Match Group Inc - New (MTCH) — Q3 2018 Earnings Call Transcript

Thank you, operator, and good morning, everyone. I’m joined on the call by our CEO, Mandy Ginsberg, and CFO, Gary Swidler. They will review the third quarter investor presentation that is available on our IR website and then will 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 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 Mandy.

Thank you, Lance, and good morning, everyone. At the outset, I think it’s worth pointing out that this was our fourth consecutive year of year-over-year top line growth, exceeding 25%, and we are on pace for full year revenue growth of about 30%. As we have discussed previously, the comps do get tougher for us starting in Q4, since last year’s Q4 was the full quarter attributable, but we have a lot of exciting developments happening at Tinder and across the portfolio that I will talk about today, which I expect will enable us to continue driving our growth for 2019 and beyond. Gary is going to talk you through the details of our financial performance and outlook. So with that, let’s start with Tinder on Slide 4. Tinder remains the centerpiece of our growth story. Direct revenue at Tinder was up nearly 100% in the third quarter compared to last year, and subscribers grew 61%, while ARPU rose 24%. Even though we launched Tinder Gold over a year ago, it continues to have a meaningful impact on the business. More than 60% of the 4.1 million subscribers on Tinder are now Gold subscribers, up from over 50% in the second quarter. One strategy to increase Gold subscriber penetration is to add more features to the Gold subscription package, making it even more compelling to our users. In early Q3, we started testing Picks, which is an incremental feature we introduced as part of the Gold package to enhance our subscription. Picks provide Gold subscribers with a personalized daily list of interesting users. We rolled Picks out to all Tinder users in September. This has helped drive more users to sign up for the Gold subscription level, leading to an increase in ARPU since Gold comes at a premium price. This implementation of Picks resulted in increased ARPU but less of a conversation benefit. As with any new revenue feature, we will continue to refine our implementation and balance the trade-off between ARPU and the number of additional subscribers. As we have said before, our ultimate goal with Tinder is to maximize revenue, not drive a particular KPI, and we continue to accomplish that very effectively. Last quarter, I talked about how our under-the-hood product initiatives have led to improved performance, user outcomes, and monetization. We are particularly focused on improving success rates for customers, including optimizations like what potential matches they are shown by our recommendation engine and the post-match messaging experience. Let’s take one example on matching. In New York City, people base in a much higher radius than, for example, Austin, Texas. In cities and places like Brazil and India, specific neighborhoods have to be taken into consideration. Small improvements to the recommendation engine taking into account the new characteristics of specific locations and potential matches can meaningfully increase match rates. Match rates are a critical driver of engagement. In fact, getting a match on the day of the user experience is the single most important driver of user retention. We also think there’s a real opportunity to drive revenue optimization. We are early on at Tinder when it comes to testing price elasticity, specifically at a country-by-country level. We believe that we can also drive revenue by fine-tuning our merchandising in areas such as how and when to show either Gold class or à la carte pay. Given this opportunity, there is a real focus on all these optimizations on the product roadmap. Turning to slide five, we highlight two product innovations at Tinder. They’re both showing promising improvements in engagement. The first is Tinder U, which we launched in late August and is now available at over 1,200 colleges and universities throughout the U.S. Tinder U is a student-only experience inside the Tinder app, giving student users access to the full suite of product features while facilitating interactions directly with other college students on their campuses or nearby campuses. We created Tinder U to attract new college students to the Tinder experience and re-engage students who have been part of the Tinder community in the past. Ultimately, we see it as a way to deliver more value to the college user by providing more relevant recommendations, which helps to increase engagement. We’ve seen strong early traction with Tinder U, both in terms of driving higher swipe rates and higher retention. On the right side of the slide, I want to highlight the progress we’ve made on our user feed. We first launched the feed to all Tinder users in March. It was aimed at enhancing the post-match experience to facilitate users starting more conversations with their matches. The feed gives users a better glimpse into their matches' lives and showcases people's passions and adventures, leading to better conversation and deeper connections. After the initial successful launch, we have been adding more content and context to the feeds. This continues to drive increased engagement and better outcomes for our users. Conversations triggered by the feed are noticeably longer, higher quality, and result in about 35% more offline connections. This is by no means an exhaustive list of all the product innovations underway at Tinder. Our work on location-based features continues as well. In addition, we began localizing the product, as evidenced by our recent launch of My Move in India, which enables single users to decide whether they want to be the first one to initiate the conversation. Slide 6 demonstrates how marketing has been deployed to reinforce our brand and product messaging and momentum. Our marketing efforts on college campuses began in March with 64 schools competing for a chance to host a Cardi B concert. That momentum from the spring semester has continued as we have leveraged social media influencers, on-campus brand ambassadors, and digital channels to support the launch of the Tinder U product when students come back to school in the fall. As a result, college-age users are now the fastest-growing demographic in the Tinder ecosystem in the U.S. This is incredibly important as we want Tinder to stay fresh, exciting, and relevant in this young and trend-setting audience. Tinder has also launched its first-ever brand marketing campaign. Tinder was phenomenally successful at launch and spread so quickly that the market was defined by the brand versus the business defining the brand. Tinder particularly resonates with our 18 to 25-year-old audience because it provides an easy way to meet new people. While Tinder sometimes gets a bad reputation for being casual, it is important to remember that people in their late teens and early 20s are not looking to settle down; they are trying to date, explore, discover themselves, meet lots of people, and be social. It's all about the single journey, and Tinder reflects how this group meets and socializes. The new marketing campaign is centered around celebrating the single lifestyle of this generation. The campaign can be seen on billboards across several major cities in the U.S., as well as on digital channels. We've also started publishing content relevant to the single lifestyle, such as stories and tips related to dating, style, travel, and food, with the aim of further reinforcing how Tinder can enable users to make the most of this fun and adventurous time in their lives. Turning to the next slide, Tinder isn't the only brand we are investing in as we see opportunities for long-term growth in many of our other brands. Last quarter, I spent time talking about how we are making investments and growing the business through internal incubation and M&A, and that work continues. If you look on Slide 7, you can see many of the product and marketing-related investments we are making across the portfolio in our existing brands. High-awareness brands like Match and Meetic are undergoing a product refresh designed to increase value for the premium and high-intent users. These changes provide better outcomes and value for our subscribers by improving algorithms, reducing cluttered ads, and including add-ons that we historically charged for separately in the subscription package. In addition, we are investing in customer service to provide a higher experience for these premium users. We also continue to right-size our marketing spends at these two brands to reflect the current reality of declining TV viewership and efficiency of TV advertising in general. Given that we have been reducing our TV spend, we expect short-term pressure on subscribers at Match and Meetic. However, there are early signs that indicate our enhancements to customer experience are leading to improved organic registrations due to stronger word-of-mouth marketing. We are optimistic that these organic trends will eventually offset pressure from the reduced TV spend. At a number of our smaller brands, we are seeing positive growth trends. At OkCupid, registration growth has been strong and markets exposed to our provocative ad campaign. As a result, we expanded this campaign into a number of key cities throughout the U.S. last quarter. On the product side, OkCupid has always had a strong and thought-provoking personality as it asks polarizing lifestyle and political questions of its users. For example, OkCupid recently asked questions related to the Supreme Court appointment process, legalization of marijuana, and exercising the right to vote during yesterday's midterms. We've elevated these questions and the product experience in a modern and dynamic way, and it is resonating well with our user base. OkCupid has traditionally been a U.S.-focused brand, primarily because so much of the brand image has been tied to these provocative political and lifestyle questions that may not always be relevant globally. Despite this, OkCupid has seen moderate organic growth in a handful of non-U.S. markets, including India. We've recently made some adjustments to the product to tailor the app, particularly the questions, to the Indian audience. We are in the early testing phase to see whether OkCupid can gain traction in a market that has enormous potential. The early momentum we've previously highlighted at Chispa, our Latino-focused app, continued in Q3, and we started testing monetization on the platform through à la carte purchases. We're particularly encouraged by the efficiency we're seeing in marketing spend aimed at attracting young Latina and Hispanic women. In our category, such efficiencies typically translate to a big boost in our ecosystem and bode well for long-term growth. In Japan, our Pairs business is one of the top apps in the market and continues to grow strongly as we expand our marketing efforts. We believe there is real potential for future growth in Japan as the category stigma continues over time. In Europe, we are building share in the 50-plus segment for the OurTime brand in key markets. This has been a long underserved demographic in the region, and the team there has done a great job at aggressively pursuing that opportunity. Last but not least, turning to Slide 8. I want to overview the momentum we are seeing at hand, which will be a big area of investment for us for the rest of this year and into 2019. The product itself has been able to capture the lightweight approach inherent in mobile-first apps like Tinder while managing to provide a depth that higher intent users are accustomed to on brands such as Match and OkCupid. There is a strong product market for Hinge in a previously underserved audience of those in their 20s looking for serious relationships. The Hinge profile in the U.S. is clean and simple and encourages users to be more thoughtful in their initial conversations. Hinge's product has really resonated in the market, and proof of that product efficacy is in the numbers. Hinge downloads have increased five times since we made our initial investment in the company. Hinge had a stronger presence in New York City and is gaining traction in major cities throughout the U.S. and in global cultural centers, such as London. We see real opportunity to invest meaningful dollars in both product and marketing at Hinge to drive long-term growth. Before I hand things over to Gary, I want to emphasize that we have a diverse portfolio of leading products in growing global categories where singles are increasingly using multiple products. We have the resources and expertise to invest smartly to further differentiate ourselves against those competing against us in the heavily fragmented and competitive landscape. We are executing on our plans as we head into 2019, and we look forward to extending our exciting line of Tinder, continuing our long history of product innovation and driving growth by enhancing our brands around the world, all while delivering for our shareholders. And with that, I'll turn the floor over to Gary.

Thanks, Mandy. We had a phenomenal Q3, and I am going to review the details of our performance and then provide our outlook for Q4, as well as some preliminary thoughts on 2019. So let's jump right in. On Slide 10, you can see that average subscribers reached nearly 8.1 million in Q3, up 23% year-over-year. North America grew average subscribers 18%, and international 29% year-over-year. Tinder's rapid growth has a bigger impact on our international business because it’s a larger piece of the pie internationally. Tinder drove our growth again this quarter with aggregate stability at our other brands. Tinder added 1.6 million average subscribers year-over-year, a 61% growth rate and 344,000 sequentially. Tinder's sequential subscriber growth was stronger than we expected as Gold continued to power the business, Picks enhanced Gold's appeal, and product optimizations began to bear fruit. Tinder Gold, helped by Picks, drove Tinder ARPU up 24% year-over-year and overall company ARPU higher by 6% year-over-year, up $0.03 to $0.57. ARPU expanded both domestically and internationally. However, international ARPU is unfavorably impacted by the strength of the U.S. dollar compared to certain international currencies. On a constant currency basis, international ARPU would have been up 11% to $0.57. On a constant currency basis, company ARPU would have been up $0.04 or 8%. Looking to Slide 11, you can see that the subscriber and ARPU growth led to total revenue of $144 million for the quarter, representing year-over-year growth of 29%. Excluding the FX impact of $8 million, total revenue would have been $152 million, 32% year-over-year growth. We demonstrated strength in direct revenue in Q3 with growth of 31%; North America grew direct revenue 25%; and international, where Tinder comprises a larger portion, was up 38%. One stop to spot was indirect revenue, which declined 7% year-over-year. We had a decline in impressions at the non-Tinder brands, coupled with an impact from GDPR on our ad sales in Europe. In terms of overall EBITDA, we saw year-over-year growth of 38% in Q3 to $165 million due to the revenue growth and operating leverage. EBITDA margins expanded by 2 points year-over-year, continuing a solid trend to 37%. Overall expenses as a percentage of revenues were 68% in Q3, down from 73% in the prior year quarter. Of particular note is that our sales and marketing expense for the quarter declined to 24% of revenue from 28% in Q3 2017, reflecting the ongoing shift to brands like Tinder and OkCupid with relatively lower marketing spend as a percentage of revenues. We did spend more in total dollars on marketing in the quarter, driven by increases at Tinder, as well as at OkCupid and Hinge. Product development costs increased by $7 million in the quarter, largely due to increased headcount at Tinder as we continue to invest in that business and investments in some of our other brands as well. Increased litigation expense and some costs related to the acquisition of Hinge were two unforeseen items that we incurred in Q3. These aggregated to $4 million. Total stock-based compensation expense, which is included in each category of expense, was $16 million. Q3 '18 SBC expense was down 19% from the prior year quarter, which included an unusually large settlement SBC charge. SBC expense for Q3 '18 was in line with our expectations. Operating income grew 54% in Q3 to $140 million, driven by the higher revenues and reduced operating expenses as a percentage of revenue, partly offset by higher in-app fees. The operating income growth rate exceeded our EBITDA growth rate due to lower stock-based compensation expense. Operating income margins rose 5 points to 32% compared to 27% in Q3 2017. On Slide 12, you can see that we are announcing a special dividend of $2 per share of Match Group common stock and Class B common stock. The dividend will be paid on December 19th to shareholders of record as of December 5th. We constantly analyze various ways to return capital to our shareholders. The dividend is something that we’ve been contemplating for some time, and we felt that now is the right time to provide a capital return to shareholders by this method. To fund the $2 per share special dividend, we intend to use cash on hand, which was $403 million as of 9/13/18 and has grown since, as well as the meaningful debt capacity we have. This could include a draw on our revolver and/or new issuance of unsecured or secured debt. You can see from the top right chart on Slide 12 that our leverage has declined noticeably over the last three years since our IPO from over 4 times to 2 times. Our target gross leverage is 2.5 to 3 times. We started the year in this range, but we’re now well below. So we have plenty of room to finance a portion of the dividend, M&A, and potential future returns of capital. We would go above the range for compelling M&A, assuming a reasonable deleveraging period. The business has generated $404 million of free cash flow year-to-date, up 94% year-over-year. At that rate, the dividend is just over 12 months of free cash flow generation. Our number one priority for capital allocation is to invest in our businesses for growth, as we’re doing across the Company. Even so, we have significant excess cash to deploy. Our second priority is accretive M&A. M&A is a core part of our DNA, and we’ve always been disciplined acquirers. We intend to continue to pursue M&A vigorously across the globe, but because to this point we haven’t deployed a large amount of cash for M&A, we are returning some of our cash to shareholders as a dividend. We believe the special dividend is evidence that we're responsible stewards of capital who deliver on our promises. At the time of the IPO, we said we would de-leverage and we've done exactly that. We're confident that we have sufficient flexibility to do what we need to do; to invest in our business and to make acquisitions to further strengthen our portfolio, when compelling opportunities present themselves. In the future, we expect to continue to apply the same analytical framework and rigor to our capital allocation decisions. On the bottom right of Slide 12, you can see that year-to-date in 2018 we've spent $86 million to buy back just over 2 million shares under our 6 million share authorization as we continue to offset dilution from employee equity award exercises and take advantage of the occasional dislocation in our stock price. The average price of repurchases year-to-date is $42.85. If you then add the $560 million that we expect for the special dividend to the $86 million spent on buybacks, we'll have returned $646 million of capital to shareholders in 2018. On Slide 13, we discuss our outlook. For Q4, we expect revenue of $444 million to $450 million, or 17% year-over-year growth at the midpoint. We expect Tinder to continue being the revenue growth driver with aggregate stability at our other brands, as has been the case all year. I want to point out that anticipated FX impacts have reduced our expected revenue for Q4 since our last earnings call by about $6 million. We expect indirect revenues to continue feeling the effects of GDPR and lower impression volume, as well as some changes to the economics of our fan arrangements. The lower impressions are primarily driven by product changes we are implementing at the non-Tinder brands. We expect $165 million to $170 million EBITDA in Q4 and a margin of 37.5% at the midpoint of our ranges. There are a few notable items that contribute to the lower EBITDA growth rate and margin than we typically see in Q4. In this year's Q4, we expect year-over-year marketing spend to be up by about 20%, driven primarily by Tinder. As Mandy discussed, we have two major marketing campaigns underway at Tinder; one for Tinder U and the other, the broader brand campaign. We're also increasing marketing spend at a few of our other brands, including Hinge, to continue to drive awareness in major U.S. markets and Pairs in Japan. Our Q4 outlook also reflects an additional $3 million of expense related to litigation, including our intellectual property claim against Bumble and the Tinder lawsuit. We strongly believe our IP is worth protecting. We believe that the Tinder lawsuit is without merit, and we have moved to dismiss it, but defending it does have a P&L impact. We expect that Q4 Tinder average subscribers will increase somewhat less sequentially than they typically have, which has been in the 200,000 to 250,000 range. The reasons for this are a combination of two items. First is the anniversary of the largest surge of Tinder Gold subscribers from Q4 last year. All the subscribers from that surge who took 12 months or two successive six-month packages will be expiring subscribers in Q4 '18, so terminations will be much higher than typical. Second, the way we have merchandised Picks has thus far been to drive ARPU through higher Gold take up, not increase the number of new subscribers. As a result, there will not be sufficient subscriber additions to offset the large increase in terminations. Tinder will continue to drive its ARPU higher, albeit at a less dramatic pace than has been the case recently, as the subscriber mix continues to trend gradually towards our higher-priced Gold subscription tier. For the full year 2018, we expect to come very close to the $1.72 billion top end of our revenue range. This reflects the strong performance we've experienced year-to-date and our outlook for Q4. It’s notable that our revenue range began the year at $1.5 billion to $1.6 billion. Therefore, we are very pleased with how the year has played out. In terms of EBITDA, we expect to come within $5 million of the top end of our outlook for the full year. There are two items I want to point out which are impacting EBITDA compared to our prior outlook. The first is the increase in litigation costs, which can be very difficult to estimate since the timing and intensity of litigation is unpredictable by its nature. The second is the Q3 costs related to the acquisition of Hinge. The total of these two items is $7 million for the full year 2018. Even with these items, we are pleased with the meaningful margin expansion and we are on pace to deliver in 2018. Recall that our initial 2018 EBITDA outlook was $550 million to $600 million. We expect SBC for the full year 2018 to be between $65 million and $70 million, slightly below our initial outlook of $70 million. As we look ahead to 2019, we are optimistic that we can continue to deliver strong financial performance. Similar to what we said at this time last year, we believe we will be able to deliver top-line growth in the mid-teens. We expect Tinder's growth to remain the story in 2019. The step change created by Tinder Gold will be difficult to replicate, but we plan to optimize and innovate in the product and enhance our marketing efforts, especially internationally, to drive continued strong growth at this iconic global brand. We expect that the work we are doing on both product features and optimizations will lead to sequential increases in Tinder average subscribers, returning to Tinder's typical levels in 2019 compared to the lower level that we are in Q4, 2018. We expect the non-Tinder brands to remain fairly stable in aggregate in 2019. As Mandy detailed, we are making product and marketing investments in a number of these brands to drive longer-term growth. In particular, we expect to be investing heavily in Hinge, which we believe is a differentiated product experience that will be a long-term growth driver for us. We expect Hinge to reduce our EBITDA by $25 million in 2019 as we ramp marketing spend to build share in key markets. In the current environment, we do expect regulatory compliance and litigation costs to continue to rise. As I already mentioned, these costs are difficult to predict, and we currently expect they could total an additional $10 million to $15 million in 2019. Long term, we are confident that 40% plus margins remain attainable for the company. In fact, we're making more progress towards this goal in 2018 than we had anticipated. We're still in the midst of our planning process for 2019, and we'll provide much more specificity regarding our outlook for '19 on our next earnings call. In closing, we've had a stellar first three quarters of 2019. We're investing in our businesses to drive growth for the long term. We believe that as we continue to scale, we can become increasingly profitable. In fact, few tech companies offer the growth, margin, and free cash flow profile that we do. We also continue to demonstrate that we're responsible stewards of capital, evidenced by today's announcement of a significant return of capital to shareholders through a special dividend. We continue to look to expand our total addressable market and market share globally, either through M&A or by developing new products. And we have the resources and track record to do so. With that, we will now answer any questions you may have. Operator, please open the line to questions.

Mandy, as you think about the non-Tinder brands going forward, what growth do you expect for that portfolio as we head into 2019? And I had a quick follow-up for Gary on the softness in the fourth quarter guide. If you could just parse out how much of that impact is external rather than any fundamental slowdown in the business? Thank you.

So, the first part of the question, we’re seeing nice strengths at Pairs in Japan, which we’ve talked about, in OkCupid and POF. And in terms of the future upside and where we see opportunity, we talked about Hinge, which we're excited about and plan on real investment, both on the marketing and product side. Then smaller brands like Chispa where we see real opportunity to address a different demographic. OurTime has been this underserved audience, particularly in Europe, where we think there is opportunity as well. When we think about it, it’s really under three buckets; the first one is new products, and Hinge is an example of that and some of the other incubators that we’ve talked about in the past; new demographics, which is like the Chispa example; and then new geographies, which Pairs is an example. We also think that the international market is very promising. We’ve learned a lot about those markets in the last couple of years, particularly with Pairs strength and Tinder strength and understanding dating dynamics in those markets. We believe that segment is still a relatively under-penetrated part of the world, particularly in Southeast Asia and South America, and we think there is real upside in these markets as social norms are changing. Lastly, I’d point out that Match and new Picks are part of our portfolio; despite the fact that we are being prudent in reducing TV spend, and we’re not seeing efficiency, we think we can get those businesses back to growth after 2019.

And then Brent, if you talk about what we’re looking at in Q4, we don’t consider it to be a negative at all. In fact, we look at it at the top end of our range. As you pointed out in a lot of your reports, we’ve been doing better than the top end of our ranges. But if you look at the top end of the range, I think we’re trying to achieve that 19% year-over-year growth. So, while it’s not as strong as the growth we’ve achieved in the last three or four quarters, as Mandy pointed out, we’ve got tough comps from Tinder Gold over that period of time. So now that we’re back to a more normal period, 19% growth at the top end still looks pretty good to us and we’d be excited to deliver that. If you take the top end of the range of $450 million and you add that from a revenue perspective to what we’ve done so far, you end up just slightly above the top end of our range for the full year at $1.723 billion. So, we feel good about delivering beyond the top end, and remembering, of course, that we’ve raised the guidance range for the year twice as the year has gone on. And that’s all despite a considerable amount of FX in the back half of the year. Since we guided last time, we have about $6 million of additional FX impact on that Q4 number. Despite that FX impact, we still feel we’re positioned to deliver strong guidance in Q4 and for the year as a whole. When we look at how the business is performing, we’re very pleased. It’s not an organic slowdown or any other organic effects that you'd be concerned about. The business is performing very strongly. There is some FX, which obviously we can’t do anything about, and other companies are facing the same issue. Looking at year-over-year, it's probably going to be about $8 million of FX effect in Q4 on a year-over-year basis. So, that’s the external impact.

I have two questions. Can you talk about the adoption you’re seeing in Tinder Picks relative to the early trends you saw with Gold last year? Just how should we think about the potential impacts on both net adds and ARPU in Q4 and as you go into 2019? And then just second on the special dividend hoping you can just elaborate a little bit more on why now, talk about your thought process there. And just in terms of your special dividend versus continuing with the share repurchase program that you have been doing? Thanks.

Thanks, Douglas. The second question was about the dividend and why now, and how we think about it. I'll take that one first, and the other question was on Picks and what we're seeing on Picks. On the dividend, which I tried to go through in my scripted explanation as much detail as I could about our thought process regarding that, obviously, it’s something we've been thinking about for a long time. We’ve been careful about it and over several quarters, we’ve been getting questions from investors and analysts about capital allocation and what we were going to do because our leverage levels are down and how we’re thinking about that. It’s a constant topic we hear all the time. I think we've been pretty clear that we've been looking at M&A opportunities around the globe and we considered some fairly seriously. But we haven’t found one that we thought made economic sense, where seller expectations are very elevated and the market has been at high levels, we decided not to stretch for those M&A opportunities. We've built a lot of cash; the business is extremely cash generative. We ended a quarter with about $400 million. The fourth quarter is an even stronger cash flow quarter for us, so we're probably sitting around $460 million of cash right now. The questions are going to be loud again about what we are going to do with the cash. Looking at it, having not accomplished a major M&A deal, we spent a modest amount on Hinge, but other than that, we haven’t really done anything on the M&A side. Instead of just sitting on cash, we said we should give that cash back to the shareholders. We believe we can build up more cash into 2019. I’m very confident we have the flexibility we need for M&A and to invest in the business and do everything we need to do. So, the question becomes, what do you do with $400 million to $500 million in cash? From a perspective of returning capital to shareholders, we felt that a dividend was clearly the most logical way to proceed. Most of it will come from cash on hand, but we have the opportunity to go into the debt markets. If they stay favorable here post-elections, we may raise money to help fund the dividend at very favorable rates on a historical basis. Looking back, we may very well be happy to have raised that debt at rates currently prevailing in the market. We’ll probably go out and raise around $300 million in debt, taking our leverage levels back up to where we think they should be in that 2.5 to 3 times gross leverage range and go from there. I don't think it changes anything regarding the growth outlook of the company or its flexibility to invest in the business or to do M&A. So that’s how we think about the dividend. In terms of Picks, I think people have to distinguish a little bit between what we expected from Picks versus how we thought about Gold. Gold was a step-function event; it’s a feature embedded first in Gold, like Likes You, that's very effective for users. Users like that feature a lot, and we saw massive uptake of Gold with massive increases in conversion as a result of Likes You. We have much more modest expectations for Picks. We think it’s a feature that resonates with people, but it wasn’t going to have the same lift as Gold. We have baked that into our guidance and our expectations for the year and into 2019. Picks has been brought out not as much as a conversion driver but something that enhances the value of the ARPU, of the Gold subscription package to users. As a result of that, it drives ARPU. You see how much ARPU continues to rise at Tinder and at the company as more than 60% of people are now taking the Gold package. We're seeing massive improvement in ARPU, which we think is up around 40% or so since we rolled out the Gold package four to five quarters ago. Significant increase in value of the subscribers we are seeing at Tinder, so as a result, you don't see a bigger lift in subscriber numbers but you do see a revenue impact and ARPU impact from Picks being rolled out. This is a feature that we will continue to refine. I think the second feature is always a little bit harder than the first feature to refine, because you've got a lot of different effects going on in the business. Tinder has become a bit more complicated from that standpoint to manage all the pieces of monetization. We'll work hard at that, and it's only been out for a number of weeks. I would expect that as we go forward, we will find ways to continue to optimize Picks, to optimize the overall center monetization efforts, and maximize revenue—something we are very adept at. We feel very good about where Picks stands. We’ve got this effect of the significant number of terminations coming from people who were in the surge of Gold last year in the fourth quarter. That surge will see some of the 12-monthers or some of the people who took a couple of six-month packages terminate. You’ll see that effect working through subscriber additions at Tinder in Q4 of this year. I think I mentioned we expect to add somewhere between 200 to 250 subscribers per quarter at Tinder, so 800,000 to 1 million subscribers next year, which we believe is phenomenal.

Gary, one quick follow-up on the answer you just provided. Can you just walk us through the package mix at Tinder? How many of the subscribers there are these six-month rolling programs or 12 months versus the monthly? There is a dynamic, just to be clear, that will drop below 200,000 for 4Q and then rebound to 200 to 250 as we get into 1Q. Just want to clarify that. Then the second question looks like Facebook has introduced the dating product into a second market recently, and this is the first call we've had since the initial market launch. So, just any update on what your thoughts are on that product and the competitive environment. Do we still perceive this to be largely benign? Finally, on the guidance, you mentioned some changes at TAM impacting 4Q, so just elaborate on what those changes were? I know you guys recently signed a partnership with Google, so just what's the ad opportunity going forward with all these changes happening on the ad side? Thank you.

Ross, let me take Facebook first, and then Gary can follow up with the others. Basically, as you mentioned, Facebook launched in Colombia. Colombia is a pretty small market for us. That said, Tinder is still the number one dating app there in terms of both downloads and revenue, and we've been closely monitoring all the metrics pre- and post-Facebook launch in Colombia. Everything from downloads, activity engagement, new users, and we have not seen any impact on the business. Like I said, it's small, but we still don't see any significant impact. We're keeping a close eye on the product both from a competitive standpoint for consumers down in Colombia as well as monitoring what Facebook is introducing in their product. So, nothing changes our view, which I mentioned a couple of quarters ago, so it's not surprising that we don’t see an impact in Colombia just because we believe Tinder users are still going to prefer Tinder over Facebook. We also think that our business has an advantage; we have 1,500 people around the globe whose single focus is really on this category, which enables us to compete, not just with small players in this rather fragmented market but also with large-scale competitors. So, we feel confident.

I think on the fan question, Ross, let me just take that one relevant to Facebook. We’ve garnered some attention for what we’ve done with Google on the ad side. We did that in Europe to use their tools in part of our direct programmatic sales. So, it’s a small piece of ad tech with Google. It’s not a fundamental change and doesn’t impact our fan relationship. I think people may be reading a little bit more into that than they should. As far as fans specifically, we had a very favorable economic arrangement with fans for a while. They had the ability to alter that arrangement if they chose to do so, and now they have chosen to make some modifications to that arrangement, thereby reducing some of the economic attractiveness to us of that arrangement. We have different options to try to offset that, and we’re trying to figure out what, if anything, we want to do to address that. There are obviously other players in the market we can work with, and so we’ll see what’s going to happen. You’re seeing some of that impact in Q4, and obviously, our plan is to try to find ways to offset that impact as we turn the corner into 2019. As for the Tinder subscribers, there are a couple of things I would say. It varies by channel and platform, whether it’s iOS or Android, on the precise breakdown of one-month versus six-month versus 12-month subscriptions. One-monthers do tend to be very prevalent just given the demographic. I would guess it’s about 80% one-monthers to 20% six and twelve-monthers, if you want to look for an average. It’s important to understand that given how many subscribers were added in Q4 of last year, with that 20% of six-month and 12-month package take-up, all of those come up for renewal now, and the renewal rates have been exceeding our expectations all year. You do see a fair number of terminations from those who took those initial six-month and 12-month packages, and it’s enough to offset what would otherwise be pretty good subscriber addition numbers in the fourth quarter. Thus, this is just ebb and flow of additions and terminations and what we’re dealing with; it’s a one-time effect from last year’s surge, and nothing more to read into it. We’ll deal with it as one of the KPIs we look at in Q4, and then we can expect to return to strong additions starting in Q1 and continue that through next year.

Maybe one for Mandy and one for Gary. Mandy, I’d like to hear your thoughts on Facebook's products in Colombia and how you view your relationship with the advertising base. Since you advertise on their platforms, it's a dynamic relationship. At a high level, how are you approaching this as the marketplace continues to change? And Gary, you reaffirmed your belief that you can achieve margins of over 40% eventually. Considering Tinder and the branding campaign there, is that something you expected? Is your outlook on reaching 40% margins evolving, with some aspects looking better or worse? I would appreciate it if you could elaborate on that. Thank you.

We’ve had a long relationship with Facebook in a couple of different areas. The first is that we advertise on their platforms with businesses, particularly like Match and Meetic. Across all our companies in the Match Group portfolio, it’s still a pretty small percentage of our registrations, at around mid-single digits. So, there’s not a lot of dependency there, and we’re continuing to advertise. Until it doesn’t make sense, we will continue to do so as these platforms are essential for reaching potential new users. On the product side, there has been more connectivity between Facebook and businesses like Tinder in the past, where the only way, over a year ago, to sign up on Tinder was through Facebook. We have looked hard at these dependencies, especially as Facebook announced they're moving into dating, to ensure that we do not have those dependencies. Across all our platforms, we now offer users the ability to sign up through SMS or email. More than 75% of new users are opting to sign up through SMS. So, we don’t anticipate much concern over these dependencies. For now, we’re taking a bit of a wait-and-see approach and managing the relationship.

Dan, on the margin question, I've got a lot of confidence that we're going to get this business to 40% or better margins over time. I think there is tremendous operating leverage, particularly at Tinder, where the margins are going to be very, very strong over time, and they are strong already. Our job is to make these trade-offs between longer-term investments that might hurt margins but be beneficial in the long run versus not. If you consider Hinge, for example, that’s the place where we’ll bear significant investments in 2019, which will hurt margins. But we believe there’s massive long-term potential there and we want to invest in that. That’s our task; we are entrusted to make those allocation decisions, and we’re committed to doing that. In '18, we had significant growth. We are on track to have considerable margin expansion, probably around 2 points, which is more than we anticipated this year. So we are over-delivering in 2018. I think 2019 could be more modest than that. If you observe Tinder's marketing campaign, we anticipated it. We knew Q3 and Q4 would be heavy marketing spending quarters, so there’s nothing surprising there, different than the pattern we typically implement from a marketing perspective. We had fully expected that. I would also say that at Tinder, as we turn into '19, I'll be surprised if marketing expenses grow faster than revenue. More likely, it’s going to grow slower. Tinder has many international opportunities, and we'll see if we can drive that with marketing; if we can, then we will invest more. However, I expect that in '19, marketing spend as a percentage of Tinder's revenues will start to decrease.

Just on Hinge, how many subscribers did you have at the end of the third quarter and how should we think about the potential for Hinge subscriber adds with marketing investment next year? Just longer term, thinking about Hinge, could you frame it up a little bit more? And then just on Tinder, any thoughts on potential relief from app store fees or take rates? Thank you.

Hinge is pretty early in its monetization efforts, and thus it has a small number of subscribers. In terms of its positioning within our portfolio, we believe it addresses a significant gap in the market. Tinder brought a whole new audience of young users, particularly in college, when it came into the market six years ago. As this demographic has matured and entered their mid-20s, a product that’s oriented toward serious dating for that age group is compelling for us. We’re excited about the growth of Hinge. We’ve observed great download growth and stellar user growth. Our strategy is to invest in marketing, especially areas where there is low awareness. We know that when people hear about Hinge and try it, they enjoy the product. It gets that flywheel moving in terms of word-of-mouth marketing. Regarding monetization and subscriber growth, the plan is to begin marketing aggressively in Q4 and drive that growth into next year while ramping up monetization.

On the app store fees, there is a lot of noise out there from other companies about the 30% take rate by Apple and Google, with various initiatives on that front. We have a very mutually beneficial relationship with Apple and Google, and we've been operating with that 30% for a while. We’d naturally like that number to be lower, and we have ongoing discussions with them. As we’re observing developments closely, we’ll see what happens. Right now, all of our go-forward assumptions are that the 30% take continues. It’s a significant sum for us. When Tinder alone generates $800 million in revenue this year, a 30% cut amounts to $240 million, not to mention all of our other businesses as well. A reduction in that 30% rate would confer a substantial benefit to our bottom line. We are very aware of that, but for right now, we presume that that remains, which is approximately 30%.

Maybe coming back to Tinder, you certainly are using product development to enhance engagement and tease out adoption of monetization at higher levels going forward. Could you help us to understand a bit of what you’ve learned in the back half of the year about the balance between engagement versus monetization, and how that feeds into your thought process around 2019 in terms of perhaps product development versus exploring pricing power in the business model over time? Thanks, guys.

We have always been clear that we view Tinder as a product-driven business. There are many things we try to accomplish with the product, but driving user growth and engagement rank at the top of the list. Much of our work at Tinder is geared toward driving user growth and engagement, and we’ve been very successful at that. Although it doesn’t receive as much attention from analysts and investors as the monetization features do, it is the bulk of where we allocate our efforts. Initiatives like loops and the feed aim to improve engagement while also achieving better matching and giving users better outcomes increasing satisfaction that drives retention. Tanya emphasizes that getting a match on day one leads users to greater satisfaction and increased retention. The revenue features serve as a smaller part of our objectives but are critically important as they dictate our profitability. Looking back at this year, most of our work revolved around user and engagement features, with Picks being the principal new feature on the revenue side. I would expect a balancing act as we enter 2019 since we’ll introduce several smaller revenue-generating features as well as ongoing features aimed at user engagement. You will see rapid product momentum at Tinder; it will be a story about velocity next year, with both user-focused features and monetization mechanisms. We believe we still have pricing power at Tinder. We’re still in the early stages of dynamic pricing and testing price elasticity; we need to enhance our sophistication at that on a country-by-country basis, as well since Tinder is essentially in every country globally. There is significant room to uncover opportunities there as we look into 2019. Accordingly, I believe you will observe a continued upward trend in Tinder’s ARPU into 2019—not to the same impressive pace we've seen this past year but nevertheless positive growth in ARPU.

Two, if I may. One related to the special cash dividend and the other on Tinder U. On the special cash dividend, I want to better understand the rationale for the $2 per share. Why not do a dollar now and another dollar maybe six months down the road where you don’t need to borrow to make the dividend? The other question is about Tinder U. You talked about the 1,200 plus campuses in the U.S., so how many campuses have you rolled out abroad? You mentioned strong engagement and the swipe rate. How has that engagement translated into potentially more subscribers and higher ARPU?

So we launched Tinder U. We really started focusing on universities and marketing on universities like last spring, and then in August, we launched Tinder U. We think that the 18 to 22 audience is really important. If you look at their market, there's really no product capturing that 18 to 25 young lifestyle and adventurous time in people’s lives. All the products launched in the last couple of years focus on much more serious relationships. We think that market is an excellent area to continue to manage and maintain. We have launched Tinder U across roughly 1,200 campuses in the U.S., which really lead to the single dating social life. We’re evaluating universities outside of the U.S., including Western Europe where university campus life is a bit more similar. There are also other regions around the world where we have ramped up marketing efforts, not Tinder U but where we focus on marketing to college-age students. We believe there’s a significant opportunity to target those in this important formative stage of their lives. On engagement—we have seen swipe rates increase, primarily because we've exhibited more relevant user matches to consumers, leading to increased engagement and thus an increase in subscribers from that audience. Overall, we’re thrilled because that segment is now the fastest growing cohort across our ecosystem, and we plan to continue to invest in it.

On the dividends, as you can imagine, we examine every permutation of the dividend amount, the timing of when to declare it, what it does to our leverage levels, our free cash flow forecasts, and so on. After careful considerations, we decided that declaring a $2 dividend now made sense. We aren’t precluded from declaring something else down the road. This decision resulted from our analysis leading us here at this particular point in time, and we’re feeling good about it. We will also continue to analyze and reassess when we stand on dividends. In our analysis, we determined our current cash positions were suboptimal in terms of leverage and we could declare, return to a more optimal position and go from there. That's how we arrived at this conclusion.

Thanks, Mandy. Thanks, Gary.

Okay, you’re welcome. Thanks, everybody, for joining. We appreciate it. And we’ll talk to you next quarter.