Spark Networks SE (NASDAQ:LOV) Q2 2022 Results Conference Call August 9, 2022 8:30 AM ET
Company Participants
Todd Kehrli – MKR Group, IR
Eric Eichmann – CEO
David Clark – CFO
Conference Call Participants
Raj Sharma – B. Riley
Operator
Good day, and welcome to Spark Networks’ Second Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations.
Todd Kehrli
Thank you, operator. Good morning, and welcome to Spark Networks’ Fiscal 2022 Second Quarter Earnings Conference Call.
With me on today’s call are Spark’s CEO, Eric Eichmann; and Chief Financial Officer, David Clark. Before I turn the call over to Eric, I’d like to cover a few quick items.
This morning, Spark Networks issued a press release announcing its fiscal 2022 second quarter 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 being made as of today, August 9, 2022, 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 GAAP and non-GAAP reporting and present the reconciliation between the 2 for the periods reported in the release.
With that said, I’ll now turn the call over to Eric Eichmann, CEO of Spark Networks. Eric, please go ahead.
Eric Eichmann
Thank you, Todd, and good morning, everyone. Before we begin our earnings commentary, I want to remind everyone that on June 1 we announced that we had initiated a comprehensive review of strategic alternatives for the company. At this time, the review is still ongoing. While there are no material updates to share right now, I know that everyone is eager to understand the status.
What we can say is that our Board has been highly engaged with the company’s external financial, legal and strategic advisers to identify and assess a range of alternatives to enhance Spark’s value and market position. We’ll have more to say on our strategic process as we conclude the review, and we hope to be able to update you with our progress in the near future. This work has reinforced our view that we participate in a large and dynamic market, and that Spark is uniquely positioned to capitalize on the opportunities ahead.
Spark is the fourth largest online subscription-based dating company across North America and Europe by revenue, and is a leader in social dating for meaningful relationships, targeting the 40-plus demographics and people with religious affiliations.
We estimate the worldwide online dating market for meaningful relationships to be about $2.3 billion growing at over 6% a year. We capture about 30% of this market in the U.S. with our strong portfolio of brands, which includes Zoosk, EliteSingles, SilverSingles, Christian Mingle and JDate.
Now let me start by reviewing our second quarter results, and then I’ll provide more color around the strategies and investments we have put in place to drive revenue growth and ultimately, shareholder value in the future. Overall, our second quarter revenue was impacted by foreign exchange headwinds as the U.S. dollar strengthened against all major currencies, in particular, European currencies where we generate over 1/3 of our revenue.
On a constant currency basis, our second quarter revenue would have been $50.3 million. During the quarter, we began scaling our user acquisition spend and saw 17% year-over-year new subscriber growth for Zoosk, which gives us confidence in our ability to return Zoosk, our largest brand, to revenue growth. We also made good progress on improving the Zoosk user experience, which we believe will drive increased adoption and renewals.
Specifically during the quarter, we developed stronger user profiles to drive greater interaction and personality representation, resulting in higher profile completion from our users. We also updated Zoosk’s matching algorithm, positively impacting both engagement and subscriptions. Finally, we optimized Zoosk’s payment flow and started testing new prices across packages.
During the quarter, we saw an increase in fraud on our SilverSingles and EliteSingles platform, which we believe led to lower performance versus our expectations. We addressed the root cause of the increase and, as a result, have seen improvements in user engagement. We will continue to work to reduce fraud even further in the third quarter. Overall, our product team is focused on improving engagement, increasing conversion metrics and strengthening safety and security on all platforms.
We are working to simplify our technology infrastructure by moving our primary brands from 3 platforms to 2. While we have made good progress in our plan, we prioritize some of our resources to focus on safety, delaying our transition to H1 next year.
Lastly, we are progressing well in revamping all of our mobile apps and expect that we will launch new apps for EliteSingles and Zoosk by the end of the year. We believe this represents a significant future opportunity for Spark as we look to capture our fair share of mobile app revenue.
On the marketing front, we began expanding our user acquisition activities during the second quarter. We’ve added new affiliate partners and we started TV and radio ads with positive results. Once we’re able to ramp up user acquisition, we saw solid results, including a 17% year-on-year increase in new subscribers and a 19% increase in organic traffic during the quarter on our Zoosk platform. We expect that these continued investments to drive increased revenue and improved profitability.
In Q3, we intend to continue to test additional social and content channels, including TikTok, native advertising and newsletters. We also expect that we will benefit from the potential decline in advertising rates in the next few months.
Finally, given the more challenging U.S. and European economic outlook, we are looking to contain costs and further prioritize investments for the second half of the year. In summary, we continue to make progress on getting Zoosk back to growth. We anticipate our product and user acquisition efforts, combined with our subscriber growth momentum in 2022 to lead to strong growth in 2023.
With that, I’ll ask David Clark, our Chief Financial Officer, to add more color around our financial performance for the quarter. David?
David Clark
Thank you, Eric, and good morning, everyone. Revenue for the second quarter of 2022 was $48 million compared to $55.3 million in the second quarter of 2021. The year-over-year decrease in total revenue was a result of currency fluctuation, decline in Zoosk revenue and a fraud-related decline in non-Zoosk brands. On a constant currency basis, revenue would have been $50.3 million.
Adjusted EBITDA was a $1.7 million loss in the second quarter compared to $8.6 million in the second quarter of 2021. The year-over-year decrease for the second quarter was primarily due to Zoosk’s revenue decline and our growth-oriented investments in product and user acquisition during the quarter.
In the second quarter, end-of-period paying subscribers were 838,000, up sequentially from 831,000 in the first quarter. Spark’s monthly average revenue per user, or monthly ARPU, decreased to $19.30 in the second quarter of 2022 compared to $20.96 in the same period of 2021. We attribute the decline in ARPU to several factors, including currency fluctuations and our emphasis on longer duration subscriptions through price incentives.
Net loss was $8.8 million in the second quarter of 2022 compared to a net loss of $49 million in the second quarter of 2021. Last year’s net loss was impacted by a large noncash impairment based on the revaluation of the company’s intangibles and goodwill.
Shifting to the balance sheet, the company ended the second quarter with $11.4 million in cash and a GAAP debt balance of $94.5 million, or net debt of $83.2 million. As a reminder, there is no principal amortization required this year under the new MGG agreement. Following the end of the quarter, as we announced today, we were able to successfully renegotiate our loan agreement with MGG to allow us to continue to invest to return the company back to growth.
Before we turn to guidance, I want to mention that this morning we filed an 8-K regarding the adjustment we are taking to the first quarter 2022 revenue. This $2.5 million adjustment was a result of a system error that led to an over recognition of revenue in the first quarter. This error has been resolved and the revenue recognized in subsequent quarters later this year. We plan to file an amendment to our first quarter 10-Q to reflect the restatement of the company’s unaudited consolidated interim financial statements included in the original 10-Q.
Turning to guidance. Due to a number of factors, the largest of which is the depreciation of the U.S. dollar, we are revising down our expectations for full year 2022 revenue. We now expect total revenue for the year to be down low- to mid-single digits on a percentage basis as compared to 2021. On a constant currency basis, we expect full year 2022 revenue to be consistent with that of full year 2021 revenue. While we are pleased with new customer trends, including an increase in new subscribers for Zoosk, we are seeing longer duration of our subscriptions, which means our renewals will be coming in later than in the past.
On the profitability side, although we expect full year adjusted EBITDA to be lower than previously anticipated, we expect to deliver low double-digit adjusted EBITDA margins for the full year. It is important to note that in periods of subscriber growth, revenue and adjusted EBITDA lag as we recognize revenue over the entire subscription length, while 100% of the user acquisition cost is recognized ahead of this growth in the quarter it occurred.
And with that, we’re happy to take your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] And our first questions will come from Raj Sharma with B. Riley.
Raj Sharma
I wanted to understand better — subscribers are up, organic and new book are up. I mean what’s the reason for the guide down? Is marketing spend up? Can you talk about that? And also how much of this guide down is ForEx-related?
Eric Eichmann
Yes. So Raj, thank you very much for the question. This is Eric. So indeed, like — the good things that we mentioned on the call is that subscriber growth is up for Zoosk, in particular, new subscribers, which is great. Overall subscribers are up quarter-on-quarter, which is great.
I think we were affected by a couple of things, and I’ll let David talk to you in a second about to what extent. But certainly, the dollar — the foreign exchange was one big factor. The second one is renewals coming in later than expected. So we had a lag in renewals coming in and they make a good portion of our revenues in any quarter. And I think we talked also about the restatement in Q1, and so that obviously had an effect.
So those were the 3 factors, really. None of those have me worried about the future of the business in particular since the renewals are not gone, they’re just coming in later. But David, any comments?
David Clark
Yes. So on an absolute dollar basis provided, we estimate that the top line is being affected by foreign currency by at least $8 million, as an example. And then Eric mentioned the $2.5 million adjustment in the first quarter, which is rolling through the rest of the year, but obviously takes down the full year.
Raj Sharma
And — okay. And what is the issue of fraud? You said there’s an increase in fraud is a big reason why the numbers were…
Eric Eichmann
Yes. On 2 properties, on EliteSingles and SilverSingles, the issue was that in an environment, mobile browsers, you could actually through one mechanism send messages for free. And fraudsters discovered that, that was available and it actually spread quite quickly amongst them. And so we saw fraud increasing significantly until we found that, that was a loophole, if you will, and we closed it.
So I think that was largely fixed. It took us a little bit of time to find it. And obviously, if you’re a subscriber and you’re getting 100 messages from fraudsters, you’re not satisfied with the service we’re providing. So that was something that we quickly found out and closed, but it affected us in the second quarter, for those 2 properties.
Raj Sharma
But it affected you how? Your subscribers went down drastically in one part of the business, in the Elite?
Eric Eichmann
Well, so a couple of things. [Card spec] is one and the other one is renewals. If you have subscribers that are going to renew but had a bad experience, they wouldn’t renew. And so I think it’s in that way that we were affected.
Raj Sharma
And is that the reason for the ARPU decline? And how do you think that the ARPU would rise over the [quarter]?
Eric Eichmann
Yes, I think we — in those cases, we would have lost subscribers as opposed to having a decrease in revenue from subscribers. The thing is a big part of the ARPU decline is also currency related, and I think that accounts for the majority of it. But yes.
David Clark
And then we have been pushing longer duration subscription, currencies certainly have an effect on them.
Eric Eichmann
Raj, just to confirm that, on a local currency basis, I think we haven’t seen significant changes in the ARPU. So yes.
Operator
Thank you. I would now like to turn the call back over to management for any additional or closing remarks.
Eric Eichmann
Well, thank you, everyone, for your interest in Spark Networks, and thank you for joining our call. Have a great day.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference, and we appreciate your participation. You may disconnect at any time.
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