Match Group Inc - New (MTCH) — Q2 2021 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Today’s call will be led by CEO, Shar Dubey; and COO, Gary Swidler. They will make a few brief remarks and then we’ll open it up for questions. Before we start, 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 Shar.

Thank you, Bill. Good morning, and thank you for joining the call today. Gary and I are once again doing this from our offices here in Dallas. While our offices are not fully open yet, we did resume some travel and in-person meetings in Q2 as the vast majority of our employees got vaccinated. This optimism was also reflected in the sentiment of our users, particularly in the U.S. and parts of Europe. As a result, every one of our major brands grew revenue in Q2, collectively delivering 27% year-over-year growth. We have solid momentum as we enter the second half of the year. As much as I'm ready for COVID to no longer be a topic of discussion, it does appear that we have to live with it for a little while longer. Widespread global vaccinations are really the only way out of this pandemic for us, which is why our brands have been particularly active these past few months, collaborating with the White House in the U.S. and the governments in the UK, France, and Ireland on public service announcements and vaccine information campaigns, and even a summer rapid campaign about the vaccine. It turns out daters are open to and are getting vaccinated at rates higher than the average population, which is certainly a very good thing. Vaccine badges have become an attractive feature on many of our platforms. In recent weeks, we have been monitoring the surge of the Delta variant and the various restrictions in countries, particularly in Asia. We've learned a lot these past 16 months about the impact of case surges and restrictions to mobility on our metrics and business globally. Our confidence in the continued resilience of our business is based on what we've seen. People around the globe have continued to turn to our products for conversations, flirtations, first video dates, and real-life dates. One of the exciting things about this quarter was Tinder's product launches, which are part of an app experience transformation journey we haven't undertaken since its very early days. The team there is executing really well, carefully testing the building blocks of this transformation roadmap. It's encouraging to see promising engagement metrics with these new products. Tinder subscriber and payer additions in Q2 were among the highest we've seen. This momentum has continued into July. In the second quarter, we also closed the Hyperconnect deal. Even though travel restrictions prevented us from meeting in person, our teams have quickly mobilized to collaborate on exciting synergies. Our near-term priorities are to drive profitable growth for Hyperconnect's Azar and Hakuna apps and lay out the broader strategy and roadmap for social discovery. We are also starting the work to roll out Hyperconnect's video, audio, and AI technologies onto our platforms over the next several months. Longer term, there's much about this acquisition that excites us. We expect Asia-Pacific will soon contribute over 20% of our overall revenue and still offers the biggest growth opportunity. Hyperconnect gives us a talented team and footprint in the region. The more I learn about the AR, conversational AI, and other technologies our team is working on, the more I'm excited about the potential to leverage this on our dating platforms. Everything from self-expression to getting to know each other can be transformed. One of our ultimate visions is for people never to have to go on a bad first date again. In Q2, we released our first impact report. I feel lucky to work at a company that has the important social mission of bringing people together and helping them find dates, relationships, and love. In this annual report, we are committed to sharing our performance on ESG metrics and progress in relevant areas, including technology and solutions for online safety. I feel good about where we are as a company, and I look forward to continuing to deliver on our vision and goals. Even though the Delta variant surge reminds us we aren't fully out of the pandemic woods yet, we have more data to manage through it with agility. And with that, I will hand it over to Gary.

Thanks, Shar. It's great to be here again in person with you and the team in Dallas today. Seeing colleagues working together makes me look forward to when the office will be filled with activity once again. We had a terrific Q2 with 27% year-over-year total revenue growth, the strongest growth the company has achieved since 2018. Non-Tinder brands grew direct revenue 28% year-over-year, the sixth consecutive quarter that these brands have grown in aggregate. Hinge, POF LIVE, and our BLK and Chispa apps continued to perform very well. Hinge grew revenue nearly 150% in the quarter, driven by strength in both subscriptions and a la carte, led by Roses and Standouts. At Tinder, the propensity to pay has improved significantly, evident in the a la carte revenue strength and overall payer numbers. Tinder saw a notable acceleration in year-over-year direct revenue growth to 26% in Q2, up from 18% year-over-year growth last quarter and 13% year-over-year growth in Q4 2020. Our direct revenue grew 25% in the Americas; 28% in Europe; and 31% in APAC and other. Our U.S. performance is exceptionally strong, while Europe is trailing slightly behind, consistent with its pace of recovery. APAC and other growth was solid in Q2, but some markets, including key ones like Japan, face increased COVID restrictions. We are now disclosing the performance of the business across three geographic regions to give investors better insight. Indirect revenue grew 54% year-over-year, marking a third strong quarter, as the advertising market generally and our direct sales specifically were strong. We closed the acquisition of Hyperconnect in mid-June, so our metrics reflect about two weeks of contribution. Net of certain one-time purchase accounting adjustments, Hyperconnect contributed $4.3 million of revenue in Q2. We have broken this out in the shareholder letter, so you can see what Match Group X Hyperconnect and what Hyperconnect itself delivered in Q2. Additionally, we moved to disclosing payers and monthly revenue per payer. Total payers reached 15 million, a 15% increase from Q2 2020. Growth was solid across geographies: up 16% in the Americas, 13% in Europe, and 17% in APAC and other. Tinder payers were up 17% year-over-year in Q2. Year-over-year, average Tinder subscribers increased by 1.3 million to 11.4 million, representing a 13% growth. Tinder's average subscribers increased just under 1.1 million or 17% year-over-year, totaling 7.2 million. This was the best year-over-year subscriber growth Tinder has seen since the pandemic began and was very strong sequentially as well. All other brands averaged 240,000 subscribers, a 6% year-over-year increase. Revenue per payer increased 10% year-over-year to $15.46, up 8% in the Americas, 13% in Europe, and 12% in APAC and other. Tinder's RPP was up 8%. Operating income grew 7% and EBITDA grew 15% year-over-year in Q2, with EBITDA margins at 37%. Net of purchase accounting adjustments, Hyperconnect reduced Match Group EBITDA by $3 million in Q2, from $266 million to $263 million. Overall expenses, including SBC expense, increased to 70% of revenue compared to 65% in Q2 2020, reflecting our pullback on spending as the pandemic took hold. For Q3, we expect total revenue for Match Group of $790 million to $805 million, which would represent a 23% to 26% year-over-year growth. We anticipate EBITDA of $275 million to $280 million in Q3, reflecting an additional $15 million of costs in the second half of the year due to government relations and other advocacy related to app store practices, and for legal matters, including the former Tinder employee litigation. We think the plaintiff's claims in that case are without merit, and we are fully prepared to defend ourselves vigorously. We currently expect that the trial will conclude by the end of the year, and the meaningful costs we've incurred related to this lawsuit should not recur beyond 2021. For the second half of the year, we expect Hyperconnect will contribute $125 million to $135 million of revenue. This outlook reflects some pullback, primarily due to COVID, as we also focus the Hyperconnect team on delivering video and other technology that we can implement across the rest of our portfolio. For the company as a whole, we expect full-year revenue just above $3 billion, including Hyperconnect, exceeding the high end of our previously stated range. This reflects stronger-than-expected performance in the first half and anticipates second-half year-over-year growth north of 25%. We are increasingly confident that the lawsuits and investigations related to app store practices will lead to changes in those policies in the near future. We've had an outstanding first half of the year where we've accomplished a great deal. Tinder's growth has accelerated, and the product is evolving in exciting ways that we expect will create real revenue opportunities over time. Our established brands are performing well, and our services are in demand as people worldwide seek social connection. With Hyperconnect, our portfolio is well-positioned to fulfill our mission of connecting people, which we believe will enable us to continue to deliver strong results for our stakeholders. With that, I'll ask the operator to open the line for questions.

Thanks for the questions. I had one for Shar and one for Gary. For Shar, on the reopening, hoping you could expand a bit on what impact you're seeing to user behavior in markets like the U.S. where COVID and Delta are flaring up recently. And then Gary, hoping you could talk about some of the puts and takes driving your expectation for Tinder revenue growth close to 20% in the second half? Thank you.

Good morning, Corey. Yes, regarding the Delta variant and case surges, one of the things to note is that more than the case surges themselves, we're actually watching mobility trends and restrictions more closely because they seem to have a larger effect. As vaccination rates increased first in the U.S. and then in Europe, mobility also increased and reflected in our business trends in Q2. However, in several markets in Asia, including Japan, which is our second-largest revenue market, there are varying degrees of lockdowns and restrictions, which impacts mobility and our metrics. Regarding the Delta surges in the U.S. in recent weeks, so far, they don't seem to have any impact on mobility unless real restrictions are put in place. Generally, we don't see mask mandates causing mobility restrictions; mostly, it's partial and full lockdowns that do. For instance, in the UK, where the Delta surged, despite it having peaked and being on its way down due to easing restrictions, mobility continued to increase without impacting our metrics.

As for our outlook for Tinder revenue in the back half of the year, we expect just above 20% top-line growth for Tinder, which is significantly higher than what it was last year. If we break it down further into quarters, I think Q3 growth will likely be just under the 20% mark because last year was exceptionally strong. North America and Europe were coming out of lockdowns and experiencing good conditions globally, leading to a solid Q3 last year. For Q4 this year, I expect growth to comfortably exceed 20% year-over-year. However, given that Q4 is still a quarter away and Tinder has broad geographic exposure, the COVID risks necessitate a conservative approach. That's what you're seeing as we give our outlook for the back half of the year on Tinder growth.

Good morning. Maybe you can talk about what is giving you confidence to raise your full-year guidance from high teens to low 20%. Are you seeing some conservatism in the outlook? Gary, can you give us a little more color on that and I had a quick follow-up? Thank you.

Sure. We've had an extremely strong start to the year, which has enabled us to raise our outlook twice so far. We feel great about our performance in 2021. Our Q2 was stellar with a 27% revenue growth, well-balanced between Tinder and non-Tinder. We are well set up for the rest of the year, and we have good visibility into Q3 reflected in our specific guidance. Anticipating solid sequential revenue growth in Q4, we should see accelerating year-over-year Q4 growth. However, as I just mentioned, uncertainty concerning COVID and the Delta variant necessitates some conservatism, and this is factored into our guidance.

And Gary, just to follow up, we wanted to make sure we heard this right, but it sounds like you're assuming Hinge is roughly $250 million in revenue in 2021. Is that somewhat in the ballpark?

Thanks. That's a good question. When you look at that chart in the letter related to the Swipe apps and PlentyOfFish live and Hinge, it's impressive how we've achieved getting those businesses from virtually nothing to about $300 million this year in aggregate. However, the letter could be clearer. Each of the group of Swipe apps and the PlentyOfFish live streaming business are each contributing at least $50 million of revenue to that $300 million total. Hinge is the balance of the $300 million after accounting for those two contributions. As we've said before, Hinge is on track to more than double its revenue in 2021 after tripling in 2020, and it saw 150% revenue growth in the second quarter. So the $250 million mark is high, but I hope that provides clarity on our expectations for Hinge.

Thank you, guys. With all the new product initiatives around Tinder, do you see advertising playing a bigger role in the medium term, or should we mostly focus on virtual currency and a la carte monetization? Thanks.

I can take that. Thanks, Jason. We are not looking at advertising as an incremental revenue source. However, we see a la carte becoming a bigger focus in addition to subscriptions. Regarding virtual currency, it is something we are testing in a couple of small markets since Q2. It is currently limited in feature set. We are encouraged by what we've seen so far and will expand to additional markets and more features. The Tinder experience is evolving to include new multi-dimensional areas within the app where users can discover and connect, and we see interesting revenue opportunities in helping users stand out in these many-to-many experiences we're building.

Great. Thanks for taking the questions. I have two on the new payers metric. Specifically at Tinder, it seems like a little over 2 million users only pay a la carte versus the 7.2 million average PMCs. So is this the right way to think about it, and how does this self-payer breakdown look at Hinge and at Match Group overall?

This is a bit complicated. There are two reasons why payers are higher than average subscribers. First, payers capture non-subscriber a la carte payers. Beyond that, average subscribers represent a daily average over the quarter, while payers refer to the number of unique payers in a given month, averaged for the quarter. Therefore, the definition of payers accounts for higher numbers compared to average subscribers. Non-subscriber a la carte payers are a relatively small piece of the difference. As we expand our a la carte monetization efforts and introduce virtual currency, especially in Asia Pacific with Hyperconnect, we expect the percentage of non-subscriber a la carte payers to increase. I encourage you to review the specific definitions we've provided of average subscribers and payers. If you have further questions, we are happy to discuss this offline.

Okay, yes, that's helpful. And then just one more on the revenue per payer by geo. So I'm surprised to see APAC and other relatively in line with the Americas and Europe at an absolute level. Any differences in spending by geo to point out, for example, does APAC and other tend to spend mostly on a la carte and not on subscriptions? Thanks.

It's a good question. We have relatively consistent revenue per payer in APAC compared to the Americas and Europe, mainly because Pairs in Japan is our highest revenue dating business, contributing positively to RPP in APAC. Additionally, we have relative price parity between Tinder and APAC compared to other regions. Therefore, those two factors help maintain similarity in RPP across the globe. Regarding mix, Pairs and Tinder tend to operate as subscription businesses in APAC currently. However, we're experimenting with ways to increase a la carte consumption at Tinder through virtual currency and other product innovations. We're early in this process, but we believe we can enhance payer penetration by adjusting our monetization strategies.

Hey, good morning, everyone. I jumped on a little bit late. So hopefully this wasn't covered. But I wanted to follow up on one of the comments in the letter regarding the HyperX Group at Hyperconnect. It sounds like a lab, and I'd love to learn more about some of the products they are working on currently, the group's strategic goals, number of employees, and whether you see this as new and incremental to Match that Hyperconnect brings.

Certainly. Within Hyperconnect, HyperX is a technology incubation lab that has developed technology assets we’re planning to deploy on our platforms, including video, audio, and some AI tools for moderation. HyperX has also incubated new apps; for instance, Hakuna originated from HyperX. I'm really excited about their technology developments like AR features, self-expression tools, conversational AI, and several elements we classify as metaverse components. These innovations could significantly transform the online meeting and connection process. Thus, the technological innovations at HyperX represent a valuable addition to Match Group. We believe it will have a significant impact, serving as a technology enabler for our other platforms.

Thank you. Could you help us understand the guidance for the Hyperconnect piece? At the acquisition time, we expected about 40% to 50% growth, but the revised guidance is slightly less than that. Is this due to COVID? Is there some conservatism there? Additionally, how do you expect to manage costs at breakeven for the back half? Any details on the potential EBITDA margins for that business would be beneficial?

There are several factors leading to somewhat lower growth at Hyperconnect this year than originally anticipated. As you highlighted, they have a significant footprint in APAC, which has been heavily impacted by COVID this year compared to 2020. There is also a challenging marketing environment, with factors like IDFA and a crowded marketplace leading the Hyperconnect team to adopt a more cautious approach in key markets than we initially expected. While we're optimistic about the opportunities to apply Hyperconnect technologies to Match Group's platforms, we've directed our focus on tech integration in the short term. We expect Hyperconnect to perform well this year and post solid revenue growth, although it might be slightly lower than our initial projections. Regarding costs, we believe margins could reach the upper 20s or 30% range over time. However, in the short term, we're focused on short-term synergy rather than margin improvement.

Great. Thank you. One on the established brands, if I can, what have been the biggest drivers of growth compared to 2019 levels? Moving forward, where do you see further opportunities to drive growth from these brands and broaden the audience? Thank you.

With these established brands, there are several different stories. Keep in mind that established brands used to be desktop-first and have now transitioned to mobile-first experiences. Some, like Match and Meetic, have shifted from a hard paywall to more premium experiences, significantly increasing engagement and conversion. Apps like POF added new features like POF Live, creating new revenue streams. OkCupid continues to expand into new international markets. Each brand has sharpened its marketing to resonate more with its core audience. As they execute, we expect modest growth from these established brands.

Great. Thanks. Two for Gary if I can. You mentioned the Google Apps changes originally set to take effect in Q4, now pushed to March 2022. Previously, you embedded some impact from that change in the fourth quarter EBITDA guide. Can you confirm that this upside has been factored in with the $15 million in incremental legal expenses offsetting that? How do you feel about the risk heading into March next year and potential workarounds? Additionally, what's the status of the former Tinder employee litigation?

Regarding Google fees in Q4, they recently stated they will push back the deadline for compliance until March next year. Consequently, these costs will not affect us in Q4. We have designed our latest EBITDA outlook to reflect a variety of factors. We've embedded our additional legal and government relations costs, which could be spent, but we're unsure of the exact amount. Conversations with Google remain collaborative, and we'll monitor how things evolve. Regarding the Tinder former employee litigation, there’s not much we can disclose. We engaged highly regarded banks that analyzed the business extensively, leading to a valuation consistent with Wall Street analysts. Thus, we are confident in our case, believe the claims are without merit, and anticipate a trial later this fall.

Great. Just curious if Hinge's 2021 topline growth includes non-English-speaking markets, or if those markets are still early-stage from a monetization perspective? How does the runway for growth at Hinge look long-term? Do you view Hinge as complimentary, cannibalistic, or a bit of both to Tinder over time? Thanks.

Currently, Hinge is only available in English-speaking markets. This year, its revenue growth has stemmed largely from user growth concentrated in medium and large cities and from the effective monetization initiatives the team has implemented. There is still significant scope for both user and monetization growth in the markets where it operates. Our intention in 2022 is to localize the app and begin expanding into international markets. Going forward, Hinge's strategy will focus on user growth in existing markets and international expansion while enhancing monetization features, which we believe will drive strong growth in the coming years. It's a uniquely differentiated product with a serious intent focus, resonating with its audience. We see little evidence of significant cannibalization; Tinder remains the number one dating app, especially among younger users, while Hinge serves as a great alternative for individuals seeking a more serious dating experience. Thank you for your participation. That concludes our Q2 2021 Earnings Call.