Spark Networks SE (NASDAQ:LOV) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: Good day, and welcome to the Spark Networks First Quarter 2023 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. Please go ahead.

Todd Kehrli: Thank you, operator. Good morning, and welcome to Spark Networks’ fiscal 2023 first quarter earnings conference call. With me on today’s call are Spark Networks’, CEO; Chelsea Grayson; and Chief Financial Officer, Kristie Goodgion. Before I turn the call over to Chelsea, I’d like to cover a few quick items. Yesterday after the close of the market, Spark Networks issued a press release announcing its fiscal 2023 first 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, 10-Q for a complete description of these risks. Our statements on this call are made as of today, May 16, 2023 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 will be discussing certain non-GAAP financial measures Spark’s earnings release and the related current report on Form 8-K described the differences between its non-GAAP and GAAP reporting and presents 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 morning everyone or good afternoon as I’m in Berlin. Thank you for joining us. Before we dive into the quarter and the news that we shared in our press release, I want to let you know that the strategic review process is ongoing. And we don’t have any material updates on that front to share on this call. While no transaction has resulted to-date, Spark has implemented key learnings from these discussions, and plans to implement many of these ideas. I’m pleased to share the transformational framework, we’re developing that’s focused on delivering a return to revenue growth and increased profitability, in addition to becoming more effective and efficient with our marketing and improving our user experience.

We continue to target at least a 50% increase in adjusted EBITDA to $28 million in 2023 and our long-term goal is to achieve and sustain 25% to 30% plus adjusted EBITDA margins consistent with industry averages, which we believe should allow us to fulfill our intent to accelerate the paydown of our debt. To start 2023 in the first quarter, our seasonally weakest quarter, our adjusted EBITDA margin grew from 2% to 6% year-over-year, which signals what we intend to be the start of a year of efficiency for Spark. We have already begun to take several steps that we believe will transform Spark and will help the company achieve its financial and strategic goals and yield a simpler, more profitable company. The proposed transformation framework includes the following: first, we intend to close our Berlin operations by January 2024, which we expect will result in significant cost savings.

In part, because of the related downsizing of the employee population by, approximately 200 full-time employees. In the fourth quarter of this year, we also intend to commence the process of redomiciling from Germany to become a Delaware corporation. Partly owing to these efforts, we expect to become a lower-fixed cost, decentralized organization with the goal of retaining best-in-class service providers that will be held highly accountable for results and some of whom we intend to compensate on a shared-success basis. Second, we intend to outsource our IT services to a third-party, offshored vendor with the goal of creating a more modern technology stack, an improved user experience and further cost savings. Towards this end, we’ve already begun to consider various candidates for this work and intend to work speedily towards an engagement, so that we can commence that transition.

Third, we plan to hire the company’s first ever, Chief Revenue Officer, who will be responsible for ongoing revenue generation and return to revenue growth. Fourth, we plan to onboard a leading performance marketing agency in the very near-term and have nearly completed the process to choose an agency. We expect that this critical and evolutionary step forward will simultaneously transform our marketing strategy, away from the company’s legacy reliance on affiliate relationships and outmoded practice that continues to return less-and-less for companies across all industries, and embrace a careful, but expeditious pivot to a contemporary and integrated program more in line with the approach used by other companies in the sector. For perspective, Spark’s publicly traded peers have achieved $4 in revenue from $1 in direct marketing using direct marketing channels such as SEM, SEO and TV.

Additionally, our peers enjoy high margin renewals and win-back streams. By comparison, our experience with affiliate marketing has returned approximately $2 for every $1 spent with a less attractive win-back and renewal stream. We expect that this transition away from affiliate marketing, a 2:1 yield to potentially higher yielding channels a 4:1 yield can give us a longer-term upside potential of up to a 100% improvement versus our current marketing yields. We expect to begin reallocating our customer acquisition budget into a curated mix of direct response television advertising paid social, SEM/SEO, lifecycle customer nurturing, and engagement and conversion rate optimization along with a range of other interactive engagements. Moreover, the real-time data and additional testing we expect to achieve with this approach should enable us to further realign our spending accordingly.

We expect these efforts will result in a reduction of approximately 40 full-time employees a roughly $7 million in headcount cost, and yield $10 million to $20 million in incremental annual revenue by the end of 2024 as compared to our current run rate. Fifth, we plan to solidify our marketing efforts around a diversified core of key meaningful brands several of which we plan to freshen over the course of this year. Importantly, we expect the data we garnered through our revamped marketing approach will help us inform our decisions. And finally, we’ve engaged Ankura Consulting Group as an external advisor to support us through this transformation process. Ankura with whom I’ve had success in the past has expertise in unlocking value, through digital transformations across digital marketing strategy and maximizing equity value.

Collectively, these efforts across these parallel paths are substantive and future-focused contributions that we believe will help us achieve long-term cost savings and growth of our business. We believe the best way to increase the value of the company is to significantly transform our operations and right-size our cost structure while reallocating capital to customer acquisition channels with the highest returns and investing in our brands with the highest ROI. Additionally, we believe these efforts will ultimately yield a simpler, more profitable business. And given the importance of our offering for so many of our users, we fully understand the trust they’re placing in us and we’re continually open to engaging with them in new ways and through new partnerships with influencers and other trusted sources.

Finally, I’m very excited to have Kristie Goodgion on our team. She was previously Spark’s Global Controller and has been an integral partner for me since before I joined the company as CEO and my capacity as a Board member. With her extensive background in corporate restructuring, operational streamlining and mergers and acquisitions, I know we’re in good hands as we navigate our transition to a more effective, efficient and profitable company. With that, I will turn the call over to Kristie. Kristie?

Kristie Goodgion: Thank you, Chelsea, and good morning, everyone. It’s a pleasure to speak with you today. Revenue for the first quarter of 2023 was $41.3 million compared to $49.9 million in the first quarter of 2022. We attribute the year-over-year decrease in total revenue, primarily to lower user acquisition spend during this period and currency fluctuations. On a constant currency basis, revenue for the first quarter would have been $42.1 million. For the first quarter, end-of-period paying subscribers were $2.6 million, down sequentially from $3.4 million in the same period of 2022. We attribute the year-over-year decrease in paying subs primarily to the lower acquisition spend during the first quarter of 2023. Spark’s monthly average revenue per user, or monthly ARPU, decreased to $19.62 in the first quarter of 2023 compared to $19.83 in the same period of 2022.

Net loss was $4.4 million in the first quarter of 2023 compared to net loss of $7.5 million in the same period of 2022. We attribute the year-over-year decrease in net loss primarily to lower customer acquisition spend and interest expense during the first quarter. Adjusted EBITDA was $2.4 million in the first quarter, a 6% adjusted EBITDA compared to adjusted EBITDA of $1 million or a 2% adjusted EBITDA margin in the first quarter of 2022. We attribute the year-over-year increase in adjusted EBITDA primarily to lower customer acquisition spend and reduced operating expenses during the first quarter. Shifting to the balance sheet, the company ended the first quarter with $10.3 million in cash and a GAAP debt balance of $95.1 million, or net debt of $84.8 million.

As a reminder, there is no principal amortization required under the new MGG agreement until June of 2023. Looking ahead, as Chelsea noted, several changes are already underway aimed at a stronger product offering and a much improved marketing engine and most important, doing all of it in a much more cost-effective way. We also are about – 15 days away from going live with the new ERP system, Workday, which we expect to provide cost reductions, access to real-time data and improve visibility into our results. However, while we have started the overall transformation process that Chelsea has spelled out, we feel it prudent to defer providing any formal cost-saving projections until we are further along. We continue to believe we can significantly improve our operations in 2023 and drive at least a 50% increase in adjusted EBITDA to $28 million with the initiatives we plan to implement this year.

Our long-term goal is to achieve and sustain 25% to 30% plus adjusted EBITDA margins, which are consistent with industry averages. And with that, we’re happy to take your questions. Operator?

Operator:

Chelsea Grayson: Thank you, 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.