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spk03: Good afternoon and welcome to the SPARC Network's fourth quarter and full year 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press more than two. Please note this event is being recorded. I would now like to turn the conference over to Todd Curley of MKR Investor Relations. Please go ahead.
spk00: Thank you, Operator. Good afternoon, everyone, and welcome to SPARK Network's Fiscal 2022 Fourth Quarter and Year-End Earnings 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 30th, 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'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 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.
spk04: 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 Sparks 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 the 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 Zoosk holds strategic value as a large mass market dating site, we also have a base of quality affinity brands, including Elite Singles, Silver Singles, eDarling, Christian Mingle, and JDate that are in demand by a large global paying subscriber base. Our non-Zeus business is close to 50% of our total revenue, and several of our non-Zeus brands have some of the best returns on capital in our portfolio. Going forward, we've 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 as product initiatives are, we view them as but one critical step in 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 free 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 on leveraging what we consider the broadest reaching free 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 have 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?
spk01: Thank you, Kelsey, and 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 2022 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 in paying subs to lower acquisition spend in the fourth quarter. SPARC'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 of 2022 compared to $20.66 in 2021. Now, we attribute the decline in ARPU primarily to currency fluctuations. As a point of information, we implemented a price increase on Zeus 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 a 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 with $11.4 million in cash and a gap debt balance of $94.8 million, or net debt of $83.4 million. As a reminder, there is no principal amortization required under the MGP agreement until June of 2023. Looking ahead, as Chelsea noted, we have several changes underway aimed at a stronger product offering and a much improved marketing engine, and most important of all, doing all of it in a much more cost-effective way. However, while we started this process, we were still evaluating how to best make those long-term changes. As such, we feel it prudent to defer providing formal 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 goal is to achieve and sustain 25% to 30% plus adjusted EBITDA margins consistent with the industry averages. We aim to substantially deleverage moving forward around a simpler, more profitable business model. With that, we're happy to take your questions. Operator?
spk03: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And our first question will come from Raj Sharma of B Reilly. Please go ahead.
spk02: 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, an incredibly high ROI brand, how do you see either one of them growing in subscriber growth and ARPU? And then I have a follow-on question on your question. How should we view direct marketing costs going forward?
spk04: Yeah, 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 is 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, are much stickier. So once you get people, because they're affinity-based sites slash 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 dive on details there.
spk01: Yeah, 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 Zeus subscriber growth primarily, but of course all platforms. Now we're going to be focused on really prioritizing payback from customer lifetime value and therefore place more emphasis on the non-Zeus brands as opposed to Zeus to maximize profitability-free cash flow this year.
spk02: How does that play into the direct marketing costs? Do you see those declining? Yeah. You know, where were they, if you can give me the number, where were they for the quarter? And do you see them declining? But that also kind of leads to a decline in revenues. Can you talk about that?
spk04: Yeah. You know, I mean, there's a bottom below which we can't decline, right, because we've got, you know, agreements with our lender, covenants with the lender. So unless we had a different agreement there, there's a floor. So barring that, it's about rebalancing. So it's about spending differently with an intensely increased emphasis over on the non-ZUSC side of the house. So my remarks today aren't meant to reflect less spending, but differently balancing. spending and more efficient and smarter spending, updated spending. And I don't actually think that to the extent we were able to spend less on UAC 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 with the right folks, right?
spk01: Right. You've been on user acquisition in the fourth quarter.
spk02: Yes, the direct marketing costs for fourth quarter and when you kind of see that.
spk01: Yeah, just under $15 million in the fourth quarter.
spk02: I'm sorry, I missed that. Just under?
spk01: Just under $15 million in the fourth quarter.
spk02: Got it. Got it. 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.
spk04: Yeah. Yeah. Well, I mean, I credit David. Yeah. Oh, I'm sorry.
spk02: No, and you're moving away from – are you moving away from Zoosk, or are you finding a new focus on non-Zoosk?
spk04: Yeah. Yeah, we're – I think it's not moving away necessarily to the point of abandonment. It's just rebalancing where we think the dollars grow legs. Like I said, you know, David has done some work with his group and shown that it's the, it's a shorter and more predictable payback period on the non Zeus side of things. And the LTV over there is you just get better bang for your buck. Yeah. And so, you know, after taking a look at, at what he tested out with his, with his group, it was, it felt to us like the move to go with. And we've talked to other experts that have started to preliminarily, again, you know, as both David and I have said, we're still in the process of assessing, but it looks preliminarily that third-party neutrals agree with us as well. So it seems intelligent to go down that path.
spk02: Got it. And then just last, maybe this is for David. So you were a net user of operating cash in the fourth quarter, when I think seasonally it's supposed to be a positive quarter. Is anything materially different there that happened?
spk01: No, usually that probably falls out of – there probably was higher spend in the third quarter. There was higher spend in the third quarter than the fourth quarter, and we were just, you know, had a – use the cash to pay off those payables.
spk02: Got it. Thanks. I'll get back in line. Thank you for answering my questions.
spk01: Thanks, Raj.
spk03: At this time, we are showing no further questions in the queue. I would like to turn the conference back over to management for any closing remarks.
spk04: Thanks, everyone, for your interest in Spark Networks, and thank you for joining our call. We'll see you on the next one, and have a great day.
spk03: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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