Q4 2022 Spark Networks SE Earnings Call

Good day and welcome to the Spartan at Spark Networks' fiscal 2021, and fourth quarter and year end earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Todd Curley. Please go ahead, Sir Thank you operator, and good afternoon, and welcome to spark Networks' fiscal 2021 fourth quarter and year end earnings conference call.

With me on today's call are sports CEO , Eric Eichmann, and Chief Financial Officer, David Clark.

Before I turn the call over to Eric I'd like to cover a few quick items. This afternoon spark networks issued a press release announcing its fiscal 2021 and fourth quarter and full year financial results. This release is available on the company's website at spark dot net.

Additionally, this call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website.

I want to remind everyone that on today's call management will discuss certain factors that are likely to influence the business going forward any factors discussed today that are not historical facts, particularly comments regarding our long term prospects and market opportunities should be considered forward looking statements. These forward looking statements may include comments.

The company's plans and expectations of future performance.

We're looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially.

Encourage all of our listeners to review, our SEC filings, including our most recent 10-K and 10-Q for a complete description of these risks.

Our statements on this call are made as of today March 14th 2022, and the company undertakes no obligation to revise or update publicly any of the forward looking statements contained herein, whether as a result of new information future events changes in expectations or otherwise.

Additionally throughout this call we'll be discussing certain non-GAAP financial measures today's earnings release and the related current report on form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release with that said I'll now turn the call over to Eric Eichmann CEO .

Oh Spark networks, Eric Please go ahead.

Thank you Todd good afternoon, everyone and welcome to our fiscal 2021 fourth quarter and year end earnings conference call. Thank you for joining us today before I recap our progress in 2021, let.

Let me tell you why we are excited about the future of spark networks.

Currently or family of brands.

Roughly 4 million page views per day, a single searching for serious relationships and millions of paid subscribers per year maintenance Park. The fourth largest online subscription based dating company across North America and Europe .

This scalable platform, we have a large growth opportunity ahead of us and with our new credit facility in place. We now have the financial flexibility to begin to execute on our strong and well developed a roadmap of strategies and investments that we believe will drive growth in 2022 and beyond.

With the right talent in place the right product strategy scalable technology and financial flexibility, we are now well positioned to return to growing our revenue.

Now let me provide some background on spot for those of you that are new to the company.

<unk> is a leading social media platform for meaningful relationships, focusing on the 40 plus demographic and feed.

Affiliation.

Segment of the online dating market is large and underserved and one of the fastest growing segment of the online dating market or top five properties.

At least single Yoga singles Christian Mingle and JV provides a significant opportunity for growth as users are increasingly looking for apps that you in long term relationships in sale instead of casual dating.

Four of the five properties are leased single silver shingles, Christian mingle and J D are focused on more specific segments within the meaningful relationship market at least singles and Silversea goals are aimed at a more mature demographic that is growing rapidly well Christian mingle and J D are targeting meaningful relationships with.

Affiliations.

These four brands.

Close to half of our total revenue in 2021, and collectively grew their revenue, 5% in subscribers, 3% year over year in 2021.

These strong brands and limited competition in this growing market segment. We are confident that we can continue to grow these brands revenue in 2022.

This is our fifth.

And largest brand and target the broader demographic within the meaningful relationship category with 40 million members worldwide use case design to forge meaningful relationships with other single using data and insights from vast membership base to deliver highly accurate and tailored matches and to prove.

<unk> social features to make the dating journey.

Seamless as possible.

While <unk> revenue declined year over year in 2021, we have been making the necessary product improvements to return to revenue growth in 2022 in the fourth quarter, we launched a new feature.

Great dates to complement just glide or free live streaming service that is available 24, seven on our iOS and Android apps available on demand with a subscription just great date allows you and your match two axis interactive video data design to inspire fun conversation.

And avoid awkward islanders. This first of its kind feature is perfect for a low impact first date.

Today's subscribers can go on interactive virtual data two four exciting destinations.

Naples.

So in Paris, which we launched on Valentine's day, with more new locations coming soon including New Orleans and Las Vegas.

Now more than ever we are providing our community of singles new seamless ways to connect virtually and just great date is part of our commitment to help people build more meaningful relationships users that have experiences great day. So far have provided strong positive feedback on these new feature.

With these new innovation as well as several other products and user experience upgrades delivered during the year, we have reduced <unk>.

Revenue decline and for the second consecutive quarter, we saw news just organic registrations growth in the fourth quarter Zeus organic.

Traffic grew 8% sequentially and 74% year over year.

We are confident that the improvements we made to <unk> in 2021, and we'll continue to make in 2022 are enhancing our competitive differentiation and will drive increased engagement, resulting in a return to revenue growth produced in 2022 as a matter of fact, so far in 2022, we have seen the signet.

Second acceleration of Q4 into Q1 billings growth versus last year.

Looking ahead, we are investing in product technology marketing and talent to capture the large market opportunity for spark.

On the product and technology front, we are working to further improve ore properties features and functionality. Firstly, we are putting in place a number of revenue generating enhancements such as an improved first time user spend new matching.

Technology and optimization of payment pages.

Second we are revamping, our apps significantly improving the app user experience and monetization capabilities. Finally, we are planning to simplify or technology platforms complexity by integrating or top four non juice brand onto one platform. This should lead to better.

Platform stability reduce technology costs, and an increased ability to launch new features and functionality on all brands.

On the marketing front, we plan to continue to optimize our marketing efforts and increase our overall marketing spend during the year. For example, we have introduced fully automated customer relationship management campaign, allowing us to increase their frequency, which has already resulted in higher billings.

Additionally, with our new debt agreement in place and it's less restrictive covenants, we expect to invest in excess of $110 million.

In 2022 marketing spend and are exploring additional opportunities to expand our marketing efforts.

Each of these increase in marketing spend will be on a renewed focus on brand building capabilities, ensuring our portfolio of brands clearly communicate our unique and differentiated brand propositions, which ultimately insurers or community of singles find their ideal matches on our platform.

Lastly, we believe there are opportunities to further increase our performance marketing spend profitably in 2022 beyond 2021 levels.

One of our most important strategies for growth is investing in talent to capture sparked significant future potential.

Adding to our recently hired CFO and head of brand marketing. We are excited to welcome Ken Cheng or new Chief product Officer, who will start in early Q2 and it comes with over 20 years experience in product leadership for online marketplace, ebay, <unk> Asia and E Commerce Farfetch.

And would trial.

Also the shiny Patel, our new head of corporate and business development started in February and comes with extensive experience in strategy and business development in the media and online travel industry.

So to recap both parts of the spark business today are addressing the fast growing meaningful dating segment of the online dating market, representing an over $2 $3 billion addressable market. The first part of or the first part of our business, including four brands that make up close to half.

Business that group collectively both their revenue and subscribers for the full year 2021, we plan to continue to invest in marketing dollars and product resources in 2022 to increase these brand share in the markets. They serve the second part is just.

Which is also addressing the meaningful market segment as well as the emerging category of social discovery.

The new features and upgrades, we made to the platform in 2021 have been well received and we are starting to see leading indicators of growth growth of organic registrations, and increasing conversion rates and an acceleration of quarter on quarter growth are clear signs that this turnaround is working we are confident.

And our strategy and execution for returning to revenue and subscriber growth in 2022.

For the first time under my tenure, we have the financial flexibility to begin to execute on our strong and well developed roadmap of strategic investments, which should further our ability to scale.

We believe these investments in talent product technology, and marketing in 2022 as well as our position in the market will allow us to capture the significant market opportunity. We have in front of us and return the company to total revenue growth in 2022. This.

This is why I am excited about the future of spark networks.

With that let me turn the call over to David who will take us through our financials in more detail and then we'll take any questions you may have David.

Thanks, Eric and good afternoon, everyone I will jump right into a review of our recent financial results.

Revenue for the fourth quarter of 2021 was $52 million compared to $58 $1 million in the fourth quarter of 2020.

And for the full year revenue was $216 9 million compared to $233 million for the full year 'twenty.

Four of our five largest brands brands elite single Silver singles Christian Mingle and JJ collectively grew 5% during the year and represented nearly half of total company revenue for the year for the full year.

Decrease in total revenue during the year in the fourth quarter is directly attributable to the decrease in <unk> revenue and lower marketing spend due to restricted.

That cut that covenant and our old debt agreement.

Adjusted EBITDA was $14 $3 million in the fourth quarter of 2021 and that compares to $13 $1 million in the fourth quarter.

$33 million for the full year compared to $38 $9 million last year the year over year increase in the fourth quarter was due to expense management and lower marketing costs.

While year on year decrease for the full year, primarily due to the revenue decline.

Grease product investments during the year.

For the quarter average paying subscribers decreased to 858975 in the fourth quarter of 2021 compared to 929503 for the same period in 2020.

The decrease was primarily a result of constraints on marketing spend and a tough comp for the fourth quarter of last year, which saw higher engagement due to the Covid lockdown.

Our monthly average revenue per user or monthly Arco decreased slightly to $20 17 in the fourth quarter of 'twenty, one compared to $20 <unk> for the same periods.

The decline in <unk> was a result of us emphasizing longer duration subscription pricing.

Net loss was $9 $9 million in the fourth quarter of 2021 compared to a net loss of $45 1 million in the fourth.

Third quarter 2020, the decrease in net loss was primarily due to a <unk> <unk> impairment charge that was taken in the year ago quarter.

For the fourth quarter operating loss decreased $33 6 million year over year to 11.

For the full year net loss was $68 2 million compared to $46 $6 million in 2020, and the increase in net loss for the year was driven by a noncash GAAP related increase income income tax expense for the full year.

Shifting to the balance sheet. The company ended the fourth quarter were $16 $1 million of cash and outstanding debt of 82 point.

$1 million or net debt of $66 million.

We continue to improve our balance sheet, having reduced our debt by nearly $17 million beginning in 2020, including a $2 $6 million reduction in the fourth quarter.

As I stated on our last call one of my primary objectives since joining the company in August 2021, also explore debt refinancing opportunities to allow us to invest in growing our businesses and our share of this fast growing market.

We were able to successfully refinance our existing debt facility to better fund our growth initiatives in 2022.

Under the new $100 million debt facility with M. G G desperate.

And in our maturity date and improve our covenant flexibility to allow us to invest appropriately in growing our business in 2022 and beyond.

Turning to guidance with half of our business already in growth mode and the other half is showing signs of positive turnaround. We are confident in our ability to return to total revenue growth for the full year.

Additionally, we see improving COVID-19 environment is having less of an impact on our results this year versus 2021.

Accordingly, with our new debt facility in place with 1 billion best we expect to grow our top line this year and deliver stable adjusted EBITDA margins, we expect strong EBITDA to cash conversion based on the expectation low single digit millions in capex of software capitalization and the fact that we have collectively a $100 million.

Tax net operating loss.

As the year progresses, we will provide investors with more specific expectation.

In conclusion, we believe spark represents a very attractive investment opportunity with upside potential given its positioning as one of the core online dating platform scale with strong brands and a large Baltimore.

We are happy to take your questions operator.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you're using a speaker a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Raj Sharma with B Riley. Please go ahead.

Hi, good afternoon.

Thank you.

Doug I wanted to understand.

There's great news on the debt refinance.

Of course, the interest rate differential.

Is pretty significant.

Plus you've paid down some debt and then can you can you give some more color on how the refinancing makes it less restrictive for you on what you need to do.

In terms of the covenants in terms of.

Youre marketing restrictions.

Yeah Ross. Thank you for the question. It's good to hear from you. So I'll I'll I'll give just a high level and then I'll pass it on to David to provide some more of the details but basically.

If you look at our all debt agreement, we had very strict net leverage covenants are which pushed us to generate profitability and the easiest way for the company as we are a subscription business and we incur the marketing costs before the revenue.

It comes in and it was to cut our marketing and so on.

One by the covenants became tighter and tighter all the way to.

A $1 75, net leverage covenant until that limited our ability to grow the business and anything that the new covenants that we have in the agreement are much.

More flexible and I'll let.

David talk to the specifics of the agreement, but overall it will allow us as we said in the call to invest in the key areas that we need to invest in namely product technology and marketing.

While there is some savings in the overall interest expense.

Important thing is what Eric just described in terms of the flexibility to invest in the business including in use.

User acquisitions.

But also the other way the old agreement was kind of constraining US is almost all in fact all of the excess cash generated by our business was going to our to our lender in this case the way the.

Amortization schedules set up there's actually no principal amortization in the first year of alone and then it steps up to about 5% per year and then eventually to 10%. So it really brings us flexibility not just on a covenant perspective, but also on the ability to carry a higher cash balances to be opportunistic.

Our business going forward and just maybe two two compared to net leverage numbers that we have in the old agreements were about $1 75 now in the new agreement four five to $4 1.5, so its a dramatic difference in and in a dramatic difference in terms of flexibility for the business and the MTGE guys also know our business well their their growth.

Oriented.

They are going to be good partners going forward.

Got it thank you for that and so just related to that I guess your statement is that you want to spend $110 million on marketing.

Is that right.

That is basically after the restrictions have been lifted that's how much you want to spend.

Can you talk about marketing efficiency, we already seen that this brings in greater.

Greater revenues.

But but.

Does it also.

Maintain sort of similar EBITDA margins.

Yeah. So let me let me let me talk about.

Maybe divide the question into three answer this one.

If you look at what we did last year there were several times during the year, where we could spend profitably at similar margins, where we couldn't or we didn't because we had limitations from our debt covenants and so that's an area, where we expect to see some.

Some growth that will happen in our in our spending the second area is.

Brand building capabilities. So we haven't really spent because that was the first area that we sort of reduce our marketing spend and in terms of brand building and it's not just sort of running ads that are top of the funnel, but much more sort of a building the capabilities around research about positioning our brand in social.

Sort of marketing, which we haven't done in the past and so that's another area of investment that's very important for the company and you know it's.

It's harder to gauge the exact return, but generally over time, that's a very high return and the third area I would say yes.

You know, we haven't tested as much new channels.

And our ability to grow our marketing spend goes to making sure we test new channels and then as we see things at work we scale those things and again in the past that's an activity that we've been running so all in all we expect that our marketing spend will grow.

And.

We mentioned 110, that's that's that's where we think at least we will be but if there are more opportunities will continue to to look at those obviously always with the parameters that we have in place around profitability.

That are important to us.

All right. Thank you so just.

A couple of more questions on more administrative.

Did you reported contribution margin and a contribution dollar amounts for the quarter or for the year.

Hum and also am I missing.

There are some direct marketing costs in sales and marketing et cetera.

Sort of a breakdown on that if you could just address the contribution and what do you think that the contribution would stay the contribution margin would stay stable in.

Fiscal 'twenty two.

So you're asking what the contribution margin was four <unk>.

Full year full year.

Yes.

And then what it would it stay stable slash or increase in 'twenty two.

So in 2021 for the full year.

Gross margin on a dollar basis.

And gross margin would also include costs for.

Deducted for credit card fees, and an app store fees and also data.

Datacenter fees. So the gross margin in the aggregate was dollar amount about 86 million.

Or.

So that's in real time.

I can also get these numbers offline. They are 40%. So I think I think we'd anticipate that that yeah. I mean, you heard Eric say that as we look at it dialing up spend we're gonna be also evaluating against profitability and lifetime customer value. So yeah, I would think we our expectation would be.

You know.

Stable, maybe even hopefully improving gross margins going forward, especially as the year lapses. We've got a number of product improvements. We are implementing are heavily in the second half of the year.

Right and then just lastly on <unk>.

You stated that organic growth of juice, because up 74% year on year traffic growth.

Obviously, not been monetized, yet and indications you social discovery live streaming or D well and they convert at some point.

If these were to convert at your historical rates oriented at expected rates.

What sort of a year on year revenue increase would that translate to four.

Zoom is could you just won.

That's more of a sort of qualitative color.

Would be great.

Here's a couple of things that are exciting about just in terms of thinking about the turnaround for it one is as we mentioned is organic registrations going up.

And so that's a key indicator why because as you know our marketing spend has been going down until nonorganic registrations have been going down but it seems that there is interest.

In juice, and Theres more and more organic registrations as a good indicator of the <unk>.

Thing that we mentioned E. Normally from Q4 to Q1, you have growth just because Q1 is or is it more of a high season.

Quarter of in the industry and this year, we've seen an acceleration of that growth.

Versus what it was last year. So those two things are are good indicators.

Of growth, we're not we're not yet providing guidance for.

Our revenue growth, but we expect it.

To be a healthy growth that would happen sometime in <unk>.

<unk> crossed the threshold if you will in the middle of the year. So that's a good.

Indication of where we should be going.

Great. Thank you for answering my questions.

Again.

Yes.

I'll take it offline from you. Thank you alright, Thanks Raj I appreciate it.

Again, if you have a question. Please press Star then one.

Okay.

Yeah.

Yes.

Okay.

This concludes our question and answer session I would like to turn the conference back over to Eric Eichmann for any closing remarks. Please go ahead Sir.

Alright, thanks, everyone for your interest in spark networks and thank you for joining our call have a great day.

This concludes.

Our conference call for today.

You may now disconnect.

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