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LOV Spark Networks SE

Participants
Chris Camarra VP of IR
Eric Eichmann CEO
David Clark CFO
Austin Moldow Canaccord
Raj Sharma B. Riley
John Lewis Osmium Partners
Adam Waldo Lismore Partners LLC
Call transcript
Operator

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Spark Networks' Conference Call to provide the company's Financial Results for the Second Quarter 2021. This call is being recorded.

We are broadcasting live in listen-only mode. I would now like to turn the conference over to Chris Camarra, VP of Investor Relations. Mr. Camarra, you may begin your conference.

Chris Camarra

Thank you, operator, and thank you, everyone, for joining us this afternoon.

Joining me on this call are CEO, Eric Eichmann; and CFO, David Clark.

As a reminder, today we published our second quarter 2021 financial results, which can be found on our Investor Relations section of our company's website at www.spark.net. I'd like to remind everyone listening today that any comments made on this call may contain forward-looking information or projections regarding future results or events. We caution you that such statements are in fact predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially from our statements or projections.

Additional risks, uncertainties, and factors that could cause actual events or results to differ materially from these forward-looking statements may be found in the company's filings with the SEC.

Following our prepared remarks, management will conduct a question-and-answer session with interested participants. This call is being recorded and will be available for playback on the Investor Relations section of our website. With that being said, I will now turn the call over to Mr. Eric Eichmann, CEO of Spark Networks. Eric, please go ahead.

Eric Eichmann

Thank you, Chris. And thank you all for joining us on Spark Networks second quarter 2021 conference call today.

As a reminder, Spark ambition is to become the leading social dating platform for meaningful relationships. We own and operate a strong portfolio of brands, the five largest being Zoosk, SilverSingles, EliteSingles, Christian Mingle, and Jdate.

Our primary focus is on the 40 plus demographic and the religious space segment, a market we estimate to be around $2.3 billion in revenue and growing at 7% per year. Along with Match Group, Bumble and ParshipMeet, we are one of the four scaled online dating companies. Every quarter, we register more than 3 million users and have more than 870,000 paying subscribers in our properties.

While we have presence in many countries, 90 plus percent of our revenue is in the U.S., Canada, U.K., Australia and France. And most of our focus is growing our U.S. based business.

Before going any further, I would like to welcome our new Chief Financial Officer, David Clark, who is with us on our call today. David officially joined us last week, and this is his first Spark earnings call. He brings more than 20 years of public market experience most notably serving as CFO of the Meet Group, now a subsidiary of ParshipMeet Group, a leading provider of live streaming video experiences and interactive dating solutions.

We also recently appointed Bangaly Kaba and Joseph Whitters to serve on our Board of Directors. These new Board members bring relevant product and public market expertise to the company. Mr. Kaba has extensive experience in consumer technology, building mobile digital products, and accelerating growth through social media. Notably, Mr. Kaba helped grow Instagram from 400 million to a billion monthly active users as head of growth and design and built instacart core product functionality. Mr. Whitters has expertise in accounting, governance, finance, risk management, and more than 20 years of experience in public markets driving shareholder value for investors.

Turning now to Q2 results, revenue for the second quarter of 2021 was $55.3 million, a decrease of $1.2 million compared to $56.5 million in the second quarter of 2020.

Our four largest legacy Spark brands SilverSingles, EliteSingles, Christian Mingle and Jdate collectively grew by 10% year-over-year. The decrease in overall revenue was attributable to the 3% decrease in the number of average paying subscribers specifically driven by risk. Adjusted EBITDA was $8.3 million in the second quarter of 2021, a decrease of $1.8 million compared to the $10.1 million in the second quarter of 2020.

Turning to our key performance indicators. Spark's monthly average revenue per user or monthly ARPU increased to $20.96 in the second quarter of 2021 compared to $20.81 in the same period of 2020 or average paying subscribers decreased by 26,798 or 3% to 878,618 in the second quarter of 2021 compared to 905,416 in the same period of 2020. Overall we are seeing healthy growth in our Spark core asset Silver, Elite, Christian Mingle and Jdate and a decline in Zoosk revenue.

For Spark's core assets, we are seeing good growth in the older demographic and higher engagement in our religious properties thanks to improvements in or matching algorithms.

For Zoosk, while we are in the right path to turn it around, and have reduced its top line decline from 15% to high single-digit, its performance in Q2 was a bit below expectations. This is mostly due to stricter fraud access controls, and the delay in product revenue initiatives. The overall rise in cyberattacks since the pandemic required us to tighten fraud controls more aggressively on Zoosk, which we believe led to lower than expected engagement metrics in Q2. We continuously monitor and improve our filters and access, and expect them to improve over time.

In addition, while our product revenue initiatives are yielding expected results, they were slightly delayed primarily on Zoosk.

We have made good progress on delivering product enhancements in Q2. We deployed new aesthetics for Zoosk, and started testing them on EliteSingles and are seeing increases in user engagement. We introduced hCaptcha on all platforms to improve security, rolled out fraud and sales tax solutions and optimized pricing.

Our optimization work has led to an increase in average subscription length induced by 15%. This is good news overall, but we'll have a short-term estimated impact of reducing or reported revenues in H2, 2021 by $3 million to $4 million, which will be recognized in 2022.

We are starting to build social discovery features throughout our brands.

As a reminder, social discovery is people leveraging online activities, social media, and other communication platforms to forge new relationships and expand their social networks. We launched Zoosk Live!, a new live streaming feature on Zoosk iOS and Android app ahead of schedule in late Q2.

While still early initial user engagement in Zoosk Live! is encouraging.

We are particularly excited about the next date feature on Zoosk Live!, which allows Singles to speed date live streamers 24/7 through a 90 second video conversation on their phones.

We are working to further expand Zoosk Live! usage to deeper product configurations in the user experience and increased education and awareness campaigns.

In addition to increase user engagement, we also expect to see steady growth in monetization as users become more frequent visitors to describe. The company is in advanced discussions with an external partner to provide our users the ability to go on virtual base with other Singles. These new experience will initially be implemented on Zoosk under the name Zoosk [Great Date]. Zoosk Great Date will allow Zoosk paying subscribers to go on guided virtual dates to inspiring locations or events. Zoosk Great Date will include embedded video dating and chatting experiences for the daters, we expect to launch Zoosk Great Date towards the end of 2021. These new social features will have a positive impact on driving user engagement, and as a result, higher retention rates, more subscriptions, and increased ARPUs.

For work on Zoosk's product improvements and social features are critical in nurturing Zoosk back to growth. And while we have had a couple of delays in executing our roadmap, we are steadily turning the corner.

Additionally, we are pleased to announce we have signed an agreement with AARP to incorporate online dating tutorials and subscription offers for SilverSingles within the AARP ecosystem. This is the first step in expanding our reach in the over 50 demographic and educating them on the benefits of online dating. AARP is the largest organization catering to over 50 demographic, counting more than 30 million users and the two largest circulation publications in the U.S. A few words on COVID-19, we originally indicated that the listing of pandemic restrictions in getting back to normal life would have a neutral effect on our business.

We are more cautious today, given the uncertainty around the Delta variant and potential new lockdowns. We feel we are well underway on executing our plan to become the leader in social dating for meaningful relationships. But due to tighter security controls, a change in recognized revenue due to longer Zoosk subscription length delays in our product execution in a more uncertain COVID outlook, we have lowered our 2021 financial expectations.

We are on the right path to get back to growth and believe the current trajectory is a one and a half quarter delay versus our original plan, effectively getting the company back to growth in the first half of 2022.

For Zoosk, our target is to reach an inflection point by Q1, 2022 with the initial subscriptions showing year-on-year growth. Earlier this year, we communicated our intent to upgrade our core product functionality, expand our offerings to social discovery features and get back to organic growth.

We are making substantial progress on all fronts, and continues to be excited about the company's potential to strengthen its leadership position in the large and growing 40 plus online dating segment. I would now like to turn the call over to our new Chief Financial Officer David Clark. David, please go ahead.

David Clark

Thank you, Eric. I'm very excited to be joining Spark at such a pivotal time in the company's history.

As Eric mentioned I've been a CFO for almost 25 years for public, small and microcap companies.

So my relevant experience includes Meet Group, now part of ParshipMeet.

In addition, I was CFO of Nutrisystem before it was acquired, which was a subscription based diet company that acquired subscribers in a similar ROI-based fashion to Spark. Spark current strong position, strategy and outstanding management you feel confident about the significant shareholder value creation potential. Adjusted EBITDA was $8.3 million in the second quarter 2021, a decrease of $1.8 million, compared to $10.1 million in the second quarter of 2020. The year-over-year decrease was primarily due to Zoosk revenue decline, and our increased product investment. Marketing contribution for the second quarter was $28.8 million compared to $29.7 million during the same three month period in 2020. The 3% decrease is a direct result of Zoosk revenue decline.

Turning to the balance sheet, the company ended the second quarter with $11.1 million in cash and an outstanding principal balance of $91.9 million, which reflected on our balance sheet net of amortized costs at $87.2 million.

We continue to deleverage our balance sheet reducing debt by $12 million at the beginning of the year. In an effort to continue deleveraging our-self one of my primary intentions is to explore possible debt refinancing opportunities. Net loss for the quarter came in at $50.4 million as compared to net income of $0.8 million a year prior. The difference was entirely attributable to non-cash impairment and related charges taken in the quarter.

We are revising our expected annual revenue between $219 million to $223 million and adjusted EBITDA range of $27 million to $30 million. This is based on some of the delays in our product improvements primarily on our Zoosk platform. This concludes our prepared remarks.

Now let me turn the call over the operator and take your questions. Operator?

Operator

[Operator Instructions] Our first question comes from Austin Moldow with Canaccord. Please go ahead.

Austin Moldow

I had a few on Great Date. I was just wondering, you know what kind of guided tours those will be. And also curious how monetization works, is that a free service first subscribe or is there some additional up-charge on using that and how will that be booked?

Eric Eichmann

Great, thank you Austin appreciate the question.

So Zoosk Great Date which is still in conception, so we're still working on it is going to allow daters to go out on a date, on a video chat experience, where they can sort of without sort of giving too much detail on this, they'll be able to go to exciting destinations, they'll be able to go to events. And the idea is that it will be a premium service.

So there is going to be some offerings that are going to be free, and some that people will have to pay for and it only will be available to subscribers.

Austin Moldow

Great, thank you. And will that service eventually be available on your other services or is this really just for Zoosk?

Eric Eichmann

Both potentially, and so obviously Zoosk is ourbiggest brand, and as I mentioned, I think this is important for us to get Zoosk back to growth. And we feel that this is going to be a very successful concept for Zoosk daters, and so we're going to start there, and depending on how it works, I think we can think about exploring, going beyond that.

Austin Moldow

Okay, and last question, so in addition to lowering, I think your absolute EBITDA number, do you imply EBITDA margin is a little lower there. Are there any reasons in particular for lower margin guys?

Eric Eichmann

No, I think it has to do with the fact that from - and I had mentioned this last year at the beginning of the year, we are investing more heavily in product and technology.

And so obviously, that's not a cost that's variable against the revenue and that's probably the net effect. But from a pure marketing perspective and contribution marketing perspective, we don't expect that to change from a margin perspective.

Operator

Our next question comes from Raj Sharma with B. Riley. Please go ahead.

Raj Sharma

My questions were more around last call, you had talked about the changes that were being made to Zoosk, there were CRM matching algorithms, some carousel changes? How are those working and how do they relate to the sort of decline in Zoosk and what is working and what is not working on Zoosk and why do you feel so confident or could you expand a little bit more on why that will change in the next few quarters so you would inflect in Q1?

Eric Eichmann

Yes, absolutely. Great question. Thank you, and it's good to have you on the call.

So a couple of things on Zoosk. One, as we've mentioned also in the past, we've sort of deployed aesthetics on Zoosk mostly on the web experience or on the browser experience, and that has gone very well. It's been well received, and we've seen a good sort of uptake in user engagement there.

So that's exciting. We've also done a number of things from a back-end perspective, which are important for us.

So things like hCaptcha, which we've introduced, which sort of is going to protect us from hacker attacks, fraud protection, and sort of some optimization on pricing. I should mention that, we mentioned this on the call, but the optimization on pricing that we've done has extended the duration, the subscription length by 15%. And that's very good news, right so that means we have people more committed to Zoosk for longer. It does have an impact as I mentioned on revenue recognition. But overall, we were very happy about that, it doesn't - it increases the initials or what we get at the beginning. And then revenue recognition gets sort of spread out a little bit further out. We talked a bit about CRM, so CRM is something that's taking a little bit more time for us.

So that's one of the initiatives that I think we had in expectation that would be done a bit faster. It is - we haven't changed our expectations in terms of the improvements that could bring to us. It's just taken us longer to get there. The matching algorithm some of that we changed already, and some of that was work that was done last year, and we continue to see good sort of performance out of that. There is a number of things in addition to that, which is why we feel quite confident that Zoosk will continue on a good path going forward. We've talked about retargeting in the past one of the things we need to set up in the company's ability to have discounts for retargeting campaigns. That's one of the things we're doing now. We're testing things like, you would think that these are sort of basic things, but abandoned card campaigns, and these kinds of things, which are all sort of - revenue initiatives on the product side are things that we're also deploying and that were a bit delayed. In part and we mentioned this because we have to pay a bit more attention to sort of user access controls and that sort of took on resources that were not applied to this.

So all in all, I think we still have a number of initiatives that we're excited about. This is beyond the social discovery features that we've talked about that fill us, and none of these have, we haven't deployed them and have not seen results. They're more a question of sort of timing of the deployment of these initiatives.

So we still feel quite good about the ability to drive revenue and performance of these initiatives.

Raj Sharma

Great. And little bit on the advertising spend, any pressure on advertising spend any sort of trends on CPM/CPC?

Eric Eichmann

So I think we saw trends on - yes so in general, not as much except for Facebook is an area where we saw sort of prices going up. And we believe that that's sort of in part associated with the restrictions that Apple introduced in iOS around data sharing, but it fluctuates. But I think we've seen some of that being a harder channel for us. But we're hopeful that that will change in the future. Other than that, I don't think we've seen sort of dramatic changes, that would be sort of noteworthy at this point.

Raj Sharma

And then lastly, just on the relative opening of the U.S., I know that things are starting to get improved with a U.S. and other geographies any change causing people to go out and mingle has that been impacted at all? Do you see any impacts from the Delta arise?

Eric Eichmann

Yes, so it's interesting, because we obviously as you know, we have tried to cater to people that are looking for long-term serious relationships.

And so when COVID just started, they were lockdowns, we saw an increase in activity, even though people were, they didn't have the ability to go out to a restaurant and meet with potential sort of dates. The activity online increased, and I think as things opened up, what we've seen is okay, for people who are interested in now dating, but their activity online has sort of, in some cases decreased.

I think it's a mixed picture now, and it's really hard to see what the future and that's why we've been a bit more cautious with new lockdowns and potentially sort of the Delta variant getting people to be a bit more concerned.

So, we're still cautious, lockdowns in the past for us were generally positive, but at the same time, there's a general fatigue out there.

And so the net-net is we're a bit more cautious, we're a bit more sort of, there's a bit more uncertainty in the future as you guys know it's hard to know when COVID is going to end or if it's going to end and what the net effect is going to be on many parts of people's lives.

So we've been a bit more cautious on that end.

Raj Sharma

And then just other non-Zoosk, you do expect the trends to continue. There is good, about 10% growth on the non-Zoosk brands?

Eric Eichmann

Yes, and we've seen good growth, and it's driven sort of mostly by the core markets.

And so we're excited about that and we continue to see good progress on that end.

Operator

[Operator Instructions] Our next question will come from John Lewis with Osmium Partners. Please go ahead.

John Lewis

Eric, how are you today, and David welcome aboard. I guess just a quick question can you get in maybe a little elaborate a little bit more on the AARP partnership and what - how is this at working?

Eric Eichmann

Yes, absolutely John, great to have you on the call. Thanks for the question.

So the AARP partnership is the beginning of what we hope will be a strong relationship with them. And it is really about educating AARP users on online dating, and sort of promoting that content within AARP. And once people use that content, they will have the ability to get rewards and get subscriptions for SilverSingles.

We are the only brand from an online dating perspective, that's part of that program.

So we're excited about it.

I think there is more potential with AARP, obviously, it's very - it's a great audience for SilverSingles. And as you know, one of the issues around online dating for the older demographic is that it's under penetrated.

So if you take the overall penetration of online dating in the U.S. about 40%, but when you take the 45 plus, that's only about 20%.

So it's half the penetration. And part of that is just lack of awareness and understanding of how online dating works. And also sort of how do you behave when it comes to online dating what are the tools, and so this is an exciting step to get people a bit more educated in that segment around online dating, and hopefully, if they do these activities on AARP, they will have the ability to redeem their rewards for SilverSingles subscription. And again, we hope that this is the beginning of an expanded relationship with AARP.

John Lewis

I guess the other question, pre-Zoosk, there is obviously the Spark Affinitas business and just triangulating using the map of where Zoosk was when you purchased it and the contraction that you've had in the business, I mean, roughly speaking, it's something like, I don't know, 110 million, 115 million in Zoosk and around little over 100 million x is that ballpark, directionally correct?

Eric Eichmann

Yes, ballpark, it's about half and half I would say, Spark versus Zoosk or the old - I would say the - not the old because they're not old, but they are great brands, but the core of brands from Spark versus Zoosk.

John Lewis

So you've got 10% growth, and basically half your business.

You've got the contraction in Zoosk, you're hoping to stabilize it.

So I guess you gave when you started the call, I think you gave an order. I don't know if this was by size, but I think it was Zoosk, Silver, Elite, Christian and Jdate, is that correct? Did you rank that by size or how would you rank that?

Eric Eichmann

Not exactly. But I would say the three largest brands for us are Zoosk, Elite and Silver.

So that part is correct. And the five largest brands are the ones we mentioned. I should mention something else, John, but I think is important for people to understand.

So we do have other brands that are non-core brands like eDarling, which is one of the original brands from Affinitas. And we were also in non-core markets outside of the five that we mentioned sort of the U.S., Canada, Australia, U.K. and France. Outside of those markets, we still have revenue in countries like in Hungary or in Scandinavia marks and Benelux and those are not part of our focus.

So we're seeing declines in those countries. And that's also sort of providing a bit of a different mix picture.

Now, it's a small part of our revenues. But nevertheless, it's one that we sort of we're not focusing on at this point.

So that sort of also changes EBITDA numbers.

John Lewis

I think you said at the Canaccord conference, you would consider selling those businesses?

Eric Eichmann

Yes.

John Lewis

Okay.

Eric Eichmann

Yes, I think, look, if we could get a good multiple on EBITDA because these businesses are helpful in terms of funding or initiatives for what's important to us. And we could, as we consider that sort of dealing those assets from our current operations in a way that's not to involve then we would definitely do that. And we've had conversations in the past, but had they haven't led yet to something meaningful on that end, but certainly, it's not something that we as a management team or anybody in the company thinks about day-in and day-out. But they are operating, and they have impaired very low cost.

And so a lot of the revenue ends up falling down to the bottom line, which is helpful.

John Lewis

Before I go, I just want to make one point to both management and the board. We've had this - we've discussed this privately, but for the board as well. It's absolutely essential that board members at the company and management participate alongside shareholders and buy stock in the open market.

So I want to make sure that everybody hears that message very, very loud and very, very clearly that this has been a very long difficult inflection point we've been approaching. And as I said, really time to really put up or shut up. And I don't mean to be crude or rude about it, but there's no other way to put it.

So I hope to see a lot of insider buying. And I hope to see, we're excited about the terms, but we got to have better alignment with a lot of the directors with some out of pocket capital, and not just option grants, that's all I have. Thanks.

Operator

Our next question will come from Adam Waldo with Lismore Partners LLC. Please go ahead.

Adam Waldo

Hi, Eric and welcome, David thanks for taking my questions. I'd like to pursue three areas, if I may.

The first would be around a little more detail beyond what you gave on AARP, both in prepared remarks and in the prior questioners, line of questioning.

Secondly, around the impairment charge in the quarter getting little more detail on that, and the current carrying value of Zoosk? And then finally, I'd like to explore debt refinancing a bit more, which is as you know had been a favorite topic for a few quarters now.

So on the AARP situation, is it fair to think about it as a sort of typical AARP affinity marketing relationship AARP as a number days, they have 39 million members, you have 1 million roughly subscribers.

So it's a potentially big hunting license, can you give us a little more color on how that affinity marketing relationship would work in terms of the economic splits between, what AARP essentially gets for members coming to you from their membership base and how we might think about the ARPU's and gross margins of clients that would come from AARP or is it just too early to give that kind of commentary?

Eric Eichmann

I think just a minute, maybe I can man, and thanks again for those questions Adam, I think they are great.

So on AARP, just to give you a sense on that, the AARP has many different programs, right.

So they have the traditional sort of affiliate you appear on their magazine or on their sites et cetera. This is a bit more integrated in that sort of, it's very relevant to what we offer in the sense that people can take sort of classes or seminars within AARP that lead to things like okay, understanding how to be safe online, what online dating et cetera. And those give you rewards and then if you want to sort of use those rewards towards - or basically have something in exchange for those rewards as a user of AARP, then you can do that for SilverSingles. And we're the only site that is present or the only property that is present from an online dating perspective.

So it's a bit different, and they're sort of, the economics obviously are confidential. But the idea just at a high level is - that exposure that they provide leads to the ability for people to get a discount from a rewards perspective for SilverSingles.

So that's on a P&L, and I'll let David take the other two areas impairment and debt refinancing.

David Clark

Yes. Adam, so there was in the quarter need a preliminary numbers, but we'll be filing our Q file in next few days. But there is about $32 million goodwill impairment related to the new trajectory for Zoosk. And even though it's a little counterintuitive, there was also a write down of a deferred tax asset because of the assumption that the delays in Zoosk would allow, will not allow us to take advantage of our [NOA] wells as quickly as originally was envisioned in the deferred tax assets.

So that's the impairment and refiling cube later this week.

As to the refinancing, this is my sixth day on the job, so bear with me, but I think the markets out there remain hot and I'd like to look at refinancing and potentially getting the company in a position where not only are we continuing to see leverage, but also have some flexibility to invest in the business as we see more growth opportunities. But very early days, so we will keep the market updated as we pursue it.

Adam Waldo

Okay. And on the carrying value of Zoosk and now then, Eric said roughly half the company's run rate revenue is Zoosk. And what's our approximate carrying value of the Zoosk asset sort of maybe you have that handy?

David Clark

Yes, it's right around $145 million.

Adam Waldo

Okay. All right. And then just one more follow-up on the refinancing.

So I mean, we have $77-ish million, $76 million of net debt presently, presumably with $12 million of current portion of long-term debt we're going to be using free cash flow principally to not entirely to pay down debt here in the second half of the year.

So we exit the year with net debt of around $65 million or so. What level does our net debt need to be? Do we think to significantly move the needle on the high interest rate that we're paying on our current debt in terms of either the bank or capital markets, debt markets, or is it just too early days there, Dave?

David Clark

It is a little early, but implied in what you said, if we kind of hit the midpoint of guidance, you're down well below 2.5 times that cash flow.

So I feel pretty good about that. But again, this is so early days, I've got to do a little more work so that I can answer that specifically.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session, and will also conclude the call. Thank you for attending today's presentation.

You may now disconnect.