Spark Networks SE (NASDAQ:LOV) Q4 2022 Earnings Call Transcript

Spark Networks SE (NASDAQ:LOV) Q4 2022 Earnings Call Transcript March 30, 2023

Operator: Good afternoon, and welcome to the Spark Networks Fourth Quarter and Full Year 2022 Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead.

Todd Kehrli: Thank you, operator. Good afternoon everyone, and welcome to Spark Networks’ fiscal 2022 fourth quarter and year-end conference call. With me on today’s call are Spark’s CEO, Chelsea Grayson; and Chief Financial Officer, David Clark. Before I turn the call over to Chelsea, I’d like to cover a few quick items. This afternoon, Spark Networks issued a press release announcing its fiscal 2022 fourth quarter and full year financial results. This release is available on the company’s website at spark.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 about the company’s plans and expectations of future performance, including comments regarding our review of strategic alternatives. Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially. We 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 30, 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 Chelsea Grayson, CEO of Spark Networks. Chelsea, please go ahead.

Chelsea Grayson: Thank you, Todd and good afternoon, everyone. To begin, I’m delighted to tell you today that I’ve accepted the Board’s request to become the Company’s permanent CEO. Over the past four months, I’ve had the opportunity as interim-CEO to learn extensively about Spark’s operations, and its great brands, and the many opportunities that exist to improve this great company. But before I talk about those opportunities and our plans moving forward, I’d like to take a few minutes to update everyone on the status of this strategic review process. At this time, the review is still ongoing. We don’t have any material updates to share on this call. We do believe the company is in a solid position with a portfolio of well-known brands that drive meaningful relationships in key well defined vertical niches, including the 40-plus demographic, busy and discerning professionals, faith based affiliations and people who are looking for long term committed relationships and well positioned to meet our customers where they’re most comfortable and to capitalize on the continued embrace of online dating in the marketplace.

While 2022 was a disappointing year for Spark, it’s clear to me that Spark is far more than just Zoosk. While this cold strategic value is a large mass market dating site, we also have a base of quality affinity brands, including EliteSingles, SilverSingles, eDarling, Christian Mingle and Jdate that are in demand by a large global paying subscriber base. Our non-Zoosk business is close to 50% of our total revenue and several of our non-Zoosk brands have some of the best returns on capital in our portfolio. Going forward, we have identified several areas where we believe the Company can substantially increase cost efficiency and solidify around a lower revenue base with a well-diversified collection of key meaningful brands, with the goal of substantially improving adjusted EBITDA margins.

Improving profitability is our highest priority and we’ve already started reviewing areas where we can achieve this by significantly reducing costs even if doing so may negatively impact our revenue generation for this year. We’re targeting at least a 50% increase in adjusted EBITDA in 2023 or $28 million in adjusted EBITDA. Going forward, we plan to accelerate our debt pay down with additional free cash flow. Our long term goal is to achieve and sustain 25% to 30% plus adjusted EBITDA margins consistent with industry averages. As such, we plan to continue to modernize our technologies to improve our marketing engagements and to improve how we collect and act on data to produce superior products and experiences for every one of our customers and to do all of that in a much more cost effective way.

Our goal is to create an environment through a combination of social media engagement that positions our brands as welcoming communities for like-minded users coupled with contemporary mobile app engagement, and supportive technology to generate a perpetually expanding circle of customers. To achieve this, we must improve our product offerings and embrace more effective and modern marketing approaches, both on the marketing technologies and the brand marketing side. On the product front, my goal is for Spark to evolve into a product first company focusing on delivering significantly enhanced mobile apps to the market. For far too long Spark has been web focused. Even as our customers have transitioned away from the desktop model, we plan to solidify around a diversified core of key meaningful brands and with the goal of achieving a trough revenue base in 2023.

In parallel, we plan to improve product functionality across the platforms, with the goal of improving retention and engagement. As important is product initiatives are, we view them as but one critical step and our growth plan for Spark. As I mentioned on my call in January, Spark is dependent on increasingly dated modes of performance marketing, such as the increasingly less effective and expensive affiliate marketing strategy that it’s used since the day it was founded. We’ve already begun to assess and revamp our marketing approach for all of our products with the goal of taking advantage of more effective and cost efficient modes of brand and performance marketing. For all the work we’re doing to create new products, we have to do all we can to ensure their success and widespread adoption once we debut them.

But we have to do so in a cost effective way. We plan to reallocate our capital into more profitable marketing channels and diversify away from affiliate to direct and social channels. As I’m sure many of you have seen, the amount of content we generate and deploy today across three social media platforms has risen significantly in the past couple of months. This is no coincidence. In fact, it’s at the core of our focus and on leveraging what we consider the broadest reaching three marketing platforms. Doing so significantly increases our ability to direct the content we create to reach the audience with whom we want it to resonate, and to repurpose it as much as possible, as we focus on increasing our social media presence and brand marketing initiatives.

And doing so is meant to reduce our marketing expenses as we reallocate our marketing budget across our highest ROI yields. I hope you can tell how excited I am about the road ahead for Spark. As I said at the beginning of my remarks, our highest priorities are becoming more cost efficient, and increasing our profitability. We believe the best way to build and sustain shareholder value is to target higher annual adjusted EBITDA margins by right sizing our cost structure, investing in our brands that are at the highest ROI, reallocating capital to customer acquisition channels with the highest returns, and strengthening our defined and diverse brands. We believe we can improve our products and operations, while at the same time increasing our adjusted EBITDA with the initiatives we plan to implement this year, not the least of which is driving additional free cash flow and then deploying that smartly, including by paying down debt.

With that, I’ll ask David Clark, our Chief Financial Officer to add more color around our financial performance for the quarter and the full year. David?

David Clark: Thank you, Chelsea. Good afternoon everyone. Revenue for the fourth quarter of 2022 was $41.6 million compared to $52 million in the fourth quarter of 2021. Revenue for the full year of 2022 was $187.8 million compared to $216.9 million in 2021. We attribute the year-over-year decrease in total revenue largely due to currency fluctuation and lower acquisition spend during this period. On a constant currency basis revenue for the fourth quarter and full year ’22 would have been $43.7 million and $197.1 million, respectively. For the fourth quarter end-of-period paying subscribers were 713,000, down sequentially from 804,000 in the third quarter. We attribute the quarter-over-quarter decline paying subs to lower acquisition spend in the fourth quarter.

Spark’s monthly average revenue per user or monthly ARPU decreased to $18.44 in the fourth quarter of 2022 compared to $20.17 for the same period of 2021. ARPU decreased to $19.29 for the full year 2022 compared to $20.66 in 2021. We achieved ARPU primarily to currency fluctuations. As a point of information, we implemented a price increase on Zoosk in February after thorough testing and we will continue to explore price increases across our portfolio in 2023. Net loss was $17.2 million for the fourth quarter of 2022 compared to a net loss of $19.9 million in the same period of 2021. For the full year, net loss was $44.2 million compared to net loss of $68.2 million in 2021. Adjusted EBITDA was $11 million for the fourth quarter, a 26% adjusted EBITDA margin compared to adjusted EBITDA of $14.3 million in the fourth quarter of 2021.

Adjusted EBITDA was $18.5 million for the full year of 2022 a 10% adjusted EBITDA margin compared to adjusted EBITDA of $33 million in 2021. We attribute the year-over-year decrease in adjusted EBITDA primarily due to lower revenue generation. Shifting to the balance sheet, the company ended the fourth quarter of $11.4 million in cash and a GAAP debt balance of $94.8 million or net debt of a $83.4 million. As a reminder, there’s no principal amortization required under the MGG agreement until June of 2023. So as Chelsea noted with several changes underway aimed at a stronger product offering and a much improved marketing engine and most important of all, doing all it in a much more cost effective way. However, while we started this process, we’re still evaluating how to best make those long term changes.

As such, we feel a prudent for providing for more earnings guidance until we have fully implemented these changes. Having said that, we do believe we can significantly improve our operations and drive at least a 50% increase in adjusted EBITDA or $28 million in adjusted EBITDA for the full year with the initiatives we will implement this year. Our long term goals achieve and sustain 25% to 30% plus adjusted EBITDA margins consistent with the industry averages. We aim to substantially deleverage moving forward on a simpler, more profitable business model. With that, we’re happy to take your questions. Operator?

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Q&A Session

Operator: And our first question will come from Raj Sharma of B. Riley. Please go ahead.

Raj Sharma: Hi, thanks for taking my question. If I can kind of delve in a little deeper on subscriber growth with Zoosk and non- Zoosk and since you have just kind of realized that non-Zoosk is, you know, incredibly high ROI brands. How do you see one of them growing in subscriber growth and ARPU. And then I have a follow-on question on, how should we view direct marketing costs going forward?

Chelsea Grayson: Yes, and I’ll turn this over to David, since I know he’s probably eager to answer this question. But you know, generally the way that we’ll get there spending our money more efficiently with the non-Zoosk brands, because the money just grows legs over there much more efficiently. And those brands, the platforms they’re on, you know, have – are much stickier. So once you get people because they’re affinity based sites/apps, and the way the tech has developed and the updated apps that we’ve launched and are in the process of launching now, it’s much easier to get people to not just subscribe, but also renew their subscriptions. But I’ll turn it over to David for a deeper delve on details there.

David Clark: Yes, I’d say, you know, as Chelsea just touched on going forward this year we are prioritizing profitability and free cash flow. In the past, we had tried to push the envelope to drive Zoosk subscriber growth primarily, but – of course all platforms. Now we’re going to be focused on really payback from customer lifetime value and therefore, place more emphasis on the non-Zoosk brands, as opposed to as opposed to Zoosk to maximize profitability, free cash flow this year.

Raj Sharma: How does that play into the direct marketing costs and do you see those declining? You know, where were they if you can give me the number – where were they for the quarter? And do you see them declining that also kind of leads to a decline in revenues. Can you talk about that?

Chelsea Grayson: Yes, I mean, there’s a bottom below which we can’t decline, right, because we’ve got, you know, we’ve got agreements with our lender, covenants with our lender. So unless we had a different agreement there there’s a certain – there’s a floor. I don’t, so barring that, it’s about rebalancing. Right, so it’s about spending differently with an intensely increased emphasis over on the non-Zoosk side of the house. So my remarks today aren’t meant to reflect less spending, but differently balanced spending and more efficient and smarter spending, updated spending. And I don’t actually think – I don’t think that to the extent we were able to spend less on UAC, that it would, that that at all presumes a direct correlation with a drop in revenue.

I think that the more intelligently you spend those dollars, the better you weaponize the content you’ve got with more modernized performance marketing and other marketing technologies. I think actually, you’d be just fine. If you did it, if you did it with the right, folks. Right.

Raj Sharma: Right.

David Clark: And on user acquisition in the fourth quarter.

Raj Sharma: Yes, the direct marketing costs for fourth quarter and when you kind of see that.

David Clark: Sure. Yes, just under $15 million in the fourth quarter.

Raj Sharma: I’m sorry, I missed that. Just under?

David Clark: $15 million in the fourth quarter.

Raj Sharma: Got it. What has – can you talk a little bit more about what has made you realize non-Zoosk is a high ROI brand now, or set of brands and niche that you’re going to allocate more dollars to it but wisely so?