Description

Spark Networks (“LOV”), is a compelling long at current prices, and has 50-100% upside over the upcoming 6-18 months and potentially material appreciation thereafter. There are a number of upcoming catalysts that should propel the stock higher and the downside should be fairly contained at current levels. Based on new Management’s recent significantly lowered guidance for 2020, the company trades at a 19.2% FCF yield to the equity and a 10.3% FCF yield to the Enterprise. 

Over the coming year we foresee a deleveraging cycle, a debt refinancing, a much improved investor relations effort, and a shift toward quarterly reporting (from current bi-annual reporting). The stock was unfairly pummeled during the COVID scare and has not yet rebounded, possibly due to management’s delaying their 2H 2019 financials for 45 days ( suggesting they should file financials within the week). The business has been seeing strong engagement of late, management in a call this week sounded confident of their prospects going forward, and the upcoming filing should enable the stock to rebound closer to its pre-COVID level which is 50% higher than current prices. 

Description: LOV provides online personals services. The Company offers web sites that enable adults to meet online, participate in a community, and form relationships. LOV also provides onsite email centers, real-time chat rooms, instant messaging services, and offline singles events. LOV serves customers worldwide.

The company is one of the largest players in the global online dating industry, controlling six major brands including, ZOOSK, Christian Mingle, eDarling, Elite Singles, Jdate, and Silver Singles. The underlying business model relies on a subscription service, with the company boasting 1mm paying subscribers with an average ARPU of €16.37. 

In July of 2019 LOV closed on its merger with ZOOSK, one of the top consolidated online dating brands globally. The company incurred significant, high cost debt (L+800) to fund the acquisition with the combined company expected to increase LOV's pre-merger revenues by 2x and EBITDA by 4x. While revenue and EBITDA forecasts have been reduced by the new CEO, the company remains extremely undervalued with significant levers available for new management to drive better results. 

LOV has executed on a series of acquisitions over many years culminating in the ZOOSK aquisition. Consolidation has long been a trend in the industry because brands can be acquired with significant cost synergies while marketing synergies can also be realized. Match Group (MTCH), the largest player in the space and owner of Tinder, has likewise grown by acquisition over the years. We expect LOV management to continue to drive cost synergies throughout the remainder of 2020. 

LOV differentiates itself as a site and community for people looking for long term relationships as opposed to hookups. The company in general caters to an older, more steady demographic and has seen some of its best growth in the 40-50 year old age category. While churn in the online dating space is fairly high, most customers eventually migrate back. Older singles tend to be more loyal to online dating brands and hence have higher lifetime values. The subscription model is effectively recurring revenue, even if the stock currently gets no valution credit for this reality. 

A big debate around LOV is whether its business is a melting ice cube. Management a few years ago stopped providing brand specific subscription and ARPU data (not our favorite sign) and instead segmented the data geography. The company currently generates about 2/3rd of its revenue in the US and 1/3rd in Europe. Due to its origins the company is domiciled in Germany, trades on the NYSE via ADRs, while the CEO resides in the US. Management claims the business is growing driven by its best North American based brands like Elite Singles and Jdate. We see the business as mostly mature, but capable of some growth with renewed marketing focus, albeit we the stock remains undervalued even if management fails to revive growth.

LOV has been written up previously on VIC, a good synopsis of pre-Zoosk LOV, as well as an industry discussion and a thoughtful, extensive Q&A thread, can be found here: https://www.valueinvestorsclub.com/idea/SPARK_NETWORKS_SE/5567634453#description 

The nature of the company’s repeated acquisitions and particularly that of ZOOSK, combined with their segment reporting, makes it more difficult to assess the health of their underlying brands, albeit Europe appears fairly mature, while some brands in the US particularly those that cater to older singles are still growing. We expect continued M&A in the space and could imagine either a future acquisition by the company (although not in the next 12 months) or an eventual take-out or take private. 

LOV remains significantly undervalued realtive to its publicly traded peers as well as to recent M&A transactions in the space:

2020 EV/EBITDA

MEET 12.7x

MTCH 32.6x

LOV    5.4x

Both MEET and MTCH have rebounded to near or above their pre-COVID levels and we expect a similar reaction from LOV once they file financials and as they continue their recently initiated re-education efforts with investors. Post the ZOOSK aquisition which transformed the company, previous management did a poor job of communicating and educating investors. Over time we expect LOV to gravitate closer to an 8-10x EV/EBITDA multiple. At 8x 2021E EBITDA the stock would trade at around $9 or 150% higher than current levels.

* call out to mgmt to assess LT tax situation

** assumes debt refinancing, rate of 6% during 2021

Summary: LOV is a compelling long investment based on its stable business characteristics, cheap valuation, and numerous upcoming catalysts. Management’s IR missteps post the ZOOSK acquisition along with their delaying 2H 2019 financials by 45 days around COVID has created a perfect storm of temporarily negative news and has turned away investors. We expect these issues to get rectified over the coming weeks and months and expect the stock can appreciate smartly. The highly free cash flow generative nature of the business, recurring revenue business model, and cheap valuation provide long term downside protection. 

Risks:

Company is shifting technology ZOOSK’s platform - However this will take two years to complete

Accounting delay could get extended or become something more ominous

Management could fail in their IR reset

Company could struggle to refinance their debt at a lower coupon

New competitors could take share

Multiple waves of COVID could discourage users from online dating

Catalyst

Debt Refinancing 2H 2020 or early 2021

Reengaging in the IR process with investors 

Filing 2019 Year End Financials 

Moving to quarterly from bi-annual financial reporting as of early 2021

Deleveraging

Takeout

Synergies

More effective ad spend

Growing North American brands 

Exceed 2020 guidance as CEO likely kitchen sinked the guidance reduction