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.)
