Spark Networks, Inc. (NYSEMKT:LOV)
Q4 2016 Results Conference Call
March 21, 2017 04:30 PM ET
Robert O'Hare - CFO
Danny Rosenthal - CEO
Kara Anderson - B. Riley
Patrick Retzer - Retzer Capital
Greetings, and welcome to the Spark Networks' Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode and interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Robert O'Hare. Thank you, you may begin.
Thank you for joining us today. I’m Rob O'Hare, Chief Financial Officer for Spark Networks. On today's call with me is Danny Rosenthal, Spark's 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 fourth quarter and full year 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 on this call, we refer to adjusted EBITDA which is defined in our SEC filings. 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. Further, 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 SEC. This call is being recorded.
With that, I will now turn the call over to Danny.
Thanks, Rob, and thank you to everyone for joining the call today. Since I assumed the CEO role late last summer, our focus has been on improving profitability, unifying our technology platform and positioning the Company to drive profitable growth across our networks. We started with attractive assets in our JDate, Christian Mingle and other networks and my confidence in our ability to leverage those assets remained. By reducing our costs and operating more efficiently, we'll be well positioned to deliver growth and value going forward.
We're in the early days of our transformation, but results in the fourth quarter of 2016 reflect clear progress. We delivered improved performance in Q4 as evidenced by the improvement in adjusted EBITDA, as we focused on doing fewer things in a better way and reducing our overall costs. At the same time, we took important steps towards implementing a unified technology platform which will power our customer facing sites and drive future marketing efforts. By reducing costs and operating more efficiently, we're positioning ourselves to invest behind data driven initiatives to connect with customers to drive profitable growth in the future.
2017 will be a transformation year for Spark Networks. Our focus remained on executing against our strategic priorities, operating profitably, re-launching our technology platform and engaging our customers through data driven marketing investments that support future growth. We're already well on our way to implementing a unified technology platform that will enable us to address the technology challenges I mentioned on our Q3 call. We've made significant progress against our aggressive product and technology roadmaps and in the short time we've been here, we're exceeding many of the internal milestones we set back in August.
Through these efforts, we're on track to deliver our new platform and re-launch JDate and Christian Mingle in Q2 and Q3 respectively. Beyond modernizing the look and feel of our sites, the real benefits of our new platform will be operational in nature. The new platform will be shared across our multiple brands and will allow us to eliminate the redundancies that currently exist within our legacy systems. We expect to realize $1 million to $2 million of savings in our annual operating costs once we complete our migration to the new platform later this year.
Over the long-term, we expect these changes will supports sustained profitability as we are able to allocate more capital to growth opportunities and less capital to our day-to-day operations. As important as these improvements will be in driving operating efficiency, we believe the improvements to our data infrastructure will be even more impactful. By moving one more modern and standardized technology platform, we will be able to efficiently share successful product features across our portfolio and better understand our customers.
Simply put these new tools will enable our team members with deep understanding of scalable infrastructure, data science and product optimization to execute more quickly and more effectively going forward. But reducing costs and enhancing our technology is only part of the story. In order to truly drive profitability and value, we must grow our business by developing a deeper understanding of our customers, our markets and our industry.
We've been actively speaking with current and future customers as well as our industry peers and as we roll-out our new platform, we will be in a position to access better data to support more efficient investment and marketing programs to effectively drive growth. As I said at the outset, we have much work to do but I'm encouraged by the progress we've made to-date and look forward to sharing more in the coming months.
Now back to Rob for our review of our financials.
Thanks, Danny. As this quarters activities demonstrates, we remain on track to operate profitably while also making the investments necessary to improve and ultimately grow our business. I'll now walk through our fourth quarter and full year 2016 financial results in a bit more detail.
Starting with revenue, we finished the fourth quarter with total revenue of $7.7 million, a decrease of 28% compared to the year-ago period and an 8% sequential decline. Jewish Networks revenue was $3.1 million, a decrease of 27% year-over-year. The decline in revenue was primarily driven by a 19% decrease in average paying subscribers over the prior year period and a 15% decrease in ARPU.
Average paying subscribers sell 9% from Q3 while period ending subscribers at the end of Q4 sell 3% compared to the end of Q3. Christian Networks revenue was $4.3 million down 28% year-over-year reflecting a 28% decrease in average paying subscribers and a 3% increase in ARPU. The year-over-year decline in the average paying subscriber base is a result of the reduction and reallocation of our direct marketing investments.
Average paying subscribers sell 16% from Q3 while period ending subscribers at the end of Q4 sell 14% compared to the end of Q3. Full-year 2016 revenue was $35.1 million a 27% decrease compared to 2015. The decrease was driven by a 12% decline in average paying subscribers and a 15% decline in ARPU.
Moving down the income statement, contribution in the fourth quarter was $7.1 million, an increase of 4% compared to the year-ago period and a 1% decrease compared to the prior quarter. Jewish Networks contribution was 2.8 million or 23% decrease year-over-year and a 3% decrease compared to the prior quarter. The declines in contribution are largely a result of the decline in Jewish Networks revenue. Jewish Networks contribution margin was 90% in Q4.
Christian Networks contribution was $3.9 million, a 39% increase year-over-year and a 1% increase compared to the prior quarter. Christian Networks contribution margin was 93% in Q4. Full-year 2016 contribution was $26.7 million a 6% decrease compared to 2015. Jewish Networks contribution declined to $12.5 million down 24% from 2015.
Full year Christian networks contribution increased to $12.9 million up 21% from 2015. For the fourth quarter of 2016 adjusted EBITDA excluding non-recurring charges was $1.8 million, an increase of $1.7 million compared to Q4 of 2015 and an increase of $252,000 compared to the prior quarter. Adjusted EBITDA margin was 23% in Q4. Current period adjusted EBITDA excludes $4.5 million of non-cash intangible and long lived asset impairment expense.
Full year 2016 adjusted EBITDA excluding non-recurring charges was $2.5 million, a decrease from $2.8 million in the year ago period. Adjusted EBITDA margin was 7% in 2016. Current period adjusted EBITDA does not include $1.2 million of severance payments and $4.6 million of non-cash intangible and long-lived asset impairment expense.
Turning to the balance sheet, Spark ended the fourth quarter with $11.4 million of cash and cash equivalent, an increase from $11.3 million at the end of the prior quarter and $6.6 million at the end of 2015. At year end the Company had no outstanding debt.
And with that, we're ready to take some questions.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Kara Anderson from B. Riley. Please go ahead.
Any promotion or otherwise event that particularly drove higher ARPU at Christian networks.
No, I mean I think it was actually little bit of the opposite Kara. I think we promoted less frequently in the quarter than we'd done in prior quarters and also it takes a quarter or two for ARPU to kind of catch up in our business. So, some of what was doing less promoting starting in August post the peak fixed deal and then that's just carrying through and now having kind of a full quarter of that promotional schedule kind of behind us.
Okay great, and then could you provide any metrics for JSwipe secure maybe the number of paying side lower ARPU.
The ARPU is right around the blended average for the Jewish Network and I can share we had about 4,500 paying subs at the end of the year. So, we're seeing nice growth there, we had some feature launches come through during Q4, and we've seen a nice -- we like to see nice continued growth in both monthly averages and also the proportion of paying subs within that MAU base.
And how is the conversion to sort of paying trended over to say the past year or so?
It's pretty amazing over the last year I mean this time last year it was zero. They started monetizing midway through Q1, so today its about4% of the base. So, again we're seeing we're seeing really nice traction and there's even been an inflection point in that monetization rate I'd say in mid Q4 through to today.
And the real focus has started, I think really at the beginning of Q4 was when there was a true focus put on monetization efforts and we've seen really strong progress since then; numbers are still small, but the progress is great.
And then should we expect any sort of campaign or spending around the re-launch of JDate and Christian Mingle in Q2 and Q3 respectively?
Yes, it won't be as much of a kind of a blitz right at re-launch. I think it'll be more getting the product out, we will support them and then we're trying to land the timing such that we can start to invest heavily in Q4 and Q1, which obviously are obviously the stronger seasonal periods in our business. So, it's really about kind of getting the platform launched and getting the new brand out there and supporting them with marketing at a time when consumer appetite is strong.
And can you share what are your expectations with regards to sort of the subscribers coming out of this re-launch?
I don't know that we've a kind of specific guidance around subscriber count and I think we're mostly focused on getting to quality with our networks over quantity, and so we're really focused on kind of doing the foundational work that we need to do in order to support the business and to be able to grow it in the future, but we -- I guess we stop short of giving specific subscriber count guidance.
Our next question is from Patrick Retzer from Retzer Capital. Please go ahead.
It looks like you've made some substantial progress from an adjusted EBITDA point of view, congratulations on that. You've thrown out some vague terms, goals, growing profitably were on track to profitability I think the phrase was with the previous caller you've talked about some positive signs regarding monetization and so forth. Can you give us any additional color on expectations for profitability, for growth, for revenue subscriber wise, any view on that?
Yes, I think what we said in the prepared remarks Patrick was that we expect to continue to operate profitably in the short run. It's now a primary focus of ours, but it's something that we think will happen naturally as we continue to look for efficiencies in our business. And then in terms of kind of giving forward guidance for future growth, I think we're really head down on doing a lot of foundational work that we think will support future work, and we think that kind of with that support will ramp marketing as I said earlier in Q4 of this year in Q1 of next year and then that should hopefully key us up to eventually grow in the future.
Our next question is from Kara Anderson from B. Riley. Please go ahead. Ms. Kara, your line is live.
Just one more question for me. You mentioned there's 1 million to 2 million in annual operating costs that you expect to take out. Can you provide further color on the timing of that and whether that's net of maybe any increase sort of growth capitals that you may allocate towards other opportunities?
Thanks, Kara. This is Danny. I can talk a little bit about timing and kind of how we expect to realize this, but as we rationalize and modernize the platforms we expect to run that's more efficiently. So, as we roll out of the platforms towards the end of this year that's when that cost savings will start to kick in, and I think you will see those are kind of the last quarter of this year and first quarter of next year. Rob, I mean if you just kind of look forward basis, it depend on our plans for marketing as we rollout.
Right, I would look at it as being separate in a part from investments that will make to support growth in the business. This is more about kind of continuing to rationalize the operational cost structure. So, lastly, we do things to support the growth of the business and I think they are in some ways separate buckets.
[Operator Instructions] And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.
Okay, thanks everyone. We'll see you at the end of Q1.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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