Q2 2021 Spark Networks SE Earnings Call
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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 'twenty 'twenty. One this call is being recorded.
We are broadcasting live in listen only mode I would now like to turn the conference over to Chris Tamara VP of Investor Relations. Mr. Mair, you may begin your conference.
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 Dot spark.
Yeah.
I'd like to remind everyone listening today 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.
Object 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.
But that being said I will now turn the call over to Mr. Eric Eichmann CEO Spark networks, Eric. Please go ahead.
Thank you Chris and thank you all for joining us on spark networks second quarter 2021 conference call today.
As a reminder, sparks ambition is to become the leading social baby platform for meaningful relationships.
We own and operate a strong portfolio of brands, the five largest being Zeus silver singles Elite singles Christian Mingle and J D.
Our primary focus is on the 40, plus demographic and the religious based segment.
Market, we estimate to be around $2.3 billion in revenue and growing at 7% per year.
Along with match group Bumble and par should meet we are one of the four scaled online dating company every quarter, we registered more than 3 million users and have more than 870000 paying subscribers you know our properties.
Well, we have presence in many countries 90 plus percent of our revenue 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 keith's first spark earnings call.
He brings more than 20 years of public market experience, most notably serving our CFO. The meet group now a subsidiary of partial knee group, a leading provider of life streaming video experiences interactive trading solutions.
We also recently appointed Bengali Cabo and Joseph winners to serve on our board of Directors. These new board members bring relevant product and public market expertise to the company. The Cabo has extensive experience in consumer technology building mobile digital products and accelerating growth through social.
Media.
Notably Mr camera help grow Instagram from 400 million to 1 billion monthly active users as head of group and designed and built into cards core product functionality Mr.
Mr. Witter has expertise in accounting governance finance risk management and more than 20 years of experience in public markets driving shareholder value.
Investors.
Turning now to Q2 results revenue for the second quarter of 2020, one was $55.3 million a decrease of $1.2 million compared to $56.5 million in the second quarter of 'twenty 'twenty.
Our four largest legacy spark brands here.
Yoga shingles.
Elite single Christian Mingle, and Jae Bae 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 <unk>.
Adjusted EBITDA was $8.3 million in the second quarter of 'twenty or 'twenty, one a decrease of 1.8 million compared to $10.1 million in the second quarter of 2020.
Turning to our key performance indicators spiked monthly average revenue per user or monthly or poop increased to $20.96 in the second quarter of 2021 compared to $20 and 80, 110th in the same period of 2020 or average.
Paying subscribers decreased by 26798 or 3% to 878600 any team in the second quarter of 2021 compared to 905416 in the same period of 2020.
Overall, we are seeing healthy growth you know spark core asset Gilbert elite Christian mingle, and JJ and a decline in <unk>.
Revenue for Sparks core assets, we are seeing good growth in the older demographic and higher engagement in our religious properties thanks to improvement.
In our matching algorithms for Zeus well, we are in the right path to turn it around and have we used to its top line declined from 15% to high single digits. Its performance in Q2 was a bit below expectations.
This is mostly due to stricter broad access controls and the delay in product revenue initiatives. The overall rise in cyber attacks since the pandemic required us to tighten fraud controls more aggressively on juice, 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 juice.
We have made good progress on delivering product enhancements in Q2, we deployed neurasthenic produced and started passing them on the leasing goals and are seeing increases in user engagement, we introduce at H cap chat on old platforms to improve security rolled out fraud and sales tax solutions and optimized.
<unk>.
Our optimization work has led to an increase in average subscription length induced by 15%. This is good news overall, but will have a short term estimated impact of reducing or reported revenues in H two 2021 by $3 million to $4 million, which will be recognized in 2022.
Yeah.
We are starting to build social discovery features throughout our brands as a reminder, social discovery is people leveraging online activities social media and all the communication platforms to forge new relationships and expand their social networks.
We launched use glide a new live streaming feature on just iOS and Android App ahead of schedule in late Q2, while still early initial user engagement in new supply is encouraging we are particularly excited about the next date feature on describe which allows.
Singles to spin date Livestream was 24 seven through ninety-second video conversation on their phones. We are working to further expand two slides usage to deeper product integration in the user experience and increased education and awareness campaign. In addition to increased user engagement we all.
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 day with other singles. These new experience will initially be implemented on juice under the name Zeus Great date.
Great date will allows duke paying subscribers to go on guidance virtual dates to inspiring locations or is that just great days will include embedded video dating and chatting experiences for the data we expect to launch this great day towards the end of 2021.
These new social features it will have a positive impact on driving user engagement.
And as a result higher retention rates more subscriptions and increased our booths.
Our work on juice product improvements and social features are critical and nurturing Zeus 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 subscriptions subscription offers.
Finger Silver singles, we then be a a R P ecosystem.
She is the first step in expanding our reach in the over 50 demographic and educating them on the benefits of online dating a R. P is the largest organization catering to the over 50 demographic counting more than 30 million users and the two largest circulation publication.
In the U S.
A few words on COVID-19, we originally indicated that the lifting 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 and recognize revenue due to longer Zeus subscription land deals.
The leasing our profit execution in a more uncertain COVID-19 outlook, we have lowered or 2021 financial expectations. We are on the right path to get back to growth and believes the current trajectory either one and a half quarter of delay versus our original plan.
Secondly, getting the company back to growth in the first half of 'twenty 'twenty four.
<unk> our target is to reach an inflection point by Q1, 'twenty 'twenty two with initial subscriptions showing year on year growth.
Earlier this year, we communicated our intent to upgrade our core product functionality expand our offerings through social discovery features and get back to organic growth. We are making substantial progress on all fronts and continue 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 Karp, David. Please go ahead.
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 CFO for almost 25 years for public small and micro cap companies. Some relevant experience includes me group now part of partial knee. In addition, I was CFO of Nutrisystem before it was acquired which was a subscription based diet company that acquired subscribers and a similar ROI based fashion to spark.
Our current strong position strategy and outstanding management, you feel confident about the significant shareholder value creation potential.
Yeah.
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 suit this revenue decline and our increased product investments.
Marketing contribution for the second quarter was $28.8 million compared to $29.7 million. During the same three months period in 2023% decrease is a direct result of Zeus revenue decline.
Turning to the balance sheet. The company ended the second quarter was $11.1 million in cash and an outstanding principal balance of $91.9 million, which is 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 to leverage yourself one of my primary intentions to explore possible debt refinancing opportunities.
Net loss for the quarter came in at $54 million as compared to net income of $48 million a year. Prior the difference was entirely attributable to noncash impairment and related charges taken in the quarter.
We are revising our expected annual revenue to 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 orange juice platform.
This concludes our prepared remarks now let me turn the call over the operator to take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Austin <unk> with Canaccord. Please go ahead.
Hi, Thanks for taking my questions I had.
A few on on create date.
I was just wondering what kind of guided tours those all day and I'm also curious how monetization works is that a a free service first subscribers or is there some additional upcharge on using that and.
How will that be booked.
Great. Thank you Austin.
I appreciate the question to Zeus, Great date, which is still in conceptions that we're still working on it he is going to allow data to go out on a date.
On a video chat.
<unk> experience, where they can sort of without sort of giving too much detail on this there'll be able to go to exciting destinations that will be able to go to events.
And the idea is that you will be a freemium service. So there's going to be some offerings that are going to be free and some that people will have to pay you for and it only will be available to subscribers.
Great. Thank you and well that service.
Essentially.
B available on your other services or is this really just persist.
Potentially.
So obviously you know as this is our biggest brand and as I mentioned I think this is important for us to to get back to growth and we feel that that's going to be a very successful concept for blue.
Staters and so we're gonna start there and depending on how it works I think we can we can think about exploring going beyond that.
Okay and last question.
So in addition to lowering I think our absolute EBITDA number the implied EBITDA margin is a little lower is there are there any.
Reasons in particular for a lower margin guidance.
No I think I think it has to do with the fact that from an it and I had mentioned this.
Last year at the beginning of the year or as we are investing more heavily in product and technology and so obviously, that's not a cost.
Variable against the revenue and that's probably the net effect, but from a from a from a pure marketing perspective in contribution marketing perspective, we don't expect that to change.
From a margin perspective.
Okay. Thank you.
Yeah.
Our next question comes from Raj Sharma with B Riley. Please go ahead.
Hi, Good afternoon, guys, Hello, Eric Hello, David.
Yes.
My questions were more revenue last call you had talked about the changes that were being made to Zeus because there were.
CRM matching algorithms some.
Some casual changes how are those working in and how do those relate to.
This showed a decline in since Covid what is working what is not working in.
On June skin, why do you feel so confident.
Could you could you.
Expanded a little bit more on why that will change in the next few quarters. So you inflect in Q1.
Yeah, absolutely great question. Thank you and it's good to have you on the call. So a couple of things on <unk>. One is that as we've mentioned also in the past we've sort of deployed aesthetics on this mostly on the web experience for them the browser experience and that has gone very well, it's been well received and we've seen.
Hey, good sort of uptick in user engagement. There. So that's exciting we've also done a number of things from a from a backend perspective, which are important.
For us so things like age capture which we've introduced which sort of he's going to protect us from hacker attacks fraud protection.
And sort of some 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 because that means we have people more committed to this for a longer.
It does have an impact as I mentioned on revenue recognition, but you know overall, we were very happy about that it doesn't you know an increase in the the initials or what we get at the beginning and then revenue recognition gets sort of spread out little bit further out we've talked a bit about CRM CRM is something that's taken a little.
More time for us. So that's one of the initiatives that I think we had an expectation that would be done that'd be faster. It is we we haven't changed our expectations in terms of the improvements that could bring to us. It's just taking us longer to get there the matching algorithm some of that we change already and some of that.
It was work that was done last year and we continue to see good sort of a performance out of that there's a number of things. In addition to that which is why we feel quite confident that that will continue on a good path going forward.
We've talked about we're targeting in the past one of the things we need to set up.
In the company the ability to have.
Discounts for Retargeting campaigns, that's one of the things we're doing now we're testing things like you know you would think that these are sort of basic things, but you know abandoned cart campaigns and these kinds of things, which are all sort of prep.
Revenue initiatives on the product side are things that we're also deploying.
Deploying in 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.
Were not applied to it so all in all I think we still have a number of initiatives that we're excited about this is beyond.
The the social discovery features that we've talked about that and none of these have.
We haven't deployed them and have not seen results. They are 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 are these initiatives.
Great and then a little bit on the advertising spend any kind of pressure on advertising spend any sort of trends on CPM CPC.
So I think we saw brands on yeah. So so in general is not as much except for Facebook is an area, where we showed sort of prices are going up and we believe that that's sort of been part associated with the restrictions that Apple introduced a.
Surround data.
Sharing but it fluctuate, but I think we've seen some of that being a harder channel for.
But we're you know we're hopeful that that will change in the future other than that I don't think we've seen sort of a.
Dramatic changes that would be sort of north not worthy.
This point.
And then lastly, just on the relative opening of the U S. I know that things are starting to get improve our 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.
Yeah. So it's interesting because we obviously as you know we have tied that cater to people that are looking for long term curious relationships and so when when when when Covid started they were locked down we saw an increase in activity. Even though people were you know they they didn't have the ability to go out to a restaurant and meet with potential should abate.
They the activity online increased.
And I think as as as.
Things opened up what we've seen is okay for what people 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 to see what the future and that's why we've been a bit more cautious with new lockdowns.
And and eventually.
Delta Varian getting people to be a bit more concerned. So you know we're still cautious.
You know lockdowns in the past for us.
We are generally positive but at the same time, there is a general fatigue out there and so the the.
The net net these where we're a bit more cautious we're a bit more 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 you can turn around and what the net effect is going to be on many parts of People's lives. So so we've been a bit more cautious about it.
And then just all the nonsense you do expect the trends to continue.
There was good you said about 10% growth on the non sysco brands.
Yeah, and we've seen good growth and it's driven mostly by the core market and so we're we're excited about that and we'll continue to see good good progress on that end.
Great. Thank you I'll take my I'll take my questions offline. Thank you.
Alright, great.
Again, if you'd like to ask your question. It is star then the one Star then one task question.
Our next question will come from John Lewis with Osmium partners. Please go ahead.
Hey, Eric how are you today and David welcome aboard I guess, just a quick question can you get in a maybe a little elaborate a little bit more on the AARP.
Partnership and what you know how.
How is this not working.
Yeah, absolutely John Great to have you on the call. Thank you for that question.
So the AARP partnership at the beginning of what we hope will be a strong relationship with them and it is really about educating AARP users on our online dating.
Instead of promoting that content within ERP and once people use that content. They will have the ability to get rewards and get our subscriptions foreseeable or singles. 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's more potential with AARP, obviously, it's very.
It's a great audience for silver singles.
And one one of you.
No one of the issues around online dating for the older demographic is that it's underpenetrated. 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 a lack of awareness and understanding of how online dating works and and also sort of you know how you behave when it comes to mind, Danny 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 you know it.
If they do these activities on AARP, they will have the ability to.
Redeem their rewards for silver single subscription and again, we hope that this is the beginning of a of an expanded relationship with AARP.
Got it I guess the other question you know pre pre Zeus.
Obviously, the spark offended TASS business and just Triangulating, you know using the math of where where Zeus was when you purchased it in the you know the contraction that you've had in the business.
I mean, roughly speaking its something like I don't know 100, 1000, and 15 million and just getting around a little over $100 million.
Is that ballpark.
Directionally correct.
Yes ballpark, it's about half and half I would say spark versus or the old I would tell you the not the old because they're not all great brands, but the core through our brands from a spark versus disk.
Got it so you've got 10% growth in basically half your business you've got the contraction in Zeus youre, hoping to stabilize it. So I guess you gave when you started the call I think you gave an order.
This was by size, but I think it was Zeus.
Silver elite Christian and J D is that correct did you ranked up by size or how would you rank that.
Okay.
Not exactly but I would tell you the three largest brands for us our Zeus can lead and silver so that that party is correct and the five largest brands are the ones that we mentioned I should mentioned something else John but I think it is important for people to understand so we do have.
Other brands that are noncore brands like E Darling, which was one of the original brands from Athene says and we're also in noncore markets outside of the five that we mentioned sort of the U S, Canada, Australia, UK and France outside of those markets are we still have revenue in countries like Hungary or in Scandinavia marks have been better looks in those or not.
Part of our focus so we're seeing declines in those countries and that's also sort of you know 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 you know we're not focusing on that at this point, so that that sort of also changes a bit.
The numbers.
Got it I think you said at the Canaccord conference you'd consider selling those businesses yes.
He had the.
Okay. Yeah, I think look if if we if we could get a good multiple on EBITDA.
Mrs are helpful. In terms of funding our initiatives are for what's important to us and we could as we consider that sort of you know.
Dealing those assets from our current operations in a way. That's that's that's not too involved then we would definitely do that and you know we've had conversations in the past, but had they haven't yet too.
It's something meaningful on that but certainly it's not it's not something that we as a management team or anybody in the company thinks about that.
But they are operating and they have very low cost.
So a lot of the.
The revenue ends up.
Falling down to the bottom line, which is which is helpful.
Got it before I go I just wanted to make one point to both management and the board are you know 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, but this has been a very.
Long difficult inflection point, we've been approaching it as.
As I've said.
Really time to really put up or shut up and I I don't mean to be crude or rude about it but.
No other way to put it so I hope to see a lot of insider buying and I hope to see you.
We're excited about the turn but we got a we got a 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.
Thank you John.
Our next question will come from Adam Waldo Workflows more partners LLC. Please go ahead.
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 to the prepared remarks and in the prior questioners line of questioning secondly around the impairment charge in the quarter get into more detail on <unk>.
And the current carrying value of <unk>, and then finally I'd like to explore debt refinancing a bit more which as you know Eric vinet favorite topic for few quarters now.
So on the AARP.
The situation is it fair to think about it is it sort of typical AARP affinity marketing relationship. Our AARP has a number of days.
39 million members, you have $1 billion roughly subscribers.
Essentially a big hunting license can you get.
Can you give us a little more color on.
How about affinity marketing relationship would work in terms of the economic splits between you know what AARP essentially gets for members coming to you from their membership base and how we might think about they are producing gross margins of clients where they come from.
Our people or is it just too early to give that kind of commentary.
I think just maybe I can then and thanks again for the questions on them, making their great. So on an ERP just to give you a sense she's not AARP has many different programs right. So they have the traditional sort of affiliate you. Your your peer I'm on their magazine or their sites et cetera. This is a bit more integrated in that.
You know, it's very relevant to what we offer in the sense that people can take sort of.
Classes or seminars within ERP, you've got the two things like okay, you're understanding how can be safe online what phone line dating et cetera, those keeping your rewards and then if you want I sort of use those rewards towards.
Basically have something in exchange for those rewards.
As a user of AARP then you can do that for silver singles and we're the only site that.
That is present or the only property that he's president from an online dating perspective, so it's a bit different and and and they're sort of you know the economics, obviously are confidential, but the idea just at a high level is there.
That exposure that they provide leads to them the ability for people to get a discount from a rewards perspective for silver singles. So.
That's that's an ERP and I'll, let David take the other two areas impairment and debt refinancing.
Yeah.
So there was in the quarter, neither preliminary numbers, but we will be filing our Q.
Just a few days, but there was about $32 million goodwill impairment related to the new traject trajectory presume, even though it's a little counterintuitive, but was also a write down of a deferred tax asset because of the assumption that the that the delays in Zeus would allow will not allow us to take advantage of our Nols as quickly as <unk>.
When it was envisioned.
The deferred tax asset so thats the.
That's the impairment.
And.
Finally, Q later and later this week.
As to the refinancing.
This is Mike.
Six day on the job so bear with me, but.
The markets out there remain hot.
And I'd like to look at refinancing and potentially going to accompany position where not only are we continuing to deleverage, but also have some flexibility to invest in the business.
As we see good growth opportunities, but very early days. So we will keep the market updated as we.
Pursuing.
Oh, Okay and on the the carrying value of just can now then Erik said roughly half the company's run rate revenue as Zeus and what's our approximate carrying value of the Zeus.
Asset mix you have that handy.
It's it's.
It's right around 101 hundred $45 million.
Okay. Okay.
Alright, and then and then just one more follow up on the 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 gonna be using free cash flow principally to not entirely to pay down debt here in the second half of the year.
So you know we exited the year with net debt of around $65 million or so.
What level of discern our net debt need to be do we think too you know 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.
It is a little early but implied in what you said, if we kind of hit the midpoint of guidance are down below.
Two and a half times.
Cash flow, so I feel pretty good about that but again. This is so early days I've got I've got to do a little more work for I can answer that specifically.
Okay fair enough. Thank you gentlemen.
Thank you.
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.
Yeah.