Description
Over the last three years the enterprise value for Spark has fallen just under 75% ($7 to $3.00, plus share ct was reduced from 34mn to 20mn). One would like guess the paid dating business is in decline and by looking at Spark's results that would appear to be the case. However, 90% of the loss in subscribers over the last three years has come from an intentional run off of a General Markets segment and a brand called AmericanSingles.com. While the rest of the business has declined modestly, the valuation has imploded (from buybacks/price decline). We believe the contraction in Spark's subscribers is nearly complete and the company should begin to start to show growth in 2010 which we believe could lead to the stock valued in the $6-7 range (10x our 2010 fcf estimate on ev basis). We believe there is a well defined niche for paid subscription based dating sites for serious daters such as Match.com, eHarmony, and Yahoo Personals. Paid online dating industry is a $1.2bn market with consistent +/-20% operating margins from what we can find. Over the last 4 years Spark has generated $45mn in free cash flow, repurchased $23mn and $20mn worth of stock in 2007 & 2008, with an EV of $55mn.
Why Spark is cheap:
a) Subscribers have fallen over the last 3 years from 230K to 165K (The vast majority has come from an intentional run off of General Markets -62K subscribers) b) investor frustration at the inability to isolate JDate's value which we believe is substantially higher than what is reflected in the share price (NY Times article rumored bids from Match/Yahoo/eHarmony of up to $9.25 for Spark in Jan 2008) c) tough micro cap market for underfollowed, no coverage, and non-promotional management teams d) repurchased 34% of the company at $4.05 then stopped (as it would push GHP over 50% and impair NOL's) e) built a "platform" for growth whereby revenue per emp is $250K vs. $700K Meetic, PeopleMedia $1.3mn, Udate.com $1mn, industry avg is about $1mn in revenue per empl. Spark is not quite an apples to apples comp as they own a small offline speed dating company). g) Over the last few years JDate was negatively impacted due to: cutting marketing 50%, +14% price hike, and the obvious recession in 2008/2009.
Why we like Spark:
Spark should become a growth story going forward. Yes you read that right. Subscribers in their big brands are starting to grow with Jewish +4% qtr/qtr, +2% for Other Affinity, while their smallest segment General Markets (6% of subs) which is in runoff was down -20% (last week the company announced merging Date.ca and AmericanSingles.com into a new brand Spark.com, who knows what the impact will be). We think comps should now be in position to show yr/yr growth in subs going into 2010.
According to the CEO paraphrasing certain brands (inside Other affinity segment) have grown substantially...while others they are not being marketed and are declining..but the ones that are growing are approaching key inflection points in critical mass. To support this claim FWIW we recently found that, ChristianMingle was ranked #1 site for Christian Dating while BlackSingles.com was rated #2 in October & November 2009 according to Hitwise. Other sites we think the company is focused on Moretolove.com, Singleseniorsmeet.com, and Singleparentsmingle.com. Affinity brands have been one area of growth in the paid online dating industry. People Media's CEO said unique users grew 50% yr/yr in April 2009 (it's the only metric he gave in this interview: http://www.onlinepersonalswatch.com/news/2009/07/josh-meyers-ceo-of-peoplemedia.html)
Eventually there will be a very good argument for IACI's Match.com to buy Spark to merge into their subsidiary People Media which would be a dominate player in Affinity dating (co's are #1 and #2 in several categories now).
Great Hill Partners invested $47mn into Spark for a 33% stake in Dec 2005 and June 2006. In 2007 and 2008 Spark repurchased 34% of the outstanding shares at $4.05 per share and today GHP owns just under 45% of the company. GHP has a strong track record of success based on building growth co's (from what I can tell invested $50mn in IGN and sold to FOX for $550mn 3 years later, September 2009 sold 91% stake in Buscape for $374mn, and GHP doubled AUM in Feb 2009 to $3bn). It appears GHP is highly active in working with management on capital allocation/strategy.
Attractive M&A opportunities:there are literally close to 1000 small mom and pop brands ignored by other large competitors that could make attractive acquisition candidates. M&A in online dating has been successful, it is a business of scale. Match.com has acquired Udate in 2003, merged Match Europe with Meetic in June 2009, and acquired People Media in July 2009. M&A works well in this industry as: very scalable business with typical $1mn in revenue per employee, tons of backend synergies customer support, IT, accounting, etc, and significant economies of scale in marketing (a heavy direct marketing business).
Spark has an experienced 5 man board that has sold over $1bn in Internet co's: former CEO of Weddingchannel.com (sold to KNOT for $80mn), former CEO of Ancestry.com (ACOM $600mn market cap), former President of Ticketmaster, former CEO of barnesandnoble.com, GHP success include the sale IGN (online video game reviews and movie reveiws) ($550mn) and Buscape (largest online comparison shopping business in Brazil) for $391mn ... management is very focused on driving shareholder value and not a lot of promotion or spin with this company.
Why online dating is a great business:
Customers supply the inventory (pictures of themselves)
Pay monthly subscription upfront (DSO's 8)
Online subscription dating industry averages 20% operating margins (Match, Meetic, Spark)
Subscription based dating is an attractive oligopoly: Top 5 control 80% of the market, generate $1.2bn in revenue with industry profits of $240mn+ annually.
Attractive value proposition avg sub pays $27.50 for JDate and $15 for other affinity
100mn singles in US (short cycle, high churn, very profitable business)
Consumer behavior: many people subscribe to "yellow pages" of dating Match.com or eHarmony.com AND with something to their particular affinity. This was hard to find but the typical monthly churn rate of various paid subscription sites ranges from 25-35% on a monthly basis. Again this is a very large constantly churning market of 100 million daters that should generate about $1.2 billion in subscription fees.
What makes JDate attractive
80% come to the site organically (word of mouth referrals and high winback rates)
spends only 33% of the industry avg in marketing (6-7% vs. 20%+)
13 years in business.... it dominates the Jewish dating market in major metropolitan cities in US.
1/3 of members make over $100K, 2/3 make over $55K
45% of graduate degrees
94% of subscribers have college degrees
55% women 45% men
90-93% contribution margins = revenue less marketing
Jdate outstanding franchise
A) As a percent of revenue JDate cut its marketing budget 50% from 2005 levels
B) announced a price hike of 14% in 2007, held the price hike more than half way through 2008
C) Many JDate subs were affected by the layoffs at Citibank, Lehman, and rest of financial services sector in addtion to overall economy
Given the above factors it is not entirely surprising given the above drivers that JDate memebership base shrunk over the last year or so.
I would largely agree with Skimmer610 valuation from Nov 2007, major difference is that Jewish Subs are down about 8% and Spark is investing more aggressively in other Affinity brands in 2009 than in 2007 which is depressing the overall business profitability. Skimmer610 valuation for Jewish Networks was between $161-181mn which would the mid point would be $7.35 a share today. Subscribers are down 8%, so a discount is warranted.
In looking at a number of other small cap Internet brands such as Ancestry.com (ACOM), Health Grades (HGRD), and Meetic (Meet) the group trades right around 12x EV/EBITDA.
A couple other small assets that Spark owns: domain names relationships.com/engage.com/date.co.uk/date.ca/cupid.co.il/americansingles.com, a social match making site kizmeet.com, an offline speed dating business (check out for details hurrydate.com), and a title to a $1.7mn house in Seattle from a law suit.
1) Continue to invest in Jewish Networks: This business has stabilized and the site was redesigned in July 2009
2) Increase Marketing spend and increase scale
3) Pursue new advertising revenue streams: Spark’s websites generate 200-300 million monthly page views a month
4) Continue cost reductions:
5) Prudent capital allocation: returned a $1.15 and $1 per share to shareholders through share repurchases in 2007 and 2008
Downside should be very well protected: Fundamentals should improve. However, if nothing really changes over the next year: Spark likely ends 2010 with likely .90-$1 in cash per share, EV would around $35mn and business is trading at around 4x CF.
Disclosure: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell shares at any time without updating the borad.
Catalysts:
Inflection point: where subscribers start to grow after 3 years of declines. AmericanSingles runoff from 40% to 6% of total subs, Jewish subs grew 4% qtr/qtr while other affinity subs grew 2%.
Develops leadership position in other niche markets: Hitwise recently rated LOV brands ChristianMingle.com #1 in and BlackSingles.com #2 in their respective categories for Oct/Nov 09. We think this might support mgt assertion that certain brands they are investing in the other affinity segment are growing substantially.
Advertising opportunity with subscribers viewing between 200-300 million monthly page views.
Great business: through numbers nearly 20% ebitda margins, 20% ROIC and cheap 6x depressed cash flow
Comps are valued at 12x EBITDA vs. around 4x for Spark. JDate is a top notch brand.
New direct comps to benchmark Sparks valuation: FriendFinder IPO shortly, Yahoo Personals is sold (alledgedly for sale) or even an eHarmony IPO in 2010 would not be surprising
Catalyst
see above