Match Group Inc - New (MTCH) — Q2 2017 Earnings Call Transcript

Thank you, operator, and good morning, everyone. I'm joined by Greg Blatt, Chairman and CEO of Match Group; and Gary Swidler, CFO of Match Group. They will review the Q2 investor presentation that has been posted to the IR section of our website and then open it up for questions. But before we start, I'd 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. Over to you, Greg.

Thanks, Lance. Hey, everybody. Good morning. Glad you could join us for our Q2 earnings call. We had another great quarter, and we're building solid momentum. Before jumping into the quarter though, I'd like to comment briefly on the management changes we announced yesterday. Obviously, Match Group and IAC have been a huge part of my life. I've been here for 14 years. We've done a lot of great things, but it's definitely been a long run. I started talking about succession with Barry and the Match Group board last year, but we wanted to make sure that I handed over the keys at a time when things were running really smoothly here. We've been through eight quarters since going public, and you'll hear in this presentation that things continue to go really well. In particular, I was focused on making sure Tinder was on stable footing. Top line performance had always been strong, but operationally, we were still in a lot of flux. When I took over from Sean last year, we both felt it was really important that we transition the company from a founder-centric startup to a more institutionalized company, dependent on no single person and to do so before looking for the next long-term leader of the company. Accordingly, we continued to build out our resources and empower our teams. Sean's involvement became less and less, and I'm confident we've now accomplished that over the last eight months. It's a different company than it was, with better systems, clearer plans, sounder technologies, and deeper personnel, and I have incredible confidence in its stability and its future. Lots of people were involved in the effort, but a particular shout out to Shar Dubey, who came over from Match Group to act as COO of Tinder during this period. I know what it is to do the weekly commute to L.A., and I appreciate the sacrifices she made to do that. In terms of taking over as Match Group's CEO, Mandy was the obvious choice. She just started running Match U.S. when I joined as CEO in 2009, and we've had a great run of successes together. We've had an amazing partnership ever since. No one has to come in and learn the ropes. She knows it all. She's a fantastic leader and is keeping a great team to make sure the good work continues. She'll be on the call next quarter. I'm happy to answer any questions about all of this, but now I'll turn back to the investor presentation. I'll talk about subscription growth and product and marketing strategy, then Gary will take you through the financials and our outlook, then we'll take questions. Let's jump right to Slide 4. We grew PMC overall 15%, generally consistent with our expectations. International PMC growth continued to be strong. As we said before, Tinder drives more of the growth rate there because it's larger on a relative basis than in North America, and Pairs also continues to be a great driver. Again, a great acquisition we made last year. North America PMC was, as we expected, dragged down again by Affinity and some non-strategic brands. We expect Q3 impact of that to be about the same as Q2 and then to start to improve in Q4 and progress in 2018. Beyond that, we saw increasing momentum through the quarter in North America excluding Tinder and Affinity, with improved year-over-year PMC growth comparisons in Q2 versus Q1, and July was an especially strong month. We've definitely seen a pickup since the slump at the beginning of the year, and things are showing real momentum. So we're feeling really well about the back half of the year. Now let's dig into each of the individual businesses a bit. Tinder PMC growth continues to be great. Q2 PMC growth beat our expectations. It's driven by a number of things: lifts in registrations from our marketing efforts and our product work to expand access to the product. Our tech rebuild is starting to pay off, especially on Android. Additionally, while we didn't have any big monetization features launched, monetization is really driven by a combination of new features and optimization and merchandising improvements of existing features. And we did a lot on that front in Q2. As mentioned, Q2 strength continued through July. In fact, it picked up a bit, which obviously bodes well for the rest of the year. We also just started testing a new Tinder Gold subscription package. It generally includes everything from Tinder Plus as well as a new feature called Likes You, which really enhances the user's experience by letting the user be more targeted in their efforts on Tinder. Similar products to Likes You have been successful on most of our dating products, but as Tinder has done with some of our other monetization features, we take a proven winner from another one of our businesses and then implement it in a uniquely Tinder way. Likes You on Tinder is very well done. We offer Tinder Gold at a premium price to Tinder Plus, which should both drive incremental ARPPU as well as incremental PMC. The test is early. It's only in a few countries, but so far it's very strong. Unfortunately, for a number of reasons, we are late in getting the test started against our schedule, so the global launch is being delayed a bit, which may offset in Q3 any gains we might have seen from its strength, but we'll see. A real shout out here to Brian Norgard, Jeff Morris, Yiqi Meng, and Amarnath Thombre, as well as their teams. It's really one of the most amazing sustained roles of successes on the monetization side that I've ever seen. Really great work by the teams there. We also completed the initial phase of Facebook ad testing. And at this point, we haven't seen any meaningful impacts on retention or engagement. So we're starting to build up our load. We're still going cautiously as the impacts on retention and engagement are our primary objectives here, and that can go long term. So we're going to roll that up slowly, but should continue to track impact over time and it's built into our financials. So we feel really good about the early returns but are going slowly. Turning to Slide 6. When I took over Tinder last year, there were a number of objectives I had for the first half of '17, and I'm glad to say we achieved most of them. One of the most important was to have the persistence and the commitment to complete the rewrites of our two native applications that we commenced at the end of last year. These projects are always hard to do, they take longer than expected and often take you down unexpected and at times treacherous paths. But under the awesome leadership of Maria Zhang and her team, we nailed both the Android and iOS rewrites, and now we're back in full feature production mode, with a stronger foundation and the ability to move faster and with less unpredictability. It's really unlocking a tremendous amount of value, and we have greater confidence in what we execute than ever before. Another prime objective I had during the first six months was to develop a long-term product roadmap really for the first time in the company's history. For a variety of reasons, we've never really had the ability to lay out a plan multiple steps ahead, and now we have, and we're incredibly excited about it. I'm not going to get into specifics of what we're doing, but over the next 12 months, we expect to completely transform the post-match experience, meaningfully enhance the quality of communication, integrate video throughout the pre- and post-match experience of Tinder, modernize our navigation, make big bets on location, which coupled with our global scale, we think enables it to be a huge differentiator for us. We're going to continue to develop and integrate artificial intelligence into the product in a wide variety of ways. I think we really have a renewed focus on the general proposition that allowed Tinder to revolutionize the category to begin with, which is that connecting with new people should be lots of fun and not a lot of work. Really, a principle that's going to underpin all the work we're doing. And again, it's incredibly robust, and we're incredibly excited about it. None of this even touches on revenue, where we always maintain a laser focus. Our large and growing tech and product resources continue to be one of our biggest competitive assets, and with crystallized long-term plans and the app rewrites behind us, we're starting to move really quickly. Let's turn now to our North American businesses, all overseen by Mandy. Last quarter, I mentioned that each of these businesses was focused on a year-long journey to more clearly reorient its product experience around its core brand proposition. The ambition was to create more differentiated product experiences, driving higher engagement and ultimately greater top-of-the-funnel activity. We're halfway through the year and generally seeing strong progress. Match, in particular, had a solid June and an even better July with net adds seeing the best momentum in a while, up year over year in four of the last five months. We're increasing mobile engagement, messages sent up 14%, which in turn increases conversion. We're getting ready to roll out our next big new feature, Match Stories, and we think it will be the video profile standard in the category. We're putting a great new marketing campaign behind it starting later this month. We intend to follow that up in Q4 with another big feature release relating to a new communication framework designed to improve the quality of connections. Together, we expect these product changes to have a cumulatively powerful effect on the Match brand. And we expect the performance improvements we've been seeing to increasingly translate into top-of-the-funnel gains, both through word of mouth, press, and just improved efficiency of marketing spend. Reflecting our strong May and June, Match's Q2 ending PMC had the best year-over-year comp in two years, and July's strength improved that comp even more. We reiterate our expectation that Match will return to year-over-year PMC growth by the end of the year. Turning to Slide 8. PlentyOfFish continues to make solid progress in its effort to organize around the centrality of conversations in the app. Its new smart feature has shown meaningful improvements in conversion rates, and we're seeing really solid improvements in ROI on increased, but still not overly significant online marketing efforts we undertook in Q2. In Q3, we're testing to see whether those gains translate to TV, and if so, we have a nice little profitable growth engine here. I think it's important to note that marketing has a somewhat different purpose and effect for a brand like POF than it does for Match. The combination of Match's hard paywall and its high brand awareness means marketing is really trying to push near-term buys as well as sustaining high brand awareness. For a brand like POF, though, there is low brand awareness, and that low brand awareness allows you to create new brand awareness at relatively no spend. And the soft paywall allows that new brand awareness to drive viral word-of-mouth growth in a way that hard paywall businesses don't really allow. So it's a different dynamic. And at least the hope is when you can market something like POF on good ROI as we traditionally measure it, it pays really exponential dividends down the road. OkCupid is similarly making great progress, focused on individuality and substance. It's rolled out a bunch of new features, and the resulting increase of 14% in user retention is really, really huge. That's really the first sign that you're meaningfully improving the customer experience. It's a little behind Match and POF in terms of translating that increased customer experience to top-of-the-funnel gains, but there is always a lag effect, and we expect to see those in the coming quarters. Slide 9. There's a lot going on at Meetic, but I want to just focus in particular on their launch of OurTime for over 50-year-old singles in Europe. They took a really interesting approach there that could be a roadmap for us. Rather than building a whole new product, they effectively leveraged their existing infrastructure as well as an initial seeding of existing users to launch the product. As a result, for very little incremental tech and product expense, they were able to spend marketing dollars on a product that had liquidity in the community from day one. The impact has been amazing. It enabled them to meaningfully increase their marketing spend to a large cohort of users while increasing their ROI at the same time, effectively allowing for really targeted marketing without having to build incremental infrastructure in order to do it. It's very powerful. If you take that and you fast forward it, one of the biggest hurdles to building new dating products is securing that initial user liquidity. You could have a great dating product, but if you don't have the people on it, it's very hard to grow. So from our perspective, the holy grail is really to use our massive existing user base to successfully seed new products that can then grow on their own because of that initial base. This venture into OurTime in Europe is really the first foray down this path. And if we can continue to evolve it, we will be unlocking an incredibly powerful growth driver. Really, one of our focuses going forward is nailing that. Turn to Slide 10. I spoke a little bit about AI at Tinder, and that's definitely where we're building the most concentrated team of experts in the area. But given our overall scale, AI's application to our products cuts across the board. On slide 10, we just show a few of the areas where we're beginning to utilize it in our products. I really think AI, along with investments in video and location, are going to have a profound impact on our business going forward. And we're committed to going deep and being the real leader in these areas. Preparing these remarks, I looked back at what I said last quarter and I basically wanted to cut and paste it, but I didn't. I'll just sort of restate that we've never had such a robust product roadmap across the company, touching on so many different aspects of our products and technologies. Product really is the key to growth in this area, and we've never been in such good shape on it. One thing I didn't touch on last time, which I think is a really exciting path for us, is geographic expansion. Recently, Alex Lubot, who has been CEO of Match Group Europe for years, added to his focus the rest of the world outside North America, South America, and Europe. And that increased focus is really uncovering a wealth of opportunities. He has brought a lot of energy to it, globe-trotting to parts unknown, and I definitely expect us to increasingly expand in new geographies under his watchful eye. No question that our international footprint will surpass our domestic footprint before long. Really just fantastic growth opportunities out there across the board, and as the global leader, I'm very confident we're going to capture them. Now I'll turn it over to Gary for the financials and be back for the Q&A.

Thanks, Greg. Now let's turn to the financial review and outlook for our business. Slide 12 has our key financial results for the quarter. Total revenue growth was 12%. Total revenue would have been $315 million or 14% growth without FX effects. Direct revenue grew 14%, driven by 15% PMC growth, and ARPPU was down $0.01, primarily due to FX. Our international business grew direct revenue 28%, driven by 31% PMC growth, while our domestic business grew 6% in both direct revenue and PMC. We had a $1.8 million decline year-over-year in indirect revenue as we continued to experience lower ad impressions in our non-Tinder brands and Tinder was in the initial stages of testing its Facebook program. The trends in the overall business haven't changed significantly since our last call, as Tinder and POF drove our growth, while Affinity negatively impacted both PMC and revenue growth as we continue to right-size that business. We had 7% operating income and 8% adjusted EBITDA growth year-over-year. The $110 million of EBITDA in Q2 was ahead of our expectations, primarily due to lower marketing spend, partially offset by $2.7 million in professional fees related to settling the Tinder equity plan. As we expected, marketing and headcount costs rose at Tinder compared to Q2 2016. We are gaining traction in a number of international markets, including India, Brazil, and Russia. Our EBITDA margins dropped 1.3 points year-over-year, largely as a result of the increased spend, which was also in line with our expectations. Operating costs and expenses were 73% of revenue compared to 72% in Q2 2016. Sales and marketing spend was 28% of revenue versus 30% in Q2 '16 despite increases in marketing spend at Tinder as the mix of our businesses continues to shift towards lower marketing spend brands, and we reduced marketing spend at our Affinity business. Operating income grew at a slightly slower pace than EBITDA because of an increasing continuing consideration and non-cash compensation, partially offset by lower amortization of intangibles from our POF acquisition as the scheduled amortization from that acquisition concluded at the end of 2016. Slide 13 shows our ARPPU, which has continued to be very steady across our brands. Total ARPPU is $0.53, down from $0.54 in Q2 2016. Total ARPPU declined just 1% on a constant-currency basis. North American ARPPU was down about $0.05 for the quarter even as Tinder PMC comprised a larger portion of our North America business. Tinder's North America rate increased meaningfully, driven by continued strong a la carte revenue. A la carte revenue now accounts for 1/3 of Tinder's direct revenue. International ARPPU is down $0.02 or 3.7%, due entirely to FX impacts. International ARPPU for the quarter was flat at $0.51 on a constant-currency basis. Turning to the next slide, 14. We've generated $138 million of free cash flow in the first half of 2017. And year-to-date, we've converted 71% of our EBITDA into free cash flow. We expect mid-60s free cash flow conversion for the rest of the year, an improvement over 2016 levels and better than our initial expectations for 2017. CapEx for the year is running $25 million to $30 million, slightly better than our expectations. We continue to grow our cash balance, as you can see on this slide, ending the quarter with $493 million of cash on hand, of which $310 million is held domestically. We're now at a comfortable 1.6x net leverage and 2.8x gross leverage. We have significant financial flexibility to pay the cash taxes on the former Tinder equity awards, pursue M&A, and other initiatives. On Slide 15, I'd like to explain the Tinder equity plan settlement that we executed in July. Tinder founders and employees held awards in Tinder under the Tinder equity plan. In May, we began a scheduled process to value Tinder and provide liquidity to vested Tinder award holders. We hired two investment banks to conduct detailed due diligence and provide a public company value of Tinder. As part of that process, we opted to convert all Tinder awards to Match Group options based on the value of Tinder the banks have determined. Holding Match Group options provides Tinder employees with more value transparency and greater liquidity and is also beneficial for Match Group's shareholders because it reduces swings in our dilutive shares based on changes in Tinder value. Increases in our dilutive shares are now primarily tied to changes in Match Group's stock price. Our fully diluted shares outstanding increased modestly, given the higher valuation of Tinder from the banks compared to what we had previously assumed. We expect to net settle and pay withholding taxes on behalf of the employees in cash for many of these options, reducing the overall dilutive impact. The next slide lays out our outlook for Q3. Overall, as Greg said, our businesses are very much on track, with Tinder continuing to grow revenue at a rapid pace, Match getting closer to PMC growth, PlentyOfFish, OkCupid, and our international businesses contributing as expected and Affinity continuing its right-sizing. Tinder Gold's early results look very promising, but its delayed launch will impact Q3 slightly, although it may provide potential upside for Q4. Our expectations for Q3 are revenue of $322 million to $332 million, 14% year-over-year growth at the midpoint and $110 million to $115 million of EBITDA. A slight delay in launching Tinder Gold globally and slower ad revenue growth trends are impacting Q3 revenue. Q3 EBITDA margins will be a little lower year-over-year as we invest in Tinder. But we are still positioned to hit our target of flat margins for full year 2017, especially given the margin expansion we saw in the first half of '17. Tinder's product innovations with heavier and more complex features are driving higher-than-expected data costs. Given how important app performance is to Tinder's success, we feel that spend is worthwhile. We're also a little ahead of schedule on Tinder hiring. Both of these items will have some EBITDA effect for the rest of the year. One-time cost of settling the Tinder equity plan will impact Q3 as employee payroll taxes and some additional professional fees flow through. The increased Tinder marketing and data costs, hiring being ahead of forecast, and equity plan settlement costs in aggregate will impact Q3 EBITDA by about $7 million. On our last call, I noted that we expect Match Group revenue momentum to build throughout the year as Tinder's product momentum accelerates from a slower first half, which have been focused to a large extent on tech cleanup. We continue to expect this to be the case, with our year-over-year revenue growth rate in Q2 representing the low point for us in 2017. Tinder's Q2 increase in PMC was well above our expectations of being lower than the Q1 increase. We continue to expect a strong PMC growth trajectory at Tinder in the back half of the year as current momentum continues and we roll out the new Tinder Gold subscription offering globally. As I mentioned, overall ARPPU has been stable, and we expect it to stay flattish for the rest of the year. The Gold subscription package should also improve Tinder's ARPPU. Having provided a full update on Q3, I want to point out clearly that we're not changing our full-year revenue and EBITDA ranges we provided earlier this year. We have significant business momentum and initiatives in place across our brands. Finally, we expect Match Group option exercises by current and former Tinder employees will result in a tax benefit that will materially reduce or eliminate our 2017 full-year tax provision and largely or even entirely wipe out our domestic cash taxes for '17. All in all, we had a very strong Q2 financially, and we're executing on our 2017 strategic priorities. Tinder has a very exciting product roadmap ahead, and the Match North America brand is poised for a return to PMC growth. Our businesses are doing a great job of modernizing their products and tying their marketing message to the updated products. With that, let's open the line to questions.

This is Alex calling in for Brian. Can you just talk a bit more about the early results you're seeing from the Tinder Gold test? Maybe the overall strategies for converting the free users to the service and upselling the current Tinder Plus subscribers to Tinder Gold? And then maybe any updates or guidance you can provide around pricing for that offering?

Sure. The only update I can provide at this stage, given that we are still early in the test, is that the performance is strong. There are many existing Tinder Plus users upgrading, and the new feature is successfully converting non-T Plus users. Essentially, it functions similarly to our other monetization features; users can go directly to the settings page to purchase it, but many discover it organically through the product experience where it is naturally presented. They then have the choice to either pay for it or not. This approach ensures that both existing Tinder Plus users and those who are not currently subscribers are presented with this feature. Once they reach that point, they can choose to buy Tinder Gold. For existing Tinder Plus users, this is an upgrade, while for others, it's essentially a new subscription. It operates in the same manner as our other features, which is effective. Conversion rates have been very favorable, and the team has excelled in app merchandising. In terms of pricing, it is set at a premium to Tinder Plus, but we employ a dynamic pricing strategy. As we are still in testing, the exact premium may fluctuate over time, across different markets, and through various factors. Therefore, for us, pricing is both an art and a science, and we are continually assessing it. I don't think quantification is feasible for us. Was there another part to that question?

No. That was it.

Greg, I wanted to ask you a couple of questions on going back to Slide 9 in particular, the point about launching new brands, wondering if you could give us a little more color here. Would these be, to the extent you can, mobile-only brands? Are we talking about apps? Are we talking about desktop and mobile? Any color on geography or markets served? And then just kind of generally on portfolio strategy. Does this mean that going forward, you might look at the overall portfolio and some of those smaller Affinity brands might be demoted or discontinued? Just some overall thoughts on portfolio strategy would be great.

We're continuously developing new products. Some are launched with significant investment, while others are tested with limited resources to see how they perform. This can occur organically, driven by ideas from our team, or centrally, aimed at addressing specific challenges. A common challenge in this category is that the product's effectiveness depends on user engagement, leading to the classic marketplace chicken-and-egg dilemma. For OurTime, they successfully utilized their existing user base to ensure the product had activity from day one, resulting in better conversion rates and customer satisfaction. Moving forward, our focus will be on replicating this success in new product development, primarily prioritizing mobile. It’s unlikely we would launch desktop products first, though we might consider dual launches for certain demographics, like OurTime in Europe, which suited both platforms. Overall, while I can’t share specific details about upcoming launches, developing new products and potentially acquiring early-stage products without liquidity to enhance them will be essential components of our ongoing strategy.

And then a quick one for Gary, if I could. Just wanted to make sure I heard you correctly, you're reiterating the full-year guidance?

That's exactly right.

Got a big picture question and one a bit more specific. So Greg, when you think about long-term, what should long-term revenue growth be ex-Tinder? And then how do you get there? And then, Gary, specifically, you talked about North America Match seeing PMC growth by the end of the year. Is there a specific expectation for Meetic by the end of the year also?

Yes. Look, I think obviously, revenue growth is fantastic right now. I think you have the law of large numbers obviously, so the growth rate declines over time. But it is incredibly strong. We expect very strong double-digit revenue growth certainly for the foreseeable future without sort of meaningful product breakthrough. I think our strategy, though, is to continue to try to roll out product features that continue to expand both the product, the market, and the category overall. I talked about a real focus on location. I think location leads in a lot of directions to broaden the use case in the market for Tinder. I think our integration of AI and our integration of video are really going to start to increasingly set Tinder apart from everything else. And so I sort of look at Tinder in two ways: what's the growth rate on the current trajectory? I think it's very solid and will continue to be the real driver or the major driver of Match Group revenue growth for certainly several years. But we are very much playing not just for that but for a meaningful expansion and a reacceleration of that through the product work that we're doing, again at a scale and a pace that I think will be unparalleled in the industry. So that is sort of the upside piece that I can't really quantify, but is very much what we're playing for.

And I think, Jason, as far as the different brands’ growth, we've talked before about the brands that have been around for a while growing in the single digits somewhere, hard to pinpoint exactly where. That's where we have seen Meetic growing, and we expect to get Match there as well. We're talking about how it's going to get to growth by the end of the year, and we think it will be moving into those single digits over the course of '18. So I don't have more specifics than that, but our goal is to get all those brands growing in the single digits. They're not 10-plus percent growers anymore, but single digits should be achievable from our perspective, especially with all the product and brand work that we're doing.

First one just on Tinder Gold. Just wanted to understand more about what gives you the confidence in the product at this point? And how do you think about it internally in terms of size or impact perhaps relative to Super Likes or Boost, maybe around where those were kind of in their testing phase? And then just secondly on the full year guidance, totally get that you're reiterating what you guys played out there before. But just given the fact that we're seeing a little less advertising revenue, some of the marketing spend is slower and Gold is delayed, can you just help us understand the acceleration more in the back half of the year and keeping those numbers?

Sure. We are seeing a lot of sign-ups for Tinder Gold, which is very exciting for us. We had strong confidence in this product from the beginning, as we anticipated it to be one of the biggest contributors to our monetization since we launched. So far, it is meeting our expectations. When we introduce new subscription features, there can be an initial influx of users followed by a slight drop-off, but we have a good track record of predicting these trends. However, we won't know for sure until that initial surge settles down. Currently, we are only testing in a few markets, which is why we are being careful with our projections. The results we are seeing are very promising. Regarding the rest of the year, although the delay affects Q3, our positive momentum gives us confidence for Q4. We've experienced strong momentum in July, and we believe that combined with what we expect to be excellent performance for Tinder Gold in Q4, we have a lot of optimism. Gary, do you have anything to add?

I think that's right. I mean, I think if you look at it on a very short-term basis, Q3 is affected by a number of weeks where Tinder Gold hasn't been able to be rolled out and some of the other effects you pointed to. But as Greg said, it looks very promising. And so as the year goes on, we think it could create some real additional momentum for us. And it's early to quantify that. It's early to call it. We're still testing it, but that's definitely a factor in kind of what impact it is. It's a timing issue more than anything else. Marketing spend, I think is fluid. We've given our guidance for Q3, and we feel we've got good momentum now on the Tinder side, and we're going to spend up in Q3, but we've got a lot of decisions to make on Q4 at Tinder as well as across some of the other businesses on marketing. So we've got some fluidity on the marketing spend side. Ads, we're continuing to make progress with the test, and we'll see how that all plays out. Again, we've given the Q3 impact. We'll see what that bodes for Q4. So all that enables us, I think, to leave our ranges where they have been for the entire year and still feel good that we're going to fall within the range from both a revenue and an EBITDA perspective.

Also, look on the ad stuff, I want to be clear that the slowness of our build, especially in the second half of the year with the Facebook network, is really a matter of discretion. I mean, we could turn it up faster and harder. I've made the decision to go slowly. I think Tinder has got great momentum. I don't want to take any rapid steps to potentially derail that. I think advertising could be a meaningful part of our long-term plan, but I don't - I personally don't want to be too aggressive on it right now. So we're building it slowly. And I also can't underemphasize the strength we had in July, both at Tinder and at Match and a number of other businesses. So it gives us a great deal of confidence in the back half of the year.

Guys, I have two questions. First is, how is the initiative to convert users on Tinder on the web versus in the app going, just any update there? And then the second question, if you look at the PMC decline ex-Tinder, it seems to be getting better even factoring in that 140,000 of Affinity brand wind down. So I guess if that's gone by the fourth quarter and those legacy brands or older brands are growing mid-singles, what are the risks as we look forward into '18, '19 and beyond? Could that be the steady-state growth for the ex-Tinder PMC going forward? Any other factors you'd call out that could impact that in the future?

Sure. I believe you are referring to North American PMC excluding Tinder and Affinity. To clarify, I mentioned that the impact of the Affinity run-off will start to significantly decline in Q4, but it won't be completely eliminated. We expect Q2 and Q3 to be low points, with improvements in Q4 that should continue into the future; we anticipate it will be fully resolved sometime in 2018. Regarding the transition from desktop to mobile, we have maintained confidence that we would reverse the negative conversion trends, which we have managed to do, and our product enhancements are on track to stimulate growth at the top of the funnel. It's challenging to predict exactly when these changes will manifest, but currently, POF is performing well, Match is expected to rebound by the end of Q4, and while OkCupid's return is uncertain by then, it should occur early in 2018 if not Q4. We are optimistic about our prospects. Predicting challenges two to three years ahead is difficult given the competitive landscape we always face. However, our products benefit from established scale and brand recognition. By year-end, I believe our offerings will be leading in mobile performance. Thus, we are confident in maintaining a baseline growth rate in the low single digits, while aiming for better results. There is a significant gap in the market as many people seek more serious relationships and may not yet see Match as the dynamic option it has become. With our ongoing product releases and marketing efforts, we believe we have a solid opportunity to not only return to growth but to achieve substantial growth. I think OkCupid has significant potential as well, maintaining a strong niche, and I am more optimistic than just the low single-digit growth expectations in the long term for some of these brands. Overall, that's probably the best way to conceptualize it. The risks mainly involve continued competition and our ability to execute effectively, which I am confident we can do.

I guess Ross' other question was around the Tinder Web and kind of where that is going.

The Tinder Web is currently being rolled out. We are beginning the test of Tinder payments in the next week or so, and we will monitor its progress. The entire Tinder Web initiative and the potential to increase margins through this transition is a long-term project. Establishing a global payment system is a significant endeavor. Until now, Apple and Google have managed this for us, which has been a considerable amount of work. We plan to start testing soon, possibly next week or the week after, and that testing will continue for some time. We view this as part of our long-term strategy and are confident in its potential. We see it as an opportunity for margin improvement, although the exact amount will be learned over time. While we have seen success in our other ventures, Tinder presents different challenges. We are cautiously optimistic and will keep you informed on our progress. We expect to have early results next quarter, but once the payment system is fully implemented, we will need to devise and execute a strategy for customer migration, which I view as a multi-quarter effort.

This is Kunal for Lloyd. Two if we could. One, on Tinder video, have you started doing A/B testing? Would you plan to use it for retention primarily or for revenue enhancement? And then on international, you highlighted Brazil, India, and Russia. Are there existing apps or services that could be attractive acquisition candidates? Or are you planning to extend existing brands to the new geos that you are looking over the next few quarters?

On Tinder video, we've not yet started A/B testing, but we are very much in development. I think it will play a number of roles down the road. I suppose it could have monetization characteristics, but we're focused on just creating a great product for users. We've got a great plan for how we're going to implement it, and we expect that to start rolling out later this year. In terms of geographies, there are certainly existing products in all of these geographies. I think when we're looking at the geo, we try to determine obviously three different approaches: one is our existing products, the other is building new products, and the other is buying products. You take a country like Japan, which we saw as a really big opportunity, we're really doing all three. Even before I got to Match in 2009, Match proper was in Japan. We still continue to run that business in Japan. Tinder has aggressive efforts in Japan, and we bought Pairs, which was a sort of native business in Japan. So there we sort of did all three. In Brazil, again, we have both Tinder, and we bought a business a while ago called Par Perfeito, which is down there. We look at those situations and those opportunities everywhere. I think it's going to continue to be a combination of those three depending on the market. As I mentioned earlier, Alex Lubot now very much has his eyes focused on the rest of the world where most of the people live. And there are some really interesting opportunities. And when we get into Asia, some of these dating products function rather differently than ours do, and they start to expand the definition a little bit. So we're looking at a lot of exciting things. I think it will continue to be a combination of build, buy, and extend.

Just two quick questions. For Tinder, just wondering how the marketing efforts are going in emerging markets. Are they having kind of the intended impact on having the platform go viral? And then just with the second question on acquisitions with the cash balance rising, kind of what's the appetite for acquisitions? And is there any particular geographies that would make sense?

In terms of our Tinder marketing, as I mentioned earlier this year, our priority was to ensure that our spending made a significant impact, which it clearly is doing by driving many registrations. We also wanted to confirm that these registrations weren't just temporary but had a viral aspect that benefits the market overall, and we've confirmed that they do. Currently, we're focused on quantifying all of this to fine-tune our marketing budget, which takes time due to the data available to us. I’ve shared this every quarter—there is intense competition for product and technology resources at Tinder, even as we grow those capabilities. We are looking to expand further on several initiatives that we believe can accelerate our value delivery. At present, in those specific regions, we aren’t capturing all the data we could to measure long-term ROI as effectively as we do in our other businesses, but the positive impact is evident. Therefore, we will continue our spending, and as we refine our measurements, we will adjust our spending accordingly in the future. We are optimistic about the current impact of our efforts, and they remain strong. In terms of cash balance and acquisition, I think our cash balance has never been a constraint to acquisition. So we've always had the ability to raise capital, and we've had the ability to use our equity. Obviously, if that cash balance grows, it becomes easier. But in general, we're focused on finding the right opportunities. I think geography is going to play an increasingly big component of that. Again, I think that as we look at things in more extended geographies, the definition of dating products evolves a little bit. And I think you'll see some real activity there over the coming year.

Tinder continues to have pretty strong PMC growth, but at the same time over the past several quarters, you've called out tech product and advertising feature rollout delays that have been caused within the platform. Just wondering can you kind of isolate down the reasons why those delays happen. Is it resourcing? Does it have to do with what you called out about the company being more founder-centric, and kind of what are you doing to address those? And then can you give us an update on the monthly average users for Tinder and maybe, a split by domestic versus international?

Sure. On the operational side, we've definitely improved a lot. About six months ago, I mentioned that a key strategy would be having more resources than anyone else, comparing it to bringing guns to a knife fight. At that time, our head of engineering joked that we were shooting ourselves in the foot with those guns and needed to stop. Just last week, we acknowledged that we’ve moved past that. I truly believe our execution has significantly improved. A major part of that was taking the time to rewrite our applications. Predicting how long this process takes is difficult because it leads you down unexpected paths. During the first half of the year, that process took longer than anticipated, which contributed to the delays you're currently discussing. For example, we did experience a slight delay with Tinder Gold, and it also faced issues with the App Store. There are always reasons behind these delays; perhaps we planned aggressively thinking it was a solid operating strategy. Historically, advertising has faced delays mainly due to competition for resources and a general prioritization of features that enhance growth, customer satisfaction, and direct revenue. It’s been a mix of factors, but I believe these will be less frequent moving forward. We're really starting to operate effectively, and I don’t see this as a long-term issue we'll continuously face, although resource constraints will always be a challenge given the number of tasks ahead of us. Regarding the balance between international and domestic, it has remained fairly stable. U.S. users and subscribers represent less than half but more than a quarter of the total, roughly in the one-third range. The remaining users are spread between Europe and the rest of the world, which we evaluate both similarly and differently based on various factors. International growth continues to outpace domestic growth, which we’ve discussed, but overall growth has accelerated recently thanks to our marketing efforts and product successes. We feel very optimistic about our direction.

Maybe just a few on the Tinder equity plan settlement just so I understood. The way you talked about stock-based compensation in terms of Q3, is all the impact in stock-based compensation in Q3 from the equity plan settlement? Or is there anything else you're calling out there? And is any of that going to repeat after Q3? Or is it sort of a one-time settlement? Second, on Slide 15, you say Match continues to own 100% of Tinder. I think a lot of people are always under the impression that ex the management equity, it was closer to 85%, 90%. So just wanted to know if we could get any color there? And then last, you said there's been a valuation that's been put on Tinder as part of this process. Any chance you would like to share that with us?

Let me take the first part of that. In terms of ownership, Match Group has always owned or at least for years has owned 100% of the equity ex-Tinder management. So we've talked about it at sort of a fully diluted treasury basis method; we've talked about our ownership, but in terms of ex-management, we've owned 100% for several years. In terms of valuation, look, we're not going to talk about that. It is two people's opinions. Other people can have lots of different opinions. And we think it's generally reflected in our stock. And we will never ever think that valuation is where it ought to be, but what it came in at was not dramatically different than what you might think. The conversion is a one-time event. Tinder equity holders now hold Match Group options. I think the major accounting effects were realized this quarter, is that correct, Gary? And we don't see any ongoing impact from it.

I think just to put a finer point on the SBC. We do see $5 million or $6 million more of SBC in this coming quarter. This additional amount is what our guidance reflects, $21 million in total, which can be seen at the back in the appendix. That total number reflects the impact of this Tinder liquidity event. So for the year, we're probably running $5 million to $6 million ahead of where we initially thought, and that is as a result of the increase in SBC that we're seeing. And that's going to flow through in Q3.

Greg, could you share your thoughts on the potential for the 50-plus demographic? You have several brands in Europe and are launching in two more countries there. I'm curious about what opportunities you see, particularly in emerging markets, comparing the demographic in Asia with North America and what that could look like in the long term. Additionally, I'd like to know your updated views on the demographic of your largest independent competitors, many of which are focused on religious affiliation.

Thank you. Europe lacked this category, and we decided to address it. We've been discussing it for several years, but due to execution constraints, we didn't progress as much as we wanted. We noticed that Meetic has a strong and growing audience, which made it logical to address this area, allowing us to enhance our marketing efficiency without needing to create a brand new product. In the U.S., our OurTime brand has been a key focus, and it still needs some product enhancements. Match and our Affinity brands in the U.S. share resources more than our other businesses, and we've prioritized Match over the past year, so I expect product improvements. We will also develop more targeted offerings for our audience, where we see real potential. However, beyond Europe and the U.S., I don't consider it a near-term focus, as our strategy tends to become more stratified with greater market penetration. There is still significant room for growth in the core markets, so targeting specific demographics may not be our immediate strategy, although that could change. Regarding religion, we do have some offerings based on religious affiliation and have explored acquiring existing options in that space, but we haven't deemed it a strategic priority for now.