Spark Networks' (LOV) CEO Michael Egan on Q1 2016 Results - Earnings Call Transcript

| About: Spark Networks, (LOV)

Spark Networks, Inc (NYSEMKT:LOV)

Q1 2016 Earnings Conference Call

May 16, 2016, 16:30 ET

Executives

Rob O'Hare - CFO

Michael Egan - CEO

Analysts

Kara Anderson - B. Riley

George Askew - Stifel

Operator

Welcome to the Spark Networks' First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Rob O'Hare, Chief Financial Officer. Thank you, you may now begin.

Rob O'Hare

Thanks for joining us today. I am Rob O'Hare, Chief Financial Officer for Spark Networks. On today's call with me is Michael Egan, Chief Executive Officer. Before we begin, there are a few items I need to cover with you.

Today we issued a press release announcing our first quarter 2016 financial results. It is available on our company's website at www.spark.net in both the Investor Relations and Media Center sections. In the press release and in our prepared remarks from this call, we refer to adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation, asset impairments, non-cash currency translation adjustments for inter-company loans and executive severance and acquisition related expenses.

Although adjusted EBITDA is a non-GAAP financial measure, we believe it may be useful to investors when evaluating the company's current financial performance. However, investors should not consider adjusted EBITDA as an alternative to net income, cash flow from operations or any other measure for determining the company's operating performance calculated in accordance with GAAP. In addition, because adjusted EBITDA is not calculated in accordance with GAAP, it may not be comparable to similarly titled measures employed by other companies. A reconciliation of adjusted EBITDA to net income can be found in the Consolidated Statements of Operations included in our earnings release.

I would like to remind everyone listening today that any comments made on this call may contain forward-looking information 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 Securities and Exchange Commission. Forward-looking statements are based on the company's beliefs as of today Monday, May 16, 2016.

The company undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as is required by law, even if new information becomes available or other events occur in the future. The information on this call shall not constitute an offer to sell or the solicitation of an offer to buy our securities. This call is being recorded.

I will now move to a review of our Q1 2016 financial results. Starting with revenue, we finished the first quarter with total revenue of $9.9 million, a decrease of 27% compared to the year ago period and an 8% sequential decline. In Q1 we had a modest sequential decline in subscribers within our Jewish Networks and our third consecutive quarter of sequential growth within our Christian Networks. Continuing the trend from Q4 ARPUs were lower as the proportion of longer term but lower ARPU subscriptions continued to increase. The resulting seven 7% sequential decline in ARPU was the primary driver of the 8% sequential revenue decline in the first quarter.

Contribution in the first quarter was $4.8 million a decrease of 36% compared to the year ago period and a 30% decrease compared to the prior quarter. The vast majority of this decline was driven by increased investment in direct marketing within our Christian Networks which grew to $4.4 million from $3.1 million in Q4 2015. Christian Network's contribution was $1 million a 60% decline year over year and a 65% decline compared to the prior quarter. The year over year decline in contribution is the result of both the lower Christian Networks revenue in our decision to invest more heavily in direct marketing during the quarter. Christian Networks contribution margin fell to 18%. We have already reduced our marketing spend in Q2 and expect to finish the quarter with $1 million to $1.5 million of Christian Network's direct marketing expense, a savings of $3 million to $3.5 from Q1.

Adjusted EBITDA excluding non-recurring charges was negative $2.3 million in the quarter. Adjusted EBITDA excluding the operating impact of Smooch Labs was negative $2.1 million compared to income of $1.8 million in the year ago period. Current period adjusted EBITDA excludes $64,000 of transaction fees related to the acquisition of Smooch Labs. Turning to the balance sheet, Spark ended the first quarter with $4.1 million of cash and cash equivalents compared to $6.6 million at the end of the prior quarter.

I will now turn the call over to our CEO, Michael Egan who will provide additional commentary on our Q1 results and discuss our plans for the remainder of 2016.

Michael Egan

Thank you, Rob and thank you everyone for joining us our call this afternoon. Our Q1 performance helped us to look deeply at how we are operating the business and how our investments are performing relative to our customer's expectations. We approach the quarter with an aggressive strategy to expand our direct marketing activities particularly with ChristianMingle Television as this is historically been our strongest quarter and our most scalable marketing channel. So we did see solid results early in the quarter both with increased pricing in the ad market and reduced customer response in February we ended the quarter flat on subscribers for ChristianMingle and slightly down on JDate as well as with higher customer acquisition costs than we've seen in the last couple of quarters.

With this experience behind us we decided to realign our strategies to ensure we are driving profitable growth. I like to talk about those plans. First off, in looking at our ChristianMingle business we firmly believe that now is the time to move its contribution margins to more closely aligned with JDate's which has some of the best unit economics in the industry.

The brand is one of the most recognized in the business and as such we believe incremental investment in television advertising has reached diminishing returns, on the flip side however we are making solid traction with our church partnership program which reflects a more organic performance driven and higher margin channel as such beginning in April we dramatically reduce our ChristianMingle television investment and are placing more emphasis on scaling our church programs.

We anticipate our ChristianMingle direct marketing investment to hover around $1 million to $1.5 million per quarter moving forward, this equates to a $3 million to $3.5 million savings per quarter relative to our Q1 Christian Network's direct marketing vestment. As for our church program, we've already signed five churches to the program representing almost 35,000 single adults and we expect this channel to represent a very sizable portion of our new user acquisition within a year's time.

Our second strategy relates to how we are servicing our customers, with the rise of freemium lightweight mobile applications with low consumer touch it is clear to us that our historical service model and technology stack is outmoded, with this in mind we've made two key changes. First, we have restructured and eliminated a number of activities across the company that were not specifically aligned with meeting customers executions. Secondly, we reorganized our products and technology team to place a major focus on overhauling our backend technical infrastructure to ensure that it is flexible, efficient and takes advantage of modern light weight technologies.

We spend a significant time improving our front end user experiences over the last year and with this new back end we feel we will have an efficient, effective technology sack that will allow us to succeed. These two changes have enabled us to reduce our headcount by close to 40% and reduce our operating expense base by approximately $4.5 million on an annualized basis. This is in addition to the savings we expect from our direct marketing changes, we anticipate completing all of the headcount reduction in Q2 and expect approximately $500,000 in severance expense related to this downsizing.

Our third strategic priority is to continue to drive growth on what we are calling our swipe platform. Today this platform which includes JSwipe and now CrossPaths has been focused on the millennial markets within the Jewish and Christian communities respectively. In Q1 we launched our first premium products onto the platform, SuperSwipes and are seeing solid adopted at an average revenue per user that mirrors our broader network. The team has been hard at work expanding the set of premium features and expects to launch a portfolio of new features that will be grouped into an ongoing monthly subscription by the end of May. Likewise, we have just moved CrossPaths onto the platform and will release this new version also in May. Not only will this give CrossPaths access to the premium features but it will also provide us with an Android version of the application.

As we have just expanded our acquisition efforts to be nationwide and are seeing some very strong user adoption engagement, we’re optimistic about the future of CrossPaths. This platform however also represents a key growth engine for us beyond these two initial brands. We will be using this platform to launch additional apps in the near future the target both international audiences within the niches we serve but also new niches. The features we are building into the platform are unique to the market and we see an opportunity for us to either build new audiences or displace older players. We continue to drive dramatic value oriented change in our business. The landscape is changing and we need to change with it. We have a unique position as a leader in the niche dating space. We are extremely strong in both the Jewish and Christian communities and have the opportunity to drive industry leading unit economics with our brands. However our historic way of doing business is no longer sufficient if we want to grow in a responsible and profitable manner.

We had to say goodbye to a number of colleagues this last week¸ many of whom who have worked with Spark for years. I want to thank them for all the effort they put it towards helping with communities we serve. With that being said we now have an organization that is economically stable and extremely focused on growing our business on serving our customers and on ensuring the technology that our products are based on is efficient and nimble. We are excited to take our existing brands to new places and to bring to market new brands that align with valuable niches. We are excited about the future.

Thank you. I will open it up now for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today is coming from the line Kara Anderson with B. Riley. Please go ahead with your questions.

Kara Anderson

I'm wondering if you could talk about some of the service activities that you plan to reduce as part of the $4.5 million savings plan?

Michael Egan

Basically what we did was looked across the company and we took a really sort of a startup mentality if we were a bootstrap start up and really driving our business and what our growth priorities were which role did we need? Did we feel we really needed in the company? And so those reductions actually affect almost every single aspect of the company itself. And there's bits and parts across the entire company that we've reduced from.

Kara Anderson

Are they customer service or customer facing activities or you know -- items--

Michael Egan

Yes, there were some in the customer service area. So for instance we have taken some areas -- some of our call center times and reduced those down which allowed us to focus in on people for a full time basis rather than we had a lot of people on a part time basis and allowed us to consolidate activities within a smaller group of individuals.

Kara Anderson

And then could you guys talk about expectations for ARPU going forward?

Michael Egan

Yes I think we're still looking at it the same way as we discussed last quarter. We think that we'll find a bottom here in the first half of the year and we should see a flattening over the course of the remainder of 2016.

Kara Anderson

And then on the -- sorry, jumping back to the savings plan for the 4.5 million in operating costs, what line items are we expecting to see that mostly impacting?

Rob O'Hare

Yes, I mean as Michael alluded to you, Kara, it will be across the Board. It really was spread across the company across every kind of cost center.

Kara Anderson

And then I guess last question is what gives you confidence that the reduction in television spending will also sort of result in much lower subscriber number for ChristianMingle? Well it will result in and lower subscriber acquisition cost. I

Michael Egan

Well it will result in lower subscription acquisition cost. We don’t think that the number of subscribers will decline nearly as much as our decrease in marketing spend and we're already seeing that generally speaking very solid subscriber acquisition costs here in Q2 as we've made those changes.

Operator

The next question is from the line of George Askew with Stifel. Please go ahead with your question.

George Askew

Building upon on Kara's question, you state in the release -- we expect to grow profitably in the second half and achieve 10% just needed down margins and I guess I'm a little confused by the term grow profitably, I can certainly see the profitability given the cost cuts and everything but what is going to grow if you're going to cut ChristianMingle television by 2/3rds, the Church program is I think it's got a lot of promise but it's unproven at this point, ARPU is going the direction you just suggested, where are we going to see the growth?

Michael Egan

Sure. I think. What really what we're focused on is generating cash flow in the business and so we absolutely expect to see growth in contribution and then to really we’re looking at each channel, looking at the returns within each channel and we're kind of not satisfied with the returns we're seeing on television and so we decided to kind of reprioritize our efforts towards more organic channels and higher return channels like the church program.

George Askew

Okay. So growth is not referring to the top line, it's referring to -- or to subscribers, it's referring more to the profitability?

Michael Egan

Yes. Exactly, we’re very focused now on being very mindful of where each of our investment dollars is placed.

George Askew

Now you know you see when you get the economics of ChristianMingle year that of Jewish Networks. You know if you look at the win backs first time subscribers data for each of the two they're almost reversed and first time subscribers in the low 40s for Christian, it's in the low 20s for Jewish networks. I understand saving and having a much more compelling cost for subscriber metrics, but if you cut marketing most of your subscribers are coming from first time sources, first time subscribers. Church program is just getting going what are we going to see there? Are we're going to see first time subscribers really fall off quickly or?

Michael Egan

No again, what we’re experiencing so far is that the decline in registrations coming from our marketing programs as we've made these cuts is not nearly as steep as the decline of the cut themselves and so when we talk about bringing the profitability up into the JDate realm it's really around those subscriber acquisition cost and what is the cost of the next subscriber in the [ph] door. We're also doing activities so the church program is part of the new user acquisition platform but we also have activities in place that are geared around retention and we’ve just sort of started to develop content and curriculum that’s in-line with the church program that we believe will lead towards a longer duration subscriber. And so we hope that that as an overall lifetime value that will start to increase as well.

George Askew

And final question, can you just sort of update on the strategic alternatives topic. I guess you have been at it you know four or five months. You know what's happened so far? What do you expect to come?

Michael Egan

Yes. We didn't put that into the release because we really don't have any additional information to share. We have retained a financial advisor and we're still speaking with them about alternatives, but at this time we're not really in a place to state anything explicitly.

Operator

Thank you. At this time I will turn the floor back to management for closing remarks.

Michael Egan

Great. Thank you very much for taking the time today to listen to our call.

Operator

Thank you. This includes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.

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