Hyperconnect, Inc. (MTCH) Earnings Call Transcript & Summary

Good day, and welcome to the Match Group call to discuss the acquisition of Hyperconnect. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Gary Swidler, Chief Financial Officer and Chief Operating Officer of Match Group. Please go ahead, sir.

Thank you, operator. Joining me today on the call is Shar Dubey, our CEO. Before we start the call, 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, let me turn the call over to Shar.

Hi, everyone, and thank you for joining us on such short notice. This evening, East Coast time, which is Wednesday morning, South Korea time, we are delighted to be announcing the acquisition by Match Group of Hyperconnect. We are super excited about this acquisition. We've been watching them for a while, having first met the CEO, Sam, on and his team a few years ago in Seoul, and I've been so impressed with what they've built. They're a great team and great people who view the world much as we do. So I'm thrilled that we finally got this agreement signed. Hyperconnect is a technology leader in video communication and mobile-optimized AI, having developed scalable and low-cost mobile live video technology with low latency back in 2013, which was a huge accomplishment at that time. Since then, they've taken their core technology and have rapidly experimented with new products. They have an incredibly strong engineering team and a lab dedicated to new technology and products. Importantly, they have already achieved 2 commercial successes with their Azar and Hakuna apps. They have achieved real user and revenue momentum, and we think we can help supercharge both globally with our experience and capabilities. The strategic rationale for acquiring Hyperconnect is multifold, great team, scaled products, innovative technology, especially in video, expansion for us in social discovery, which is an increasing area of opportunity for us and expansion for us in Asia, which is a big focus for us. Hyperconnect's business is over 75% in Asia. So it really fits the bill for us on that front. We couldn't be happier to bring Hyperconnect into the Match Group. With that, I'm going to turn it over to Gary to review the deal terms, and then I'll come back and share some more details on Hyperconnect and their business.

Thanks, Shar. Match Group is buying 100% of Hyperconnect for $1.725 billion. The $1.725 billion is payable in half cash, half stock, with the share price determined prior to closing. We also retained the option to pay up to all cash if we so choose. The transaction requires regulatory approval in a number of countries, and therefore, we expect to close sometime in Q2. We currently have just under $800 million of cash on hand and a $750 million revolving credit facility. So we expect to pay the 50% cash portion from cash on hand and by tapping into the revolver, if necessary. Importantly, in the 50% cash, 50% stock scenario, we believe that we will still be able to achieve net leverage of slightly less than 3x by the end of 2021, which has been our stated target. Before I hand it back to Shar, on Slide 4, I just wanted to point out a couple of items regarding Hyperconnect's financial performance. In 2020, the company had revenue of just over $200 million. So it's a fairly substantial company already. Most of that came from their Azar product, which has been monetizing for a number of years, but their Hakuna app is also showing strong monetization trends. The company is growing rapidly overall, with top line up over 50% year-over-year in 2020. We expect 40% to 50% growth again in 2021. On a revenue basis, the $1.725 billion purchase price is roughly 8x trailing revenues, but under 6x forward revenues. The company is also slightly profitable. Our goal will be to ensure the proper level of investment in the business and to gradually improve its profitability. With that, I'll turn it back to Shar.

Thanks, Gary. And to those following the slide deck that we shared earlier, if you flip to Slide 4, let's first talk about a little bit more detail about the 2 global apps that Hyperconnect already has brought to market. So when they launched the Azar app in 2014, it was a novel social discovery app. It employed very advanced technology to enable users to video chat with people in real-time around the world, powered by real-time language translation. Azar monetizes well, it's ranked among the top 10 highest grossing nongame apps in the Google Play store, which is the main distribution given the heavy presence in Asia. 90% of the company's revenue is derived from a la carte purchases, things like filters and badges and so on. Building on the live video technology they have developed in late 2019, Hyperconnect launched Hakuna, which is a multi-party live streaming app for social connectivity. Hakuna is rapidly scaling users and revenue in a number of markets, including Korea and Japan. Hakuna monetizes via virtual gifting, and it's still very early in its trajectory with lots of room to expand geographically. And in our earnings call last week, I had mentioned that there was a growing trend of online social discovery experience, particularly among young and especially in Asia and emerging markets. In addition to being a fast-developing space, it actually falls within our mission of using technology to enable meaningful connections. We've also learned from our Ablo and POF Live products, and that's what gives us confidence in the potential of Hyperconnect and its strategic fit within our portfolio. Based on the trends we've seen in the past few years, this category has a potential addressable market more than twice that of dating. We had already started to invest here, and we think Hyperconnect will meaningfully accelerate our growth in social discovery. Slide 5, for those who are following it, a little bit more about the Hyperconnect team and the capabilities they have. They're just under 400 employees, primarily in Seoul, South Korea. Roughly half of them are engineers, which is great. In its home market of South Korea, the company is regarded as an innovative start-up and a desirable place to work. So it's able to attract very strong young engineering talent as a result. You can also see some of the experienced leadership team on this page, and I'm really looking forward to working with them, especially their co-Founder and CEO, Sam Ahn, who I've gotten to know well over these past few years. He's a tremendous product tech talent and a leader will be a great asset in addition to Match Group's leadership bench. The deal includes retention arrangements with the leadership team and employees. I mentioned earlier in my opening remarks, but I do want to reemphasize how groundbreaking the Hyperconnect team has been in video technology. We now take video for granted, but back in 2013 when Hyperconnect was one of the first to develop a mobile version of WebRTC and commercialize and scale it through the Azar product, delivering low cost, high-quality video chats with low latency, even on low-end devices. That was cutting-edge and a big accomplishment. That is this company's DNA. On top of that long history with video, they have deep AI capabilities that power their recommendation engines and all the way to real-time video content moderation. They are also among the few companies in the world that have developed on-device deep learning engine that's going to become increasingly important as a technology for more privacy-focused applications. We've been extremely impressed by Hyperconnect's efforts in privacy, moderation and safety. This is going to be an area of collaboration for us from applying our standards to leveraging their advanced technology and tools on our other products. Hyperconnect is also working on emerging technology areas of AR and audio technology, which could have brought applicability on our product portfolio. Flipping to Slide 6. In addition to all the technology capabilities, Hyperconnect's user footprint is really exciting to us. You can see that 70% of the users are Gen Z and millennials. And also 75% to 80% of the users and revenue comes from Asia, which is very complementary to our existing footprint. As you know, we've talked about a 25% target for Match Group's revenue from Asia, and this acquisition will move us much closer to hitting that goal. Importantly, they're starting to see real traction in markets in Europe, in Japan, where we have a track record. So we think we really can help leverage our expertise and teams on the ground to turbocharge growth in these markets post acquisition. And then, of course, the Americas, where they don't have much of a presence today, could be real opportunities in the future under our umbrella. I will close on Slide 7 and just reemphasize a couple of points. We're buying a great team with a like-minded philosophy and view of the global opportunity and market evolution. They have a tremendous track record of innovation and commercial success with capabilities in video and AI that we can leverage across the combined portfolio. Their experience in virtual currency, a la carte and gifting as well as their broad footprint and base in India, which are areas we've been looking to expand in, makes this transaction a great strategic fit. We can also help increase the momentum of their business as we have done the prior acquisitions of Pairs and Hinge by leveraging our expertise and experience, especially in markets that are newer to Hyperconnect. I very much look forward to working with the Hyperconnect team and reaping the benefits of this combination for many years to come. With that, we'll ask the operator to open the line and see if there are any questions for us today.

[Operator Instructions] And the first question will come from Mario Lu with Barclays.

So the first one is on the TAM of social connectivity and how you're going to implement that into your current apps. So you mentioned that the TAM is more than twice of dating. But I guess the question is more on the strategy of implementing the live streaming and social connectivity within your core dating apps. I believe you've done that already with Plenty of Fish. So can you comment on whether you saw increased engagement from that? And if that drove further engagement within the dating app itself? Or was it somewhat cannibalistic between the 2 functions?

Yes. Gary, I can take this question. Thanks, Mario. Yes. So the social discovery space is actually a pretty fast-growing and large space in Asia, in particular, and it's growing in other parts of the world. And as I've mentioned, we've been sort of testing the waters with our Ablo product as well as POF Live. And the reason we got more and more interested in this area and Hyperconnect, in particular, is because of a mutual synergy that we see. So POF Live is entirely accretive to the POF experience. And we also think within the social discovery applications, there is a use case of dating that happens as well. And so that's how we think our world sort of make all the sense to be together because both are technology in the pursuit of meaningful connections. I hope that's helpful.

Great. That's helpful. And then just one on monetization. So Hyperconnect is 90% a la carte. I believe Tinder is currently around 30%. So in the longer term, do you guys believe one monetization strategy between the 2 will eventually win out? Or is it purely a regional difference that it will likely remain the same in those areas?

Sure. I have always thought that on applications such as ours, we have the ability to monetize both through subscriptions and through a la carte purchases. The way I generally describe our monetization strategy is you sort of have subscription models that lend itself for pay for access. And you have a la carte consumable-type revenue models that work well for paying for advantages. And so the both of them coexist on our platforms. However, there are absolutely regional differences where in Asia, it is much more friendly for the -- because the consumer mindset is more used to sort of pay-as-you-go models instead of the recurring renewing subscription, we think there is a greater propensity for a consumable a la carte-type price model to work better in Asia. But I do think there is a lot of learnings we can take from each other and eventually, some mix hybrid of both of these models will exist on all of our platforms.

Got it. And congrats on the agreement.

Thank next question will come from Justin Patterson with KeyBanc. Great. Two, if I can. First, could you talk about just the -- a little more of a history of the transaction? Was this a competitive bid? So that's question number one. And then question number two, it sounds like there's a lot of opportunities to really refine the product with this. So I'd love to hear about some of the key learnings you think you can get from Hyperconnect that you can apply back to the rest of the business.

So let me take the first part, and Shar, if you want to take the second part. The company really had a lot of opportunities on its own, and it had a great path. So you can imagine that every strategic option was on the table. Ultimately, we wanted to pursue a controlled transaction with them, and we convinced them to join the fold, but they certainly had options to raise money and keep going independently. And IPO is possible for them. So they certainly had lots of options, and we're delighted that it ended up working out this way. I think they're excited to be part of our organization, and we're very excited to have them. So that's kind of how this ended up turning out this way. And we think we can do a lot together.

Yes. In terms of sort of learnings of what we could do with each other, as I mentioned, there are a number of different areas that I think we learn, are able to deploy both their technologies as well as their learning. So as I mentioned, a video -- real-time video, in particular, has been growing in its footprint on our products. They have one of the best. That obviously becomes helpful and useful to us. They have learnings around moderation and AI. They have learned -- they have technology around -- more emerging technology that could become so much more useful as we work to develop richer experiences on our dating apps themselves. And then, of course, it's -- the monetization is another area where there is a lot of cross learning that can happen, which is why we are so excited about having them in our portfolio.

The next question will come from Brian Fitzgerald with Wells Fargo.

Congrats. We want to know if you can give a sense of the scale of the user base at Azar and Hakuna? And then how that user growth versus ARPU is contributing to that top line 50% growth in 2020? And then I have one more.

Yes. So Hakuna's user base is small, but -- relatively small but growing quite quickly. So that's really driving a lot of the success there, and kind of monetization is ramping up relatively quickly at Hakuna as well. The Azar MAU base is actually quite substantial into the double digits. And so that's definitely a piece of it. We think we can further accelerate the growth of MAU there as it expands into more geographies and becomes more of a household name in Europe and in the Americas. And again, I think there's room on the ARPU side as well to continue to increase ARPU and drive growth. So it's going to be both prongs of things as we develop both apps. But Hakuna -- you should understand that Hakuna is much, much, much earlier stage. Azar has been around for a few years now, although still growing very nicely.

And then the follow-up was just we noticed on Hyperconnect's website, they talk a little bit about an enterprise product and an opportunity. Is that something you plan to continue to invest in and pursue or not?

Yes. They -- in fact, their enterprise product could be -- we could be the first test beds for it. Because today, we use third-party vendors to power all of our one-to-one and one-to-many video instances on all of our platforms. And so that's obviously the very first step for us to be able to do at some point after closing, and then we will have to see where this all goes.

The next question will come from Lauren Schenk with Morgan Stanley.