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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Adam Berger, Chairman and Chief Executive Officer of Spark Networks, Inc. had this to say about their recent performance:

2008 was a mixed year for us. We achieved moderate annual revenue increases in Jewish Networks and Other Affinity Networks, improved Contribution margins to 74%, cut Operating Expenses by 19%, drove annual Adjusted EBITDA to record levels at a 28% margin and returned capital to stockholders by using cash flow to repurchase 21% of the shares outstanding at the start of 2008.

That is the sound of a man eager to please shareholders with tales of stock buybacks, serious belt-tightening and efficiency improvements. All that hard work and look at the stock price.

So much for the benefits of recession.  

Revenue down 18% to $13.2 million.

Net loss for the fourth quarter of 2008 was $164,000, or $0.01 per share, compared to net income of $6.6 million, or $0.25 per share, for the fourth quarter of 2007.

JDate: down 7% to $8 million for 4Q, yearly up $100,000. Lost 7,000 subscribers in 4Q.

We will continue to invest in and enhance the JDate product, adding fresh looks, new tools and relevant content to meet the needs of the single Jewish community.

Most Jewish people I talk to don’t like JDate, but its the only site they are aware of. Enviable market position or not, the reality is that less people are visiting and while on the site they are browsing fewer profiles. JDate needs to do something before a new site swoops in.

I know one company that has JDate squarely in their sights but it’s going to take several years and an enormous amount of marketing spend to get even 1/3 of JDate’s business. I don’t see the usual remnant social networking junk traffic as an option, either. Competitors need to purchase the highest quality traffic they can afford, otherwise the site simply will not take off and become sustainable.

Just look at the embarrassment that is JLove. What stinker that site is, including their ill-fated marketing campaign, which tanked the company before they could get any sort of traction. Case study on how not to start a new dating site, and some of the staff were from JDate!

Fourth quarter 2008 revenue for Offline & Other Businesses was $446,000, a decrease of 54% compared to $965,000 for the fourth quarter of 2007. I wish they would mention what brands are in each category. If HurryDate is part of Offine & Other Businesses and revenue is down 22% for the year.

I believe General Market Networks is where they hide the albatross that is American Singles. Almost a 60% decline in revenue due to a 59% decrease in marketing spend. See what happens when you buy junk traffic based on spammy pop-under ads?

Imagine if American Singles was able to buy social networking traffic like True and SinglesNet, they could have been a contender. What a difference a few years can make.

Final answer: You can increase margins, add bells and whistles and buy back all the stock you want, but Spark is in trouble and I don’t think a website refresh is the answer.

I welcome comments from the more astute financial experts reading this.

Details at Spark Networks Investor area.

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Spark Networks, Inc. (AMEX: LOV) today reported financial results for the second quarter and six months ended June 30, 2008.

Spark Networks overall subscriber base is diminishing while profitability is up. Spark lost close to 30,000 paying subscribers, mostly from General Market Networks. I’d like to know which sites are categorized as General Market Networks and Other Affinity Networks.

I’ve bolded some of the key highlights from

“Our overall strategy continues to be to strengthen our position in the affinity-based segment of the subscription-driven dating market,” stated Adam Berger, Chairman and Chief Executive Officer of Spark Networks, Inc. “Over the past five quarters, we’ve been focused on increasing stockholder value and return by growing our Other Affinity Networks segment, maximizing the yield from our Jewish Networks, optimizing our marketing spend, adding an advertising revenue stream, reducing overhead, and prudently allocating capital.”

“This strategy has translated into increased profitability and cash flow in the second quarter. Adjusted EBITDA(1), excluding currency translation adjustments, was $4.4 million or a 29% margin. Cash flow was $4.2 million, a 19% increase over the same period last year, and a 43% sequential increase.”

Second Quarter 2008 Financial Highlights

Revenue for the second quarter of 2008 was $15.0 million, a 10% decrease compared to $16.6 million in the second quarter of 2007, and flat compared to the prior quarter. Revenue for the six months was $30.0 million, a 10% decrease compared to $33.4 million for the same period last year.

Contribution(2) for the second quarter of 2008 was $11.0 million, a 2% decrease compared to $11.2 million for the second quarter of 2007, and flat compared to the prior quarter. Contribution for the six months was $21.9 million, a 3% increase compared to $21.2 million for the same period last year.

Operating expenses for the second quarter of 2008 were $8.0 million, a 15% decrease compared to $9.5 million for the second quarter of 2007, and a 5% decrease compared to $8.5 million for the prior quarter. Second quarter 2007 operating expenses include approximately $687,000 of charges related to our Scheme of Arrangement. Operating expenses for the six months were $16.5 million, a 22% decrease compared to $21.2 million for the same period last year. Operating expenses for the six months ending June 30, 2007 include $1.1 million of charges related to the Company’s Scheme of Arrangement.

Net income for the second quarter of 2008 was $1.6 million, or $0.07 per share, compared to $1.9 million, or $0.06 per share for the second quarter of 2007, and $1.6 million or $0.06 per share in the prior quarter. Net income for the six months was $3.2 million, or $0.13 per share, compared to $534,000, or $0.02 per share, for the same period last year.

Adjusted EBITDA for the second quarter of 2008, excluding currency translation adjustments and Scheme of Arrangement costs, was $4.4 million, compared to $4.5 million for the second quarter of 2007, and $4.0 million in the prior quarter. Adjusted EBITDA, excluding currency translation adjustments, for the six months was $8.4 million, compared to $7.5 million during the same period last year.

Average paying subscribers(3) in the second quarter of 2008 were 190,455, a 13% decrease compared to 219,196 for the second quarter of 2007, and a 1% decrease compared to 192,652 in the prior quarter. Average paying subscribers for the six months were 191,554, a 14% decrease compared to 223,664 for the same period last year.

Segment Reporting(4)

Second quarter 2008 revenue for Jewish Networks was $8.6 million, a 5% increase compared to $8.2 million for the second quarter of 2007, and flat compared to the prior quarter. Jewish Networks revenue for the six months was $17.3 million, a 4% increase compared to $16.6 million for the same period last year.

Second quarter 2008 revenue for General Market Networks was $2.2 million, a 49% decrease compared to $4.3 million for the second quarter of 2007, and a 16% decrease compared to $2.6 million in the prior quarter. General Market Networks revenue for the six months was $4.8 million, a 49% decrease compared to $9.3 million for the same period last year.

Second quarter 2008 revenue for Other Affinity Networks was $3.4 million, a 6% increase compared to $3.2 million for the second quarter of 2007, and a 2% increase compared to the prior quarter. Other Affinity Networks revenue for the six months was $6.8 million, a 5% increase compared to $6.4 million for the same period last year.

Second quarter 2008 revenue for Offline & Other Businesses was $765,000, a 14% decrease compared to $886,000 for the second quarter of 2007, and an 80% increase compared to $426,000 in the prior quarter. Offline & Other Businesses revenue for the six months was $1.2 million, a 7% increase compared to $1.1 million for the same period last year.

Average paying subscribers for Jewish Networks were 91,598 during the second quarter of 2008, a 2% decrease compared to 93,408 for the second quarter of 2007, and a 1% decrease compared to 92,719 in the prior quarter. Average paying subscribers for the six months were 92,159, a 3% decrease compared to 94,687 for the same period last year.

Average paying subscribers for General Market Networks were 33,573 during the second quarter of 2008, a 45% decrease compared to 61,529 for the second quarter of 2007, and a 10% decrease compared to 37,435 in the prior quarter. Average paying subscribers for the six months were 35,504, a 47% decrease compared to 66,985 for the same period last year.

Average paying subscribers for Other Affinity Networks were 63,309 during the second quarter of 2008, a 1% increase compared to 62,450 for the second quarter of 2007, and a 5% increase compared to 60,133 in the prior quarter. Average paying subscribers for the six months were 61,721, a 2% increase compared to 60,781 for the same period last year.

In 2006 the company had 244,000 paying subscribers. Back in January 2008 I talked about a New York Times Article stating that Spark Neworks was putting itself up for sale.

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JDate, the leading online community for Jewish singles, has been selected as an Official Honoree for the Social Networking category in the 12th Annual Webby Awards.

Last time I checked JDate was a dating site. “J” for Jewish, “Date” for dating. Someone please explain this to me.

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On April 26, a one month subscription to try and meet your match on JDate is going to set you back an almost eHarmony-level $39.95, and you don’t even get to answer 436 questions.

As a result, you have until midnight Wednesday, April 25, to lock-in JDate’s lowest available 1-month rate. If you wait until Thursday morning, you will be too late. Each year, thousands and thousands of singles meet their soulmates on JDate and we want you to have an opportunity to do the same.

Here are the details: The new price will be $39.99. If you act now, not only will you save $5 on your first month’s subscription but you will also secure the low guaranteed renewal rate for as long as you remain a paying subscriber! For an even better value, purchase one of our 3- or 6-month subscriptions today.

Hey JDater’s, what about the cost of post 4/25 long-term subscriptions?

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I’ve been hearing a lot about Spark Networks acquisition of Stu & Lew Productions, creator of “Schmooz-a-Paloozaâ€?. For those that don’t know, Spark owns Jdate, the largest Jewish online dating service and Stu & Lew runs big parties in LA for the Jewish community.

I’ve heard from competitors as well as those close to the deal that feel jilted by Spark and question the motivation and tactics which drove the purchase. Basically all the hubub surrounds the LA and New York party scene on Christmas eve and how Spark has allegedly unfairly dealt with other party promoters. Who knew the Jewish Christmas Eve party scene was so full of intrigue and deception?

That a dating site would be unfair to it’s perceived competition should come as no surprise, there are more than a few executives in the industry more than happy to smile and pat you on the back while writing down your secret sauce and building it in-house. I know, I’ve been in some of those meetings. That’s the way certain organizations in the online dating industry have chosen to conduct business.

It sucks for some involved, yes. The little guy quite often gets steamrolled in the end when it comes to working with large partners. Qué Será, Será.

Mark Brooks called this deal “a bold move and a precedentâ€?, which I don’t understand. People have been throwing Jewish-themed parties for at least 20 years on Christmas eve. Speed dating, Lock-n-Key parties, done done and done.

I’ve never heard of Stu & Lew until this week, although I hear their email list is what helped kickstart JDate’s growth.

Remember MatchLive and IRL Networks? Probably not. That’s what happens when you try to scale national singles events up enough to be profitable. Simple and small is what works.

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