Online Dating Insider » Finance

Shareholder Battle Over Spark Networks Escalates

David Evans — Wed, 10 Mar 2010 02:38:43 +0000

The following letter was sent to the board of Spark Networks Inc. (NYSE Amex:LOV) March 8, 2010 in opposition to Great Hill Partners’ bid to acquire the company.

Dear Board Members,

Osmium Partners beneficially owns 6.1% of Spark Networks common stock. We are outraged and deeply disappointed to see that Great Hill Partners (GHP) offered a 5% premium to market to acquire the 56% of Spark Networks that it does not already own, for a paltry 5.2 multiple of enterprise value to heavily depressed adjusted EBITDA. When GHP invested 5 years ago, the valuation equated to $6.95 a share or 11.2x current EBITDA, and after growing EBITDA significantly over that time frame GHP now expects to buy out fellow investors at a multiple of 5.2 times adjusted EBITDA. Recent results are encouraging with Jewish Networks’ subscribers growing 10% over the last two quarters. We believe in a fair sale process that included Match.com, eHarmony, and others potential bidders that the business could sell in the $6-$7 range today.

Spark Networks’ management has in JDate what they term an “iconic” business with a “dominant brand and very high margins” which translates into approximately 92% contribution margins. However, these attractive economics are obscured by management’s investments in the Other Affinity segment, which only has 33% contribution margins. Furthermore, Spark Networks is one of the least efficient operations in the industry, generating only $224,000 per employee versus a peer range of $650,000-$1,000,000. All of the decline in total subscribers over the last three years can be attributed to a management ordered intentional run-off of the General Markets segment. Other factors that have hurt the company’s ability to grow include a 14% price hike on JDate in April 2008, a 50% cut in JDate’s marketing budget, and a large investment in subscale brands with deteriorating economics. Despite all these factors Spark still generates 23% adjusted EBITDA margins.

In our opinion, Great Hill Partners is focusing undue attention on overstated negative factors while ignoring the improvement in subscriber growth in an attempt to acquire our stock at a valuation of less than half of what we think an industry buyer would pay. The current valuation reflects only 4.8x an average of the last four years free cash flow.

We believe management considers JDate an “iconic” business with a “dominant brand” due to the following JDate subscriber attributes (from June 2009 investor presentation):

80% come to the site organically

1/3 of members earn over $100K, 2/3 make over $55K

45% have graduate degrees

94% have college degrees

55% women 45% men

90-93% contribution margins (revenue less marketing)

In summary, Spark is an extraordinary business with extremely high returns on capital, a dominant brand in JDate, a recurring revenue subscription model, and strong user demographics.

Let us review recent history:

In December 2004 and June 2005 GHP invested $47 million for a 33% stake in Spark Networks at a $143 million weighted average whole company enterprise valuation. On current numbers GHP entry investment was made at 11.2x EV/EBITDA.
Between 2006 and 2008, Spark used almost $45 million to repurchase shares at a weighted average stock price of $4.20, equating to a 7.4x EV/EBITDA multiple based on 2009 results.
In January 4, 2008 NY Times reporter Andrew Ross Sorkin wrote an article claiming that eHarmony, Yahoo, and Match.com were rumored to be interested in paying up to $185mn to acquire Spark Networks or $9.05 a share which represents a 16.7 EV/EBITDA based on 2009 results.
In June 2008, the current CEO bought 70,500 shares at $4.15 a share ($84.5mn enterprise valuation) or 7.4x EV/EBITDA based on 2009 results.

Finally, GHP now expects to buy the 54% they do not own for a meager enterprise valuation of $55 million or 5.2 EV/EBITDA based on 2009 results.

Industry margins and valuation multiples have remained fairly steady over the last several years. Private transactions have occurred at 9.1x EBITDA, which would equate to $5.43 a share, and public market comparables trade at 11.3x EBITDA, which would imply $6.73 a share. We think both implied valuations are understated due to the current inefficiencies in the business. Please see the valuation exhibits below.

In our opinion the company has not done enough to increase its exposure as a public company, such as seek Wall Street analyst coverage, attend conferences, road shows, or do anything proactive to court prospective investors. These actions have been costly; in fact, since GHP has been an investor with a board seat, the value of the company has dropped from $147mn to $62mn.

Why might a strategic buyer pay more than a financial buyer such as GHP?

From a customer acquisition standpoint the larger the marketing budget the lower the per customer acquisition cost. (Spark Networks’ two largest competitors have 6-9 times the revenue.)
Match.com’s ownership of People Media and Spark’s affinity brands are typically #1 and #2 in each category they compete in. We believe combining these businesses would be extremely accretive.
Subscription fees are typically based on regional subscriber concentration; the bigger the network typically the higher the monthly subscription fees. Competitors have significant membership bases to cross sell and significantly grow the various brands while increasing ARPU.

From September to December 2009 we had several conversations with the management of Spark Networks, in which we conveyed our belief that the company was significantly undervalued and that JDate could be readily sold for $6-7 on a standalone basis. Management agreed that Spark Networks’ valuation at the time was “ridiculous,” but said the company was uncomfortable undertaking a formal investor relations program given the drop in subscribers over the years even if the stock was highly undervalued at around 4x cash flow. Nevertheless, management acknowledged that JDate’s value inside of Spark Networks was significantly higher, but they considered taking action to realize this value “uninteresting” and indicated that they were playing for something significantly greater over time. We were frustrated, but as patient long-term oriented investors we agreed that there was significant upside which would be realized over time.

Spark investors have been waiting years to reach this inflection point and in our opinion Great Hill Partners is attempting to acquire our asset without proper compensation including a reasonable change of control premium. How many “iconic” businesses with 92% contribution margins sell for approximately 5x depressed EBITDA or 2x JDate contribution margin? Given ample evidence, we believe Spark Networks is inexpensively valued in the $6-7 dollar range. Therefore, we consider Great Hill Partners’ offer outrageous and grossly inadequate, and intend to aggressively defend our rights as shareholders.

Sincerely,

John H. Lewis
Managing Partner
Osmium Partners

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No Longer a Bright Spark

David Evans — Fri, 05 Mar 2010 17:49:26 +0000

Today’s guest post is by Ross Felix. Ross has been paying close attention to Spark Networks for quite some time and is well-versed in the challenges it faces today.

Spark Networks reported their year-end results on Thursday March 4th. Much of their results came in as expected with a few big surprises. All in all, it was yet another poor showing for the company.

The Numbers

Net Revenues for the year $45.4 million, down for the 4th year in a row. Total revenues are down 34% since 2006. Excluding the General Market Networks, revenues are only down $387,000 or 1.6% for the same period. That said, management has maintained for the past 6+ quarters that they are “managing the decline of the brand” in reference to the General Marketing Networks, and obviously, they have been very successful in doing so. The question is, why are they managing the decline? Perhaps they should either pull the plug, or do something to salvage it. What kind of message does this send to its remaining 9,594 paid members (down from 92,041 in 2006).

For the year, Spark Networks reported a large loss of $6.4 million for the year. To be fair though, it was largely impacted by a write off of just under $12 million. The bulk of the accounting charge though came from writing down the assets of their Other Affinity Networks, which is made up of a number of niche sites that Spark bought a number of years ago. These include Moretolove, InterracialSingles, ChristianMingle and others. Though unexpected, this makes complete sense. Earlier this year, Spark announced that it would be honing its focus on just a few of the brands in the Other Affinity Networks area, and allowing the others to continue along as they will. Basically it sounds like they’ve allocated X number of advertising dollars to the category as a whole, and if the top choices don’t utilize the entire ad spend, the step children will get a bit of the love. In 2009, Spark spent only 8.2% of the Jewish Networks revenue on direct marketing expenses, while they spent 64.8% of the revenues from Other Affinity Networks. It’s obvious that they want to bring that number much more in line. They indicated that they would only focus on two or three of the brands in this section, thereby devaluing the other brands, which probably led to the write off. Spark during the quarter retired their debt. While that makes for a stronger balance sheet (one more easily purchased, I’d imagine) it leaves members wondering why they didn’t use some of that money to improve the sites.

On the topic of improvement, Spark has also indicated that it will use 2010 to merge their technology platforms, bringing a homogenous approach to all of their dating sites, as well as their back end technology used by their customer service department. Unfortunately for members, while they do this integration they will not be focused on new site improvements. So, for those of you who hate change, 2010 will be great for you. And for those that enjoy waiting on hold, they also announced during the quarter, 24 positions were eliminated to reduce costs further (I believe most if not all of these were from the customer service department).

One other very interesting note, as mentioned in my prior Spark post, What is Great Hill Partners up to?, they have been doing a lot of discounting to try and turn around their slumping member base. Over the 4th quarter on Jdate they provided deep discounts for multiple month membership plans. While it helped bring the subscriber numbers up a bit for JDate (5% increase) and the Other Affinity Networks (4%), it reduced their average revenue per user by 15% and 16% respectively.

With all of the companies innovating in the online dating space, it should be very interesting to see how Spark does in 2010, while they hunker down instead of trying to play catch up. Will they begin to burn more brightly, or will their spark flame out completely?

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Virtual Economy Is Booming

David Evans — Fri, 05 Mar 2010 01:12:29 +0000

A few weeks ago I got a chance to talk to Ian Swanson, founder of Sometrics. Ian was previously at Userplane, building social applications for sites like MySpace. Sometrics is focused on monetizeing the social web, providing solutions to maximize revenue from virtual currency. Initially was a banner ad manager which did optimization based on social data.

Sometrics reports that it has awarded more than 1 trillion virtual currency credits in the past year; now connected to 100+ million online gamers. The company’s products currently reside on hundreds of games, with an inventory of more than 7,500 advertiser-based offers. Sometrics generates eCPMs as high as $700-$900 for its partners.

Its Offer Solution reaches across social games, MMOs and virtual worlds, partnering with top publishers in each market – including Playdom, LOLapps, IMVU, K2, NHN, among others.

Jennifer Bartlett, business development manager at Sometrics wrote The Battle For Brands: How To Attract Them To Your Game for Virtual Goods News.

The universal currency wars are coming is a good read as well. I talked to someone who’s working with viximo about virtual gifting and currency and this is a hot market that has nowhere to go but up. Relevant for dating sites interested in further monetizing members in terms of best practices.

Virtual games and currency are fascinating. Lot’s of the casual dating sites are moving in this direction. Easier to attract users, much larger opportunity and quite frankly off-the-chart innovation compared to online dating.

Keep up with the Sometrics blog.

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What is Great Hill Partners up to?

David Evans — Wed, 03 Mar 2010 22:59:10 +0000

The contents of this post are based on Spark Networks’ 10K from 2008 and their 10Q from the third quarter of 2009. Input was received from several people who have tracked Spark Networks for many years, with special help from Ross Felix.

Great Hill Partners, a long time investor in Spark Networks (Jdate’s parent company)has put out an offer to take Sparks private at approximately $3.10 per share. In the past few years, the stock price has dropped from the $7 range down to as low as $2.12 in August of 2009.

Its member base has dropped equally precipitously from approximately 237k in 2006 down to just 165k as of September 30, 2009. While American Singles (now dubbed Spark.com) accounts for most of the decline, having lost 78k members over that time, not even Spark’s powerhouse, Jdate emerged unscathed having lost 11k during the same time period.

The one bright spot has been their Other Affinity Networks, home to sites like the recently rebranded Moretolove, CatholicMingle, and others. Their 32.5% growth though has come at a price. Advertising costs for this area through the first nine months of 2009 was almost 8 times higher than the ad spend on their Jewish Networks. Spark mentioned during the 2nd and 3rd quarter conferences call that they might focus only on the top brands within the Other Affinity Networks category, cutting back on the ad spend for the remainder of the group.

Equally concerning is the lack of growth on either the top line or bottom line. Net revenues have been steadily declining since reaching almost $69 million in 2006. For the first 9 months of 2009, Spark’s topline number was $34 million. Annualized, this would be a 33.5% decline since 2006. Comparing annualized 2009 vs. 2006 shows a 51.8% decline in ad spend, and a 28.1% decline in Unallocated Operating Expenses, accounting for cost savings of over $23 million. In an industry highly driven by ad spends, it is counter-intuitive to reduce ad spend further once membership numbers are softening. That said, even $23 million in savings only translated to an operating income of $246,000 higher in 2009 than 2006 (again, assuming annualized 2009 numbers). The take away: Cutting costs is great, but if you lose members, you’re not going to do well financially.

One other area of concern is ARPU (average revenue price per user). This is one of the figures that Spark’s management often focuses on, basically what is the trend of what they’re making per member (per paying member that is). Jdate has been running special rates to celebrate holidays. Most recently, they offered a $20.10 rate to celebrate the Jewish holiday of Purim. This follows discount offers for Valentines’ Day, New Years, Hanukah, Thanksgiving and more. Either they’re gaining more members at a much lower ARPU, or even more tragic, would be losing members in spite of offering such deep discounts.

With Spark reporting their earnings tomorrow, it should be very interesting to see what management has to say about these trends. For those interested in listening in:

Call Title: Spark Networks Q4 ‘09 Financial Results
Toll-Free (United States): 1-888-601-3884
International: 1-913-312-1472
Passcode: 4259397

In addition, the Company will host a webcast of the call which will be accessible in the Investor Relations section of the Company’s website at: http://www.spark.net/investor.htm.

Not everyone is excited about this prospect. Tripp Levy PLLC has launched an investigation into the acquisition. In a press release, the firm stated: “The investigation concerns, among other things, whether the consideration to be paid to Spark Networks shareholders is grossly unfair, inadequate, and substantially below the fair or inherent value of Spark Networks. Indeed, the offer price represents only an approx. 5% premium over Spark Networks closing stock price the day prior to the announcement. The investigation further concerns whether Great Hill and/or the directors of Spark Networks may have breached their fiduciary duties by not acting in Spark Networks shareholders’ best interests in connection with the sale process of Spark Networks.”
The full press release can be found at:
http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20100303006258&newsLang=en

So, what are the advantages at this point of taking the company private. There’s only one thing that Great Hill can do with Spark as a private company that they can’t do with a public one – which is, have more flexibility in terms of how they can change the future of the company. Shareholders can be a real drag. Perhaps they intend to spin off Jdate from the rest of the company, and sell the remaining assets to a competitor. Considering Great Hill’s voting block, they could probably oust management without needing to take the company private. But of course, this is all speculation, so take it with a pound of salt.

So, we’re back to where we started, “What is Great Hill Partners up to?”

What do you think?

PS: Great Hills you should be in contact with Ross, he knows more about Spark Networks than anyone I’ve talked to (and can acknowledge publicly.)

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IAC’s Match.com to Acquire Singlesnet

David Evans — Thu, 25 Feb 2010 17:47:45 +0000

Several weeks ago I heard from a reliable source that IAC Has Acquired Another Top Dating Site. I’ve known who it was all along, and decided to do the right thing and not mention the name of the company being acquired on this blog. I just heard from Match’s PR team and the public announcement is happening shortly, the big news is that Match.com will acquire Singlesnet. Here are the important parts of the press release:

Match.com, an operating business of IAC (Nasdaq: IACI), announced today that it has signed an agreement to acquire Singlesnet, one of the most visited online dating sites in the United States. Terms of the deal are not being disclosed.

“Singlesnet has built a heavily trafficked site with an active and dedicated community of users,” said Greg Blatt, CEO of Match.com. “While Singlesnet’s traffic is currently in decline, we believe that by applying our category expertise we can reverse that trend, increase the site’s profitability and improve the overall user experience. This is more of a value acquisition than a strategic one, and Singlesnet will predominantly be run as a standalone business. Nonetheless, the addition of the site’s considerable traffic to our existing aggregation of traffic in this single category should open new monetization opportunities for Match.com’s collective portfolio of domestic online dating brands.”

“Match.com has been the standard-bearer for the entire online dating industry, so we’re excited to team up with them,” said Singlesnet founder and CEO Quinn Lipin. “Singlesnet boasts a vibrant user community where members are constantly emailing and IMing each other, and I believe working with Match.com will enable us to re-start growth in the business.”

Adrian Ong, who joined Match.com from Soulmates Technology, a company acquired by Match.com in 2002, will assume responsibility for Singlesnet. Mr Ong has held various leadership roles within Match.com’s International business, primarily in the areas of product and technology, and most recently has led Match.com’s effort to transition its European business to Meetic in connection with its sale last year. Mr Lipin will continue to work for the company in an executive capacity.

Quinn Lipin is the guy behind the curtain at Singlesnet. Notoriously tight-lipped within the dating industry, the founder of the one-time most-trafficed dating site in the US has managed to sell the company as the serious decline in traffic continues.

No word on the pricing or other details, we’ll update you as our sources check in with us. For more about Singlesnet, read about thehive (website), its parent company. Search LinkedIn for people like Richie John, the Anti-Fraud guy at Singlesnet and other Singlesnet employees. Try searching for Singlesnet here at OnlineDatingPost.com and you’ll come up with a wealth of information about this secretive company that took the online dating industry by storm.

Congrats are in order to Match and Singlesnet. I’m sure there are champagne corks popping all over the place down in Texas with the marketing team all excited about the potential reduction in customer acquisition costs and other benefits that Singlesnet brings to the table.

When the dust settles, a few questions:

How Match is going to siphon off, I mean cross-sell, members from Singlesnet?

Are Singlesnet members a good fit for Match? It’s like going from a horse-drawn carriage to a Ferrari in terms of site functionality and membership base.

Will Match tone down the big boobs and hookup-style advertising that grew Singlesnet?

What was the sale price and how much of it is tied into earn-outs?

What do you think of the deal? Do you think Match should have acquired Yahoo Personals instead?

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Zoosk is Crushing All Dating Site Traffic

David Evans — Tue, 23 Feb 2010 23:40:51 +0000

Look at this ComScore data on Zoosk vs. Match and Singlesnet. Of course we don’t know what is driving this gargantuan traffic spike, but Zoosk raised $30 million, and if they poured some of that into a marketing campaign (Zoosk ads are everywhere), that could account for some or all of the spike.

I treat all casual dating site traffic spikes with a healthy dose of criticality. It’s real all right, but what is the effect on the site? Are these people converting to paid members (more serious) or just clicking ads(casual) or doing nothing (junk traffic.)

So, Zoosk, nice hockey-stick growth, what’s the deal?

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IAC Has Acquired Another Top Dating Site

David Evans — Wed, 10 Feb 2010 21:25:12 +0000

Newsflash: IAC has acquired a major dating site. When you find out which site it is you’re going to be surprised. Of all the dating sites acquisitions Match has been looking at, this is the last one I would have figured them to acquire. I’m going to have a lot to say about this deal, but I’m not going to mention any names yet until the deal is public. I love a good scoop on a snow day.

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As if Online Dating Wasn’t Expensive Enough

David Evans — Tue, 09 Feb 2010 23:44:45 +0000

Mark Brooks over at Online Personals watch says that online dating sites “could raise their prices without losing customers.” I almost choked on my drink reading that. With the rise in free an freemium-based dating sites, I think that subscription-based sites should, if anything, reduce their pricing.

Lower prices will draw more subscribers, more subscribers = more revenue. Less spam and scammers = more subscribers, which = more revenue. Of course, as a UK contact of my attested to a few weeks ago, getting the price point right takes a lot of testing. Try $3/month, $12/month, $23.67/month and see what happens. People ask me all the time about optimum subscription pricing. I say, let your users tell you what they are willing to pay. There is no magic number across the entire industry.

Look at Match.coms revenue for the year, flat like Kansas, same as last year, same as the year before that. They can’t really raise prices, scratch that… they probably can and get away with it because when people are ready to try online dating, they just want to get the signup process over and done with as quickly as possible.

Dating sites are always talking about raising prices, they test new prices, it usually fails, and they go back to their regular pricing. If anything, most sites should be cheaper unless you are offering a premium service. Enhanced search is not premium, and selling a silly little red box around your search photo is just desperate. Now, enhanced search placement in search results based on a new algorithm, I’m all for that.

Another Brooks quote: “The real measure is the number of people who have logged in, a paid subscription isn’t worth it unless monthly traffic is at least 10,000 unique visitors.” Depends on what you’re measuring there, Mark. I think he means that turning on a subscription paywall doesn’t make sense until 10,000 unique visitors. I’ve heard numbers all over the place on this one.

As for consumers, since traffic systems (at least the free ones) don’t measure logins vs. visitors, the statement doesn’t make sense. Joe sixpack isn’t looking at Comscore when he’s signing up to a dating site buzzed at one in the morning.

Now, effectiveness, stickieness and revenue per subscriber based on unique logins, that would be a decent set of metrics to measure.

A useful metric that Redg used to talk about when he was with Skout was the number of returned emails. Those stats would absolutely turn the online dating industry on it’s head.

The most telling quote of the story is that complaints about dating services rose 62% from 2005 to 2008, according to the Better Business Bureau.

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It’s Official, FriendFinder Networks Cancels IPO

David Evans — Fri, 05 Feb 2010 19:53:31 +0000

After a long-awaited public offering, FriendFinder has cancelled their IPO. According to TechCrunch, flat sales and lackluster investor are to blame. The high-profile network of dating and adult sites planned to use the IPO to pay off the staggering debt, currently $471 million.

This is a big setback for FriendFinder. What can they possibly do now? It’s easy to see them spinning off AdultFriendFinder, but that was big reason that Penthouse brought the network in the first place. I can only imagine the back-room drama thats going on right now. There is always much more to the story than what’s mentioned in the media. It’s really too bad for FriendFinder, it’s IPO would have brought some legitimacy to the whole sector and loosened up investor purse strings, along with the potential for an increase in M&A deals. I’ll continue to track the situation with updates as people close to the story get back to me.

Update: According to the LA Times, FriendFinder sold 15 million shares for $7 apiece, the IPO trackers said, citing bank sources.

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Match.com and Meetic Announce Latin America Partnership

David Evans — Thu, 04 Feb 2010 22:38:52 +0000

Not satisfied with European market domination, Match and Meetic have established a joint venture in Latin America.

Match.com and Meetic will each own 50 percent of the joint venture’s equity, and Match.com will control the new entity’s operations. Match.com will pay Meetic $3 million in cash at the closing, which is expected by March 15, 2010. Meetic’s participation in this new entity is subject to put-and-call rights that can be triggered beginning in the fourth year, when Match could purchase Meetic’s stake at fair market value. An additional payment of $1.5 million could be triggered at that time.

Greg Blatt, CEO, Match.com:

By combining ParPerfeito’s strength in the Brazilian market with Match.com’s presence in the rest of Latin America, we believe we’re best positioned to drive that expansion and create an asset of meaningful value. We’re confident from our work together in Europe that further partnering with Meetic will be a productive experience.

Another day, another big deal for Match and Meetic, who seem quite comfortable with each other given their expanding online dating empire. Match has been looking for partners for a long time, and Meetic and People Media seem to fit the bill quite nicely. Muy bueno.

And what pray tell are eHarmony and Yahoo up to? Eharmony’s international expansion is nowhere near as advanced as Match/Meetic and Yahoo appears to be stagnant, if not faltering.

Something tells me we’ll be hearing more about Match in Asia as well. They have a couple of properties there but we haven’t heard a peep about them in a long time.

More at Boston.com.

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