Match Group Inc - New (MTCH) — Q1 2017 Earnings Call Transcript

Thank you, operator, and good morning, everyone. I am joined on the call by Match Group Chairman and CEO, Greg Blatt; and Chief Financial Officer, Gary Swidler. Greg and Gary will be reviewing the investor presentation that has been posted to the IR section of our website and then we will open it up for questions. I'd also like to remind everyone that during this call we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate, or similar statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed here today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. Now I'll turn the call over to Greg.

Hey, everybody. Good morning. Glad that you joined us for our Q1 earnings call. We had a great first quarter and the year is looking very solid. I'll talk about sub growth and product and marketing strategies, and Gary will take you through the financials and our outlook then we will take questions. Overall PMC growth was very strong, driven by international PMC growth which was really excellent. Tinder drives more of that growth rate because it's larger on a relative basis in North America, Meetic doing really well, POF and OkC both are starting to contribute more internationally and Pairs in Japan continues to prove to be one of our smarter acquisitions in a long, long time. As we said on the last call, the end of 2016 and start of 2017 had sort of a weird funk to them in North America, sort of across the board in our businesses for no clear reasons. We thought maybe the election, but we didn't really know. Regardless, it finally picked up again at the beginning of March with that rebound continuing through today. This initial slowness combined with some marketing spend shifts to Q2 impacted North America PMC a bit, but nonetheless we are generally on track. We had strong growth from Tinder and POF, Match and OkC were generally consistent with what we expected. And of course, the biggest impact on the quarter was from affinity and its continued control run-off costing us a large chunk of PMC on a year-over-year basis. Again, that loss of PMC is unprofitable PMC. So it doesn't really affect our underlying economics, but it does drive down the year-over-year sub comps and has an impact on year-over-year revenue. We expect that negative affinity comp to persist for several quarters. Now let's dig into each of our individual businesses a bit. Slide 5, Tinder obviously had great PMC growth in Q1 and it's starting to slow just like the bunch of our other businesses, but then picked up again in March. We launched SuperLike to non-subscribers and continue to drive up overall revenue through optimizing between PMC and à la carte. Again, most of the things that we do through PMC, we can also do through à la carte; in fact many of them we do on a hyper basis with the subscription you get some part of the à la carte usage. So we are sort of constantly optimizing there and toggling, and focus primarily on revenue growth, not necessarily PMC growth or à la carte growth in isolation, but optimizing the two. It's pretty amazing that we are now number two in app store revenue for non-games globally behind only Netflix. We are certainly always confident that we will be able to build a great subscription business on the Tinder products, but it's obviously incredibly gratifying to see it come through the way it has. It's an incredible business with great monetization characteristics. We have also implemented the Facebook Ad engine we talked about last quarter. We use it to fill access inventory beyond our direct efforts. On testing, the rate was somewhat impacted by the tech debt related feature freeze that we talked about last quarter and we will talk about a little bit more later, but it's starting now. We should have a good sense of where we're going to be on that front next quarter. Turning to Slide 6, on the Tinder product side there continues to be a lot going on. Two very long-running projects; SMS Authentication and Tinder Online are both now in test, it's early, but the preliminary results are promising. It looks like we should see a user bump, especially internationally, but it's also too early and noisy to quantify. Additionally, on the online business, we will be watching online payment sometime in Q3. We certainly never get the same sort of mix of payments online as we have with our other businesses, but over time we do expect to be able to move a portion of our users to pay us outside the app store. That will be a nice bump to margins, but we will play out over time. Again, hard to predict the exact level of impact at this point, but once we've launched it we will be working to optimize that part of the business. We also finally finished cleaning up our tech debt in both our Android and iOS app. This is a big multi-month project that occupied a lot of our tech resources. Thankfully, it's already paying nice dividends in terms of reduced crash rates and generally higher performance. Probably most importantly, it really should set a solid foundation for easy integration on products going forward, easier code to write, fewer bugs, and just faster iteration. Finally, now that we're finished with our feature freeze, we've got a number of new projects in the pipeline that include changing navigation, improving our recommendation engine in part through the use of some very cool AI from our dedicated and top-notch data science team at Tinder. We are adding new revenue features and a host of other cool stuff; I can't really talk about yet. But I said last time, Tinder will look and feel different to our users by the end of this year and we are well on track to bring that around. A ton of energy is going into increasing Tinder's vibrancy, creating new features and experiences to enhance our relationship with our users — all key to driving our continued growth.

Thanks Greg. Now let's turn to the financial review and outlook for our business. One note: everything I discussed excludes the Princeton Review because that sale closed at the end of March and we are now including discontinued operations for all periods. On Slide 12, you can see that we experience strong revenue, operating income, and EBITDA growth in Q1 2017. As Greg mentioned, we actually started a little weaker than is typical, which caused us to be a little conservative in our outlook for the quarter, but March and April trends compared to January and February look much better. For Q1, total revenue was $299 million, up 15% driven by 16% PMC growth and steady ARPU. FX impact caused a loss of $3.5 million in the quarter or one point of growth. Revenue benefited from increased year-over-year marketing spend in Q4 2016, which manifested itself in higher revenue in Q1 2017. Typically, year-over-year changes in marketing spend have the largest impact on subsequent quarter year-over-year revenue comparisons. International direct revenue grew 30% driven by 33% PMC growth. International benefits from our fast-growing Tinder business, which represents a greater portion of revenue. North American direct revenue grew 8% year-over-year with Tinder and POF driving strong growth, but the intentional right-sizing of affinity brands was a significant headwind. We are optimizing the affinity brands for long-term profitability. As we cut unprofitable marketing spend, we reduce subscribers and revenues, but don't really affect profit. We should be in a position to start growing profitability again in affinity once we right-size that business. We're down just slightly on ad revenue in the quarter as we continue to work to offset the reduction in impressions caused by the shift to mobile at our formerly desktop brands. Please note that our results do not yet show the benefit of Tinder's agreement with Facebook's Audience Network, which began testing in April. We had 72% operating income and 28% adjusted EBITDA growth in Q1. The quarter benefited from some cost controls, but also a decline in year-over-year marketing driven primarily by significant decreases at affinity as well as some pushing of marketing spend from Q1 into Q2. Operating costs and expenses were 80% of revenue compared to 87% in Q1 2016. Operating income also benefited year-over-year from a $6.3 million decrease in amortization of intangibles related to the PlentyOfFish acquisition and a $1.9 million reduction in expense related to contingent consideration in connection with a previous acquisition. On Slide 13, you can see our ARPU, which has continued to be very steady. Total ARPU grew by $0.002 year-over-year, but rounded up, it looks like a $0.01 change. The six largest businesses in our portfolio: Tinder, Match, OkCupid, Meetic, POF, and Match Affinity, all showed flat or higher ARPU year-over-year in Q1 on a constant currency basis. North American ARPU is up by $0.01 for the quarter, signaling better monetization in most of our brands, partly offset by the mix shift to lower-priced brands. International ARPU was down 2% due to FX impacts. The FX impacts in the quarter amounted to $1.07. International ARPU for the quarter was up 7 times of $0.001 on a constant currency basis. Overall ARPU increased approximately 1% or $0.005 on a constant currency basis. Tinder's ARPU in Q1 continued to benefit from strong à la carte revenue from subscribers more than offsetting the shift to lower ARPU international markets. Overall ARPU will continue to be slightly impacted by our gradual portfolio mix to lower ARPU brands and the faster PMC growth we are seeing in international markets. Turning to Slide 14, we had $84 million in free cash flow in Q1, and we continue to grow cash balances. We recognize meaningful proceeds from the sale of The Princeton Review, just under $100 million, and so we now have $436 million in cash on hand, $260 million of which is held domestically. As you can see on the right side of this slide, we've been delivering quickly. We're now at 1.8 times net leverage and 2.8 times gross leverage, below our three times target. For some time we've been saying that we would use our cash to deleverage or for opportunistic M&A; that remains the case. But today, we're also announcing that our board has authorized us to repurchase up to 6 million shares of our stock. We think this is a great additional capital management tool for us to have. We are very mindful that our public flow is quite constrained and we still expect flow to increase over the course of 2017, but our stock has tended to fluctuate significantly, and the buyback authorization enables us to take action if the circumstances warrant. This is not a buyback authorization; we plan to go into the market aggressively. It’s possible we don't use it at all, but we do think, given our cash flow characteristics, it's a good option to have and enables us to act opportunistically to drive longer-term shareholder value. The buyback authorization is similar in size to the proceeds from the Princeton Review sale, so you can think of it as potentially returning gross proceeds to our shareholders, so again, how much of this will end up using is uncertain. Given our strong free cash flow generation and our strong balance sheet, we're confident in our ability to consummate a buyback, continue to deleverage, and execute compelling M&A transactions should they present themselves. Turning to the next Slide 15, this lays out our financial outlook. At this time, we are not changing our full-year 2017 outlook. We're on track to be within the region we presented, and it's only Q1, so we're not going to tinker at this point. We've always said that marketing spend can vary easily quarter-to-quarter, which can impact any individual quarter but not EBITDA over the course of an entire year. That's the case here. Altogether, our first half of the year will be very close to what we expected coming into the year. While marketing spend was down significantly in our non-Tinder businesses in Q1, we expect it to ramp on a year-over-year basis during the balance of 2017. We expect marketing spend to be up meaningfully year-over-year by Q4 2017. On our last call, I noted that we expect revenue momentum to build throughout the year as Tinder's product momentum accelerates from a purposely slower first half, which has been focused to a large extent on tech equipment. We see the expected improvements in our non-affinity businesses driven by revitalized product and increased marketing spend, as Greg spoke about. That remains the case. Additionally, ad revenue should ramp as the year progresses. Tinder's increase in average PMC in Q1 was impacted by the somewhat slow start to the year that Greg mentioned in his remarks, but this has picked up nicely beginning in March. We continue to expect Tinder's Q2 increase in average PMC to be moderately lower than Q1 given normal seasonality with an accelerating again in the back half of the year as we roll out some significant new monetization initiatives. As we had said previously, we are focused on overall revenue growth at Tinder, not specifically subscription revenue and are targeting between subscriber growth and à la carte revenue. À la carte revenue is increasingly contributing to Tinder's performance. Our Q2 revenue reflects the impact of the decline in Q1 marketing spend. The ramp in marketing spend at Tinder and non-affinity brands in Q2 will impact our Q2 EBITDA. All in all, we had a strong Q1 financially, we're executing on our 2017 priorities, and we are reiterating the full-year outlook we provided on our last call. With that, let's open the lines to questions.

Thanks, guys. Artificial intelligence seems like an interesting way to innovate some of your products; we saw a checkup launch on the Meetic platform. Can you talk maybe about avenues in which you could utilize AI in the future and how you see it playing out for your other different brands?

Yes. It's going to be very big. Tinder alone, we've built an unbelievable dedicated data science team run by Professor Lou, who took over from McGill; all they do is work on AI. It's most simple form, right? It's going to drive amazing enhancements to recommendation engines. I mean the technology they are developing — within a few swipes they can start to tell exactly what you want, who you're interested in, etc. And the early prototypes are very exciting. They are also going to be able to suggest where you should go on a date, make proposals about sort of common interests and common suggestions, and it's really exciting. There are also various things we're playing with in terms of augmented reality and communication through augmented reality that sort of allows for facial gestures and other forms of non-verbal communication to pick up signals and send visuals back and forth. It's really amazing — it's amazing what we're starting to be able to do. Chatbots, we take this another example of it. So I think, I mean everywhere AI is just starting to scratch the surface, but we're making a big investment in it. It's not quite rolled out in our recommendation engine yet, but will be soon, and we really expect it to just build from there. So we think it's one of several exciting technology vectors that are starting to really transform the category — location, video, AI; I think these are all very big, and we are making investments across the board.

Hey, good morning everyone. Gary, as I sit here and look at I guess Slide 13 with ARPU trends here, I think back — it was always part of our thesis at least that this bigger trend down over time. Is that still the case? I mean did it appear that maybe over the long-term, especially Tinder, is performing above your expectations? I mean you said in your prepared remarks that you really expected it to be a platform that monetizes well. But I'm just curious more than just with the incremental product development you're doing on the smaller things. Is there a big picture change that's happening here? And then secondly just specifically on Tinder Social perhaps just a little bit of an update on what you're seeing for engagement there and you mentioned PlentyOfFish, the higher rate of conversations than other apps — is that an opportunity for more social opportunities there? Thanks.

Thank you, Dan. On the ARPU, I think I do expect it over time to decline, although I think modestly. What has happened over the last year and a half is we’ve really been able to sustain Tinder ARPU through the growth in all of our revenue to subscribers. That will continue to some extent, but I do think the exceptional growth we're seeing in the rest of the world PMC at Tinder will start to overwhelm that. Pricing is different between North America, Western Europe, and the rest of the world, and while PMC growth is strong everywhere, surprisingly, the rest of the world is bigger than North America — than Western Europe. And we're seeing proportional growth there. So I think that it hasn't declined as fast as we expected, certainly, and we've adjusted our views on the rate of mix shift and our ability to offset it through these other means. But I do think in the long-term, it will decline modestly. The POF question was — on Tinder social, I think we want to Tinder social in the form that we did is not hugely impactful. I think that we continue to run it and I think we are pursuing a number of social features that don't run through Tinder social per se. So we tested something called Tinder tonight. We're also working on a number of new features, and the goal is still to engage people beyond one-to-one. Tinder social itself was not hugely impactful. In terms of POF, I think the higher conversation rate is unique to POF. I think because it is more social in terms of people communicating more, I don't know that it necessarily leads to social dynamics the way we're pursuing in Tinder, and to go by the Tinder, I think it's a different audience; it’s a different case, and I think Tinder is the place where you will see the most social dynamics in terms of groups, events, all that sort of things versus some of our other properties.

Good morning. Two if I could. First of all, going back to the affinity, I wonder if you could give us a little more color on the run-off you put in the 120K. Can you give us a rough split, go split of the 120K, and then can you help us at all size the run-off going forward and when we might start lapping that? And then secondly on Match, you talked about the product-oriented marketing plan, Greg, you — can the first time you guys have gone down this path. And you said it's going to lead to higher marketing spend behind Match. I just want to make sure that all of that increase in marketing spend is already fully contemplated in your guidance. Thanks so much.

Yes, I'll take the second one first, the answer is yes. We said that our marketing spend is somewhat variable through the course of the year. We certainly don't think that margins will come down as a result of the marketing spend, but it shifts around between different businesses. We certainly have always contemplated increasing the Match marketing spend throughout the year. As Gary said, we were down in Q1 year-over-year; marketing spend is something we expect to be up meaningfully by Q4 year-over-year. So the Match marketing spend is relative to the week’s expansion that we talked about in terms of the new products — all of that is built into our guidance.

So Peter, the run-off of affinity and the run-off of the street brand are two slightly different things. I just want to make sure everybody is clear on this. We have some non-strategic brands in our portfolio that we acquired that we are intentionally running down. These are portfolio acquisitions that we acquired cheaply, and these were $7 million acquisitions that pick up and see experiments, etc., but have meaningful PMC. So those have been running down for several quarters, but they remain as they continue to run down a headwind on North American PMC numbers. And it is a relative piece, but when you look at the total of 120,000 PMC, the bulk of that is caused by affinity, which is this step function run down that we’re intentionally doing as we focus on higher ROI targets for our affinity marketing spend. That impact is going to be prevalent in this quarter and it's going to last for another two or three quarters as that business gets right-sized, and then the net impact will start to lessen. So there we're going to see it in our performance and our metrics for the next couple of quarters and then that will be less of a factor.

Thanks. Two questions, so one, can you comment or give color on MAU to PMC conversion? Just any color would be helpful? And then second, the magnitude of the Tinder à la carte and advertising. When we think about getting to the fourth quarter of this year or early next year, maybe help us understand as you're thinking about it how big that could be relative? Thank you.

So MAU to PMC conversion is continuing to drop as I said; we don't get five consecutive quarters in all our formally — you know all are more established brands that conversion going up is obviously positive. On Tinder, which is sort of excluded from that group, again conversion continues to be strong. Gary said we're going to launch some new significant monetization feature in Q3; we haven’t really launched anything this significant while that will continue to drive up conversions. So conversion overall across the portfolio is definitely going up. Gary, do you want to take that question?

On the outside, we talked about — first of all we don't feel the impact of the Facebook Ad Network program yet in our results, but as that continues to be implemented, we will see if we get revenue from that. And the ad revenue is scaling in the back half of the year, and we talked about it being a little bit faster than our revenue growth on the outside. So this quarter is basically just downside on that, but we should see improvement in the direct revenue line as the year progresses.

And then on à la carte, again I think the majority of our à la carte revenue comes from subscribers and that is built into our ARPU line. So I think that it's all obviously within the guidance. And I think that as Gary said, ARPU is holding steady at Tinder much as a result of those increases in à la carte. We are starting to grow à la carte outside of PMC, which is not included in the ARPU number and is still relatively small. And I think it doesn’t have a positive impact, but it's not continent moving by any stretch at this point.

Thanks for taking the questions. Maybe one for Greg, just wanted to understand all that product detail that was really great, I think it's that question probably aren’t in terms of how that product innovation works through the conversion as we move through 2017 and 2018. So maybe just a color of product innovation and how it plays out in the marketplace; I think any color you could give there would be really helpful.

To your point on product, I think there tend to be, although not always, a bucket of product work to drive conversion and a separate bucket of product work that drives usage for marketing users. Not always different, but they're usually different. And clearly, as we develop products in the non-conversion bucket, we are very mindful not to trip up conversion bucket. When you look at something like misconnections, which drives the increased communication, in the product like Match increased communication drives increased conversion. There are sort of very aligned. SuperLike at Tinder was an example of something that was both. But on a business like POF for instance, where it's free to communicate, driving out conversation doesn’t necessarily impact conversion one way or the other; it just drives additional usage. So I think the way to think about it is there was always conversion work being done in the background that you don't necessarily see or hear about it from us, but you are going to hear about it sort of out there. As I said, our focus has not been there over the last three years as we've really focused on trying to create a functional mobile product that drives monetization the way we need to and now we're really focused on that sort of excitement factor, the differentiation factor. We don't expect it to negatively impact conversion, and in fact we expect that. In totality we will be driving conversion up throughout the year even as we drive those initiatives.

Thanks for taking the question. Two things, first Greg just wanted to ask on Tinder and just how you're thinking about kind of learning so far on experimenting with products inside and then outside of the PMC paywall. SuperLikes you had originally kind of the inside for PMCs and then moved out. And then when you talk about the significant monetization features in Q3, should we assume that that's really just for PMC? And then secondly, if you could just comment a little bit more on the timing and kind of a trend that you saw in Q1 — the weaker January, February and into the better March — the degree to which that's continuing into Q2 and how to kind of think about that relative to your comments on a seasonally slower quarter as well? Thanks.

Sure. In terms of — if I understood your first question, look our philosophy on our soft paywall businesses is generally that we offer features behind the paywall that we couldn't really offer to everybody, meaning if we have a feature that’s going to make everybody's experience better, we will give it to everybody. But there are some features that if you gave everybody would hurt the ecosystem, which you can give to a smaller number of people. For instance, Boost is an example. Boost is a feature where it allows you to sort of move yourself ahead in other people's recommendation engines, or by definition you couldn't give that to everybody because it's a relative comparative advantage, so you charge for it; same thing with SuperLike. The whole point is to create scarcity and then you'll allow people to buy beyond that scarcity. So that's the way we sort of think about features that are paid and think about features that are unpaid. In terms of new monetization feature, we are rolling out roughly as I said, we’re somewhat agnostic about which we exactly how we make money in this area. And I think that this feature in particular may be something of a hybrid the way some or other features have been. We're actually experimenting with a number of different ways to do that. We're confident to drive monetization meaningfully and certainly PMC will be a part of that; it may or may not be the only part of that. It was just weird. I mean I've been doing this for a long time; sort of in November things sort of just became a little muted. It stayed muted in December, it stayed muted in January. I think we talked February 1 and I think we said it was sort of a weird start to the year, continued into February. It absolutely turned in March, has continued in April; it's sort of things are back to the world that we know better. I have no expertise or ability to tell you exactly what was going on; the best thing we could point to was that it was sort of the post-election was weird and there was a lot of weirdness, but we are not pundits. I don't really know exactly what happened, but it was not brand specific; it was sort of across the board. So that's really all we know.

Yes, probably quickly, Gary, you mentioned that you would see flow increase over the year even as you're operating a $6 million buyback, wondering where the shares are likely to come from? And also has there been any update or any more talks from IAC with their plans on the Match shares?

On the second question, the answer is, it's not something we deal with. I see I know how investor call; yes I think we get investor call tomorrow. They're the shareholders; they may make those decisions. So no question should be directed to them. In terms of share counts, we've got a lot of security. I think we've been public now for will be going on two years; we expect there to be exercised over time. There could be M&A activity. So it's not — we’re not thinking you're going and doing some big secondary operating in two months, but just naturally we expect flow to continue to increase and we don't expect our buyback activity to be greater than that natural increase in flow.