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Edited Transcript of LOV.A earnings conference call or presentation 29-Aug-19 8:30pm GMT

Half Year 2019 Spark Networks SE Earnings Call

Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Spark Networks SE earnings conference call or presentation Thursday, August 29, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeronimo Folgueira

Spark Networks SE - MD, CEO & Director

* Robert O'Hare;Chief Financial Officer

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Conference Call Participants

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* Adam Waldo

Lismore Partners, LLC - Chairman of Managing Members

* Austin William Moldow

Canaccord Genuity Corp., Research Division - Associate

* John Hartnett Lewis

Osmium Partners, LLC - Managing Partner, CIO and Co-Founder

* Kara Lyn Anderson

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* Michael Joseph Olson

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Patrick Retzer;Chief Investment Officer

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Spark Networks SE First Half 2019 Earnings Conference Call. This call is being recorded. (Operator Instructions) I would now like to turn the conference over to Mr. Robert O'Hare. Mr. O'Hare, you may begin the conference.

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Robert O'Hare;Chief Financial Officer, [2]

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Hello, everyone. I'm Rob O'Hare, Chief Financial Officer for Spark Networks SE. On today's call with me is Jeronimo Folgueira, Spark's Chief Operating Officer. Before we begin, there are a few items that I need to cover with you. Today, we issued a press release announcing our first half 2019 financial results. It is available within the Investor Relations section of our company's website at www.spark.net

In the press release, and in our prepared remarks from this call, we refer to adjusted EBITDA, which is defined in our SEC filings. Although adjusted EBITDA is a non-IFRS financial measure, we believe it may be useful to investors when evaluating the company's current financial performance. However, investors should not consider adjusted EBITDA as an alternative to net income, cash flow from operations or any other measure for determining the company's operating performance calculated in accordance with IFRS. Further, because adjusted EBITDA is not calculated in accordance with IFRS, it may not be comparable for similarly titled measures employed by other companies. A reconciliation of adjusted EBITDA to net income can be found in the consolidated statements of operations included in our earnings release.

I would like to remind everyone listening today that any comments made on this call may contain forward-looking information or projections regarding future results or events. We caution you that such statements are, in fact, predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially from our statements or projections. Additional risks, uncertainties and factors that could cause actual events or results to differ materially from these forward-looking statements may be found in the company's filings with the SEC.

Following our prepared remarks, Jeronimo and I will conduct a question-and-answer session. This call is being recorded and will be available for playback on the Investor Relations section of our website for the next 2 weeks.

With that, I will now turn the call over to Jeronimo.

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [3]

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Thanks, Rob. And thanks, everyone, for joining the call today. 2019 is already, undoubtedly, the most transformational year in Spark's history. I'm pleased with the progress that we have made so far in building the foundation for a large, more diversified portfolio of brands, particularly within North America.

We remain focused on the North American market, which is the largest geographic market for dating revenue. And now for the first time ever, represents more than half of the Spark's total revenue. I am pleased with our results in North America as we drove growth across every key performance indicator: registrations, paying subscribers, monthly ARPU, revenue on contribution. I'll also like to highlight that our contribution grew while we continue to increase our investment in direct marketing within North America. In the period, we saw continued strength from SilverSingles, which exited June with over 60,000 paying subscribers. It is exciting to see the success of our growth initiatives as we continue to capture market share in this critical region.

When looking at the first half results, it is important to note that revenue was influenced by a nearly 30% year-over-year decline in marketing spend within our international segment. In certain international markets, we fail to find opportunities to deploy marketing capital that met our return thresholds for those markets. This was especially true in France where we reduced our marketing spend by approximately 40% following an increase in unit cost with some of our key marketing partners. We secured new agreements with these marketing partners in the second quarter. However, the majority of our first half marketing spend is typically deployed in January and February.

Overall, our strategy is not growth at all cost, and we utilize a very disciplined, data-driven approach when allocating our marketing spend. As a result, we will continue to rightsize the business to secure our profitability goal of delivering over $50 million of adjusted EBITDA in 2020. Also, at this profitability level, we would expect to exit 2020 with a net debt to adjusted EBITDA ratio below 2x.

As we have spoken about in the past, on July 1, we completed the acquisition of Zoosk. As a reminder, our first half 2019 financials do not include any Zoosk figures. However, going forward, Zoosk will represent approximately 60% of our revenue and will meaningfully accelerate our profitability towards the 2020 target.

Zoosk is one of the largest dating brands in North America and has been for nearly a decade. Zoosk large mass market brand is highly complementary to Spark's portfolio of niche-focused dating brands. While our brand positioning is different, Spark and Zoosk share a very similar approach to digital performance marketing. We are confident in our ability to manage and ultimately improve Zoosk marketing efforts. Further, the combined direct marketing spend of approximately $150 million per year should help us drive marketing rate improvements with key marketing partners.

We have now owned Zoosk for nearly 2 months, and we're very pleased with the progress we have made since the close of the acquisition. The integration is progressing to plan, and we have assembled a broad cross-functional team within Spark to ensure that we transition out assets of the Zoosk business.

One of our key competitive advantages is our low-cost centralized operating model in Berlin, and we expect Berlin to continue to be the base for our operating teams long term. As a result, we have reduced Zoosk's headcount by over 40% already, and are confident that we will achieve the $15 million cost synergies that we have identified before acquisition closed. We have learned a great deal through the integration of the Spark, Inc. merger, and we anticipate an equally successful and highly accretive combination with Zoosk.

As we look to 2020 and beyond, we envision a future where Zoosk serves as a hub for our portfolio and is surrounded by differentiated niche brands like EliteSingles, SilverSingles, Christian Mingle and JDate. This portfolio of complementary brands will eventually be powered by a single shared technology platform, loveOS.

By operating a range of diverse brands on a single technology platform, we will be able to more quickly develop new products and features and efficiently share these enhancements across our global portfolio. Operating on a common platform also will allow us to further lever our centralized technology team in Berlin, which is one of the largest and most efficient teams in the dating industry. As we announced earlier this month, we have migrated eDarling Spain already, a brand that represents roughly 1% of our run rate revenue, over to loveOS. Post migration, we are now focused on optimizing loveOS conversion and retention in advance of upcoming rollout of additional brands in countries.

I am very excited by what the future holds for Spark. We operate in highly attractive industry and have built a large and cash generative business with strong brands. We have leadership position in North America and have clear roadmap in place to capitalize on the assets we own.

Lastly, I would like -- also like to address recent developments in our share price. In order to secure the Zoosk transaction, 3/4 of Spark's shareholders agreed to lock out their shares by a voting agreement that expire a few weeks after closing. Additionally, Zoosk shareholders receive 13 million tradable ADRs as part of the consideration for Zoosk, resulting in a significant liquidity event for this group.

The combination of these 2 events has resulted in a meaningful increase in our recent trading volumes and has put pressure on our stock. While thankfully in the short term we believe that the turnover of our investor base is beneficial for Spark, we are replacing early-stage investors that have made large profits with Affinitas and Zoosk with new public market investors that will support Spark in the next phase of growth and development over the next 3 to 5 years.

Before I turn the call over to Rob, the Board and I would like to thank him for his significant contributions to Spark over the last 4.5 years. As we announced last month, Rob will be leaving us to pursue a CFO role in another company in San Francisco. I'm also excited to welcome Bert Althaus, who will be joining us in a few weeks as our new CFO. Bert brings extensive financial and operational experience and will be a tremendous asset for our leadership team. I'm extremely confident that Bert's proven track record will enable us to continue to responsibly grow our portfolio and deliver profitability improvement.

With that, I now turn the call over to Rob.

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Robert O'Hare;Chief Financial Officer, [4]

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Thanks, Jeronimo. And thanks, again, to the Board and everyone at Spark Networks. I've truly enjoyed working with this team, and I'm proud of the business that we've built. I want to share some additional details on our first half 2019 financial results. As a reminder, the Zoosk acquisition closed on July 1, 2019, and therefore will not be included in our results.

Starting with revenue, we reported EUR 49.2 million of total revenue, a decrease of 7.1% from EUR 53 million in the first half of 2018 and a decrease of 4.5% from EUR 51.5 million in the second half of 2018. The year-over-year decrease was attributable to the 9% decrease in the number of average-paying subscribers offset by a 2% increase in monthly average revenue per user, or ARPU.

As Jeronimo mentioned, revenue was also impacted by the cuts to international marketing spend in the first half of 2019.

Moving down the income statement. Contribution was EUR 20.4 million for the first half of 2019, flat compared to the first half of 2018 and a decrease of 16% from the second half of 2018. We typically invest more heavily in direct marketing in our high season during January and February. As a result, we see stronger profitability in the second half of the year so that the sequential decline in contribution was in line with our expectations.

For the first half of 2019, adjusted EBITDA was EUR 3.8 million, an increase of EUR 1.4 million compared to EUR 2.4 million in the first half of 2018 and a reduction of EUR 4.7 million compared to EUR 8.5 million in the second half of 2018. Our first half 2019 adjusted EBITDA margin was approximately 8%, an increase of more than 3 points from the prior year period.

Turning to the balance sheet, Spark ended the first half of 2019 with EUR 12.5 million in cash and cash equivalents compared to EUR 11.1 million at the end of 2018. At period end, the group had EUR 11.3 million of debt outstanding, down from EUR 12.1 million at the end of 2018.

As we've shared previously, the Zoosk post-merger integration is our top priority for the remainder of 2019. We remain confident that the operational and strategic fit between Spark and Zoosk is very strong, and that we are well on our way to achieving our $15 million cost synergy target. These cost savings will help drive us towards our goals of delivering more than $50 million of adjusted EBITDA in 2020.

That concludes our prepared remarks. We'll now open the line up to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Kara Anderson with B. Riley FBR.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [2]

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I'm just wondering, if you can elaborate a little bit more on the cut to international spending and sort of the failure to find opportunities with the required returns? You went through that really quick, so if you could just elaborate on that, that'd be great.

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [3]

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Yes. Sure. So in international, one of the key situations we had in the first half was in France where one of our marketing partners increased the cost of user acquisition, and we decided to stop working with that partner for a couple of months. And that obviously generated a substantial cap in marketing, but that's affected also the top line. We follow a very strict ROI-driven allocation of marketing. And if we are not able to reach the ROI targets that we want or we need to support the profitability of the business, we never spend money on marketing with negative ROI. So if the unit economics are not there, we'll save the money. Usually, we will relocate that money to other parts of the portfolio. But in this case, there were not enough opportunities in other channels to deploy that amount of money. So that resulted in a short-term hit in the allocation of marketing spend.

Additionally, the EliteSingles and SilverSingles app was out of the App Store during month of January and February, also our high season, which affected our performance substantially. We have since then got the apps back, and especially with the acquisition of Zoosk, built a really strong relationship with Apple. So we feel that, that's addressed now. But obviously, having the apps outside of the App Store in those 2 critical months meant that we were also not able to deploy money on television. So TV advertising was inefficient for us in the first half, especially in the first quarter and also we couldn't deploy more money into that channel because of that. So one of those -- and both of those issues have been addressed already. So we see a change in performance already for the summer.

And then on top of that, there is ongoing impact on international market. So our brands Attractive World and eDarling are declining in some markets, and that has been a trend that has been ongoing -- underlying and that's something that continues, but not to the extent that we have seen in these results. So that's something that we do expect to continue to see because we not focus on international, especially on those 2 brands. However, this short-term pressure accelerated the decline in international far more than we would have liked or expected.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [4]

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Great. That's really helpful. And then sort of focusing on North America, the ARPU really did quite improve in the first half of 2019. Can you talk about what's particularly driving that?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [5]

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So there are several things driving that. So obviously, we continue to work on product improvements and optimize pricing as well, but also there is a shift in the brand mix. So SilverSingles continue to grow and become a larger part of the business, and SilverSingles has a higher ARPU than other brands in the portfolio. So that also helps improve the ARPU.

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Robert O'Hare;Chief Financial Officer, [6]

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Yes. We also saw a lift -- Kara, this is Rob. We also saw a lift on the Spark Networks, Inc. brands. Now that those brands have been owned for over a year, the team in Berlin has really been able to optimize and improve conversion and allow us to kind of keep pricing constant. So we definitely saw a benefit on that side of the house too.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [7]

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Great. And then with respect to the loveOS platform and the roll out there, can you provide sort of an updated time line on how we should think about the remaining brands? I know you have Spain. I think eDarling on it at this point. Just kind of an update there, that'd be great.

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [8]

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Yes. That's a long-term ongoing project, and it's too early for us to commit to any deadlines for additional brand migrations because we have migrated Spain in order to have one large country where we can look at the KPIs and iterate. We are extremely data driven, so we will not migrate a country until we are absolutely sure that we have the same levels of KPIs or that the KPIs are going to improve. What we have seen with Spain now that we have enough data after a month and substantial volume is that in the new platform, the monetization is still below what the legacy platform has. So we still have some work to do there over the next month to catch up on the KPIs of the new platform versus the old platform. And until we're not at the same monetization level as the old platform, we're not going to migrate new brands. As soon as the monetization is at par or better, then we will start migrating more brands.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [9]

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Great. And then, I guess, one question from me on Zoosk. Now that you've had it for 2 months, have you learned anything about the customer crossover or otherwise interesting data points around customers that you can share since now having full access to the brand?

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Robert O'Hare;Chief Financial Officer, [10]

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No. We -- I mean, no. I think the thesis, so far, remains to be intact. I mean we haven't seen a significant overlap in our customer base. We think that it generally has a different positioning in North America than we do. And so we think -- as we said in the remarks, we think it's a really nice complement and can serve as a hub for our portfolio with the niche brands surrounding. So yes -- no changes from what we expected coming in on that front.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [11]

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Okay. And then just a housekeeping question, real quick, can you provide us with period ending subs for North America and international?

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Robert O'Hare;Chief Financial Officer, [12]

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Yes. So we ended North America -- North America ending subs was 188,000. International subs was 246 -- just over 246,000.

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Operator [13]

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Our next question is from Austin Moldow with Canaccord Genuity.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [14]

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Just got one on Zoosk. I think your previous commentary for 300 million combined top line sort of implied Zoosk was around 175 million. And you said at the time that they started to grow in the beginning of the year 2018 and then faced a little weakness because of some product rollouts in the fall. So I'm just wondering if you can maybe give some commentary on the current Zoosk's top line growth trajectory.

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Robert O'Hare;Chief Financial Officer, [15]

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Yes. We saw sort of a mid- to high-single digit decline in the first half of the year on the top line, Austin. And so on an LTM basis, the business is about 165 million of revenue through June.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [16]

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Got it. That's helpful. And then shifting to some other brands, you just sort of mentioned the Spark, Inc. brands how they had contributed to the ARPU expansion. Can you speak a little more generally about how their total revenue trends have been?

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Robert O'Hare;Chief Financial Officer, [17]

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No. I mean that was an important milestone for us. Exiting 2018 was to get those brands to stability and ultimately to grow. So we did see modest growth for those brands in Q4, and there hasn't really been a material change in that trend. They still continue to be stable brands.

When we look at the portfolio, some of the other brands do monetize better and have a slightly higher marketing return. And so having the ARPU increase year-on-year will help those brands long term, kind of, compete for capital within our portfolio, but we still have some more work to do to kind of get them all the way to the monetization that we see on something like SilverSingles or Elite.

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [18]

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And we don't disclose their actual revenue month per brand. So we -- that's not a split that we publicly disclose. However, the former Spark, Inc. brands represent between 10% and 15% of the current run rate once we include Zoosk.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [19]

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Got it. And just want to ask about that EBITDA target for $50 million. I mean you mentioned it a few times, but want to just sort of confirm that. You still have confidence around that number, given maybe some lumpiness that we're seeing in the top line. So is that still the case?

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Robert O'Hare;Chief Financial Officer, [20]

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Yes. I mean obviously we came in I think eyes wide open in terms of the top line trajectory of Zoosk. And so the $50 million definitely factored that in. So yes, we still have a lot of comfort in the $50 million for next year.

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Operator [21]

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Our next question is from Mike Oslo with Piper Jaffray.

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Michael Joseph Olson, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [22]

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Congrats to you, Rob, on the new opportunity. So you talked earlier about allocation of marketing and the lack of willingness to spend on negative ROI marketing. And just wondering, could you talk about how the Zoosk deal may help to drive a better marketing ROI? In other words, to what extent will scale help in the ability to spend more on an acceptable kind of ROI marketing flow that could benefit top line growth?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [23]

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Yes. So we believe there's twofold. So one is, we -- together with Zoosk now, we are one of the largest or the largest buyer of dating traffic for affiliates worldwide, and that gives us a lot of negotiation power in those discussions. And then we can secure that traffic in better terms with these marketing partners, which are quite substantial for us. So therefore, things like France would be less likely to happen given the new negotiation power that we have with these marketing partners. And that's one of the reasons also to combine with Zoosk was to secure such a strategic channel for us. The second will be to start exploring more retargeting because now Zoosk is a really large brand in the North America market and mass market. So there's opportunities for us to start retargeting those customers with additional brands, even that we know that people on average will use 3 to 5 dating products at the same time. And that's something that the Match Group does extremely well and extremely efficient, and one of the reasons why their marketing efficiencies is substantially higher than ours. And that's something that we have not been able to do in the past because our brands are extremely niche. And with now having a mass market brand and a very large database of singles in America is one of the areas where we feel we will be able to find ways of spending more money at a more efficient way.

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Michael Joseph Olson, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [24]

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Okay. And that was kind of my second question. I realized the deal is officially closed, but to what extent at this point are you starting to retarget some of the Zoosk users to other more category specific brands or maybe when will you begin to do that is probably the better question.

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [25]

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So we haven't started yet because we have focused the first 2 months on securing the key people and putting all process in place and optimizing their own spend, so we haven't started retargeting yet. And we are integrating Zoosk on our systems and our tracking within the next few months. So we expect that before the end of the year, and ahead of the next winter high season, we will be able to do that.

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Operator [26]

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Our next question is from John Lewis with Osmium Partners.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [27]

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I guess one thing I've seen in the industry, especially with the Zoosk acquisition, is that there's really 4 players that now control I think it's 75% to 80% of the online dating market in North America and Europe. And I think it's obviously Match; Spark, Zoosk, Affinitas is one group; and then Bumble and Badoo; and then Parship. Is that fair that the industry is really consolidated to those 4 or now 80% of the market or so?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [28]

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Yes. So when you look at the North America market, especially all the large brands and players, everything is in the hands of those 4 players that you said. So basically the Match Group owns pretty much half of the larger brands in North America, especially Tinder and Match, of course. But Bumble is in the hands of Badoo, eharmony is the hands of Parship. And then the all the other brands in the market really belongs to us. There's almost no player left in North America with the scale that doesn't belong to one of those 4 groups. Probably the only exception would be Grindr that is a market leader in the gay segment, but that will be the only other relevant player in North America. And then there's nothing else of scale.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [29]

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And it seems like all of these businesses are targeting 20% to 40% operating cash flow margins. I mean it's fundamentally a good-to-great business in terms of how the business works of customer supply, labor, inventory and marketing when they're successive. So I guess the question really is that with the relatively high valuations ex Spark and the industry, it seems like this is a very different market structure than we were 4 years ago. And therefore, it seems like there should be sustainably an attractive places to invest capital going forward. Do you see that to be the case? Or how do you think about this mass industry consolidation in the paid dating world and the ability to leverage what you have here to really drive incremental margins?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [30]

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So I can only comment on us and on Match because those are the only 2 public companies out there, and the Match Group, of course, has very high margins and really high cash generation. And that business has been performing extremely well, and there you can really see the benefit of scale. So when you have scale on the dating side, you can generate really high profitability and also really high cash generation.

When you look at our business as well, what you can see is with the increase in scale, we have been able to increase our EBITDA margins year after year. And now with the Zoosk acquisition, we're targeting to have a margin -- EBITDA margin of close to around 20%, which we believe is still in the low end for what we see of players of our size in North America. So we feel that our targets for 2020 are reasonable and achievable. And that's substantially increased from where we were. So the businesses at around 100 million of revenues, we used to operate at around 10% margin, 10% to 15% margins. And businesses of this scale that we have now basically 250 million to 300 million in revenues, we should be able to achieve 20%-plus margin and eventually even 30% margin.

Also, then looking at the cash generation, this is a business that has relatively low CapEx. So a lot of that profitability turns into cash flow. In our case, of course, we have debt. So we have interest expense. We are not a meaningful tax payer, but we have interest and debt repayments. But from an operating cash perspective, this business generates a substantial amount of cash flow. And that's one of the things you can see even on the first half of the year, which is a small period and actually the first half is usually seasonality-wise the lowest profitability period for the Spark business. You can see that the net debt has actually improved from the end of the year until the end of June. So you can see there how the EBITDA translates into cash generation by looking at the net debt evolution.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [31]

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Just 2 other quick housekeeping. You paid 4.4 million in legal, right, for the Zoosk acquisition?

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Robert O'Hare;Chief Financial Officer, [32]

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Yes. Legal and some other deal fees. There's a fee for arranging the debt in there.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [33]

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I see. And then the other large CapEx is right around 4 million, 5 million a year?

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Robert O'Hare;Chief Financial Officer, [34]

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Yes. It's kind of in that range, John.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [35]

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Got it. And then my last question is really on loveOS. What -- can you talk a little bit more about -- I get it. You just brought it out less than 30 days ago, and you're optimizing and trying to work out all the kinks. But what do you hope it would achieve that your old platform doesn't? I mean I know it's mobile first. There's micro payments. But can you give more like what do you -- if you got everything you hoped out of it, what would it bring to the table that the current platform doesn't?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [36]

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So there are several things that loveOS should bring and that's the reason why we have been investing in that project and continuing do so. One of the key benefits will be to simplify our structure because right now we are managing 5 different tech platforms. And if we manage to have all of our portfolio in one single tech platform, we will be able to achieve a lot of synergies and potentially cost savings or having more people dedicated to the platform. So right now, if we want to build one feature and deploy it to the whole portfolio, we have to build it 5 times. In the future, we'll only have to build it once, which means that with the same people in the same period, we will be able to build 5 features instead of one.

Also, that platform is new and modern, so it's built with an architecture work. We can build components and launch new sites and brands easily. So it will allow us to either launch new dating products and sites pretty quickly or new geographies or integrate businesses that we acquire in a very quick and efficient manner.

And ultimately as well, once we have everything on a single tech platform and if you share the same database, then we will be able to cross share user pool liquidity, which we see that in places with low user density, it makes a huge impact on conversion. And if we were able to have all of our users under a single database and share liquidity when people basically run out of matches, that should have a substantial impact on our business.

We have seen that with EliteSingles and SilverSingles. Those are the only 2 brands that share liquidity -- user pool liquidity in North America. And what we have seen is that with the launch of Silver and increasing the overall pool of users, EliteSingles benefited. But also, it allowed us to launch SilverSingles pretty much profitable from the start on a lifetime basis because we can monetize the first user already on that platform without having to burn money on building the initial pool.

We, of course, always match people within their own brand first. So the cause of sharing liquidity is something we only use to top up matches when people run out of matches with their selections. But that allows us to provide more matches and provides people with more filters. So they can get more matches for what they're actual looking for.

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Operator [37]

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Our next question is from Patrick Retzer with Retzer Capital Management.

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Patrick Retzer;Chief Investment Officer, [38]

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So you've talked about $50 million in adjusted EBITDA next year, which I believe works out to about $2 a share in adjusted EBITDA. Do you have an estimate for free cash flow for 2020?

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Robert O'Hare;Chief Financial Officer, [39]

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Sure. We haven't published that, Mr. Retzer, but we can talk through. I guess some of the big -- bigger building blocks. I think from the $50 million, we would have approximately $5 million of CapEx. With our current debt terms, we would have about $12 million of interest. We don't expect to be a meaningful cash tax payer. And then there is a $10 million deferred payment -- $10 million deferred payment to Zoosk. So those would be kind of the big uses of cash and the remainder would net you to something in the neighborhood of $20-ish million next year, again, taking into account that one-time $10 million payment to the Zoosk shareholders.

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [40]

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There will also be probably some one-off payments for retention at Zoosk, so there might be some additional uses of funds just to secure the talent at Zoosk. But basically, we will be in that neighborhood.

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Patrick Retzer;Chief Investment Officer, [41]

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Okay. So you talked about getting your net debt down to less than 2x adjusted EBITDA by the end of 2020. How much are you talking about reducing the debt by during the next 1.5 years?

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Robert O'Hare;Chief Financial Officer, [42]

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Yes, I mean, the multiple that we've given is obviously both the mix of EBITDA expanding and then also paydown in the debt. I think in the next -- by the end of 2020, we should be in a position to have paid off something in the neighborhood of $20 million of debt.

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Patrick Retzer;Chief Investment Officer, [43]

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Okay. And then sometime during 2020, do you anticipate reaching at an inflection point where top line starts to grow again?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [44]

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Yes. So what we currently see is that we need to rightsize the business, especially to secure the profitability. So we are cutting costs, and especially with Zoosk, we're looking into all the marketing campaigns and we're cutting the campaigns that have the lowest ROI. So we will probably continue to cut marketing for them that will continue to put pressure on the top line but it will improve the bottom line. And we expect that to continue for another 6 months or so, so we would expect to stabilize the top line around midyear 2020.

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Patrick Retzer;Chief Investment Officer, [45]

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Okay. And then in the past, I believe there's been talk about Spark becoming a U.S. company, doing quarterly reporting. Is that the plans?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [46]

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So we are currently not working on any changes of our legal structure or moving the headquarters, and that's something we cannot comment as well. For now we continue to be a German legal entity. However, our intention is to move to quarterly reporting, and we have lost the foreign private issuer status with this legalization. We will keep that status for another year. So we must report quarterly reporting from 2021. However, it is our intention to start quarterly reporting sooner than that.

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Operator [47]

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Our next question is from Adam Waldo with Lismore Partners.

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Adam Waldo, Lismore Partners, LLC - Chairman of Managing Members [48]

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With the Zoosk business being about USD 165 million in run rate revenue. If they are sort of below the gross profit line, the cost structure looks pretty similar to yours, it's pretty easy to see how you can get almost all of your $15 million of OpEx saving targets for 2020 just there. Can you be a little more granular about where we could see gross profit margin go over the next year to 1.5 years on the combined entity, putting out some sort of more comprehensive target for gross profit margin than just the EBITDA numbers you've given and then I have a follow-up?

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Robert O'Hare;Chief Financial Officer, [49]

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Sure. I think your assumptions around the Zoosk cost structure are correct. I mean I think both businesses operated in a very similar way, both Spark and Zoosk, with each spending roughly half of their revenue on direct marketing efforts. And we think that's -- obviously, that's important to stabilizing the business and ultimately growing the business. So we wouldn't expect material cuts there from a margin perspective. And really all of the cost savings will come sort of below that gross profit line in what we call the fixed costs, right? It's all personnel and....

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Adam Waldo, Lismore Partners, LLC - Chairman of Managing Members [50]

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Okay. And then on the debt side. You are able to show to various syndicated bank lenders or capital market lenders what should hopefully be comfortably at or above $50 million of EBITDA in 2020 you get late in 2020 or early 2021. Is it fair to assume you're going to go out either to the syndicate bank lending market or the capital markets to refinance the debt that you took on for the acquisition?

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Robert O'Hare;Chief Financial Officer, [51]

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Yes. There's some provisions in the current credit agreement that make it quite expensive to refinance the debt in the first 12 months of the facility. But I think beyond that, we would have sort of a fiduciary duty to make sure that we have the lowest cost of borrowing possible. So I think thinking about alternatives to the current credit agreement is something that we'll contemplate as we go definitely.

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Adam Waldo, Lismore Partners, LLC - Chairman of Managing Members [52]

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So by the time we're looking at '20 -- or in 2021 guidance, we might be looking at $6 million to $8 million in annual interest expense for 2021, not the $12 million or so that we're looking at now?

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Robert O'Hare;Chief Financial Officer, [53]

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I'm a little uncomfortable signing up for a cost of borrowings that far out, but I think directionally, something closer to 2 turns of leverage in our industry I would think that we could materially lower our cost of borrowings, yes.

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Operator [54]

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Our next question is from [Roger Berry], private investor.

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Unidentified Participant, [55]

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First of all, good luck, Rob, with your new appointment, and I'm sure you'll do a great job back in San Francisco, which must be marginally better in terms of climate than Berlin, although Berlin is beautiful. I was looking at the competitors' EBITDA at roundabout 615 million and their market cap at 24 billion. When do you expect, we, because I'm an investor, we'll get to a similar ratio, pushing our market capital roundabout 2 billion?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [56]

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I can take on that. So I do think that the Match Group has a really high multiple, especially because they own Tinder and that's delivering really good growth results. So I think that the difference in top line growth profile affects that multiple. So we need to be able to show not only bottom line growth but also top line growth eventually. For the next 12 to 18 months, we really want to focus on profitability. So our first target is to get the margins and profitability up, and then after that, start having substantial growth initiatives again to accelerate the top line. So I think the Match multiple is affected a bit by that high growth of Tinder. And if you look at the Match Group outside of Tinder, there hasn't been much change since the actually IPO. All of the growth, everything, came through Tinder and that business went from $2 billion, $3 billion to $22 billion. So a lot of that value creation was through Tinder.

However, our current multiple is substantially lower even than that when you exclude the Tinder effects. And I think that as I said on the earnings call is that we are currently suffering from a short-term pressure on selling volume. So there's a lot of shareholders from Affinitas and Zoosk that after 10 years or 11 years having invested and have made substantial profits on these investments, they're looking for liquidity. So we have seen an increase in trading volume and the share price pressure when the lot have expired and the Zoosk shareholders got their shares. And therefore, we think that an imbalance between supply and demand at the moment is pushing our multiple down. And once that clears, we should be looking at a different multiple. Right now, I'd say we're trading below 6x 2020 guidance for EBITDA. And historically, before this selling pressure, we used to trade usually at around 10, 11. So that has been part of the explanation why our multiple is lower. And it will eventually, I think, correct itself.

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Unidentified Participant, [57]

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Okay. Obviously, I congratulate the Affinitas and Zoosk individuals. Sadly, I'm a Spark individual, so I'm suffering a little bit. Listen, come the 31st of October, the U.K. may well need all the dates they can get. Can you help us out there, please?

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Robert O'Hare;Chief Financial Officer, [58]

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U.K. has been a core market for the Affinitas brand for a long time, so it's definitely an important market for us. We wish them the best.

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Unidentified Participant, [59]

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It's other nations we need to -- it's other nations we wish to date with.

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Robert O'Hare;Chief Financial Officer, [60]

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Yes. Okay. We'll have the U.K. fill out a profile, and we're happy to add them as subscriber.

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Operator [61]

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Our next question is from [Jim Cran] with [Moonbridge].

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Unidentified Analyst, [62]

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I'm wondering how much you're currently spending on R&D of the loveOS? It will go away once it's completed and rolled out and all the platforms are on it. And also how much cost saving you'll have by reducing all the other operating systems?

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Robert O'Hare;Chief Financial Officer, [63]

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Yes. So on the loveOS spend, it's been on average kind of EUR 2 million to EUR 3 million per year. And really that spend is comprised of capitalized work, right? So it's work from employees that are building features within loveOS that we're then able to capitalize as an asset. And so once the loveOS work is complete, we may choose to reallocate that team to focus on different features or different products or different brands. So we haven't necessarily signed up for cost savings once loveOS is complete, but that's something we'll evaluate when we get more sites rolled onto the platform.

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Unidentified Analyst, [64]

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And then how much cost saves will you have on reducing the other platforms?

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Jeronimo Folgueira, Spark Networks SE - MD, CEO & Director [65]

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So the question ultimately will be what -- whether we want to reduce the overall head count or keep that head count working on loveOS to make more features and more products faster. So currently, I think after the synergies of Zoosk, we are going to have a tech team of close to 80 people, and that's currently supporting 5 platforms. Then, we haven't yet decided whether once everything is in a single platform, we will have 80 people working on that platform to make substantial progress or we're going to shrink that team to a lower amount of people to support a single platform.

Of course, the more people you have, the more products you can do. So ultimately, it will be about ROI, will that additional head count deliver value or it's actually better to cut that cost. Generally, we believe that we have really good engineers. You will usually be able to achieve a good ROI by having them working on new features and accelerating the product development.

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Operator [66]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.