Match Group Inc - New (MTCH) — Q4 2020 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Today's call will be led by CEO, Shar Dubey; and our CFO and COO, Gary Swidler. They will make a few brief remarks, and then we'll open it up for questions. Before we begin, I need 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. With that, I'd like to turn the call over to Sharmistha.

Thank you, Lance. Good morning, and thank you all for joining the call today. Since this is the first one of the year, I'm going to start out with sharing some of my thoughts and then Gary is going to add a little more color to the financials. The year 2020 was challenging, and even though it feels like we're still dealing with some of the aftereffects, all in all, I feel grateful for how we navigated the year both as an organization and as a business. It is remarkable that despite COVID and lockdown having put a real damper on dating, meeting, and socializing, we were still able to meet our goal of mid to high teens growth we set out at the beginning of the year. Without COVID, it would have been an even better year. The strength of our portfolio strategy, as well as our ability to pull different levers quickly, allowed us to manage through the volatility we saw throughout the year. COVID has had a resurgence in the second half of Q4 in several large markets, with the UK being an example, where four of our largest brands have a meaningful presence, and they are still seeing a significant drag. Despite that, every one of our key brands grew revenue again in Q4. At the beginning of COVID back in March and April, I don’t think I could have predicted exiting the year with 19% revenue growth, and more importantly, fueled by all of our major brands. Investors should take comfort in the institutional strength of the company. We delivered on business goals consistently over the last five years of being a public company, and in a year like 2020, with all of our global employees working remotely, we seamlessly navigated leadership changes and even a full separation to become an independent company. Looking ahead, I see 2020 as a turning point in user behavior, particularly in how much of our lives and activities have moved online. I believe that as the world gets back to normal, some of this online behavior will rebalance, but part of it is definitely here to stay. This has implications for our products, both in how we evolve the experiences on our apps and look at new use cases to help people connect. We think this will be a big area for us this year. While we set similar levels of goals for ourselves at the beginning of the year, it is important to keep in mind that the pandemic is still disrupting our lives, and we continue to see volatility, making predictions for this year particularly challenging. In our Western markets, we generally see positive seasonality post-Christmas and into the New Year. However, as you can imagine, this was less pronounced this year. That said, in Q4, we expect to see all of our major brands grow revenue again in Q1. As we saw last summer, in countries that emerged from lockdowns, as vaccines roll out and conditions improve, we expect more people to engage in dating activities and use our apps. One area of incremental investment and focus for us this year is in our trust and safety efforts. This has been a crucial area for our category since the beginning. In the real world, we have developed laws, enforcement tools, acceptable codes of behavior, and rules over hundreds of years. The digital world has only been around for a couple of decades, and its popularity really has only increased in the last decade. It will require leadership from tech companies, regulators, law enforcement, and the community at large to establish acceptable rules and norms in this digital landscape. We plan to increase investments in our own platforms; but more importantly, you will see us making greater efforts in broader initiatives, such as partnerships with third-party organizations, technologies, and non-profits. We will enhance collaboration with law enforcement and regulators around the world to continue leading the conversation on trust and safety in the digital realm. Overall, I feel good about our product and portfolio strategy that provides us with multiple growth avenues. The value proposition of our products remains strong, and I am hopeful that the vaccine rollouts will bring normalcy later this year. I am personally looking forward to traveling and visiting our teams, and I know our users will be eager to date and meet with a renewed perspective on what connections and relationships mean to them. With that, I will turn it over to Gary.

Thanks, Shar. Q4 saw our fastest topline growth of the year at 19% year-over-year, a one-point acceleration from Q3 levels. Tinder grew direct revenue 13%, and the non-Tinder businesses continue to accelerate with direct revenue up 28% year-over-year. All major non-Tinder brands contributed to year-over-year direct revenue growth in Q4. This was the third consecutive quarter of non-Tinder brands showing growth in aggregate. Pairs, as well as our newer brands Hinge, Chispa, BLK, and PlentyOfFish live streaming, all grew rapidly in the quarter. We believe Q4 results would have been even better had COVID lockdowns not forced people back into their homes and colder weather limited activities in many parts of the globe. The growth in Q4 was well-balanced by geography, with both North America and international contributing to 19% year-over-year direct revenue growth. Indirect revenue grew 35% year-over-year as many marketers looked to deploy unspent budgets in Q4. Average subscribers increased by 1.1 million over the prior year to 10.9 million, representing 12% year-over-year growth, up 9% in North America and 14% internationally. Year-over-year, Tinder’s average subscribers were up over 800,000, or 14%, and non-Tinder brands were up over 300,000, or 8%. Recall that Q4 typically tends to be our weakest quarter seasonally for subscriber growth. Virtually all the sequential subscriber growth in Q4 came from Tinder. Subscriber growth, particularly at Tinder’s broad global business, was impacted by COVID-related effects in key markets, including India, Brazil, and Western Europe, particularly the UK. Total company ARPU was up 5% year-over-year to $0.62, up 7% in North America and 4% internationally. Tinder ARPU decreased slightly year-over-year due to a decline in a la carte revenue as COVID lockdowns increased, and a deliberately slower than expected rollout of Tinder Platinum, which we decided to restrict to existing Tinder subscribers in Q4. Non-Tinder brand's 16% year-over-year ARPU growth was remarkable, with all major non-Tinder brands increasing ARPU year-over-year in Q4. Pricing optimization at Hinge and OkCupid and the launch of a la carte features at Hinge and PlentyOfFish's live streaming revenue were major contributors to the ARPU improvement in the quarter. Operating income grew 17%, and EBITDA increased 13% year-over-year in Q4. EBITDA margins were 38%, which is 1.8 points lower than in Q4 2019, primarily due to higher costs for revenue and sales and marketing spend. Sales and marketing expenditure was up $34 million or 34% year-over-year as we sought to leverage new channels in Japan and invested in the well-received Match Made In Hell campaign. Marketing spend represented 21% of total revenue in Q4, in line with Q3 levels, but up three points from the previous year. The cost of revenue was impacted by higher IR fees, web hosting expenses, and the costs related to live-streaming video at PlentyOfFish. For the full year, we achieved nearly $2.4 billion in total revenue, up 17%, and almost $900 million in EBITDA, up 15%. Despite all the challenges posed by COVID, we met the mid to high teens revenue and EBITDA targets we set a year ago. Our gross and net leverage improved to 4.3 times and 3.5 times, respectively, down from 4.8 times and 4.6 times at the time of separation from IAC. We ended the quarter with $739 million in cash on hand. Because of the timing of specific payments, our EBITDA to free cash flow conversion rate was higher in Q4 than it had been year-to-date through September. Our full-year 2020 free cash flow conversion was similar to that of 2019. As we noted in our shareholder letter, there is much uncertainty as we begin 2021. We expect COVID to continue being a headwind for subscriber growth in the first half of 2021, but we are hopeful for improvement as the vaccine rollout gains momentum. Considering this, we believe we can generate $2.75 billion to $2.85 billion in total revenue in 2021, representing another year of mid to high teens top-line growth. We anticipate strong contributions to growth from both Tinder and non-Tinder brands. We expect the combination of low double-digit subscriber growth and single-digit ARPU growth to drive direct revenue growth. Our outlook also assumes indirect revenue will remain essentially flat year-over-year. While we expect Tinder subscriber net additions to gradually improve as 2021 progresses, our Q4 performance demonstrates that our growth is no longer dependent solely on Tinder subscriber additions. Our business now has multiple growth drivers, and we anticipate that these will yield strong growth in the foreseeable future. We expect 2021 EBITDA to exceed $1 billion with mid to high teens year-over-year growth, driven by revenue growth and increased spending on product development, trust and safety, and somewhat higher legal costs. The increase in legal costs includes expenses incurred to defend against a lawsuit by former Tinder employees, which is scheduled to go to trial later this year. The incremental product development spend will focus on three areas: continued investment in our emerging brands, such as Ablo, Hawaya, and Pairs Engage, the latter two aimed primarily at growth in Asia; enhancing our tech and video capabilities as we expand product use cases; and supporting growth at Tinder, Hinge, and our other key brands. Given the investments we believe are appropriate, we may not expand margins this year. This assumption is based on the idea that conditions will create an environment where our expected spending levels, particularly in marketing, are justified. That is far from certain in the current tumultuous climate. We will remain flexible and adjust our strategies as we have throughout the past year in light of the pandemic. In 2021, we expect to drive significant growth from newer brands such as Hinge, Chispa, and BLK, which have recently reached or are close to reaching profitability. As these brands continue to improve their margins, the overall company margins will benefit as well. We continue to expect gradual company margin increases in subsequent years to reach our long-term target of 40%. We anticipate 2021 capital expenditures of approximately $80 million as we expand new office space in New York and LA. We expect free cash flow conversion levels in 2021 to resemble those of the previous two years. We do not expect to be a full US Federal cash taxpayer until 2023. Our projected stock-based compensation for the full year 2021 is approximately $100 million, while depreciation and amortization will total around $45 million. For Q1, we anticipate total revenue between $645 million and $655 million, which would represent an 18% to 20% year-over-year growth. In Q1, we expect sustained revenue growth rates exceeding 20% on a year-over-year basis at non-Tinder brands, with slightly stronger year-over-year growth at Tinder compared to Q4. We expect EBITDA of $210 million to $215 million in Q1, which reflects margins consistent with our typical Q1 levels. Our ranges for Q1 and the full year 2021 take into account anticipated impacts from Google's new requirement to utilize their in-app billing system starting in September. This outlook does not include potential impacts from IDFA changes, which remain difficult to quantify at this time, nor any relief that may occur regarding App Store fees due to ongoing regulatory actions challenging Apple and Google's conduct. We are delighted to provide an outlook that includes mid to high teens revenue and EBITDA growth for 2021, as we did for 2020 a year ago. We are hopeful that 2021 will gradually provide calmer conditions on which we can execute our plan and deliver another solid performance for our shareholders. With that, I'll ask the operator to open the line for questions.

Great. Good morning. Thank you. I have a couple of questions on Tinder. Could you provide more details regarding the sources of the revenue growth slowdown in the quarter and the sustainability of the drag likely in the first half of 2021? Additionally, regarding your product roadmap, could you provide the latest updates on the Platinum rollout more broadly to non-subscribers?

Thank you, Ben. Let me start with a broader view of how the second wave of COVID resurgence is playing out, and then I'll focus on the specific impacts on Tinder. In particular, the second half of Q4 and into the new year has seen a surge in COVID and lockdowns, leading to reduced mobility in many markets. Specifically, as I mentioned in my remarks, the typical peak season looks different this year. The UK is one of the worst impacted areas, likely due to a combination of both COVID and Brexit, but there are also markets throughout Europe that are less severely impacted. Here in the US, California and New York have seen more impacts compared to Florida, Arizona, and Texas. Similar situations have been observed in certain markets in Asia and LatAm, which reflect patterns we've seen earlier in the year. The impacts have affected both new users and the propensity to pay, especially for a la carte offerings, and these effects vary by market. In summary, Tinder’s geographic exposure is significant, as markets like India and Brazil alone could yield a 100,000 subscriber swing. The propensity to pay decline affects a la carte revenue heavily, which impacts Tinder more because it relies more on a la carte compared to other brands. Hopefully, that answers your questions about Q4. We acknowledge there will be an impact from COVID at the beginning of the New Year; however, we are optimistic that Tinder will experience accelerated growth rates as the quarter progresses, based on our previous summertime patterns and recent trends in markets like India as lockdowns ease, resulting in increased mobility. Regarding Platinum, our strategy has always emphasized ARPU, and due to its premium pricing, we have chosen not to roll it out to all users. It is currently accessible only to existing and previous subscribers, and we will evaluate when it makes sense to offer it to a wider audience. The users who have received Platinum access have shown increased engagement in terms of messages and matches, which was our intention. Therefore, we view it positively and will monitor for the right time to fully roll it out.

Excellent. Thank you so much.

Great. Thank you. This is for Shar and/or Gary. Regarding the non-Tinder brand performance, as Gary mentioned, we observed further acceleration in non-Tinder brands in Q4. Can you discuss the key drivers of growth in the quarter and your expectations for non-Tinder brands in 2021 and beyond?

Sure. Gary, I can address this. As we highlighted last quarter, the performance of our non-Tinder brands is driven by three key factors: First, legacy brands like Match, Meetic, and OkCupid in North America continued to accelerate thanks to product and marketing initiatives. Second, our newer brands such as Hinge, Chispa, and BLK have experienced significant user growth and monetization. Pairs has contributed greatly, as we opened new marketing channels that put it in a strong position for 2021. Third, new revenue initiatives like Pop Life have become meaningful contributors, having started with zero revenue at the beginning of the year. We firmly believe that these growth drivers within non-Tinder brands are sustainable and poised to make strong contributions in 2021 and beyond. As current drivers are supplemented by emerging brands like Hawaya, Ablo, and Upward, we are optimistic about future growth. Overall, we have a robust set of drivers for continued growth within our portfolio.

Thank you.

Great. Thanks for taking the question. You mentioned this in your prepared remarks, but I'm curious if there have been any new developments regarding potential gross margin or EBITDA impacts from the requirement to use Google Play payments starting in September. Just to clarify, does the full-year guidance assume all Android payments will go through the billing system starting in September?

Sure. Let me address that. First, taking a step back to discuss gross margins, I would say our cost of revenue, excluding in-app fees, remains relatively stable. Despite various initiatives we have in place for video and others, we see that stability. On the in-app side, we are observing a slight increase due to apps like Hinge, Chispa, and BLK contributing increasing revenue and incurring the standard 30% fee across the board to the app store. This mix of brand contributions is impacting our overall in-app fees as a percentage of revenue. Regarding Apple, there is limited flexibility; we will see how this develops. As for Google, they announced a policy change slated for September, which would significantly impact us if enacted. We are maintaining a constructive relationship with them and are having productive discussions. They recognize the potential financial impact of their policy change on us, and we remain hopeful for a solution that will help mitigate these costs. Our guidance for the year incorporates the anticipated impact in Q4 from the Google change. If a solution is found, we will adjust towards the higher end of our range. There are many moving parts regarding regulators worldwide and App Store fees, making this an important year for assessing how these situations will unfold.

Great. Thanks, Gary.

Great. Thanks so much. Looking at Hinge specifically in 2021, how are you thinking about balancing further ARPU growth versus acceleration in subscriber growth or payer penetration rates? Are there any key KPIs or milestones you can provide about that business exiting 2020? Additionally, regarding IDFA, given the ambiguities, any range of scenarios or outcomes you're considering regarding IDFA rollout would be helpful.

Sure. Regarding Hinge, our primary goal was to establish a strong subscription product, followed by the launch of two solid a la carte offerings. The Roads and Standouts feature—analogous to super likes on Tinder—has already exceeded our take rates compared to Tinder's super likes. Interestingly, Roses are not just a revenue product; they also serve as a highly effective engagement tool, facilitating 2.5 times more conversations off the platform. ALC revenue at Hinge is becoming a meaningful source of income, especially considering it was virtually nonexistent at the beginning of 2020. In 2021, we have a comprehensive roadmap to enhance both the subscription and overall product engagement features. Hinge's user growth strategy includes testing in select international markets, with a broader rollout plan set for 2022. We are optimistic about Hinge’s execution, and we have full confidence in its prospects for 2021. As for IDFA, since we are not an ad-supported business, the potential effect on us primarily concerns marketing expenditures and user acquisition efficiency. There are many variables involved, and we are unclear about how it will develop. Poorer targeting could affect marketing efficiency, but it is also uncertain how pricing may change. While we have experience with evaluating brand spending, like out-of-home and TV, we cannot precisely assess the IDFA impact. Currently, we are not incorporating it into our outlook. Gary, did you want to add anything?

No, I believe you've covered it all.

Thank you.

Good morning. Gary, could you walk us through your expectations for the second half of the year, considering that many anticipate a return to normalcy? What expectations are you embedding for the latter part of the year?

Yes, Brent. As you know, we strive to be cautious in our forecasts, especially given the uncertainty that exists as we begin the year. We are early in 2021 and are being careful not to overly assume positive outcomes. We are optimistic but remain cautious, especially because many questions remain. Currently, when looking at the year, we’ve provided specific expectations for Q1, factoring in COVID headwinds. In Q2, we expect some continued COVID headwinds, but the comparison is easier than last year due to significant COVID impacts in Q2. For the second half, we have assumed a reduction in current COVID challenges but do not foresee a return to full normality. We have refrained from factoring significant pent-up demand for dating activity into our expectations for the second half of the year, even though it's a possibility that some may believe it could occur. Thus, we’ve chosen a more conservative outlook. We plan to monitor these circumstances for a quarter to see how vaccine rollouts advance and how mobility changes. Improvements in mobility result in increased dating activity. If, as the year progresses, trends exceed our expectations, we will adjust our outlook accordingly. That said, the current approach reflects what we believe is prudent.

Thank you.

Hi, thanks for taking the question. Just a follow-up regarding the improvement in India and how it influences engagement metrics like MAU usage time, platform activity levels, and how the insights from India can be applied to other markets as they begin to reopen in 2021.

I think Shar is trying to speak, but I can't hear her. So...

Sorry, Gary. Hey Kunal, I apologize. I was on mute. While I don’t want to draw too many conclusions, India has faced significant challenges, which we noted previously. However, in recent weeks, we've observed a substantial rebound in case numbers and increased normalcy. Although conditions have improved recently, Q4 did have a material impact on subscriber additions, particularly in the first half due to the impacts we earlier seen. Generally, as markets ease out of lockdowns, we observe a clear correlation between increased mobility and activity on our platforms. We witnessed this throughout the summer in various other markets recovering from lockdown periods. Although I don't want to make specific predictions, I believe our experiences in India provide valuable insights that can be applicable to other markets as they reopen.

Thank you so much, Shar.

Great. Thanks. I wanted to dig deeper into your plans for investing in trust and safety improvements and stigma reduction in emerging markets. Could you clarify what those investments entail, and what sort of impact we should expect? Are these investments likely to drive meaningful improvements in international growth in the near term or more in the long term?

Yes. Beyond what I've mentioned about the importance of trust and safety in the digital world, we’ve witnessed the repercussions on our category as we’ve developed it over the past 15 years. We can firmly assert that it affects category perception and penetration. We’ve made substantial efforts in this area, particularly in Western markets. Notably, Japan stands out as a market where we have been proactive with features like verification and enhanced community engagement, which included collaboration with local regulators and authorities. Our marketing and PR outreach has opened new marketing channels, which has allowed us to explore opportunities in television advertising too. These short-term efforts are crucial in fostering positive perception, leading to long-term gains in higher stigma markets. We are also starting similar initiatives in India. As such, we plan to intensify our approach to moderation and safety features directly on our platforms. However, our focus will also be broadened this year to involve outreach with third-party organizations, partnerships with non-profits, and engagement with regulators and law enforcement. I am personally committed to this, as I believe we can provide strong leadership in this regard.

Great.

Thanks. I have two questions regarding Asia. You with regard to trust and safety, could you elaborate on your key initiatives and brands more broadly in the Asian region this year? Additionally, with Japan being your second-largest market today, are you reassessing your long-term target of Asia representing 25% of revenue or could it surpass that based on early progress?

I will address the latter part of your question. Asia remains strategically vital for us. Our medium-term target of having Asia encompass 25% of our revenue remains unchanged. The pandemic has delayed our progress, and we currently sit around 17%-18%. However, we recognize the significant potential in this market. Our strategy involves multiple product approaches, and Japan is thriving. We have a strong team and valuable brands there, including Tinder and Pairs, with numerous opportunities for growth. Additionally, our Matrimony product is well-suited for that market. While India is also critical, and we enjoy success with Tinder there, OkCupid is gaining traction. The pandemic hindered our push in 2020, but we are renewing branding efforts at the beginning of 2021 and remain optimistic about product outcomes. South Korea is another area of interest, but we need to refine our product offerings there. We are applying a multi-faceted strategy across Asian regions with Pairs, Tinder, OkCupid, the Matrimony product, Pairs Engage, and Hawaya. There’s a long-term play here, and we are preparing to resume in-app currency initiatives for Asian markets that were delayed because of COVID. Significant efforts are underway in Asia, and we remain committed to reaching our goals.

Thanks. Very helpful.

Thanks. Can you comment on the success of Ablo and your focus on non-dating applications? How are you thinking about monetizing these products, and could we see development of an ad platform to support these apps?

Sure. As our lives increasingly move online, the opportunities for in-person connections decline, contributing to a rise in loneliness globally. Ablo was created with the understanding that deeper connections, conversations, and community-building capabilities are essential in these circumstances. Ablo features 'Around the World,' allowing users to connect through shared interests like food, culture, and travel, fostering deeper conversations and connections across the globe. We've also seen engaging stories on POF Live, such as one where a homeless man built a community, showing the platform’s potential in transforming lives and creating networks of positivity. This aligns with our mission of enabling meaningful connections. We believe that this social discovery format, which is popular in various parts of the world, will gain traction domestically. Regarding monetization, this platform loves well to virtual currencies and consumables. We are experimenting with gifting features, and POF Live already has established monetization through gifting. We are in the early stages of exploring different monetization strategies, and we prefer direct-to-consumer revenue as opposed to ad-based models. Thank you all for participating in this call. I sincerely hope that the vaccine rollout enables us to move past this challenging pandemic. Thank you once again.