Spark Networks SE (NASDAQ:LOV) Q3 2022 Earnings Conference Call November 8, 2022 5:00 PM ET
Company Participants
Todd Kehrli – MKR Investor Relations, Inc
Eric Eichmann – Chief Executive Officer
David Clark – Chief Financial Officer
Conference Call Participants
Raj Sharma – B. Riley
Operator
Good afternoon, and welcome to the Spark Networks Fiscal 2022 Third Quarter Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Todd Kehrli, MKR Investor Relations. Please go ahead.
Todd Kehrli
Thank you, operator. Good afternoon, and welcome to Spark Networks’ fiscal 2022 third 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 afternoon, Spark Networks issued a press release announcing its fiscal 2022 third 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 made as of today, November 8, 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 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 Eric Eichmann, CEO of Spark Networks. Eric, please go ahead.
Eric Eichmann
Thank you, Todd and good afternoon, everyone. Before we begin our regular earnings commentary, I wanted to remind everyone that on June 1, we announced that Spark had initiated a comprehensive review of strategic alternatives for the company. At this time, the review is still ongoing.
Spark is the fourth largest online subscription dating company across North America and Europe by revenue and is a leader in social dating for meaningful relationships, targeting the 40-plus demographic and people with religious affiliations. We estimate the worldwide online dating market for meaningful relationships is approximately $2.3 billion of spend annually, with anticipated single digit annual percentage growth over the next five years. We capture about 30% of these markets in the U.S. with our strong portfolio of brands, which includes Zoosk, EliteSingles, SilverSingles, Christian Mingle and Jdate.
Let me first review our third quarter results. We continue to be impacted by foreign exchange headwinds in the third quarter as the U.S. dollar strengthened against all major currencies. This contributed to our third quarter revenue being down 9.6% year-over-year to $48.2 million.
On a constant currency basis, third quarter revenue would have been $51.5 million, down 3.4% year-over-year. During the quarter, we scaled back our user acquisition spend to focus on profitability and to account for a seasonally slow time of the year for online dating, which impacted our ability to grow revenue during the quarter. Despite this, we delivered initial subscriber growth of 5.1% and total average subscriber growth of 3.4% for our largest brand, Zoosk, in the third quarter.
Since we acquired Zoosk three years ago, its subscriber base has declined every quarter until last quarter. So, we are excited to see our hard work to turn this around paying off with the second consecutive quarter of Zoosk subscriber growth.
From a profitability perspective, we delivered a 66% increase in adjusted EBITDA of $8.3 million or 17% of revenue compared to $5 million or 9% of revenue in the third quarter of last year.
Now let me provide some detail around the significant product improvements we made during the quarter, which we believe drove increased conversion rates and engagement. In fact, our subscription conversion rates for both Zoosk and non-Zoosk brands increased 11%, which we attribute to product improvements we made during the quarter, as well as our ability to drive higher-quality traffic.
First, by modernizing Zoosk’s profile content and streamlining the profile completion experience, we encouraged users to create high quality profiles, driving increased engagement between users. As a result, our user profile completion rates improved dramatically with completion rates of new users’ profiles improving fivefold. Stronger profiles drive greater interaction between users and positively impact engagement and subscriptions.
During the quarter, we launched a refresh of the Zoosk Android app in the U.K., with improved engagement and retention metrics and an uplift in conversion rates. Following this app refresh, Zoosk’s Google Play Store ratings improved 0.5 points. We expect that our other app ratings will also improve as we continue to update our apps. We are rolling out these updates to the U.S. and other markets.
We plan to launch updated apps for EliteSingles on iOS and Android, and Zoosk on iOS in the next couple of months. We also made product improvements during the quarter to combat fraud, reducing increases in fraud during the first half of the year by as much as 80% on some of our brands.
During the quarter, we successfully deployed new Zoosk prices, leading to increased conversion and a higher average price for Zoosk subscriptions. Based on these successful changes, we believe there is additional room for improvement on pricing in the future. As a result of these efforts, we saw a meaningful increase in positive customer feedback in the quarter to the highest levels we have seen since acquiring Zoosk.
On the marketing front, after expanding our user acquisition spend in Q2, our focus shifted to driving profitability for Q3 and Q4. With this new focus, we increased our measure of subscriber profitability by 13% during the third quarter versus last year.
In addition, we made great progress implementing a CRM tool that should significantly advance our life cycle communications with potential subscribers, which we believe will drive increased revenue and profitability in Q4 and beyond.
The product improvements, including enhanced payment configurations and marketing focus on higher-quality traffic, led to an increase in our subscription conversion rates across all brands by 11% over the quarter.
Finally, I want to touch on the macro environment. While I am happy with the progress we are making, we are facing a tougher economic climate. Publicly issued results from other established dating brands showed year-over-year revenue declines of 15%. And while our quarterly revenue trajectory compares favorably to these other brands, it suggests a temporary slowdown in demand for our products. As a result, we plan to continue to contain costs and further prioritize investments throughout the rest of the years to focus on profitability.
In summary, in Q3, we significantly increased profitability and made good progress in evolving our products. We saw improved conversion and engagement metrics. And for the second quarter in a row, saw subscription growth at Zoosk. We will continue to execute on product improvements while we focus on profitability and on strengthening our market position and financial outlook.
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 afternoon, everyone. Revenue for the third quarter of 2022 was $48.2 million compared to $53.3 million in the third quarter of 2021. We attribute the year-over-year decrease in total revenues largely to currency fluctuation and lower user acquisition spend during this period. On a constant currency basis, revenue would have been $51.5 million.
For the third quarter, end of period paying subscribers were 804,000, down sequentially from 838,000 in the second quarter. Spark’s monthly average revenue per user, or monthly ARPU, decreased to $19.50 in the third quarter of 2022 compared to $20.52 in the same period of 2021. We attribute decline in ARPU to several factors, including currency fluctuations and our emphasis on longer duration subscriptions through price incentives.
Net loss was $10.7 million in the third quarter of 2022 compared to a net loss of $2.7 million in the same period of 2021. During the third quarter, we incurred an $11.8 million non-cash impairment charge related to the Zoosk trade name.
Adjusted EBITDA was $8.3 million in the third quarter, a 17% adjusted EBITDA margin and a 66% increase when compared to adjusted EBITDA of $5 million in the third quarter of 2021. We attribute the year-over-year increase in adjusted EBITDA to primarily lower acquisition spend during the quarter as we increased our focus on increasing profitability.
Shifting to the balance sheet. The company ended the third quarter with $12.7 million in cash and a GAAP debt balance of $94.5 million or net debt of $81.8 million. As a reminder, there is no principal amortization required this year under the new MGG agreement.
Turning to guidance. Due to a number of factors, the largest of which is depreciation of the U.S. dollar, we are revising down our expectations for the full year 2022 revenue. We now expect total revenue of the year to be down low double-digits on a percentage basis as compared to 2021.
On a constant currency basis, we expect full year revenue to be down single digits on a percentage basis. On the profitability side, we expect full year adjusted EBITDA margins to be in the high single digits, and fourth quarter adjusted EBITDA margins to be approximately 20%.
And with that, we’re happy to take your questions. Operator?
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]
Our first question will come from Raj Sharma with B. Riley. You may now go ahead.
Raj Sharma
Hi. Hello. Thank you for taking my questions. Could you give some color on — you gave some color on Zoosk. Could you give some color on the non-Zoosk brands, the subscriber growth or any sort of — and then any color on churn? What is specifically working and what is not?
Eric Eichmann
Great. Thank you, Raj. Appreciate the question. So, on Zoosk, we did mention that we saw initials, so new subscribers coming into Zoosk, going up 5.1% versus last year and average subscribers going up 3.4%.
One of the effects of us sort of focusing on profitability, in particular in the second half of the quarter, is that if you look at the numbers that we’ve provided in terms of end subscribers that David talked about, they’re a bit down; they’re about down 4%. And so expect that, that’s across the board, the same. As we look at the future and we focus more on profitability, we are sort of focusing on a more balanced approach from customer acquisition, which sort of deemphasizes a bit Zoosk and emphasizes some of the other brands. So, you should expect that, that will be reflected in the future.
Churn, we haven’t seen significant changes in churn for all properties. We have seen, as we mentioned, due to the macro environment, a bit of a softening in demand, but churn has not dramatically changed. And that might be — I mean, obviously, we don’t know what other competitors have, but we have improved a number of areas in our products that we believe have had a positive effect in engagement. And normally, sort of higher engagement means sort of better metrics from a churn perspective.
Raj Sharma
Got it. And then is that any — what does that say about the ARPU do you think going forward? I know the ARPU was a little lower year-on-year. Any sort of color on that and –?
Eric Eichmann
Yeah. It’s interesting because obviously, ARPU has been hurt in part by the strengthening of the dollar, right, because we have over a third of our sort of billings that come in foreign currency. So, as the dollar strengthened, those sort of decrease the ARPU. But we have had, at the same time, sort of test some pricing. And we successfully sort of drove on Zoosk, in particular, sort of higher conversion and higher prices. And so, I think all of those effects sort of lead to a bit of a lower number in ARPU, but I wouldn’t read anything in terms of particular trends on that front. If nothing else, I would expect that is — who knows what the future sort of reserves for the dollar. But as the dollar sort of weakens a bit against some of the other major currencies, if it does, that ARPU would sort of recover some of the lost ground that it had in this quarter.
Raj Sharma
Got it. And then, any sort of new color on the new products? The introductions that you talked about that you were going to do — virtual dating, live streaming or anything else? Is that helping?
Eric Eichmann
No. No big updates on that front. I mean, they continue to be products. The satisfaction ratings continue to be high on that. As I mentioned, I think in the last call, a lot of the — sort of the video trips, the virtual trips that people can take or virtual dates to other locations have been reviewed very favorably. I think what we’re focusing on now is how can we get more and more people to connect, so that those become opportunities for them to take advantage of that feature.
I would say one of the big things that we’re proud of this quarter is we focused quite a bit on reducing fraud. And through a number of initiatives, we’re able to decrease fraud significantly, in particular, on brands like EliteSingles and SilverSingles, where we had seen a sort of a big increase in fraud in the first half of the year and sort of we almost brought all of that down to the levels that it was before that increased. So that obviously has a big effect on engagement, because when you have real people talking to real people, that drives engagement up as opposed to obviously fraudsters.
Raj Sharma
Got it. Thank you. And then any update on the strategic review? I mean, obviously, anything there in terms of–?
Eric Eichmann
Yeah. No updates on that front. I think we’ve been running the process. And if and when there is an update, we’ll obviously talk to the market about it.
Raj Sharma
Great. All right. Thank you. I will take my question offline. Thank you.
Eric Eichmann
Thank you. Appreciate Raj.
Raj Sharma
Yeah. Sure.
Operator
[Operator Instructions]
It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Eric Eichmann for any closing remarks.
End of Q&A
Eric Eichmann
Thanks everyone for your interest in Spark Networks, and thank you for joining our call. Have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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