Spark Networks Q1 2010 Results

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.

For those of you who aren’t that familiar with Spark Networks, it’s made up of several components: Jewish Networks (aka: Jdate), Other Affinity Networks (small niche sites bought approximately 5 years ago), General Market Networks (American Singles and others) and finally, their Offline and Other Businesses (Hurry Date and some of their travel events).

JDate members should be happy as the Jewish Networks division added just under 3,000 members in the first quarter of the year. That said, the fresh meat came at a lower average monthly fee. In other words, more people are jumping on those holiday savings. If you missed the last one for Mothers’ Day, don’t worry, they’ll probably offer deep discounts over the Memorial Day, Fathers’ Day and July 4th. Questions still remain as to what percentage of JDate’s members are paid members, and how many members cannot send or receive emails. (Match.com’s numbers improved to just over 10% in the first quarter of 2010 – if you assume 1.6 million paid members and their advertised “15 million members.”)

If you’re a member of Spark.com (formerly American Singles), I’m truly sorry. Average users dropped to just 7,813, a far cry from the 92,041 members at the end of 2006. Basically, Spark has said that they’re managing the decline of the brand. They are VERY successful at that. If you’re considering joining the site, just remember, they intend to continue reducing the ad spend, and have no intention on growing the brand. Honestly, they should probably go with the band-aid approach and just close it instead of continuing to collect monthly fees for a site that they’re killing off.

Other Affinity Networks, most or all of which were purchased from another company about 5 years ago has had mixed success. Where Spark Networks only invested 7% of the Jewish Network’s revenues into advertising, they had to pay 58% of their quarterly revenues to keep this unit going. Their plans are to focus only on 2 or 3 of the brands in this unit (there are more than 15) and to stop or reduce advertising the rest of their brands in this category. If I was a member of one of their smaller sites in this category, I’d be concerned about whether I was paying membership fees to a declining brand.

Major warning signs (as I see them):

1) The company has again announced that it’s going to continue to “manage the decline of the brand” for American Singles, and most of the Other Affinity Network sites. Frankly, if you aren’t a member of JDate or one of their top niche sites, you’re in trouble. Why? Because those sites are basically going to be the red headed step children of their stable. They’re going to get no love at all, which is truly sad for a dating site.

2) They’re going to focus on merging their legacy systems (SQL/.NET for JDate & Spark.com with the LAMP platform for their purchased sites). While that would normally be considered a positive (cost efficiencies, better customer service, best of breed), unfortunately they’ve also stated that they will not innovate at all in 2010. Ouch. Many think that the JDate platform is already years behind the rest of the market, now they’ll be even further behind.

When the company was asked “Is there any legal risk from the members of all of those sites that are not being advertised suing” company management said, “No, we’re not concerned about that.” If I had paid 6 months in advance for a site, and I just found out it was being intentionally run into the ground, I’d be VERY concerned.

So overall impressions: The company added more members, but had to sacrifice some of their monthly fees to get them, which questions the value of their product offering. They’re basically shutting down everything but three brands, but are still wasting money on some of the same brands that they intend to kill. In short, they should probably just sell off the brands that they intend to kill, and invest the money in their core brands instead of burning it on dying products.

No Longer a Bright Spark

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?

What is Great Hill Partners up to?

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.)

Someone Just Bought 5% of Spark Networks

While we were all sunning in Miami at iDate last week, s Someone named John H. Lewis at Osmium Partners spent $2.5 million to acquire about 5% of Spark Networks, or a little over 1 million shares. SEC notice. I love these investor sites which only have a home page and contact information. Mysterious! Thanks to my favorite tipster for all things Spark.

Update: Seeking Alpha has more.

…(Jdate) has been mentioned on popular TV shows such as House, South Park and the Daily Show. The word of mouth impact keeps promotion costs low for this business.

Management has bought back a stunning amount of shares over the past 2 years. In fact $47,354,000 was expended for share repurchases over the two year period from 12/06 to 12/08.

I’ve never seen such a highly educated and experienced executive team and board members for such a small company.

Return on invested capital has also been stellar.

I would not be surprised if Jdate.com alone receives a price greater than the current market cap for the entire company.

Dating Revolution comments on Spark’s financial situation, definitely worth a read of marketing spend and revenue are of interest.

Spark Networks

Spark Networks is trending down, with a few positive notes.

  • JDate revenue and subscribers down
  • General market revenue down 49%
  • Revenue for Offline & Other Businesses down
  • Average paying subscribers down 10%
  • The Company purchased 1.6 million shares during the quarter at $3.81 per share for an aggregate amount of approximately $6.1 million.

SPARK NETWORKS REPORTS THIRD QUARTER 2008 FINANCIAL RESULTS

Spark Networks: No Love for LOV

Seeking Alpha talks about the true value of Spark Networks:

At first glance, the stock has all the makings of a potential value play. It’s got captive audiences in a growing industry, a P/E under 10, and its net income has grown consistently..

Looks great! Unfortunately, this is exactly why investors cannot make purchase decisions “at first glance”. We’ve discussed examples here of what kinds of things get buried in the notes to the financial statements. In this case, however, the investor need not go further than the income statement.

While most companies lose 35-40% of their income to tax, Spark Networks actually gets to double its income in 2007, and pay very little tax in 2006! Clearly, this is not sustainable. A careful reading of the notes reveals this tax gain is a result of making up for past operating losses, and that a large chunk of these tax assets have now been used up.

I predict Spark will sell in 2008, but for how much? Leave your guesstimate in the comments.

Spark Networks, Making More While Making Less

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.

Spark financials, iDate wrapup, Matchmaking demo

Lot’s going on today. First up, the iovation iDate wrapup webinar at 2PM EST, the Spark Networks investor call at 4:30PM EST, followed by the Matchmaking Institute Cupid system demo, at 5PM EST.

Spark financials, iDate wrapup, Matchmaking demo

Lot’s going on today. First up, the iovation iDate wrapup webinar at 2PM EST, the Spark Networks investor call at 4:30PM EST, followed by the Matchmaking Institute Cupid system demo, at 5PM EST.

Spark financials, iDate wrapup, Matchmaking demo

Lot’s going on today. First up, the iovation iDate wrapup webinar at 2PM EST, the Spark Networks investor call at 4:30PM EST, followed by the Matchmaking Institute Cupid system demo, at 5PM EST.