator:]

Thank you. Ladies and gentlemen, that's all the time we have for questions. I'd now like to turn the floor back over to management for closing remarks.

[Michael Egan:]

Great. We want to thank you so much for joining us today and I'm looking forward to the 2015 year and talking to you again in another quarter. Thanks so much.

[Operator:]

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.