This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good day and welcome to Spark Network's second quarter 2022 financial results conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. You may register to ask a question at any time by pressing the star and one keys on your touchtone phone. You may withdraw yourself from the queue by pressing star two. Please note this event is being recorded. I would now like to turn the conference over to Todd Curley of MKR Investor Relations.
spk01: Thank you, operator. Good morning and welcome to Spark Network's fiscal 2022 second quarter earnings conference call. With me on today's call are Spark 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 earnings 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 report, 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 8K describe the differences between our GAAP and non-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 Spartan Networks. Eric, please go ahead.
spk03: Thank you, Todd, and good morning, everyone. Before we begin our earnings commentary, I want to remind everyone that on June 1st, 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 advisors 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 he's 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 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, Elite Singles, Silver Singles, Christian Mingle, and Day-Date. 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 a third of our revenues. 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, the largest brand, to revenue growth. We also made good progress on improving the Zoosk user experience, which we believe will drive increased adoptions 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 Silver Singles and Elite Singles platforms, 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 our platform. We are working to simplify our technology infrastructure by moving our primary brand from three platforms to two. 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 Elite, Singles, 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 restarted TV and radio ads with positive results. Once we were 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 used platform. We expected 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 US 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?
spk04: 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 is a result of currency fluctuation, decline in ZUSC revenue, and a fraud-related decline in non-ZUSC grants. 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 Zeus' revenue decline and our growth-oriented investments in product and user acquisition during the quarter. 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 ARPA 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 non-cash impairment based on a revaluation of the company's intangibles in Goodwill. Shifting to the balance sheet, the company ended the second quarter with $11.4 million in cash and a gap 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 regarding an adjustment we are taking to 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 will be recognized in subsequent quarters later this year. We plan to file an amendment to our first quarter 10 to reflect the restatement of the company's unaudited consolidated interim financial statements included in the original 10Q. 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 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 Zeus, 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?
spk00: Thank you, sir. At this time, if you would like to ask a question, please press star 1 on your touchtone phones. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. And our first questions will come from Raj Sharma with B. Riley. Your line is open. Mr. Sharma, your line is open. Please make sure you're not muted.
spk02: Sorry. Thanks for taking my question. I wanted to understand better, subscribers are up, organic and new both are up. 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?
spk03: Yeah, 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 Zeus, in particular new subscribers, which is great. You know, 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 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, EQ1, and so that obviously had an effect. Those were the three factors, really. None of those have me worried about the future of the business, because since the rules are not gone, they're just coming in later. But, David?
spk04: Yeah, so on an absolute dollar basis, we estimate that the top line is being affected by foreign currency by at least $8 million, as an example. And then Eric mentioned a $2.5 million adjustment in the first quarter, which is rolling through the rest of the year, but obviously takes down the full year.
spk02: And, okay, and what is...
spk03: The issue of fraud, you said that an increase in fraud is a big reason why the numbers were... On two properties, on elite singles and silver singles, the issue was that in one environment, mobile browsers, you could actually, through one mechanism, send messages for free. And fraudsters discovered... 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, but it took us a little bit of time to find it. And obviously, you know, if you're a subscriber and you're getting, you know, a hundred 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 two properties.
spk02: But it affected you how? Your subscribers went down drastically in one part of the business, in the elite?
spk03: Well, a couple of things. You know, chargeback is one. Another 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.
spk02: And is that the reason for the ARPU decline? And how do you think that the ARPU would rise?
spk03: Yeah, no, I think ARPU, I think we, in those cases, we would have lost subscribers as opposed to, you know, having a decrease in revenue from subscribers. I think a big part of the ARPA's decline is also currency-related, and I think that accounts for the majority of it. Yeah, currency, and then we have been pushing longer duration. Correct.
spk04: Currencies certainly have an effect on ARPA. Yeah.
spk02: All right. Thank you. I'll take it. I'll take more questions offline.
spk03: Thank you, Raj. You just confirmed that on a local currency basis, I think we haven't seen significant changes in the So, yeah.
spk02: You got it.
spk03: Thank you. Thank you.
spk00: Thank you. I would now like to turn the call back over to management for any additional or closing remarks.
spk03: Well, thank you, everyone, for your interest in Spark Networks, and thank you for joining our call. Have a great day.
spk00: Thank you, ladies and gentlemen. This does conclude today's conference, and we appreciate your participation. You may disconnect at any time.
Disclaimer