MeetMe, Inc. (NASDAQ:MEET) Q2 2016 Earnings Conference Call August 1, 2016 8:30 AM ET
Todd Kehrli - IR, MKR Group
Geoff Cook - Chief Executive Officer
David Clark - Chief Financial Officer
Darren Aftahi - Roth Capital Partners
Ronald Josey - JMP Securities
Jeff Houston - Northland Securities
Blake Harper - Topeka Capital Markets
Good day and welcome to the MeetMe Second Quarter 2016 Financial Results Conference Call. Today's call is being recorded, and at this time I would like to turn it over to Todd Kehrli of the MKR Group. Please go ahead.
Thank you, operator and good morning, everyone. Welcome to MeetMe's second quarter 2016 earnings conference call. On the call this morning are MeetMe's Chief Executive Officer, Geoff Cook; and Chief Financial Officer, David Clark.
Before we begin, I'd like to remind everyone that during this conference call, management will make certain forward looking statements, which convey management's expectations, beliefs, plans and objectives regarding future financial and operational performance. Forward looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects, including those relating to our plans regarding new products and mobile monetization. Actual results could differ materially from those described in this conference call and presentation. Information on various factors that could affect MeetMe's result is detailed in the reports filed with the Securities and Exchange Commission. MeetMe is making these statements as of August 1, 2016 and assumes no obligation to publicly update or revise any of the forward looking information in this conference call.
In addition to GAAP results, we will discuss certain non-GAAP financial measures, such as adjusted EBITDA and non-GAAP net income. Our earnings press release can be found on the news release link on the Investor Relations page of the company's Web site, www.meetmecorp.com. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. A replay of this conference call will be available at the Investor Relations section of the MeetMe corporate site at again, www.meetmecorp.com.
With that said, I'd now like to turn the call over to our, CEO, Geoff Cook.
Thanks, Todd, and thanks everyone for joining us this morning. We have made tremendous progress in the quarter towards our mission of creating the largest global service for meeting and chatting with new people.
We achieved record second quarter revenue, adjusted EBITDA, and net income. In the second quarter, mobile revenue grew 82% year-over-year to $15.1 million, while total revenue increased 48% to $16.4 million. Mobile represented more than 92% of our total revenue in the second quarter. Adjusted EBITDA increased 109% year-over-year to $6.0 million, reflecting a 37% adjusted EBITDA margin and we achieved non-GAAP net income of $4.8 million, a 103% increase over Q2 of last year.
We also set new records for mobile DAU, daily active users, MAU, monthly active users, and user engagement in Q2. In the second quarter, mobile daily active users grew 15% year-over-year to 1.22 million on average and total mobile monthly active users reached 4.8 million, a 32% increase year-over-year, and up 10% sequentially from our first quarter.
What's more, the strong growth in mobile traffic and engagement that we experienced in Q2, continued into July. In fact, just last week we achieved a new mobile DAU record surpassing 1.37 million daily active users for the first time and reached a new record of 32.2 million chats in a single day.
During the second quarter, our mobile ARPU was $3.11, an increase of 38% versus a year ago, when most of the quarter was subject to fixed rate CPM contracts. Given the strong historical seasonality in the mobile advertising market, we expect ARPU to continue to grow in each successive quarter of 2016, building to a maximum in Q4.
As I have said before, we believe MeetMe's future depends on the quality of the connections we facilitate for our users. To that end, we launched Discuss in the second quarter. Discuss is designed to foster conversations in community around interests via group communication with the goal of facilitating high quality interactions and improving retention. With Discuss, we are able to facilitate discussions around the interests that we believe our users share.
We have seen some positive early signs. In particular, comments per post on Discuss have averaged so far more than 250% in excess of those on legacy feed posts. We believe Discuss is quickly becoming a vibrant community where more and more members feel that they belong. We aim to continue to facilitate higher quality connections in Discuss. Our goal is to continue increasing posting and commenting volume via a deep pipeline of Discuss related enhancements. We plan to launch an algorithmic top level feed for our main Discuss tab this quarter.
Right now, Discuss posts receive no preference in our main feed despite their much higher quality. We intend to redo this feed to privileged posts that our users are more likely to comment on based on their interests and based on the post’s own performance. We believe the improved algorithm will drive increased comments and likes as well as increased usage of Discuss. Additionally, we intend to strengthen the Discuss community by enabling threaded replies to comments which would then alert the original commenter via notification.
We also look forward to moving beyond text and photos by enabling commenting and posting via different media types like animated gifts, video, and links. Longer-term, we intend to enable our members to create their own topics, providing for smaller and more specific interest based communities. We believe user generated topics will enhance [virality] [ph] as topic creators recruit new members as well as provide even more opportunities for our users to form high quality connections around quality content.
Beyond Discuss, we are focused on growing engagement and retention. I mentioned previously that our data indicates users with more photos are more likely to remain on the platform longer, thereby helping to lift DAU. To that end, we dramatically improved our photo experience in recent months, launching multi-photo upload among other improvements. The results have been strong. 57% growth in new photos added per day since February of this year. We believe we can continue to improve the number of photos per day and we expect to launch Facebook and Instagram import tools in order to make it even easier for our members to access their photos wherever they are.
In the quarter, we also announced our agreement to acquire Skout, a combination that we believe will dramatically expand our scale and further our mission of creating the largest global service for meeting and chatting with new people. Combined, the companies connect more than 8 million monthly users around the world while signing up more than 100,000 new users every single day. We expect to close the acquisition in October of this year. We continue to expect Skout to do at least $7.5 million in adjusted EBITDA in the first 12-months following the close and we believe there is potential to do better.
Since the announcement one month ago, the two companies have been hard at work, identifying actionable synergies, and low hanging opportunities. By way of example, we have identified the solution to improve Skout's location algorithm to drive higher quality, more local connections. We also believe we can optimize Skout's advertising display logic to increase ARPU. While Skout and MeetMe share many metrics in common, including chats per DAU, we have noted that MeetMe users add twice the number of photos as Skout users. Given the connection between retention and photos, we believe there is an opportunity to lift Skout retention through an improved photo product.
Of course, we have identified ways to improve the MeetMe business as well. For example, we believe there are opportunities to improve MeetMe's on-boarding process for new users, as well as aspects of our ad program. Additionally, we have determined that if MeetMe could monetize its non-English speaking audience based on the regional ARPU that Skout experiences today, we believe we should be able to drive at least an incremental $5 million in annualized revenue from the MeetMe product.
We intend to begin testing international ad placements in September of this year. As I have said before, we plan to take our time with the rollout so we do not disrupt the strong growth in engagement we are experiencing internationally. The potential synergies go beyond these. We intend to exploit cross-promotional opportunities given the negligible overlap among monthly active users of the two services. In the longer term, we plan to investigate sharing user bases more directly so that users available could chat in MeetMe, maybe able to connect to Skout users and vice versa. By increasing the density of users in the geographic area, we believe we will increase retention and engagement.
Furthermore, by standardizing the backend for certain products like the recommendation engine, chat, and feed, we believe we will lower technology costs over time. I very much look forward to working with Skout's talented team to realize these potential synergies and others, as we work to build the highest quality products for meeting new people.
In conclusion, our second quarter was strong. We grew revenue, adjusted EBITDA, and net income to record levels while growing users and engagement to all time highs. We also announced the Skout acquisition which we believe will enable further growth and bring two of the largest mobile apps for meeting and chatting with new people into the same portfolio.
We continue to believe, we are in the early days. That the opportunity for meeting new people is a multi-billion dollar and that we are well-positioned to create and capture value for our shareholders. With that, I will now turn it over to David.
Thanks. As Geoff noted, we achieved record total revenue and record mobile revenue in the second quarter, reflecting continued growth in mobile engagement by our users, as well as the continued strength in the mobile advertising industry, overall.
Total revenue for the second quarter was $16.4 million, up 48% from $11.1 million a year ago. Mobile revenue increased 82% on a year-over-year basis to $15.1 million for the quarter, with a bulk of the quarter's mobile revenue attributable to advertising. Mobile was approximately 92% of MeetMe's total quarterly revenue, another all time high in our history, up from 75% a year ago. Web revenue was $562,000 in the quarter, down from $1.5 million a year ago.
Our mobile quarterly average revenue per user, or ARPU, increased 37% to $3.11 in the second quarter, up from $2.25 a year ago. Mobile average revenue per daily active user or mobile ARPDAU, was 13.6 cents in the quarter, up 58% from 8.6 cents a year ago. Web ARPDAU was 5.3 cents in the quarter and that's down from 9.7 cents one year ago.
From an operational perspective, we spent $2.5 million or 15% of revenue on marketing during the second quarter and we anticipate spending approximately 15% of revenues on marketing for the remainder of this year.
For the quarter, we reported adjusted EBITDA of $6 million or 37% EBITDA margin, which is up 109% compared to $2.9 million a year ago. Adjusted EBITDA for the second quarter adds back $754,000 in depreciation and amortization, $916,000 of stock-based compensation, $5,400 of interest expense, a deduction of $27.2 million of an income tax benefit that I will cover in just a moment, $787,000 from the change in warrant liability, and a deduction of $18,000 for the effect of a foreign currency exchange rate.
Our second quarter reported net income was $29.6 million but that included a onetime accrual to create a deferred tax asset anticipating ongoing profitability and the consequent use of our net operating losses for tax purposes. Without the accrual, net income was $2.3 million in the quarter. A reconciliation of GAAP and non-GAAP measures, such as adjusted EBITDA is included in our SEC filings and in the appendix of the presentation that’s now posted in the Investors section of our corporate Web site which is www.meetmecorp.com.
We generated cash flow from operations of $3.4 million in the quarter and used $103,000 to pay down capital leases. We ended the quarter with $32.1 million of cash and cash equivalents on the balance sheet, that’s an increase of 22% or $5.7 million from the first quarter ended March 31, 2016.
Now moving on to guidance. The following does not include the acquisition of Skout which we expect to close in October. I will address Skout in just a minute. For MeetMe, we are raising our previously provided standalone revenue guidance for the full year of 2016. For the year, we now expect MeetMe revenue to be in the range of $66 million to $68 million, up from our previous range of $63 million to $66 million. This new revenue range represents total revenue growth between 16% to 20% year-over-year. We are also raising our guidance for adjusted EBITDA. We now expect adjusted EBITDA for the year to be in the range of $25 million to $27 million, which represents growth in the range of 24% to 33% year-over-year.
We anticipate being net income positive in all quarters of the year and expect CapEx for the year to be $2 million and therefore expect to be substantially free cash flow positive. We expect MeetMe standalone revenue in the third quarter to be in the range of $17 million to $17.5 million representing growth from 19% to 22% year-over-year, and adjusted EBITDA in the third quarter to be in the range of $6.5 million to $7 million.
As Geoff mentioned, we continue to expect our recently announced acquisition of Skout to close in October of this year. Based on that target closing date, we expect MeetMe's consolidated 2016 financial results to be, revenue of between $73.5 million and $75.5 million, which would include three months revenue contribution from Skout, and adjusted EBITDA between $28 million and $30 million, which would include three months of adjusted EBITDA contribution from Skout.
As I have mentioned, these numbers assume an October close. They will prove different if the closing does not occur when we expect. We continue to believe Skout will contribute an incremental adjusted EBITDA of $7.5 million in the first 12-months of our expected October close.
So to conclude, the mobile advertising market remains strong and we believe it will continue to grow as advertisers try to reach the coveted millennial generation. As a public market leader for social discovery on a mobile device, with almost 5 million monthly active users or 8.5 million once the Skout acquisition is completed, we believe MeetMe is well positioned not only to capture but to capitalize on the increasing ad dollars being spent on mobile advertising.
And with that, operator, you can open the call for questions.
[Operator Instructions] We will take our first from Darren Aftahi with Roth.
Congratulations on a nice quarter. Couple of things. First, I think last quarter you had talked about potentially spending 15% to 20% on variable marketing, this quarter you spent 15%. You kind of said that for the year. What's kind of the change do you think that the steady run rate kind of going beyond 2016?
We make the acquisition spend decision on a near weekly basis based on what our cost per installs are looking like and comparing them to our ARPU, so the fact that we came out of 15% as opposed to 20% just as a consequence of making a discretionary decision to spend money. But we are obviously spending at a pace higher than we ever spent because our ARPU is so much higher than it has been historically.
Got it. And then on Discuss. Can you talk about some of the topics where you are seeing the most traction? And then Geoff, I think you had said that you are going to get into personalized topics. So this kind of opens up maybe a bigger opportunity as MeetMe wants with sort of a reason to go for romantic attentions and meeting new people, but now it's a place potentially to kind of go to the long tail. So how do you bridge the gap between people wanting to discuss specific things and then kind of building communities around that to kind of keep engagement. And then last one for David, I didn’t quite catch what the cash flow from operations number was. Thanks.
Sure. And this is Geoff. So some of the more popular categories are video games. It’s one of the most popular for comments. LGBT is a very popular category among the gay and lesbian community posting. We also see Rate Me. People are posting their photos to other users to rate. Music is always at the top of our lists. And actually a relatively recent one, Pokémon Go ends up being a fairly popular category for our user as well, but there’s over 40 categories.
In terms of bridging the gap, I guess you talked about between dating and platonic, I think our users are already here for both reasons. That’s been true historically where surveys of our users indicate that many join for dating and many join for friendship and simply to chat. And so, we think that as Discuss evolves, as the algorithm that I talked about replaces the current feed, we would expect more and more activity to go into Discuss, and as we just build out Discuss through the various features I mentioned, we would expect to put more traffic on Discuss. So for example, one of the tests we are interested to see the result of is potentially defaulting the default tab of MeetMe from its current Meet tab for some subset of users. For example, potentially female users and users who are here for platonic intentions, defaulting them to discuss rather than to meet, as we can distinguish between what users are doing based on -- or why users are here based on what they are actually doing inside the platform.
Darren, our cash flow from operations was $3.4 million and we used just a little bit over $100,000 to pay down capital leases.
We will take our next question from Ron Josey with JMP Securities.
Great. Thanks for taking question and congrats on a great quarter. I wanted to ask two please on, one on just ARPU guidance. I believe, Geoff you talked about it reaching a maximum in 4Q. I understand the benefits of seasonality typically in 4Q. Just looking for some more color here. Maybe in terms of how you all have improved overall monetization to give you that confidence, and/or if there are any specific ad launches or current ones that are generating better than expected results. And then on international, you talked about $5 million potentially in the first year or so. Can you just give us an update on international engagement, how that’s ramping? Maybe concentration of users. That would be great. Thank you.
Sure. So on the first question, the improved monetization and why we have confidence in ARPU increases throughout the second half. Historically, we have always seen ARPU increases throughout the second half except when we of course had fixed rate contracts in place. So the ad market is of course extremely seasonal. We tend to see the seasonality pattern play out, both at the end of every quarter, where the end of quarter -- the end of month or the last month of a quarter will typically have the highest CPMs and then play out at a much greater scale with respect to the last quarter of the year having much higher CPMs.
And so, it's a pattern we have certainly seen play out in every month this year and we would expect to continue throughout the second half. I think there has of course been multiple improvements we have made and optimizations we have made to our ad program, but I think the ARPU increases we would presume to see are mostly seasonal ones throughout the second half. In terms of...
I am sorry, Geoff, If I could ask, just on the seasonal improvements. I know you invested or at least launched interstitial ads. Recently you talked about native ad unit as well. Even you talked about that during the Skout acquisition. Are those some of the -- are those driving ARPU as well. Thanks.
To some extent. I think the interstitial ad is good for about $5000 per day. It's certainly a unit that I think will remain a part of our mix. I don’t think it's going to be certainly anywhere near being on par with the other units we run. But I think it will be a consistent $5000 per day or maybe slightly better as CPMs improve. In terms of the question about international engagement and kind of concentration, I think where we are on [indiscernible] -- so international now is about 46% of our mobile MAU, and non-English is approximately 32% of our mobile MAU. And when I mentioned that, at least $5 million number in terms of incremental revenue we could drive if all we did was put ads on the non-English version of the MeetMe app. That’s essentially being derived by taking our traffic in different regions and multiplying it by the regional ARPU that Skout experiences.
Ron, it's David. You also bring out an important point. We are now going to starting comping going forward. Start comping against quarters under which we were no longer last year subject to fixed CPM rates under contract with either Beanstalk or Pinsight. So we are now comping against some fairly strong quarters for the remainder of the year and while we are anticipating growth year-over-year, it won't be as dramatic because we are not comping against a fixed CPM but rather a floating CPM that we had last year.
We will take our next question from Jeff Houston with Northland Securities.
So to start off with, looking at the guidance for third quarter and full year. Outside of seasonal strength, which was probably already in the prior guidance range. Does it assume that the strong DAUs and chats from July continues, or do you assume those kind of stabilize?
Our assumption is that we are going to continue to grow our DAU and our chats throughout the year.
Got it. Got it. I was just trying to get a sense of, if there is a bit of conservatism still within that guidance range or if, just how aggressive you are being on that guidance range but I think that provides some good color. Switching to some of the benefits that Skout is going to bring over to MeetMe. You mentioned that there is some room for improving the on boarding process for MeetMe. Could you elaborate on that a bit? What are you doing now and what is Skout doing that could make that a bit more enhancing?
I would like to elaborate on it but for competitive reasons I don’t want to.
Got it. Understandable. Then last one, looking at Skout, I think you said before that you are confident you are going to close October 1. And then the commentary today sounded like it was just sometime in October and I know the guidance is based on it closing October 1. Is that still roughly the range or was I just kind of read in that, that it might be not October...
We are still anticipating an early October close but not the first. We are kind of thinking the third.
[Operator Instructions] We will go next to Blake Harper with Topeka Capital.
I had a question about the margins. Looks like they are going to be up to almost 40% adjusted EBITDA margins in Q3 and I know you talked some of the [indiscernible] long-term margins. I just want to see if we could get an update on what you think on they would be, [indiscernible] get out of the platform versus reinvesting.
So if you look at the business model we are in, largely mobile advertising and with relatively fixed cost people in technology. We are not anywhere close to the scale of Facebook as Facebook does consistently over 50% EBITDA margins. But we are obviously also growth story so we are choosing to spend money on user acquisition, especially as our ARPUs remain strong. So we are modeling, yes, you are right, we are modeling sort of a low forties, or 40% EBITDA margin. I want to maintain the flexibility as we guide, for us to be able to spend money to acquire users, especially as we start to look at monetizing international markets.
Got it. Okay. And then David, just a follow-up. Did you use the buyback in the quarter and just some thoughts, I guess on your cash strategy. It looks like you do have enough cash under balance sheet to fund the cash portion of the Skout deal. Just want to see if there is an update, kind of put [indiscernible], so what would kind of be the cash flow?
We did not buyback any shares in the quarter because of exactly what you are focusing on. So for the closing, we anticipate closing the Skout deal with cash off our balance sheet and probably incurring a small loan of about $10 million-$12 million in the form of a straight bank revolver. And that’s going to be it. So we are not going to have to raise any other external capital other than the bank deal and that commitment letter all but ready to be signed. So we feel we are in really good shape to fund off of our balance sheet. As we continue to build cash, we will look at the buyback potentially, but we did not use it at all in the quarter anticipating the Skout closing.
With no further questions in queue, I would like to turn it back to management for any additional or closing remarks.
Thank you, operator, and thank you everyone for joining us today. On the investor relations front, management will be presenting at the Canaccord Genuity Growth Conference in Boston on August 10. If you are attending this conference, we will encourage you to come by and see our presentation. Otherwise we look forward to updating you on our progress on our next quarterly conference call. This concludes today's call. Thank you.
That concludes today's conference. We thank you for your participation. You may now disconnect.
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