Match Group Inc - New (MTCH) — Q2 2019 Earnings Call Transcript

Thanks, operator. Today’s call will be led by CEO, Mandy Ginsberg; and CFO, Gary Swidler. They will review the second quarter Investor presentation that is available on our website and then answer questions. 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. Over to you, Mandy.

Good morning, everyone, and thanks for joining our Q2 2019 call. Our second quarter results speak for themselves. Our growth accelerated and our momentum enables us to increase our full-year outlook while investing in the future. I’m going to leave the financial details for Gary to cover; I’ll cover a number of big picture strategic items as well as product initiatives across our businesses. I’m thrilled to say that our businesses are executing very well on their strategies and we’re pushing into a number of exciting new areas and new geographies. Before I jump in, I want to mention a research study called Disintermediating your friends by Prof. Michael Rosenfeld at Stanford. You can easily find the draft form of a study online. It provided a sense of the macro impact the dating category is having on relationships and U.S. society. Now, for those of us who work in the industry or if you’re a 22-year-old and half your friends met their significant others on dating apps, what I’m about to tell you won’t be a surprise. But for a lot of people, the findings of this research are eye-opening. The study details how couples meet in the U.S. and reinforces many of the trends that we’re seeing today. The research found that meeting online is now by far the most common way for couples to meet. Today, nearly 40% of relationships start online. There’s been a massive acceleration in this trend over the last 10 years due to the rise of smartphones and mobile dating apps like Tinder. Meanwhile, meeting offline at bars, parties, or through friends or family has declined significantly. And what’s happening is when people meet online, they’re meeting people outside their social circles. The study found that among couples who met online, nearly 90% met people who were complete strangers. They were not connected through any friends or family. For me personally, the most important thing to note is that the study found the relationship quality among couples who met online was no different than among people who met through existing networks and more traditional channels. We’ve been talking about this trend for a while and this study reinforces what we’ve seen in western markets. We firmly believe this trend is poised to sweep Asian and Middle Eastern markets also; younger people in these geographies are now opting to pick their own partners, and our business will continue to benefit from these societal tailwinds. We can bring our longstanding capabilities in dating to these markets. And we know that we have to do this in a way that reflects evolving technology and online behavior, and most importantly being cognizant of regional and cultural differences. This is why we’ve been increasing our focus on Asia, which if you recall from last quarter, represents roughly half of our total addressable market. Let’s turn to Slide 3. On this slide, you will see our concrete steps to execute our global growth strategy. I’ll cover how we’re building and investing in new brands and extending our existing brands. Four years after acquiring Pairs, it’s now become the market leader in Japan. The Pairs team has accelerated growth and is growing steadily as category stigma rises. In fact, growth at both Pairs and Tinder is significantly outpacing the competition in Japan. We have combined our unrivaled product marketing and monetization expertise with our local teams’ extensive knowledge of this market. The senior management team and I just returned from a week in Japan. We were struck by the country’s aging population and low marriage and birth rates, which makes dating and relationship products critical. Less than 20% of Japanese singles are open to the category and we think these numbers will go up, especially as brand and category awareness increase. Pairs has a lot of additional runway and we hope it can have a meaningful impact on society. Given the strength of our local team plus the growth opportunity we see in Japan, we are extending the Pairs franchise by launching a new digital product called Pairs Engage. This new product will leverage technology to serve the local matrimony market more efficiently than it’s historically been conducted offline and in physical stores. We believe we can offer a more efficient and less expensive service geared to those who are highly motivated and want to get married within a year. Most people on this call are in the U.S. and we don’t have a comparable matrimony market here. In Japan, however, we estimate the matrimony market is already a $0.5 billion and we believe our new product can capture share of that market. A move like this could disrupt more traditional matrimonial players. This is another way that the Pairs team can provide real value for Japanese singles. Moving to the right side of the slide, we bought out existing investors and made a majority investment in a small app called Harmonica. Harmonica was developed by a team of entrepreneurs based in Cairo, Egypt servicing that market. They saw an opportunity to leverage technology to enhance the match-making process. In fact, the CEO was influenced by watching his friends and family go through the traditional arranged marriage process. He wanted to create a product for a young and modern audience that still respects local traditions and cultural norms. Young people want to meet others with similar backgrounds and values. The shift is now they want to choose their partner versus having their partners chosen for them. Essentially, the CEO created an app that someone like his sister could use. It's clear that the young single Muslim audience is a massive and growing market. There are 1.8 billion Muslims in the world; this is 24% of the world’s population and is expected to grow by more than 70% in the next three decades. And today, dating products don’t adequately address their needs. It’s important to work closely with entrepreneurs and a local team that truly understands the challenges singles in these regions are facing. Harmonica gives us a great base to build on and enables us to better serve the 33 countries throughout Asia and the Middle East that have large Muslim populations. We brought on all 12 Harmonica employees and plan to leverage our resources and our knowledge to help the team in Cairo further develop their product and scale their business. So, the business is small today. This local approach is similar to what we did in Japan with tremendous results. There is no denying the opportunity in front of us across Asia, the Middle East, and North Africa. We’re moving quickly to ensure that we capitalize on this opportunity as the market evolves. Let’s turn to Slide 4, which talks about Tinder. We rolled out a number of monetization features at Tinder in the last few years. As we mentioned on the past few calls, a big priority for us in 2019 was to optimize our existing features to drive revenue growth. Tinder’s performance this year highlights just how impactful these sometimes imperceptible changes can be on a platform of Tinder’s scale. These changes fall into three main categories; first, improving the recommendation engine to drive more engagement for all of our users; second, bringing more sophistication to our approach on paywalls and pricing; and third, improving where, when, and how we merchandise Tinder goals. As a result of these changes, we’ve been able to increase subscriber additions and accelerate revenue growth beyond our prior expectations. We highlighted features our users find valuable and by doing this, more users choose the more feature-rich and high-priced Tinder Gold subscription package. Optimizations at Tinder could be a never-ending process just like at our brands that have been around for more than 20 years. I’m confident we’ll continue to improve the Tinder platform to drive continued growth. In addition to all the wins we’ve achieved on the product optimization front, we’ve also introduced a few new consumer-facing features. Let me go into some of these features, which are unique to Tinder, because unlike any product in the category, Tinder has a global audience. First, let’s discuss Tinder Lite. For some members of our global audience, the cost and speed of data is a big concern. Tinder Lite will run faster, consume less battery, and reduce network usage by about 20%, lowering data costs for users. It also is a drastically smaller app to download in the first place, which again, reduces data costs for our users. We’ve rolled it out on Android in Vietnam and we will be rolling it out across Southeast Asia over the coming quarters. In addition to Tinder Lite, we introduced a credit card payment option on the Android app at Tinder in Q2. Most of our other brands as well as our competitors offer users the option to use credit card payments on Android and now Tinder is doing so well. To roll this out, we first had to build a web-based payment infrastructure to be able to accept credit card payments. We did the work because we believe it’s important to provide users with a choice of payment options. Let’s move to the third image on the right. We also launched Tinder Traveler Alert for our global LGBTQ users. We are by far the largest app to launch this type of warning to protect users in nearly 70 countries that still have discriminatory laws criminalizing people who are LGBTQ. Whether you live in one of these countries or are using Tinder while you travel, this is one of the many steps that we’re taking to protect our users around the world. It’s been a busy quarter at Tinder. We’ve also launched two new monetization features. Super Boost is a feature we think has particular appeal to a member who is a bit less price sensitive and is willing to pay to increase his or her activity on Tinder. Read Receipts is another a la carte feature we introduced. We knew users would find this feature valuable based on learnings from our other apps. These a la carte features will help drive average revenue per user and revenue. Before I wrap up the Tinder section, I want to emphasize one point. We’ve talked a lot about Tinder monetization, but delivering a fun, free, and effective base experience for all users on Tinder remains critically important and it’s what fuels stickiness and morality. We expect to continue to drive growth over the long run by both innovating the free fun experience and introducing new features that provide an enhanced experience for those willing to pay for them. Tinder is demonstrating the ability to deliver what young singles want. The team is hard at work evolving the product to ensure it remains the unparalleled choice for this global audience and digital natives. On Slide 5, we highlight OkCupid, which has undergone a wider turnaround over the last 24 months. After a product revamp in late 2017, OkCupid has executed successful marketing campaigns and monetization efforts throughout 2018 and into this year. This has led to OkCupid reinvigorating revenue growth in 2018 and they’re on track to do it again this year. The OkCupid team is now diligently exporting the brand to markets outside the U.S., targeting geographies where they have seen some early organic traction. Their first foray was in India in late 2018, where they localized parts of the product and deployed a modest amount of marketing dollars. This increased focus in India led OkCupid to quickly surpass both local and global players, who are spending significantly more in marketing. Given OkCupid’s momentum, we’re ramping marketing spend and launching OkCupid’s first-ever brand campaign in India. The campaign is focused on young Indians, who want to take charge of their lives, including finding their future partner. Take a look at the image on the far right. The tagline, Find My Kind, is juxtaposed against the arranged marriage newspaper ads, which feature religion, family background, and appearance. OkCupid is focused on matching people beyond just appearance and family background and emphasizes what truly matters. Based on consumer testing, we think this magic message is going to really resonate. The campaign goes live this week. In addition to OkCupid’s efforts in India, we see an opportunity in other global markets. We believe the team can replicate this playbook to expand into additional international markets in the coming quarters. Let’s turn to Slide 6. Hinge continues to have excellent momentum with strong user growth in the U.S. and in key international markets. Global downloads in the second quarter increased more than three times year-over-year. Hinge is quickly becoming one of the top dating apps in the U.S. and the UK with strong popularity among younger, more serious daters. They value Hinge’s in-depth yet modern product experience. We know that Hinge users are looking for serious relationships and to ultimately get off dating apps. That’s why Hinge’s new tagline, Designed to be Deleted, is resonating with consumers. This quarter, Hinge is launching a big marketing campaign, which we expect to drive accelerated user growth. Marketing creative that supports the tagline Designed to be Deleted emphasizes higher relationship intent and will be seen in digital channels and offline later this month. The marketing campaign follows organic press coverage that Hinge received thanks to the presidential candidate Mayor Pete Buttigieg, who met his husband on Hinge. This has increased national attention on the brand and provided more fuel to the already strong growth we’ve seen. Moving to the right of the slide, the Match brand continues to evolve its product and improve customer satisfaction. It’s on a relentless mission to provide a premium experience both in price and service for relationship-minded singles in their 30s and 40s. In the second quarter, Match launched a distinctive new feature called AskMatch, where subscribers can act as a live personal dating coach. We know that for singles looking for a relationship, some of the ups and downs of dating come after matching with someone and taking things offline. This is the first time, we’re aware of a dating app combining technology with a platform of experts to help users improve outcomes. Feedback from people who have used the feature has been great. After a session with one of our coaches, the recommendation to natural friends’ rate goes up by more than 50%. The efficacy of these impactful sessions makes us optimistic about scaling the service effectively and differentiating Match. We reduced marketing and Match in Q2, but we are ramping up brand spend in Q3 to support a fun and edgy new campaign. The new ads feature actress Rebel Wilson, and they went live last week. In the ads, Rebel hosts a podcast and risks on the trials and tribulations of dating, and who knows better how to address the needs of people looking for a serious relationship than Match. This is a great time to build buzz for Match given the past few quarters; we’ve made real strides in the product experience. We believe that with the truly revamped product, improved monetization, and a clear differentiator in AskMatch, the brand is positioned well for the long run. To wrap things up, we had a stellar quarter. Growth is accelerating; we’re continuing to connect more and more people in these sparkly friendships, great dates, relationships, marriages, and families. All the time we hear, if it weren’t for your app, I wouldn’t have met my group of friends in college through Tinder or I never would’ve met my husband, or my wife, or girlfriend, or my mom wouldn’t have met my stepdad, and one of my favorites, I wouldn’t have a house full of kids if I didn’t meet my spouse through your app. These are the stories that we hear every day, whether it’s to meet new people when you move to a new city after college or you want to find your soulmate, and these stories motivate us to develop products that create these meaningful human connections for our users. We’re investing heavily for the future to further distance ourselves from the competition, both here in the U.S. and globally. Finding your person through an app has definitely become more common than even 10 years ago. That said, we think it’s going to become even more mainstream and common, for example, as going online to book travel. If I’m right, then we would expect to have many more quarters like this ahead of us and even more importantly, many more relationships to tout. With that, I’ll turn it over to Gary to discuss Q2 financial performance and our outlook.

Thanks, Mandy. As Mandy said, we had a terrific quarter with strong growth at Tinder, solid progress on many of our strategic and product initiatives, and an improved outlook for the year. Let’s get right into the specifics from the quarter, then I’ll update on our financial outlook. On Slide 8, you can see that Tinder direct revenue grew 46% year-over-year in Q2, an acceleration from 38% in Q1 as the cumulative effects of paywall and pricing changes, various product optimizations, and the better gold merchandising on iOS had a real impact. We’ve been saying for some time now that 2019 would be about a series of product initiatives and optimizations on the Tinder platform, which would drive strong results. Tinder’s performance in the first half of 2019 certainly bears that out. In Q2, Tinder subscribers grew 39% year-over-year to just over 5.2 million. Tinder added nearly 1.5 million subscribers year-over-year and 503,000 subscribers sequentially, the second best in Tinder’s history. The only quarter where Tinder had seen a higher level of subscriber additions was right after we first introduced Tinder Gold in late 2017. Tinder’s ARPU was up 6% year-over-year as reported, but on an FX neutral basis was up about 10%. Gold subscribers as a percent of the total continued to decline and now exceed 70% of the total subscribers at Tinder. On Slide 9, you can see that average subscribers across the company’s brands reached over 9 million in Q2, up 18% year-over-year. Tinder drove our overall subscriber growth again this quarter with Pairs also contributing nicely. Hinge’s user growth is starting to generate subscriber growth even though monetization hasn’t yet been a real focus for us at Hinge. For the first time in our history, the number of international subscribers exceeded North American subscribers. We expect this trend to continue as our international growth efforts, both at Tinder and elsewhere, continue to gain steam. As we’ve talked about before, about two-thirds of our addressable market lives outside Western markets and we expect the steps we’re taking to address that massive opportunity will continue to manifest in our subscriber numbers. We continue to cut down on marketing at the Match brand in Q2, which impacted its subscribers. Marketing spend at Match was at its lowest level in more than five years, down double digits year-over-year in the quarter. That said, as Mandy talked about, the product refinements at Match continue to gain traction and we’ve launched a new marketing campaign in Q3 to begin to get the Match story back out. As reported, ARPU for the company was up $0.01 year-over-year to $0.58. It was up 4% in North America and up 1% internationally. On an FX neutral basis, international ARPU was up 7% and total company ARPU was up 5% year-over-year to $0.60. Flipping to Slide 10, you can see the company’s total revenue growth was 18% year-over-year, reaching $498 million of total revenue for the quarter. Total revenue growth would have been 22% without the impact of FX for total revenue of $514 million on a constant currency basis. North America grew direct revenue 13%, driven by 9% subscriber growth and 4% ARPU growth, while international direct revenue increased 27%, driven by 27% growth in subscribers and a 1% ARPU increase. International subscriber growth was particularly strong, driven primarily by Tinder, Pairs, and better meeting performance. Indirect revenue, mostly from ad sales, decreased close to $3 million due to continued declines in ad impressions, coupled with the impact of changes to the terms of our relationship with our ad partner. We expect indirect revenue growth to improve over the coming quarters. Operating income grew 15% to $173 million. EBITDA grew 16% to $204 million. The growth was driven by the higher revenues and lower overall marketing spend as a percent of revenue, partly offset by higher in-app fees, $9 million of higher legal regulatory and compliance costs, and in the case of operating income, higher stock-based compensation expense of $5 million. Stock-based compensation expense in the quarter was $22 million, primarily due to the acceleration of certain awards and the granting of new awards, particularly at Tinder. Given the higher than expected level in Q2, we now expect $80 million to $90 million of SBC expense for the full year. Marketing spend declined as a percent of revenue again this quarter. Tinder’s marketing efforts, particularly in several western European countries, are going very well. Our cash flow generation remains excellent, and our balance sheet remains very healthy. In the quarter, we spent $84 million of cash to buy back stock and to net settle employee equity awards. Even with this, we ended with $266 million of cash on hand. Our trailing leverage ended Q2 at 2.3 times on a gross basis and 1.9 times on a net basis. Year-to-date, we have spent a total of $215 million in cash and buybacks, and withholding taxes related to net settling of equity awards. On Slide 11, we have our latest financial outlook. For Q3 2019, we expect total revenue of $535 million to $545 million and $200 million to $205 million of EBITDA, representing year-over-year growth rates in the low-20’s percent range on both metrics. Our Q3 EBITDA reflects significant incremental marketing spend compared to Q2 2019 as we simultaneously ramp campaigns at a number of brands, including Hinge, Match, and OkCupid. As Mandy noted, Hinge is expanding its Designed to be Deleted campaign, Match recently launched a new campaign featuring Rebel Wilson, and OkCupid is undertaking its first brand campaign in India, all in Q3. We also expect to begin marketing at Harmonica, Pairs Engage, and in other international markets that OkCupid and Q3, and we’ll invest further at Tinder globally. We expect a sequential growth in marketing spend to be north of 20%. Given our strong performance in the first half of the year, we now expect full year 2019 revenue growth to be in the high teens, up from our prior expectations of mid-teens. This implies accelerated growth rates in the back half of 2019 compared to the front half, which is consistent with what we’ve been anticipating. We’re also refining our expected EBITDA range to $770 million to $800 million for the full year given improved confidence in our full-year performance. As I mentioned on the last call, we’re planning a number of discretionary long-term oriented investments in the back half of this year to reinvest some of the outperformance in the business. We’re very pleased to have the financial flexibility to make these investments, which we believe will improve the company’s long-term growth outlook. Where we fall in the EBITDA range will depend significantly on the level of discretionary investments we choose to make in the last two quarters of the year. On the back of record performance, we’re planting seeds for future growth to further capture the large market opportunity in front of us. Many of these investments are intended to further our growth efforts in Asia, so let me give some color on a few of them. You heard from Mandy about our investment in the Harmonica app and bringing on the team to better serve the large Muslim demographic globally. We plan to invest several million dollars this year to build out the team, further develop the app, and market it in several markets. This has not been incorporated in our outlook previously. In addition, Mandy mentioned the new Pairs Engage product, which is designed to be a digital matrimony product serving the large marriage-focused market in Japan. We’re optimistic about the prospects for this newly created product and are investing further in it following its recent introduction to the market. Additionally, we’ve talked several times about the organic momentum that OkCupid has achieved in India. We’re increasing our investment in OkCupid in that market and in several other markets in Asia and the Middle East, where we believe the brand can achieve similar traction. Aside from these key initiatives, we’re also investing even more heavily in Tinder product and marketing to drive product awareness, especially in a number of global markets where we see meaningful long-term opportunity including in Southeast Asia. We’re considering investing additional marketing dollars in a number of our newer bets in the second half of the year, including Chispa, BLK, and Ship. Last and most importantly, we’re investing in our employees globally, including enhanced 401(k) matching to help employees save more for retirement. Our parent company, IAC has championed these efforts and we are excited to roll out these benefits recently. Aside from our growth-oriented investments, we’re incurring higher legal regulatory and compliance costs globally. As an example, France recently passed a new 3% digital services tax, which primarily impacts our Meetic and Tinder businesses and is retroactive to January 1 of this year. We expect this to impact us by $3 million in 2019 with three quarters of it taken in Q3. Other countries are also considering following France's lead. It is clear that we – like many tech companies – are operating in an environment with higher scrutiny around our activities and we’re investing to ensure we stay ahead of this trend, especially in areas that protect our users’ data privacy and safety. With the success of Tinder’s various product initiatives, for the full year 2019, we now expect subscriber additions at Tinder to be approximately 1.6 million, well above our previous expectation of greater than one million. The rollout of better gold merchandising on iOS created upward momentum in subscriber additions in Q2, and we expect the lift in Q3 from the rollout of this initiative on Android. For Q3, we expect more than 400,000 average subscriber additions at Tinder quarter-over-quarter. We’re thrilled to have delivered a solid first half and a strong outlook for the full year. Our Tinder business continues to grow meaningfully around the world, and we’re investing to supplement that growth. We’re taking steps across the portfolio to capture the large opportunity in Asia and we’re executing on our numerous strategic and product objectives. I am confident that all of this puts us in a terrific position to continue delivering solid financial performance for our shareholders. With that, I’ll ask the operator to open the line for questions.

Great quarter, guys. Thank you very much for taking my question. Earlier, in March, we noticed a change in the payment flow on your Android apps on everything other than Tinder Gold. We then saw on a third-party dataset that tracks Google Play Store revenue that revenue on Google Play Store collapsed, which obviously didn’t happen given how well you did in the quarter. The obvious conclusion here is that you’re skipping the Play Store and you’re getting payments directly, but that didn’t seem to show up in your cost of goods. Is there something we’re missing here?

Okay. Thanks, Nat for your question and for the compliments on the quarter. So, you’re right, I know there’s a big topic. So, let me try to step people through this a little bit. You’re right that in April, we introduced an option on Tinder, on Android, to offer users a choice of whether to use Google Pay or credit cards. As Mandy mentioned in her remarks, it’s something that we’ve been planning for. It’s something that we have on many of our other brands, so it’s not particularly new, but it was new to Tinder. We had to do some work to get there and we accomplished that and then we were able to roll it out. This is really something for new transactions. So the benefits of this will sort of build over time. It’s a relatively small amount of benefit in Q2, but it’ll be larger in Q3 and then as we move to 2020 and beyond, it should increase from there. You can notice it in the cost of goods as you mentioned. If you go back over time in our cost of goods, you’ll see that that percentage has been increasing relatively significantly for many quarters. In this quarter, we had a slight change in that trend, and we’ll see as we go forward, some impact on that percentage as well. So, I would say it’s kind of single digits in this quarter of the benefit, but it will be increasing. I think that answers your question.

It does, can I ask just a quick follow-up?

Sure.

Would you expect to see this happen on iOS as well? And what do you think the response will be for Google and Apple?

So, if you look historically, Google has been a more open platform. And as I said, we’ve been offering this option on many of our brands. So, I’m going back a fairly long time, so, this is not new from a Google perspective. Apple has tended to be more restrictive, so we’ll see what happens with Apple. We’d love to offer the same kind of choice on Apple as we do with Google, but it’s not clear to us, if or when that’s actually going to be able to happen.

Great. Thank you.

Thanks so much. Maybe, diving in a little bit in terms of the narrative broadly overseas and what you’re seeing in Asia, and what you’re seeing in the Middle East. I want to understand a little bit of the nuance about how you might be taking different approaches to marketing and positioning brands in those markets, and how we should be thinking about ROIs on investments in those markets against the subscriber growth opportunities? So maybe, see if we could go a little bit deeper into the opportunity you see especially in the Middle East and Asia as you called out in the slide? Thanks, guys.

Okay. I’ll take that, Eric. So, if you look at these markets, which are more underpenetrated markets, there are definitely more secular tailwinds. I mean, these are markets where there’s big population growth and we’re still seeing Internet penetration increasing and mobile usage increasing. I think one of the most important things to point out is sort of that stigma is eroding, which we think is going to help really increase usage across the brands. Because of these dynamics in the market, it really gives us the opportunity to take a number of our apps into these markets depending on the segment that we’re going after. We’ve really tried to be holistic in thinking about a market. So, for example, in India, Tinder has been present in India as the largest player there, but we recently introduced OkCupid because we felt there was a hole in the market in terms of a more serious-minded relationship app. Japan is another market, where there is Tinder; there is Pairs, which has seen tremendous growth, and now we’re offering a third product as of a few weeks ago with Pairs Engage. Then the one we talked about today, which is Harmonica, is really around looking at cross-geo demos, where we can serve the Muslim population. We’re excited. We don’t think in these markets there’s winner-takes-all as we think we can offer different apps for different segments. There’s a real opportunity for growth. Then you asked me about how do we think about marketing? We approach marketing a bit based on brand lifecycle. So, as we launched new products in new markets, we generally tend to spend more money on brand spend and measure awareness. Then over time, as brands and products become more mature, we tend to start shifting more to performance marketing. We’ve got a really good track record in the past for being smart and prudent, and we need to take some bets as well. I think that balance of brand and performance marketing has served us well.

Thanks so much.

Hey, guys. So, Gary, a question on the guidance for back half, so we’re obviously seeing – as you mentioned, the second highest net adds for Tinder in company history, so tons of momentum, but the guidance implies a little bit of tailing off of the net adds in Q3 and Q4. So, is that from the new merchandising playbook having less dramatic impact on the Android side? Is it from higher churn or just higher rate of drop-off or is that just usual conservatism? Any color there would be helpful. Thanks.

Sure. So, I think as you know, if you kind of look historically, when we roll out new features that are focused more on monetization or we’re focused on optimizations, you do see a particular bump in the quarter when we roll it out, from a net adds perspective. If you’re looking at Q2 at the high number of subs that we added at Tinder, you can see that’s been driven by the iOS optimizations that we did, as well as the merchandising changes that we did. We’ve rolled that out now in Q3 on Android. We talked before about how Android doesn’t quite have the same impact as iOS when you roll out something new like this, but we’re seeing in our guidance for Q3 on net adds that there is still a nice lift from normal levels in Q3 that we’re expecting when we’re guiding to north of 400. You can see the impacts there of those changes in Q2 and Q3. At the moment, we don’t have a plan to do something we think would have this kind of impact in Q4. So that’s why we’re expecting a smaller number of net adds in Q4 than we’ve seen in the first three quarters of the year. It’s also important to note that we’ve rolled out some new a la carte features and we’ve been adjusting pricing, and the percentage of gold subscribers is increasing. So, a lot of people like to focus just on subscribers, but as we often say, it’s a revenue focus at Tinder, not just the subscriber story. The subscribers are a piece of it, but we’re also focused on driving ARPU higher, which we’ve been able to do and we’re expecting to have solid year-over-year growth in ARPU in Q3 and Q4 as well, which will drive improved revenue at Tinder. So, that is the other piece of it. We’ve just rolled out these two new a la carte features that Mandy mentioned. I think you’ll see some lift on the ARPU side as you see the results for Q3 and Q4. Anything else, Ross? Otherwise, we’ll move to the next one.

No, that’s super helpful. Thanks.

Okay, great. Thanks.

Good morning. Mandy, can you just maybe walk through some of the core Match improvements in the early results and for Gary, there are a lot of questions around can it grow, are you going to run that core business just for profits? If you could add a little more color around the financial dynamics that you see going forward for core Match?

Okay. Good morning, Brent. So, let me take that first part. So, can we take a step back and think about kind of the audience that Match serves? It’s really focused on singles in their 30s and 40s in the U.S. that are looking for a serious relationship. For people over 35, it’s the brand that still brings the highest number of new entrants into the category. We have made a lot of progress over the last couple of quarters. Satisfaction rates are up; conversions are up, and we’re feeling really optimistic. And then we also introduced a new feature called AskMatch, which I talked about. We think it’s highly differentiated. We felt good enough that this is really the time to bring attention back to the brand, which is why we launched this new campaign that I talked about. Our goal remains to turn the brand to grow similar to what we did at OkCupid over the last couple of years, and we are cautiously optimistic that we can turn Match around and return it to growth. We’re feeling good about that brand.

Yes. And I think if you look at Match itself, as Mandy said, our goal is to get that brand back to growth from a subscribers and a revenue perspective. If you zoom out a little bit away from just Match and look at the non-Tinder brand, which we’ve been talking about, it’s kind of been flattish from a revenue perspective. We think we have a lot of different weapons inside the non-Tinder portfolio that will return all those brands in aggregate to growth in the not-too-distant future. We’ve talked a lot about Hinge. We’ve talked a lot about what’s going on at OkCupid. We’ve talked a lot about the positive momentum at Pairs, and I could go on, but our expectation is that the non-Tinder brands will start contributing to the revenue growth of the company, hopefully by the end of this year, if not then very early next year.

Great. Thanks.

You’re welcome.

Great. Thank you very much and congrats guys. Gary, can you size what you termed the discretionary long-term oriented investments? I think you guys have talked about $10 million previously and just how will those costs look into next year, whether these costs basically remain in the P&L next year or whether we anniversary them and move on? Thanks.

Yes. I don’t think I’ve actually ever given a size around these discretionary investments. I think last quarter, I basically just said we were contemplating making them. So, let me try to take it kind of in two pieces. Given the overall strong performance and the strong performance of Tinder, we want to reinvest back both in Tinder and in some of these other initiatives. I can’t really remember a time when we’ve had so many great investment opportunities, so many assets to invest in when you look at Harmonica for the Muslim market, when you look at Pairs Engage, which we’re really excited about in the matrimony market in Japan. It’s a place we’ve never tried to attack before. We’ve got a lot of really interesting opportunities in front of us, and given the strong performance this year, we’ve got the ability to go make these investments. We’re trying to do a number of different things here in the last couple of quarters of the year. If you look at, we’re going to invest a bunch back in Tinder marketing into new geographies, where Tinder historically hasn’t marketed before. That includes some in Asia, and we think there’s room to expand the geographies, where Tinder has been marketing and put some real dollars to work there. So, that’s a piece of it. Then as we’ve kind of gone through, there’s probably four or five more buckets, OkCupid and some of the international markets including India, that Mandy referenced, Harmonica, which I referenced as well as Pairs Engage. If you take all of those other buckets plus Tinder, you’re probably looking at, I would guess about $25 million or so of EBITDA impact from all these investments that we want to make this year yet. So, it’s a pretty big number. As far as whether it will continue, we don’t know yet what the impact of all this is going to be. We’ve got to look at is it Tinder marketing effective? Is Pairs Engage gaining the traction we want yet? Is the Muslim market product getting the traction we want to get? So, I don’t know what it portends for 2020 yet, and our hope is that that marketing and those investments will have a real impact and we’ll want to continue them. Ultimately, they will lead to revenue and ultimately EBITDA benefits. But it's going to be some time before we see what the real impact of all these investments is? We're making them cautiously. We've thought about them for a while now, and we're starting to make those investments. We have a pretty good ability to figure out where to invest. And we'll have to see, but we don't look at them as kind of one time once-and-done investments for the most part; they are things that are meant to drive the business going forward. That discretionary bucket, which is a large bucket and has a lot of different components, is on top of our addition to money that we're spending around regulatory and making sure users stay safe and their data is protected. So there's another bucket on top of that. You aggregate that up, it's a pretty big impact on our EBITDA in 2019.

Thanks.

Yes, hopefully that helps you. Okay, great.

Yes, super helpful. Thanks, Gary.

Great. Thanks for taking the question. Good morning everyone. Mandy, I just wanted to ask a little bit more about Asia broadly, and maybe you could just considering that most of us on the call are a little bit more US focused, you could maybe just refresh us on the competitive environment there and how it may differ from what you see in western markets in terms of local players or maybe some changing dynamics lately that you'd highlight. And then secondly, I'd just like to drill down a little bit more on Pairs Engage and what you noted is sort of attacking the matrimony business specifically and which obviously is all part of relationships, but a little bit different than some of your apps and there are certainly businesses that have taken a different approach there. Could you just spend a little bit more time on matrimony services specifically? And where that opportunity may also be in Asia beyond Japan as I think that's fairly common in India and South Asia as well? Thank you.

Okay. Morning, Dan. Alright. So let me take that. So, we talked about Asia opportunity, but Asia is obviously very multifaceted, and so I will talk about it in a couple of different areas. We really look at developed markets like Japan and South Korea. Then we look at developing markets, Southeast Asia and India to all break those up. For the developed markets, there is a real social need given low population growth, low marriage rates, and people are looking for ways to meet people, especially outside of their social circles because there’s a little bit more shyness around meeting people through friends. In Japan where the category is growing, only about 17% of singles are open to using a relationship or dating app that's low. I mean that’s about 50% in North America and Europe, so that dynamic is a significant change. We think there’s a real opportunity to increase user adoption. It’s pretty interesting in these markets where social stigma is changing, but I think part of one of the opportunities that we see regarding stigma is historically mainstream media. I’m talking television, billboard, radio, they have not traditionally allowed dating apps and relationship apps to advertise. Those barriers are slowly collapsing, which I think will further help erode stigma and make it just much more normal in society to use the apps. The one other dynamic I’d point out in these more developed markets is that monetization is really different. In many of these markets, particularly Japan, it's even better monetizing than in some western markets. So that dynamic is really an advantage for us because people are willing to pay for products. If you look at developing markets, it's definitely a little bit different. These are where population growth is exploding. Internet and mobile penetration is still growing meaningfully faster than anywhere else in the world. There are a couple of factors in those markets, which I think are interesting and really compelling to us. So, there are highly populated cities, and in those cities, there are large segments of young educated, affluent users, which we think is an opportunity for us to offer products like Tinder and others. Then, you asked about the competitive set. There are definitely well-fortified competitors in some of these markets, both global players that we're seeing, as well as local or regional players. I think in terms of our position in the market, I don't think it's a winner-takes-all market. In the U.S. we're seeing people use multiple apps. I think that's going to continue to be a trend, not just in the U.S. and Western Europe, but I think we'll see that happen over time as well. So, I do think it's possible that as these new entrants come into the market and spend heavily along with us having a presence in these markets, it could open up the market and further erode stigma, which I think would sort of lift the whole category app. Regarding how we're competing, I think we’re really well positioned. We’ve got a track record of creating products that really resonate with a young audience that are looking for relationships. We’ve also done, I think a good job and identifying, finding, and investing in local teams, which we think is even more important over the next five years, and then extending existing brands into the market. So overall, we feel like we’re in a great place. I’ll talk a little bit about the marriage market because I think that is relatively new. We just launched Pairs Engage honestly weeks ago, so it’s still super early. There are, the matrimony markets are pretty large in a number of markets like India and South Korea and Japan among others. These businesses, because a lot of us don’t have direct exposure to them, are mostly offline. They’re brick and mortar, so they have a store front. They’re generally pretty high-priced for consumers and it’s pretty expensive to service these consumers, especially given kind of the brick and mortar footprint I mentioned. Often they have salespeople in a lot of service-oriented areas within these brick and mortar stores. The Pairs team, which we've talked a lot about has done a great job in building this Pairs business over the last few years, so they have really strong assets. We believe they can leverage the latest technology plus the Pairs user base, and we think that combination has the ability to potentially disrupt this marriage market, which we talked about, which is pretty large in Japan, and it’s really early; we just launched early tests and got a lot of press and early signals of strong user interest. As you know, as we expand over the next few years in Asia, I can imagine that these types of solutions can translate to other markets. So, we will see, but I think that’s certainly one more product in our arsenal to address that market.

That's great. Thank you for all that color, Mandy. Appreciate it.

Hey guys, congrats again on the good execution. Gary, going back to the app payments and the impact on COGS, as you noted, it fell sequentially as a percentage of revenues for the first time in many years. I think you mentioned that the IAP change had single-digit impact and will grow, but single digit what? Can you clarify what you meant there? And basically, would you expect that COGS to continue to fall as a percentage of revenue for the foreseeable future? And then secondly, related to that for modeling purposes, can you help us understand what the percentage of total revenues are currently originating on Android and how you expect that to evolve over time? Thanks.

Sure. I'm sorry if I wasn't clear on the answer earlier. When I was responding to actually with Nat about the report that he thought the change by adding credit card added $10 million to EBITDA, I think is what he said. I was talking about it as it was less than that. It was kind of in the single digits in this quarter. So that's what I was responding to. So it was an EBITDA contributions kind of number. But you're right, this is the first quarter in a while that we've seen, if you look at the sequential trends in COGS, it's down about 50 basis points. So that is a change in trend. I think we'll see how this kind of plays out over the next few quarters, but my expectation is that there’ll be some level of stability. Maybe it'll be up a little bit, maybe down a little bit, but if you look sequentially over the next few quarters, you're going to see more stability, less of an increase than what we've been seeing sequentially for the last many, many quarters. That's kind of the change from the impact of adding the Google credit card option. As far as how do we think about the breakdown between iOS and Android on Tinder, as you might expect, it is more iOS heavy at the moment. It's more than majority iOS, but as we expand internationally, especially to some of these developing markets where Android is more popular, I think that that balance will shift over time. So, we could see some more parity there over time. But right now it does lean more heavily on the iOS side from a revenue percentage perspective.

Thank you. Just one quick housekeeping. The tax in France and other taxes they may come, is that going to be counted as a contra revenue G&A or is that just part of the income tax line?

Yes, it's not an income tax. It's an above-the-line item. So it is an expense item.

Okay. Thanks. Last question.

Okay. Thanks for allowing me in here. I was just wondering if you could talk about your capital allocation priorities, given your and your strategic presence in APAC? And secondly, perhaps, could you highlight the near and long-term market opportunity and the competitive environment you see in the Middle East and how well Harmonica is penetrated there? Thanks.

Okay. From a capital allocation perspective, I think if you go back, it's probably about a year ago or so now, we laid out how we think about capital allocation. We laid out four priorities, which were, in order if I get them right: organic investment in the business, M&A, return of capital to shareholders, and debt pay down. That has been our way of thinking about capital allocation. Obviously, there are a lot of different factors that go into it and we constantly analyze it. That has kind of been our framework. Fortunately, what we're seeing this year, given the outperformance that we're experiencing, is that we've got the ability to really invest in organic growth, which is our number one priority. That's what we're doing. We’re doing it in a bunch of different ways. We're doing it at Tinder by expanding its marketing into more geographies. We're doing it at OkCupid by expanding it into new markets, in India, and elsewhere in Asia. We're doing it at Pairs. We’re really hitting that number one priority of investing organically in our business in a big way on multiple fronts, and we're excited to do that. But as we've also shown over time, if we don't have a capability in-house that we think we can do better by making an acquisition or investment, we'll do that too. Pairs was an example in Japan that we did initially, and that's worked out really well by combining their know-how and ours. We're hoping that the same will hold true at Harmonica where it's a very small app focused on the Egypt market at the moment. We’re going to try to build it out and expand it and get it into other geographies and invest in it with product and marketing. We believe there's real opportunity just given the size of the Muslim demographic that Mandy talked about and how quickly it's growing. We think we can position ourselves over the next while to capture more and more of that opportunity. It will take time, so people are going to have to be patient to see the results from that investment in Harmonica, but it's one that we're excited to be making.

Great. Thank you.

Okay. I'm going to leave it there since we're out of time. Appreciate everyone joining and we look forward to talking to you again next quarter. Thanks so much.