Match Group, Inc. (MTCH) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining us. I'm Lauren Schenk, Morgan Stanley's small, mid-cap internet analyst, and we are thrilled to be joined this morning by Gary Swidler, Match's COO and CFO. Thank you so much for joining us.

Thanks for having me.

So I wanted to start a little bit bigger picture. Metaverse, social discovery, end of swiping, what does this all mean? Where do you see the business going? There's been several defining moments in the industry for the past 10, 20 years? Is this the next one?

I think it could be. I mean, I think that there's certainly a lot of momentum in this direction. You see all sorts of different companies becoming interested in metaverse. The few things that we've experimented with so far are really interesting and engaging and fun and cool and could be a very different experience from what we've had up until now. As you say, we sort of use algorithms to match people and require people to fill up big profiles and whatnot. And then it went to, let's make this simpler, just have a picture and a little bit of information on swipe. I think the pandemic has helped in this regard because people have moved so much of their lives online and are interacting so much online, and it was already happening, anyway. If you go to kind of younger people in their teens, how much time they're spending just hanging out with friends online and playing games online and everything like that. So it was kind of heading in that direction anyway. But to the extent we can build experiences where people are immersed in a virtual world and they're moving around a virtual world and meeting people and getting to know people, sometimes taking it off-line and sometimes not, I think it could be the next phase. It's a very logical extension of what we do and how we think about introducing people to others for socializing, and so we're very excited about it.

Okay. We'll touch about it on that a little bit later. But I guess, dovetailing off of that, as we think about the last 2 years, how has COVID changed online dating behavior for better or for worse? Where are there still lingering effects? Where do you think you feel totally back to normal? And sort of how do you see the business progressing through the course of the year?

I think the adoption of video early on in the pandemic was probably one of the more notable things that happened. We've always thought that video was a logical part of the experience because why not spend a few minutes on video and see if you really like the way someone sounds, the way they move rather than going down to Starbucks and meeting them, do that first. It's a low investment, and you could tell a lot by somebody when you do a video with them, as we've all seen through Zoom calls and everything else, not as much as you can in real life, but certainly a lot. So adoption of video has definitely been a step forward. But I think the immersiveness of people's lives online is really the biggest, most enduring change from the pandemic, and we're still at the very early innings of that. It's happened to everybody that whether they do their business meetings online or they order their groceries online or whatever they do, now meeting and socializing online has become a bigger part of people's lives, and so we need to capture that. We're the leader in introducing people to others for purposes of socializing, and so we need to have a major part of the next phase, if that's what's indeed coming. In terms of the business overall, I would say there's a few things, I think, that are ways to look at it that's helpful. The first is, immediately, at the beginning of the pandemic kind of in Spain, Italy, if you remember back to 2020 and then in the U.S. and other markets, we did see a bit of a freeze initially, people less willing to pay because they couldn't go out and meet people in real life. And then they said, "Okay, well, I still want to socialize and be connected with people." In fact, the value of that became higher through the pandemic, right? I think all of us feel like traveling is much more valuable now, going out to brunch with friends is much more valuable now. And so being with other people has clearly become much more valuable and important to people and certainly not too many people want to go to the next pandemic by themselves. And so gradually, I think our business recovered from that initial shock, and we definitely saw strong performance throughout the period from, let's say, May or June of 2020 right up until present day. People have gone back out there and met people, and they found ways, whether it was walking in the park with somebody or doing a video date or whatever. So the business has stayed pretty resilient, but it hasn't gotten that tailwind from the end of COVID, much like most people in this room probably feel. They've resumed some of their normal activities. They've resumed a little business travel. They've resumed going out to brunch with friends, but there's still a lot that's missing, whether it's fewer events at your kid's school or you haven't gone to as many big events like weddings and big celebrations as you used to. So those things are still down, but they're coming back slowly but surely one by one, and it's not the same in every geography. So one of the complications of running a global business is you've got slightly different trends in every market. And so the U.S. is better than Asia, right? The U.S. is much more back. And within the U.S., San Francisco is just coming back, and Florida never went away, right? And so it depends on kind of what market you're looking in. But I live in New York, and you can feel there was a little bit of a burst of momentum when people got their vaccines back in the spring of 2021. And then people realized it wasn't the silver bullet, and that sort of disappeared a little bit. But now I think people do feel like Omicron was probably the last stand, we're going back to normal. It's going to take some time to get there, but we're heading in that direction. And so I think we're seeing improvements in the U.S. and in Western Europe. Asia is behind. They actually fought off the pandemic pretty effectively at the beginning. They didn't have that April, May 2020 that I was talking about before, but they've had a rough time over the last 6 or 9 months. Japan mobility is at the lowest level it's been at since March of 2020. So Japan is not back, and that's an important market for us. It's going to take time. And people are a little gun-shy. They've seen these movies before of lockdown and open and back and forth, so it's going to take some time for this to play out. But my confidence is high that we're getting there. The spring and summer should be good. People are ready. They want to get back out there. They see the value of meeting people. They want to get back to normal. And so it's going to accelerate as we get through the next few months, assuming the world stayed a relatively stable place, which is a very difficult assumption right now. But I think the momentum post-COVID, post-Omicron, at least, is building, and so we're going to make progress forward. I'm pretty confident.

Okay. Maybe touching on that last point. Could you just help us frame exposure to Russia, Ukraine, Eastern Europe more broadly? Any impact that you're seeing there and sort of how you're thinking about managing that area of the business?

As my mom used to say, if it's not one thing, it's another. Yes, I think we felt like the post-Omicron effect was like 2 weeks. While people were watching the Beijing Olympics, there was like 2 weeks of what seemed like return to normalcy. And then soon the Olympics ended, the invasion started. And so we have a reasonably sizable bit. We don't have any people in Ukraine or in Russia, fortunately, no employees, and we didn't have any employees who happen to be there. Those are the first few things we checked. But we do generate some revenue in that region, probably about 1%. Let's call it $30 million, $40 million of our revenue comes from that area. And obviously, the business in Ukraine has been significantly interrupted. The business in Russia has been interrupted as well. And as you kind of radiate out from there, you're still feeling some effects. So pull in, let's say, is not as bad as Ukraine, but it's right next door. And so it's feeling some effects. People are nervous. People are watching. They're a little distracted. And then as you get further out, the distraction level, the focus on this starts to reduce, but it's still there. So people in France are still focused on what's happening there. Even in the U.S., I'm sure you're watching a little more CNN or whatever channel you like to watch your world news on than you were a few weeks ago. So there's the distraction factor, for sure. These things tend to be somewhat short-lived. But obviously, it's a pretty terrible situation, and it's a pretty explosive situation. And so we'll see how it plays out, and we're weathering this one as well. Clearly, not the biggest problem to weather a dating app situation while this war is raging. But hopefully, we'll see some cooler heads prevail at some point, and we'll get back to that more normal recovery that I think we are heading towards.

Okay. Great. I guess moving to a topic I know you're very passionate about: App Store fees and the regulation around them.

I thought you're going to say the baseball season resuming, but I guess not.

I guess what do you make of the fact that we haven't heard from Google about the March 31 workaround expiring? And after that, sort of how do you see the regulatory environment sort of going from here?

Yes. I mean, look, I guess Google's willingness to dig in on this point, maybe larger than we initially thought. They haven't shown any desire to announce a change in policy, which is surprising to me because the momentum on the regulatory front continues to build. Margrethe Vestager, who is the European Union person who basically kind of single-handedly pushed through GDPR and was very forceful with GDPR, has come out really strongly, basically saying, "Hey, guys, you're not listening to what the regulators are saying to you in the Netherlands and in Korea, and so we're going to have to clamp down harder. And we get that you don't care, Apple, about a EUR 5 million a week fine. We don't love that you're behaving that way, we're going to have to clamp down harder." And so I think she's very committed to it. I think the European Union is very committed to it. I think, in fact, that there's a lot of agreement among jurisdictions around the world that something needs to be done. Korea got the ball rolling. The Netherlands followed. But the EU and the U.S. and Japan and India and other markets, I think, are pretty aligned on this. And so something like the Ukraine war doesn't help because it's [ dragged fuel ] with more important things to focus on, but the pressure continues to build. And so I think changes continue to come there. The pace and exactly the order in which they're going to come is a little hard to predict, but I think the momentum is there. And the European Union one, what's called the Digital Markets Act, the DMA, actually has 2 provisions that are interesting, right? One is it disallows the mandatory use of in-app payments, which is what Korea did and what the Netherlands did with respect to dating. But second, it says that developers can't be treated disparately. They can't be treated unfairly, which implies, to me, that they're basically saying, "You need to rethink the economics of the App Store because you can't have some small percentage of people paying and everyone else not paying in the App Store." And that's an unfairness that the European Union has focused on. So we'll see how all this plays out, but I continue to believe change is coming to the App Store ecosystem, and we're looking forward to that.

So to the extent we do see lower fees sort of industry-wide, how would you think about allocating those savings, reinvest in the business, invest in metaverse, flow to the bottom line? Like what -- from a priority perspective, how would you think about that?

Look, I think it will be all of the above at some point. It changes the whole dynamic because a customer becomes much more profitable if you got to pay less to Apple and Google, so you can spend more dollars in marketing and attract more customers. You can give some back to the customer because instead of paying 30% to Apple, you now have 30% more to invest in marketing and return to the customer. You can invest it in your own employees and hire more people and continue to innovate in the business more fulsomely. We can invest in metaverse through various different ways. So there's lots we can do, and we'll figure that out once we get to that point.

Okay. I guess moving to Tinder, can you talk a little bit more about the strategy and monetization opportunity around virtual currency? How does the Explore tab fit into that strategy? And how do you think this affects payer penetration over the next several years?

So the Explore tab, I think, is a gateway to doing lots of different things. It's a gateway to enable people to filter and say, "Oh, I went into that room, and that's where the dog lovers were or that's where the people who went to Berkeley are, and that's kind of who I want to meet, and so that's where I'm going." So it's got a very sort of basic function in the Tinder ecosystem. But it also opens us up to lots of different experiences, whether it's Swipe Night, which is an interactive experience that everyone kind of does at the same time and can bond over. We're about to roll out Festival Mode, which we've been delaying because of COVID. But basically, that's going to enable people to connect through Tinder and say, I'm going to the same South by Southwest or some other festival that's coming up, and we're doing that with Live Nation. And so it's a good example of the use of Explore for things that are happening right now that people are going through. They can share the experience in common. They meet online but then meet off-line, so it's a good collision of the online and off-line worlds. We're doing it with partners, with name brands that people have heard of. So there's lots of interesting things that we're going to be able to do with the Explore tab, and we're just in the very early innings. I mean, I think the key thing was obviously building it, getting people to adopt it, go check it out. That's happened, and it's happened really well. Adoption, men, women, by geography has been really strong, and so now we can start to really build on it and give people different experiences, give them more reasons to go there, more reasons to spend time on Tinder. And then we can start to turn our attention to monetization down the road. And it opens up a lot of possibilities. It opens up potential linkages with Hyperconnect and some of the video and other experiences and live streaming type experiences. It opens up lots of different things we can do, so the menu is long. It's a question of prioritization and building those out. And then from the ones that people engage with, figuring out how to best monetize. So that's like a multiyear project to figure that out, but we have some great ideas and are excitedly kind of building away for all of that.

Okay. I would be remiss not to ask about Hinge, one of my favorite aspects of the investment story. You made a comment on the last earnings call about Hinge on its way to becoming the #2 dating brand globally. Can you tell us what you're seeing that gives you that conviction? And then as you begin to enter non-English-speaking markets, how does that strategy look different from Tinder's?

So you called it. I have to give you credit, right? You said Hinge is going to be a great thing, and it has turned out to be a great thing from a business that really had nowhere to go back in 2018. And we were able to make a smart investment and kind of set the price for it and ultimately buy it in 100%. And the team there has done great as well. We thought it was a good product, that people really enjoyed the product. But together, with the Hinge team, we've really built it out from a marketing perspective and from a product perspective. And it continues to be an app that's resonating with its target community. And so -- it's seen great success in the U.S. It started off in New York, L.A., markets like that, but it's really expanded into a lot of other smaller markets now. The traction in the U.K., Canada, Australia are all very strong. And look, it's catching up. It kind of depends on the country, depends on the week maybe. But when you look at it, it does look like it's the #2 most downloaded app after Tinder in some of those markets. And so that gives me confidence to say it's doing what it's supposed to be doing. It's continuing to grow its share. And I don't know if you follow kind of these viral prompts, but that was a huge win for the Hinge team. They came up with an idea to introduce voice prompts into the product, so it's a product feature. And then it went viral on TikTok with people kind of leaving their favorite voice prompts and some really funny ones, and that kind of spread and really saw Hinge explode from a downloads perspective in December and January, and that was in the face of Omicron. So you can only imagine how strong that business would have been had we not seen an Omicron surge in its key markets in December and January. So the momentum is great. The team is running as quickly as they can, and they're really just constrained at this point by people being able to build as quickly as they can to get into a handful of markets in Europe and then kind of expand across the globe. And people always ask me, "Can they go faster? Can we do all the markets at the same time?" And the reality is you're a little bit constrained. You only got one app, and everyone's got to build on it. So we're going to get into Europe over the course of '22, and then we'll go into other markets after that. And the organic traction is good in a lot of these markets. People already heard of this product. They're excited to use it. Translate into different languages will be a real benefit; localizing the product so it resonates, with voice prompts and things like that, that resonate in that specific market will be a major step forward. And so the momentum is great at Hinge, and we're continuing to help them and push them along and give them the resources they need. And from my perspective, the sky is the limit. They've just got to keep cracking away.

Okay. Great. And switching gears to the Hyperconnect acquisition. The 2 portfolio brands, Azar and Hakuna, maybe didn't perform the way that you were initially expecting right out of the gate. What were the drivers there? How are you feeling about the momentum from here? How should we think about investment needed there, if any, and sort of path to normalized margins over time?

Yes. So Hyperconnect, I think you can't -- I guess it's [ under the carrier ], you can't win them all. We had a great win with Hinge. It continues to do well. We didn't quite get the start we wanted from Hyperconnect's 2 apps, as you say, Azar and Hakuna. One is a one-to-one video chat app, and one is a live streaming, one-to-many app. But I think -- and I don't like to blame COVID, but frankly, just being in the middle of COVID and buying something in Korea, halfway around the world, probably didn't get our arms around it as quickly as we would have liked to. But we've done that now, and the team is actually there again this week for the multiple times. We've got people stationed on the ground there now. And the team at Hyperconnect is really, really strong. So combined with a strong team on the ground and our team, I'm optimistic that we're making the right moves, and it's heading in the right direction. The financial performance has stabilized and started to improve, so those are the keys. If things are not going well, at first, you got to get to stability, then you got to get to improvement. And so I think we're doing the right things there, and it's working. We're helping them on the marketing side, where I think they were a little bit weaker in a tough marketing environment. The product, I think, is making some tweaks and performing well. So things are starting to really pick up there, and I feel good about how the last few months have gone. And so that feels like the trend is going in the right direction. So I appreciate everyone's patience in that regard. And then some of the other things coming out of Hyperconnect are really exciting. The integrations with our brands and their audio and video chat capabilities is a huge step forward. It's going extremely well. The teams are working really well together. You never know when you mix 2 companies like that how it's going to go, but Hyperconnect is really innovative, really responsive. We're working hand in glove. It's resonating well with the users at our Match and Meetic brands, and we're expanding their efforts to the Plenty of Fish brand and the Pairs brand in Japan in the second quarter. And so the integrations are going really well with a lot more to go and a lot more to do. And obviously, at some point, Tinder could make sense, as you asked about, with Explore, and integrating some of their capabilities into Explore certainly seems like a very logical thing to do. So lots more to go on integrating Hyperconnect. And then they're building some really cool things for the metaverse, which you asked about at the beginning, some really interesting new app experiences where you can meet people by traveling around inside a virtual world and you're represented by an Avatar, and you go into different rooms and meet people and do different things, whether it's more like heavy metal or it's more like piano bar or karaoke, whatever it may be. So that could have really big applicability for our business. It's a fun, engaging, immersive way to meet people. It's different than swiping. It's different than putting up a profile and kind of going through profiles. So we think it could be the wave of the future. It's really exciting. Korea is really on the cutting edge of some of this metaverse stuff. I know everyone's kind of jumping on the bandwagon now, but they've been at it for a while. Obviously, it's a big, long-term project with lots of people all over the place kind of working on it, not only at our company, but many others. So the potential is big, and we're going to continue to manage margins like we have, investing in our business. We've been investing in Hinge. We've been investing in Hyperconnect. We're investing in one of our swipe apps, which are newer for us. And there's -- we always try to manage the business in a way where we know we've got to make investments for growth. We know some businesses are more mature. They grow more slowly. We've got to harvest those. And so that's my job, and we'll continue to do it hopefully well and allocate capital well and continue to position the business for growth. And I think there's a long runway ahead, and we're excited about the next phase if that indeed ends up being metaverse.

Okay. I guess on that point, you've historically said you saw a path to at least 40% adjusted EBITDA margin for the core dating business. Obviously, right now, Hyperconnect is a slight headwind. But is that 40% or at least 40% number still in play? We're at 36% or so today. And if so, what are the major drivers over the next several years that gets you to that number?

Yes. So that ignores meaningful App Store changes, right? I think we can get there. It's sort of incremental 50, 75, 100 point kind of moves annually to kind of push us in that direction. We're getting benefits from marketing. It continues to shrink as a percentage of our overall revenue, and we can continue to tighten that. We're getting benefits from our scale and learning how to do things once and then kind of farming them out to all the various brands instead of building something 7 times. So whether that's a safety feature like content moderation, whether that's some of the video and audio technology, the fact that Hyperconnect can build these things and we can plug in the SDK and do that brand by brand repeatedly is a massive benefit to us from a margin perspective. So some of these efforts are newer for us, the safety area, which is really important to our business, we're pouring a lot of resources into. But ultimately, we'll see some benefits of scale there. We had to separate from IAC a couple of years ago. We had to build out some capabilities in the tax area and the legal area and the GR area and so forth. We've spent on that. But ultimately, we'll start to see some benefits of that. We're not going to kind of keep replicating those expenses. So we'll make progress on the margins. And I think that goal of 40% plus is still achievable. And obviously, if the App Store relief comes through as I think it will at some point, then the margins will go up from there.

Okay. I guess a near-term question. You talked on the last earnings call about sort of the different puts and takes in the guidance for the full year, sort of assuming in the back half of the year we're back at sort of October pre-COVID operating levels. I guess walk us through again some of the puts and takes in the guide for the full year. Where could it be conservative? Where is it not necessarily a home run yet?

Yes. I mean, when you look at it, a very small piece of the growth this year is attributable to macro improvements from COVID kind of getting behind us. And obviously, we have new macroeconomic concerns. But -- so we modeled out that we'd go back to kind of those pre-Omicron levels of October, and that's how our business would look from a new user perspective and from a payer perspective, et cetera. And we knew that could prove conservative, but we've all been head-faked a few times. And until we see it, we didn't really want to call it. And so I'm optimistic, even just kind of talking to people at a conference like this, that people are ready to get back out there, and they want to go. And they don't want to go back to just October levels, they want to go back to October 2019 levels, and they want to socialize and see friends and travel and do all this stuff. And so I'm optimistic that we're going to see some of that tailwind in our business which is going to manifest itself in terms of new users and propensity to pay and people spending time on the apps. We haven't seen it yet. I thought maybe we saw a glimmer of it in February in that little, tiny window. We started to see some pickup. So we'll see how the spring and summer progress. And again, we talked about, not every geo is exactly on the same pace. But I'm optimistic. If this is truly the end, we're going to get COVID behind us, people want to go out. They want to socialize. They remember how fun that is. They remember how important it is, how valuable. Our apps are better at introducing people to others than anything else out there, and so I think the future is still very, very bright. It's bumpy and continues to be bumpy, but we're going to get there, and it's great for our business ultimately.

Okay. One last one to wrap it up. Capital allocation, acquisition strategy, do you want to buy more dating app? What -- if you were going to acquire something, what would you potentially be looking for? Buybacks possible? Any comment there?

Yes. I mean I think, in general, we're a very cash-generative business. We want to deploy our capital in a smart way. We don't want to just build capital for the sake of building capital. And so in terms of buying dating apps, we feel like we have a pretty complete suite of dating apps. I don't feel a burning need to buy more dating apps. It's not to say we wouldn't buy 1 or 2 here and tuck it in if it's a new geography or a new segment or something that we don't already have. But for the most part, we're not really spending a lot of time looking at other dating app acquisitions. I think Hyperconnect is a good blueprint for people. It gave us some technologies that we didn't have, audio, video, that we're able to deploy in our business. It gave us people on the ground in Asia which we wanted and traction with the younger generation of users, more Gen Z, more a la carte. So it's a good blueprint what kind of things we might look at again. We think, in general, we've been good at acquisitions, and we've created a lot of value. If you look at Hinge, if you look at Pairs in Japan, if you look at Plenty of Fish, we've created a lot of value. And so we're eager to keep working at that. And so we would use capital to make acquisitions that expand our business and further our mission of helping people socialize and meet people they don't know. And as the world evolves, whether it goes in the direction of metaverse or whatever, we want to make sure we're prepared for that. So that's where we're looking to invest. If we don't find those opportunities and certainly giving money back to shareholders through buybacks or whatever is logical, it's probably something, especially with the stock where it is, that we should be looking at. And so we'll be dusting all of that off and thinking through how to return capital. We don't have a tremendous amount at the moment since we just hit our kind of leverage levels, but it builds significantly through this year and through next year. And so we'll be talking to our Board about exactly how to handle buybacks and capital allocation more generally.

Okay. Excellent. Thank you so much for the time.

Thanks, Lauren. Great to see you. Thanks for having me.

I really appreciate it. Good to see you. Thanks, everyone.

Thanks, everyone.