Spark Networks: A case study in love for sale
Spark Networks joined the OTC last week with shares listed on the exchange under ticker symbol LOVLY as of Sept. 8. Because it is a new entrant on the OTC, Spark is likely to pop on the radar of microcap investors interested in tech-focused social networking companies.
What’s the Spark story?
Spark operates faith-based dating platforms. Founded in 1997 under original name JDate.com and based in Berlin, today the company employs less than 400 people with offices in New York and Utah. JDate was originally launched to connect Jewish singles. The company has since expanded to 10 dating sites catering to distinct audiences, including Christian Mingle, Silver Singles and Elite Singles.
They’ve been around 26 years, going public in June 2000 on Germany’s Neuer Markt. The company joined the Nasdaq in 2017, though now lists on the OTCQX Best Market.
It’s been a bumpy road across the last half a dozen years.
Gone are those heady days of trading at $12.50 back in 2017. Before being booted off the Nasdaq last week, the stock was selling at about 28 cents in late August. Shares closed at that same price Sept. 8, the company’s first day on the OTC, after some intraday volatility that saw the stock lurch from 15.2 cents to 28.14 cents a share.
Meanwhile, net losses posted for the second quarter were triple the losses Spark Networks reported for the year-ago period. Revenue was down 14% year-over-year. Paid subscriptions fell even further.
Board chair Colleen Birdnow Brown took the reins in July as Interim CEO of Spark Networks, after chief executive Chelsea Grayson stepped down, effective July 7. This followed an internal strategic review.
Grayson continues to serve as a board member and advisor to Spark, the company said in a statement at the time.
Second Quarter 2023 Financial Results
Spark last month said it plans to shift a substantial portion of its operations to one or more third-party managed service providers to reduce costs. It also partnered with a marketing agency to design an integrated marketing plan to drive growth. Outsourcing should be completed by the first quarter of 2024 resulting in “a dramatically reduced employee headcount,” the company said.
- Revenue was $41.2 million, compared to $48 million in the second quarter of 2022.
- Net loss was $26.9 million, compared to $8.8 million in the second quarter of 2022.
- Adjusted EBITDA was $7.2 million, or a 17.5% Adjusted EBITDA margin, compared to $(1.7) million, or a 3.6% Adjusted EBITDA margin, in the second quarter of 2022.
From the Nasdaq to OTC
If you knew nothing else about Spark Networks and just finished reading the company’s announcement about listing on the OTC, you might never know the stock had once traded on the Nasdaq – or what happened. Regulatory filings with the SEC offer a more complete picture of what went down.
On April 12, Spark received a letter from the Nasdaq noting that its stockholders equity had fallen below the $2.5 million minimum for continued listing on the exchange.
As noted in an earlier 10-K filing, the company reported a stockholders’ deficit of approximately $6.8 million. By April 18, the company did not meet the Nasdaq’s alternative compliance standards relating to the market value of listed securities or net income from continuing operations.
Spark also fell out of compliance with a Nasdaq requirement that it maintain a bid price above $1 per share.
Regulatory filings show Spark submitted a plan to regain compliance. The plan was rejected.
On June 21, Nasdaq notified the company that its request for a continued listing was denied. Spark appealed. Within three weeks board chair Birdnow Brown took over as interim CEO.
Nasdaq told Spark on Sept. 6 that it would be delisted, with trading suspended on Sept. 7. The company announced the switch to the OTC later that same day.
In the last 100 Spark Networks trades there were 2.64 million shares bought and 2.33 million sold. Most of the latest transactions have involved insider selling. There can be a variety of reasons for this, but such activity merits close monitoring.
Spark Networks’ chief competitors include Match.com (MTCH), Bumble (BMBL), Tawkify (privately held), QuackQuack.in and Chicken Soup for the Soul Entertainment (CSSEP). There are dozens more.
The online dating industry is saturated with players catering to almost every conceivable form of human interaction. Among the publicly traded companies operating in this space, few of the microcaps have any ongoing analyst coverage.
CNN Business recently cited an unnamed analyst as having a “buy” recommendation on Spark with a target of $1.50, which would represent a 433.05% upside from the last closing price. Equities researchers at StockNews.com initiated coverage on Spark Networks in a note issued to investors on Saturday. The brokerage set a “hold” rating on the stock.
Where’s the love?
Dating apps have seen a falloff in user growth over the last several quarters, stoking investors’ concerns that the honeymoon may be over for the online dating industry, Morgan Stanley reported earlier this year.
Fueling the view that the industry is becoming saturated, mature or over-monetized, the top dating apps reported slowing revenue growth in 2022 (the industry overall reported about $2.6 billion in revenue last year) and tempered guidance for 2023.
For perspective on the market demand for these services, about 32% of the U.S. addressable single population uses online dating, and, of those, slightly more than a quarter pay to access a platform.
The key to growth and profitability, according to Morgan Stanley, will be for online dating platforms to find new ways to monetize services, rather than trying to grow a subscriber base in an already saturated market. Examples include the ability to buy and send flowers, chocolates and other gifts, as well as tiered service layers with additional features available at higher price points.
“A focus on getting users who are already paying to increase their spending could be one tactic toward growth, as analysts believe the top 1% of dating spenders remain heavily undermonetized,” Morgan Stanley reported. “Additionally, apps could target payers who can’t afford monthly subscriptions or other premium features with more a la carte features or weekly subscriptions. Even the holdouts who prefer not to pay at all offer a large revenue opportunity via advertising.”
In other words, investors who only pay attention to online dating user growth may be looking for love in all the wrong places.
“The market too often focuses on just user trends but misses the importance of monetization, which is likely the most important driver of revenue growth going forward,” said Lauren Schenk, Morgan Stanley’s equity analyst covering small and mid-cap internet stocks.
Which way is up?
Through outsourcing plans, Spark appears set on continuing its focus on paid subscriber growth, as subscriptions were down 21% in the second quarter compared to the same period in 2022. The company in a statement has said the priority is to more profitability increase its marketing spend to boost subscriptions.
Whether the company also intends to devote resources to the monetization of add-on services, as Morgan Stanley believes is the future of online dating, Spark Networks has yet to say.