Jiayuan.com: Strong Balance Sheet But Needing To Reduce User Churn

Shares of Jiayuan.com (NASDAQ:DATE) are currently up 22% in 2013, but still down 39% from the IPO price in May 2011. Jiayuan is the largest of the three main Chinese online dating sites and is in excellent financial shape with no long-term debt and $83 million in cash and investments. The Chinese online dating industry is difficult to make profits in though, with low revenues per user compared to American sites, and high user churn levels leading to significant user acquisition costs. One other thing to note is that Jiayuan's shares trade on the Nasdaq as American Depository Shares - also known as ADS. Two ADS equal three of Jiayuan's common shares. All per share numbers mentioned here will be per ADS.

The Chinese Online Dating Industry

There are three main companies in the Chinese online dating industry. Jiayuan is the largest with over 90 million registered users, while Zhenai.com has over 58 million registered users and Baihe.com has over 40 million registered users. The popularity of these sites is fueled by China's gender imbalance. Around 120 boys are born for every 100 girls, leading to an excess of 41 million males, which is expected to increase to as much as 55 million excess males by 2020.

An interesting dynamic is that the single men often are poorer villagers who have moved to cities for work and come from villages where males greatly outnumber females. On the other hand, it is easy for rural females to find husbands due to the gender imbalance. Many of the females on these dating sites are educated professional women who have trouble finding a spouse due to the Chinese tradition of women marrying up in status. Jiayuan's own user base reflects some of these differences, with 11% of men owning an apartment, but nearly all of the women wanting a partner that owns an apartment.

The online dating market in China was expected to reach $328 million by 2014, doubling its 2011 value. This compares to the $1.22 billion online dating market in the United States. A key difference is revenues per user. A site like Match.com can get nearly 2 million subscribers to pay $20 per month. Few Chinese users are willing and able to pay that amount.

Jiayuan's Business Model

Jiayuan's primary source of revenue is its online services division, which represents its dating website. This division accounts for 89% of Jiayuan's revenue. Users can sign up and browse for free, but either the recipient or sender must pay $0.33 to be able to read the first message between users. There are also subscription options and revenues from enhancements such as virtual gifts, improved search rankings, and premium profiles.

Jiayuan also has an events and VIP services division, which accounts for 11% of its revenue. This deals with offline speed-dating and social events, as well as personalized matchmaking services. These matchmaking services are popular among wealthy Chinese and can generate significant revenues, but are also labor and time intensive as the higher end packages involve teams scouring cities for suitable candidates.

User Churn

The largest challenge facing Jiayuan is controlling user churn on its online services. Many users sign up for the site, but few users keep a profile for longer than six months. To put things in perspective, Jiayuan added approximately 22 million registered users in the last year, but only added 103,490 monthly paying users, and actually lost 11,958 monthly active users. Churn is a problem with most dating sites, but appears to be a particularly large problem with Jiayuan since it is unable to grow its active user base despite adding tens of millions of new users.

Q2 2011

Q2 2012

Q2 2013

Average Monthly Active Users (MAU)

5,429,176

5,333,341

5,321,383

Average Paying MAU

1,139,171

1,222,880

1,326,370

Registered Users

45,455,661

67,657,540

90,000,000

Click to enlarge

Note: Jiayuan did not disclose registered users in its Q2 2013 quarterly report, but announced 90 million registered users in a press release shortly after the quarter ended.

Increased Conversion Rates and Revenues Per User

Although Jiayuan has not been very successful at keeping new users or growing its overall active user base, it has made significant progress in converting users into paying customers as well as increasing the average spend per paying customer. The percentage of active users who are paying customers increased from 18.6% in Q1 2011 to 24.9% in Q2 2013 and has been on a general upwards trend.

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Average MAU

4,744,705

5,429,176

5,560,387

5,179,713

5,434,692

5,333,341

5,242,237

5,123,265

5,188,638

5,321,383

Average Paying MAU

882,471

1,139,171

1,250,439

1,172,159

1,171,031

1,222,880

1,272,185

1,233,466

1,279,063

1,326,370

Paying Users (%)

18.6%

21.0%

22.5%

22.6%

21.5%

22.9%

24.3%

24.1%

24.7%

24.9%

Click to enlarge

As well, average monthly revenue per paying user has increased from $4.00 in Q1 2011 to $6.63 in Q2 2013. The effect of that combined with the higher percent of paying users means that the average revenue per monthly active user (paying and non-paying) has increased by 122% since Q1 2011.

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Average MAU

4,744,705

5,429,176

5,560,387

5,179,713

5,434,692

5,333,341

5,242,237

5,123,265

5,188,638

5,321,383

Average Paying MAU

882,471

1,139,171

1,250,439

1,172,159

1,171,031

1,222,880

1,272,185

1,233,466

1,279,063

1,326,370

Average Monthly Revenue Per Paying User

$4.00

$4.20

$4.54

$4.87

$4.74

$5.37

$6.43

$6.38

$6.43

$6.63

Click to enlarge

Low Operating Margins Due to User Acquisition Costs

Jiayuan has reported relatively low operating margins due to the need to constantly bring in millions of new users and a relatively low revenue per user compared to Western dating sites. Jiayuan reported operating income of $8.2 million on $73.2 million over its last four quarters, which is an 11.2% operating margin. For comparison, Match.com reported operating income of $221 million on $744 million in revenue, which is a 29.7% operating margin. Jiayuan's operating margin is likely to remain at a similar level unless it is able to reduce churn levels or reduce its user acquisition costs significantly.

Strong Balance Sheet - What Do To With It?

Jiayuan raised $78 million during its IPO in 2011 and so far has managed its money well. Jiayuan is modestly profitable, having reported profits in eight straight quarters, but also has never posted a profit of more than $0.13 per share.

Jiayuan has a very healthy balance sheet, with $83 million in cash and investments and no long-term debt. Its cash is equal to nearly 40% of its current market capitalization. However, Jiayuan may need to be more aggressive in utilizing its financial resources to drive more growth. Jiayuan is taking steps to invest more money into its business and recently launched a mobile app that allows users to search for matches using voice commands. It is also introducing face recognition software for matching purposes.

While Jiayuan is still searching for efficient ways to drive growth and retention, it has taken other steps to utilize some of its cash balance. Jiayuan announced $10 million share repurchase plans in each of the last two years and also announced a special $0.26 dividend in May 2013. Jiayuan has also added an annual dividend policy to pay annual dividends of up to 60% of its non-GAAP annual net income. That is likely to result in a dividend yield of approximately 3% at current share prices if results are stable.

Conclusion

Jiayuan is in a strong position as the leading site in the growing Chinese online dating market. However, the market is competitive and has required significant user acquisition expenditures. Combined with Jiayuan's struggle to combat user churn, this has led to relatively low operating margins compared with Western dating sites. Profitability growth is likely going to be limited until user churn is reduced, but in the meantime Jiayuan has made significant strides in increasing its percentage of paying users, and increasing average spend from those users.

Jiayuan is also making technology investments, which may help improve growth and retention. It has also been making share repurchases and has instituted a dividend policy. At current valuation levels of roughly $4 per share net of cash, Jiayuan appears fairly priced based on its current growth track. If Jiayuan shows signs of improving churn rates and consequently growing its active user base, then it will have excellent potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.