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

Okay. Good morning. I'm John Blackledge, Internet analyst at Cowen. We're happy to have Gary Swidler, COO and CFO of Match Group. It's good to see you in person.

Great to see you, John.

Try this on in person now. Okay. Good.

Maybe we'll kick it off kind of high level on -- in the 1Q shareholder letter, you guys said business isn't totally back given the variants and spikes in cases. So just to level set for the guide for 2Q and for the full year. It's kind of post-Omicron but not prepandemic kind of environment. And then just curious what the spike in cases in the U.S. -- have you noticed anything in the last couple of months?

Yes. I would say, in general, I think that's kind of where we are, where the world is, where socializing is. It's not prepandemic levels, but it's kind of slowly ticking in the right direction. And that's kind of what I see in our business as well. It's kind of a chugging along gradual recovery and improvement probably around pre-Omicron kind of levels. Clearly, every wave that's happening is having less effect on the business. So we didn't see much effect from Omicron. And in some places like in New York, I think there's a bit of a spike now. We're not really seeing any of that. So I think we're starting to get to the point where it's just something that people are living with. Even in markets like Japan for us, which have been really impacted by all the shutdowns that they had done, we've seen a bounce back there that's been pretty nice and kind of more of a return to the new normal. And I think the new normal will gradually improve. It's not back to kind of prepandemic levels and probably take more time to get all the way back to prepandemic levels. I think one of the things we'll have trouble with is contracting, let's say, to travel, which has really kind of bounced. I think travel really kind of went down significantly in the pandemic. It's bounced back now because a lot of people want to go to Europe and go different places to travel this summer. So obviously, bookings and things have been very healthy. There, you're seeing like a spring bounce back. I don't think we're seeing that, but we're seeing this sort of gradual chug along improvement, I would say.

Okay. That makes sense. And then you mentioned Japan, and in the shareholder letter, there is a great chart in there that showed kind of April, just with the cases kind of coming down, lockdowns easing, the April new user growth just really spiked up. And just curious. It's a really big market for you guys, if that, in fact, will continue or...

It has been continuing, actually. I looked at some numbers yesterday on this. And we have got -- they had this Golden Week holiday in the early part of May. We've gotten a really nice balance that's continued through the holiday period for them. And our strategy there, I think, is working. The natural momentum post lockdowns and as that market recovers is definitely helping us. And then we're spending marketing dollars and have some big ad campaigns running into that reopening, and that's kind of juicing it up even further. So I think that strategy has really worked out nicely, and we'll continue to employ it.

Okay. Good. Maybe we'll pivot to the App Store fee kind of update. Maybe just high level, if you can just talk about puts and takes of kind of where we are kind of in the U.S. and then -- and globally, and then we'll kind of get maybe into the play.

Yes. So I think it's important to sort of set the context, as you say. If you go back a few years ago, there was no legislative efforts anywhere to regulate App Stores and App Store fees. It wasn't a thing that was on anybody's radar screen. And then South Korea was kind of the first one that came out with a law and basically said it's not fair for the App Stores to require mandatory use of their payment systems then get the 30%, right? If you use your own payment system, you pay 2.5%, 3%, and they should be able to mandate that. They're only able to do that because you've got these 2 monopolies that you don't have any other choice. And so if they say, "It's 30%. Use our system," there's nowhere else to go, right, for a company in our shoes at least. And I think Apple and Google kind of blew off South Korea. They basically said, we don't want to have like a separate policy for South Korea than we do for the rest of the world, and they kind of ignored it. And I think that did not make the South Koreans very happy, but they've been kind of going back and forth. Then the Netherlands came out with a similar view. And I think the view was, okay, the Netherlands, small country in Europe, we can kind of also continue to ignore that. And I think that really got the rest of the EU angry because they basically said, "Okay, well, if the laws are going to get flouted here, we're going to have to strengthen the laws." And as you probably remember from GDPR, the privacy regulations, the Europeans are pretty bold on this stuff. They take it seriously. They want to lead the way, and they're pretty bold. And so Margrethe Vestager and others who are involved in GDPR basically came up with the DMA, the Digital Markets Act, to apply to the European Union as a whole, which is almost 500 million people, and basically pass that law for the entire EU to say, "We're not going to allow mandatory requirement of IAP, and we're not going to allow discriminatory fees in the App Store." So for example, we think it's discriminatory to say Match Group, which matches 2 people for dating, is a digital service that should pay 30%. But Uber, which matches a driver and a passenger, that's not a digital service, that shouldn't pay 30%. That feels discriminatory. There's no clear line. When there was a U.S. Senate hearing on the topic, one of the senators basically said, "That feels completely arbitrary to me. I don't understand that distinction at all," and neither do we. And more importantly, not only do they pass the DMA, but Vestager basically says, "We saw what you were doing in the Netherlands and kind of flouting your nose at the laws. You can't do that anymore. We're going to make sure they're tight, and the penalties are severe." And I think that was really the game changer. So it was kind of South Korea to the Netherlands, but then the EU basically kind of changed the game. And now I think where you are is Apple and Google recognize that the EU has passed this law. They're going to have to have a new policy for the App Store. They're going to have to make adjustments. It's going to be time in early 2023 to basically revamp their App Store policies, and it's going to have comply with the rules that say no mandatory IAP and no discriminatory fees. So that's coming. Now the U.S. is basically trying to figure out, should we pass something or should we not? And I won't get into kind of the dynamics between Republicans and Democrats here. but there's some question whether kind of Congress can get their act together to pass the Open App Markets Act or not, which is similar to the DMA. But I think regardless of whether the U.S. acts or not, the DMA was already the game changer. And so change is coming in the App Store landscape, which is great. It's great for consumers. It's fair. We're very happy about that. The thing that we sort of didn't anticipate was Google had announced that they were going to require mandatory use of IAP effective April 1. And with all this legislative change, it seemed to us, it seemed to me, in particular, that they wouldn't go ahead and enforce that change as of April 1 because they know that sometime next year, they're going to have to reverse course. What we didn't fully anticipate was the notion of kind of a land grab to say, "Let us get as many customers using our payment system. It'll be hard for those customers to go back and use Match Group or the developers in that payment system in 12 months." And so they implemented the policy. And we thought that was completely unjustified because not only does it really interfere with the relationship with the consumer and make it much more difficult for the consumer, but it creates a lot of work for us. We've got to comply with their policy, and then we've got to comply with the new policy next year. It's a tremendous waste of engineering and other resources. And it distracts from our work on our product road map, and we didn't want to do it. And so we weren't -- we tried to reason with them. We had all these discussions with them. We couldn't get to a place where everyone agreed on what to do. We basically already don't have mandatory IAP in a number of our apps, and we basically said, "Just let us keep the status quo for 12 more months until you know change is coming," and they didn't agree with that. And so we basically filed a lawsuit against them, basically saying their behavior is anticompetitive and illegal. And the judge looked at that and basically said, "I agree. There's real questions here as to whether what they're doing is proper." And we asked them to restrain Google from implementing the policy on April -- on June 1, really or on April 1, let's say, because it was going to be enforced as of June 1. And so the judge said, "Look, I don't really want to decide whether it should be restrained or not. You guys work it out if you can. If not, I will decide." And so we were able to work out with a little pressure from the existence of the restraining order request. We were able to work out with Google basically the status quo. So we don't have to put in the mandatory IAP. And they basically said, "Okay, but if the judge sides with us in the trial in 2023, you're going to pay us." And we said, "Okay. Fine. We'll put the money in escrow. I mean I think we're good for it, but we'll put the money in escrow, and it'll sit there. And if the judge says you are entitled to, you'll get it. And if not, we'll take the money back." And we've basically agreed to that, although we're still working out some details. And we think we're going to likely prevail in the trial next year. And it's not just us against them. You've got 37 states attorneys general alleging that what they're doing is unfair. You've got the Department of Justice alleging that. You've got Epic Games, another developer, doing the same thing. So there's a number of lawsuits that are all consolidated into one with a federal judge in California who's going to look at this. My guess is you'll see legislative change and change in their policies before that ever gets the trial. But if not, I think the trial will be the mechanism to force much more fairness in the system, which will be great for consumers and great for developers. And I don't think the U.S. wants to get left behind. Europe is clearly going in a direction, and this is a global marketplace. I don't think the U.S. wants to have a different policy. So we'll see how this all plays out, but my sense is change is coming, and change is coming in 2023 to the App Store ecosystem. And so this is a little bit of gymnastics between now and then, but we're going to see a significant change, which will be helpful from a margin perspective for us over time as well.

No, it's huge. I mean the -- your -- the business model for the company is incredible with these -- even with these kind of huge fees, and then there should be relief. So that will be good. And...

Well, it's not just that, right? It's -- when you pay a 30% tax, right, the consumer is essentially bearing that, right? And so if that comes down, the consumer will be more profitable over time for us because we won't be paying 30% of what they pay to Google and Apple, which means we can market more, which means we can attract more customers. And so it really does affect the whole ecosystem of our business, which will be very exciting, and we think we can pass some of the savings on to consumers as well. So it'll be good for consumers. It'll be good for the ecosystem, and we're looking forward to it.

And the one question we're getting from investors is you guys are putting, I think, $40 million in escrow, I think, up until maybe next April, but then you guys had kind of guided to $6 million a month starting in June. So there's a little -- there's a difference in the numbers.

I'll do the math for you. $42 million would have been the cost for the full year, and we agreed to escrow $40 million between now and the trial, which we're estimating is going to be sometime April or the way trials go off and they get delayed. I mean this is until the trial or final disposition. So my guess is it'll sort of be ratable over that 12-plus month period as opposed to the $6 million a month that we had said for the rest of the year. So there'll be some small savings for us over the course of the next few months.

Okay. Okay. That's helpful. And Apple has been holding the line.

Yes.

So I guess next year, it will be interesting to see.

Yes. I think that Apple is just holding on for as long as they can, which my guess is it's 2023 will be the end of when they can hold on for. So they never allowed you to use another payment system unlike Google, which was allowing it and then decided to change their mind. Apple has always had that very strict policy. So my guess is they'll hold their policy until sometime next year, and then they'll have to revamp as well. So you're going to see relief at both Apple and Google ultimately.

And not that I've seen it, but have -- I don't know you guys have seen or heard anything on the EU side about potential what the rate may go to.

Look, I don't know that they're going to legislate that. I think they're going to allow there to be a way around the payment system, so you can use your own payment system. And then it's this nondiscriminatory kind of requirement that's going to be the lever on which people have to look and say, "Okay, what does that mean?" And it could mean that everybody has to pay something in the App Store as opposed to some significant majority of apps who don't pay anything and a small minority who pay a lot. And so we'll see how that ends up playing out. I don't know yet what they're going to do. It's going to be interesting to watch for sure.

Okay. No, that's super helpful update. Maybe we could pivot over to Tinder. You mentioned, I think, on the call, a strong kind of product road map on the back half of the year. Just curious if you can just talk about the pipeline for product at Tinder as we kind of get through the year.

Sure. I mean I think it kind of goes in a few buckets. One is kind of women-oriented monetization features, which is something that Tinder really hasn't focused on. We've always known there's an opportunity there. We have predominantly male payers at Tinder, so we think there's room to monetize females as well. The trick is, what will women find valuable on Tinder? And I think what we believe is the case is some more control over their experience, the ability to have more high-quality matches, more matches of the type that they want as opposed to more quantity of matches. And so we've been testing some different features that are aimed at that goal, and we're going to put them into a package, which will be a subscription package targeted at women sometime in the second half. And so that's one large initiative. The second large initiative continues to be around Explore, which is kind of the new experience around Tinder, which allows you to find people that have kind of common interest or a background that you're looking for. It also allows you to see people in a different context as opposed to just swiping through cards and seeing them once and deciding yes or no. You can see them as, oh, I went to UCLA. You went to UCLA. You like dogs. I like dogs. Whatever it might be, and you have some common interest. And so you can see them in that context, which is more the way you meet people in real life. You meet -- you might see somebody in a bar or somewhere, and you see them for a couple of minutes. You make a decision yes or no, then you might see them at a party 3 weeks later, you get another shot to decide, maybe you talk to them and see if you're interested in them. Tinder hasn't really allowed that second part, right? It's been here they are, yes or no. And that's not really the way things go in real life. And so Explore gives you another opportunity to get to know somebody. And we think there's interesting things we can do in Explore that we're just starting to scratch the surface on. And then I think the virtual gifting economy there will be very interesting. We're still building that out. It really is not a 2022 revenue item. It's really a 2023 and beyond revenue item. But building out coins, enabling an ecosystem where if you want to gather somebody's attention, right now, you can send them a Super Like, which has been a great feature on Tinder, an a la carte feature, but we think that could be a lot more interesting with different types of virtual goods and virtual goods kind of going back and forth. And we've seen the power of the virtual goods ecosystem in our Plenty of Fish business where in live streaming, people are sending bigger and bigger gifts. It taps into the whale phenomenon. Someone wants to go spend thousands of dollars standing out, in Plenty of Fish LIVE! streaming, they can do that. If somebody wants to spend a lot of money on Tinder standing out, it's really hard to do it. So we don't really capture heavy users, heavy spenders on Tinder. The virtual goods ecosystem ultimately should allow that, which we think should be really interesting. So we're building that. We'll test it, refine it, and it will really be an impactor for next year and beyond. But that's an exciting thing that's happening at Tinder on the product side that is not sort of very near term, but I think will be a significant impact there.

That's great. And then maybe we'll move on to Hinge, which was a really great acquisition by the company. And you're monetizing it, and you've been pretty bullish publicly about the prospects over the next several years. Could you just talk about how the monetization is going on the platform? Maybe we'll start there and then -- and maybe layer in kind of the non-English-speaking market expansion.

Yes. Look, I think that Hinge has been, as you say, a great acquisition. The combination of their really interesting product -- the other 2 big competitors, Tinder and Bumble, competitors to Hinge, kind of have the same experience. It's been a swipe experience historically. And now Hinge has introduced a different product aimed at more serious people. It takes more work to get into the app. It's more substantive. It scrolls up and down as opposed to swiping. It's more targeted at kind of the Instagram generation, and I think people really enjoy using the product. So to me, that's the first thing is that it's a differentiated product that people really like. And it's very closely aligned with their focus on seriously intentioned millennials. And you don't have to take my word for it. I mean if you look at the organic traction that Hinge has around the world, even in markets where we haven't done anything, a market like India, for example, we haven't done anything with Hinge. Yet because it's an English-speaking market, hinge has really caught on in that market. And so we're really happy with the organic traction that Hinge has in a number of markets. You probably remember a couple of years ago, Hinge was really big in New York, it was big in L.A. And now it has filled in the map in the rest of the U.S. And in English-speaking markets. It's the #1 most downloaded app in the U.K., in Australia. So there's real traction there. And the open playing field for Hinge is vast because the rest of the world, the non-English-speaking markets, it doesn't have any noticeable presence in other than some modest organic traction. And so what we're doing is we're spending time at the beginning of 2022 starting to translate the product and starting to localize the products. So if we have questions or things like that, we want them to have relevance in the market that they're in, so the questions in Germany might be different than the question in the U.S., for example. And we've done that now in the first market, which is Germany. It's launched, and we're supplementing that in June with some marketing spend, and we'll try to really get the flywheel going in Germany. And we'll then deploy the same strategy in a couple of other languages in Europe in the second half of the year, and we'll kind of roll through Europe and then ultimately kind of roll through Asia. We have a good sense of how to do this because we've done it with Tinder. We've got people on the ground in these markets, and ultimately, as I mentioned, I think India could be really interesting for Hinge. It's a more serious relationship market. It plays well to Hinge's strengths. Japan, which you also mentioned, is an important market for us. We've got a big presence there. I think Hinge makes sense there over time. Korea, with the Hyperconnect team on the ground, I think we can really benefit from that as well. So we've got a pretty clear road map for where Hinge should go, and we will kind of follow that around the world. And I think Hinge can grow significantly from where it is now, on track to be kind of the $300 million revenue business this year. It should be much bigger over the next 2 or 3 years as we roll internationally and continue to fill in the English-speaking markets as well.

Super helpful. Yes. That makes sense. And like you said, you have the track record with Tinder. And I'm sure it'll go well. And then Match has a new CEO. I think he started yesterday.

He did. Yes.

Can you talk about kind of -- just color on what we should expect from him, his experience and how that may translate to Match's brands.

Look, I think that the company, in general, has a pretty clearly articulated strategy. We know where we're going. We know what we want to do. And I'm not expecting a sea change from him. It's not like the company needs a new direction or have struggled or anything like that. It's performed really, really well. And so he's coming in with some fresh perspective, good experience on the monetization side, good experience kind of following tech trends generally. And I think he'll kind of take a fresh look at everything and I'm sure have some really interesting thoughts and perspectives, which we should deploy. It's too early to say exactly what that is. We spent some time yesterday going through things. I'm flying to L.A. We're going to meet a bunch of us next few days to go over Tinder and how it's doing and where we want to go. He's got some good international experience, which I think will be helpful as well. So I think it will be more along the lines of what we've been doing, but we'll try to amp some of it up, and we'll see where that takes us. So I'm not expecting kind of radical changes at all, but more just some specific spots where he may have some different views or some ways to advance the ball for us, and we're looking forward to his perspectives. We're doing a big world tour over the next month, and so I think we'll have a good update on the earnings call in August after he spends 60 days getting to know the business and thinking through where he wants to take it, and we'll likely provide some good color on that call about kind of what we see, if anything, kind of changing or what his perspectives are in the business.

Okay. No, that makes sense. We'll look forward to that. And you mentioned the world tour, and then you guys bought Hyperconnect. And can you just talk about how the business is doing? I think one of the rationales for it was maybe porting some of their technology to the other brands. And if you can give an update there on the video side. Yes.

Yes. I think -- look, Hyperconnect, we think the team is great, very innovative, very fast-moving. They try a lot of stuff. Some work, some doesn't, but they kind of keep iterating. They've got this very interesting metaverse work that's going on now. And so they're going to keep trying different things. That's kind of their DNA, and we want to encourage them to do that. They've got great video technology, great audio chat and video chat technology, and we've been leveraging that. We've got it now in the Match app, in the Meetic app, in the Pairs app. And we're looking at it in other places as well across our portfolio. And the interaction between our apps and the Hyperconnect team to build video chat, to build audio chat has been really, really good. The feedback has been great. It's been super productive, very quick-moving, responsive to changes and improvements. And so the leveraging of their capabilities around video and audio has really gone well, and their kind of look into the future with different technologies like related to metaverse has also gone really well. What has been a bit tougher out of the gate has been their performance of their Azar app and, to some extent, the Hakuna app, but mostly the Azar app. And I think that's a combination of a few things. Some of it is COVID-related. Some of the markets had a tougher time. Some of it is ATT-related. We at Match Group were pretty good at responding to the Apple changes. They were a little slower, I think, and kind of weren't as well equipped. And so that hurt them in the early going. We've sent a team in there to help them, and I think they're in a good spot now as it relates to some of those changes, but it took them a little while to adjust. And some of it is just competition and adjustments to the product that they had to make in response to a changing market environment. You can't -- you've got to constantly adapt and change in the market we operate in. So we've had people on the ground there now for a while. We've had teams kind of going in and out and helping them. They've been super receptive to the changes and the input and the suggestions. And I think things are really going well now. So I think the business has definitely stabilized. It's actually started to improve, even, in Q2. And our outlook for Q3 and Q4 is brighter. They've got work to do and initiatives to put in place. BK -- Bernard and I are going there with some of the team in a couple of weeks. We're going to go through the business and spend more time on the back half of the year plan and kind of what happens beyond. And I think there's lots of opportunity. So I think it was not as easy out of the gate as we would have liked, but I think we've got it in a good place now. We're using some of their technology across our portfolio, and there's much more to come. So if you take a slightly long-term lens on that, I think that acquisition will prove to have been a good one, and there's lots we can do with it. I think it just -- it's an evolving and improving story, and I'm very optimistic still that we'll get to where we want to be with it.

That makes sense. And so maybe let's stick on kind of non-Tinder, non-Hinge. Any other brands that you would maybe call out as kind of you're excited about or kind of, like you said, you ported some of the technology from Hyperconnect into Match, Meetic and Pairs? Just the non-Tinder, non-Hinge, ex Hyperconnect. Any color?

Yes. So I think there's kind of 2 things that I would point out. One is in that bucket that you're referring to, we've got our Pairs business in Japan. That business has had a tough time over the last 9 months or so because there's been 5 states of emergency in Japan or lockdowns. So imagine in the U.S. market, if we had 5 lockdowns, where people's minds would be at? And I think that kind of froze Japanese society. And now it's been released, and they're sort of kind of getting back to some level of normal. And that's why we're seeing a real turn in the trajectory of our business. So it got beaten down pretty good, but now it's really coming back nicely as we talked about at the beginning. And that's an important contributor to our business. The Pairs business should be one that grows very solid double digits, and we have not seen that for the last while. And so I'm optimistic that at least on a kind of constant currency basis, that business will return to some nice growth over the coming quarters. So that's one component of it. The other component in that bucket that I think is worth calling out is the marketing environment. Match and Meetic, in particular, which are still sizable businesses for us, are heavily dependent on marketing spend. And the marketing environment has been made tougher by the Apple changes for sure, right? Facebook marketing, for example, has been much less effective. And so we've been forced to find other channels and kind of revamp our marketing spend in light of the Apple changes. We've done a good job reacting, but it still has some negative impact. And the marketing environment generally in kind of the I'll call it the post-COVID period, right, there was that initial like no one was marketing, if you remember. There was no travel. There was no car sales or none of that. And that has come back in a significant way. And with the economy strong, the marketing environment has been what I would describe is pretty frothy. It's been expensive. And we just haven't been able to spend in those businesses the way we wanted to spend because the ROIs weren't there, and we've chosen to stay ROI discipline and not chase things. And so with that hurdle in mind, that has affected user and subscriber growth to some extent in the Match and Meetic type of businesses, the more established brands, as we call them. And I'm hoping now, although I'm not rooting for a real downturn, I'm hoping that as the economy cools a little bit, we'll start to see a little bit more normalcy return to the marketing environment, which will help those legacy brands because we'll be able to hit our hurdles with more spend. So that's kind of the environment I'm rooting for, a little bit of a cooler marketing spend environment. We'll see if we get it. But it feels like we're on the cusp of that. I'm optimistic that the back half of the year, we might see that, certainly into 2023, and I think that will give us some tailwinds in those businesses.

Yes. That makes sense. Yes. Yes. Because we just talking with investors, it's like if we head into a recession, companies that I cover, it's like, well, obviously, Match and Netflix and some are -- we would think would be more resistant to the recession than obviously in advertising, which is tied to the macro. And so that's a good point.

Look, I think the business was very recession-proof in 2008. It actually saw a bit of a boom in 2008 in the middle of the great financial crisis because people had a little more time on their hands, they want to go out and meet people. And for most people, $16 a month is still affordable even if things are bad, and that's not spend they're going to cut if they can go and meet people and still be happy. And so I'm not expecting that we're going to see a significant impact from a downturn on our business. And in fact, in the marketing environment, for example, it might actually give us a bit of a tailwind. So I think our business should be fairly recession-proof. We'll see. Every recession is a little different, but we'll see how it goes. But I would bet on us through a recession, and I think there should be some tailwinds to us on the cost side, not only on the marketing side, but also on the labor side. It's been really expensive to retain people, to hire people over the last 12 months. And I think you will see some cooling, and that should help us. You've seen a number of our competitors implement hiring freezes and really talk down their hiring expectations. So if even in the kind of the companies you probably cover, you see some talking about a downturn in the advertising market already, right, you've seen some of that kind of flow through. You've seen a lot of announcements, whether it's Uber or Lyft, Facebook, Twitter, announcing hiring freezes or changes to their hiring plans. And so those things should help us on the cost side, I think, in the back half of the year, if not in the first part of 2023. And so we haven't had that environment for a while, and some return to a bit more of a kind of goldilocks environment, if we can get there, would be really helpful.

Yes. That's great. I think we're out of time. Great to see you. Thanks so much.

Thanks, John, for having us. Appreciate it.

Appreciate it.