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

All right. Good morning, everyone. Thanks for joining us. I'm Lauren Schenk, Morgan Stanley's small and mid-cap Internet analyst. And I'm excited to be joined this morning by Gary Swidler, Match's COO and CFO. Thanks, everyone, for being here. Before we begin, a couple of disclosures. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/disclosures and the safe harbor for Match. During this presentation and during the Q&A session, 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 periodic reports filed with the SEC.

So with that out of the way, let's start a little bit bigger picture. There's a lot of discussion about the end of swiping, the metaverse, social discovery. How do you think about the industry over the next 5 to 10 years, how you see it changing? And then maybe as part of that, how has COVID changed the industry? And how do you see the industry today versus maybe 3 years ago?

Well, I think that, actually, talking about kind of the end of the industry or changes, I think, is way premature. I think actually what's happened in the last few years is that people have gotten more and more comfortable with more aspects of their life online, doing more online. So I have a 15-year-old son, as an example. If you ask him, how do you feel about meeting people online, he doesn't even really understand the question. He said, "Of course, I meet people online, I have friends online, I hang out with people online," right? You go into his room, he's playing video games and people are on video with him. It's become very, very normal for people of that generation. So I don't think there's any question at this point that the tailwinds behind us in terms of people being willing to meet others online and socialize online, that era has arrived. And so now the question is, what's the right way to satisfy that interest? You've got a generation of people who spent a lot of time online, who are very comfortable online, who are very tech savvy. They're clearly digital native. And so what's the right product? And the Swipe notion has gained a ton of traction over the last decade and has proven itself to be a very strong, successful and resilient way for people to meet, but it's not the only way. And I think we have this portfolio of strategy for that exact reason that we can have different kinds of products, different experiences with different groups of people, knowing that most people are on our products to meet others who they don't know, and we have to find ways to satisfy that need that people have. I think from a COVID perspective, what we've learned or at least what's been reinforced is that there's a lot of lonely people in the world who want to meet people, who don't like being cooped up at home by themselves for days or weeks or months on end, and they're willing to use the tech resources that are at their disposal to keep themselves busy and socialize and entertain themselves. And while I think there's a little bit of a retraction from some of that now because it was too much for a lot of people, we're going to find a new equilibrium around that, which I don't think we've actually found yet. People are still readjusting to being back out and traveling and socializing and dinners and parties and everything else. And it depends what country you're in because it's different in the U.S. than it is in Japan, for example. And so I think the world is still kind of recalibrating to the new normal. And something that I point out, for example, if you were somebody who did your dates 5 days after work every day where you had a drink with somebody, now you only go into the office 2 days, you have 60% less opportunity to meet people after work. And so you have to adjust the way you're socializing. And I think people still haven't quite gotten to that point yet of full adjustment, but it's pretty far along at this point.

Okay. Great. There's also been a lot of debate about how online dating performs in a recession, right? On one hand, it's a relatively low-price offering, finding love is high on people's list of needs and desires, and there should be some pent-up demand from over the last 3 years. But on the other hand, it's also a very discretionary purchase. Could you talk about the trends that you're seeing in à la carte versus subscription and maybe how your views or expectations of how the business performed and recession has changed over the last, call it, 9 months?

Yes. Look, I think your description of it is accurate. It's a small purchase that makes people happy, but it is somewhat discretionary. And I think what we've seen now a few times is that when there's some kind of shock to the system, people do pull back on their à la carte purchases. They keep using the products, they keep engaging with the products, they generally keep their subscriptions, but they tend to calibrate their à la carte purchases. So when COVID first hit, people generally kept engaging actually at a higher level with the products. They kept their subscriptions. We did see some pullback on à la carte, which was pretty noticeable because people said, "Well, why should I boost myself or try to get myself more attention? I can't go out anyway and so this isn't really going to function in a way that makes sense for me to pay for it." And then after a couple of months, when people got back to somewhat level of normal, we saw that trend reverse itself. When oil prices, gas prices shot up in the late spring, we saw people feel that economic shock because I don't think the general public is as good about managing their finances as thinking about recessions and things. Maybe economists give them credit for. But they know that when they fill up their car and it costs 60% more than it did before, they can feel that, right? And so we did see a pullback in the spring. People say I got to be a little more careful with my buying, and they pulled back a bit. And then as gas prices came down, it normalized out. And now I think you're seeing that again. People see -- they read in the press about layoffs. They read about recession. They're getting more nervous. And so we're seeing some pullback. It's not equivalent at every business in every geography. I'm more worried about Europe, frankly, than I am about some other geographies. I think this is going to be a bit of a tougher winter for people here in this market. I do think that our younger users are more susceptible. If you have your first job out of school and you're reading a lot about layoffs, you tend to get a little more nervous. I think we have a broad cross segment of the population. We have affluent people. We have less affluent people. And obviously, affluent people are still holding up pretty well. Less affluent people are being more careful on pulling back. I also think that people have gotten used to a lot of Internet purchases. In the last 10 years, there's a lot of subscriptions, music and video and everything else. And so people are recognizing that now as they're trying to figure out what they can live without. And they're trying to figure out what is important and what is not. I don't think that we'll see people fully pull-back on dating, but they might kind of nip and tuck here and there in à la carte. That's kind of what we've been seeing for the last 6 or 8 weeks, pretty significantly at Tinder. Our Plenty of Fish business, where people gift for live streamers, we've also seen very susceptible to economic trends where, in COVID, when there was government stimulus, they feel like they have more money in their pocket, they spent more. Now they feel the opposite. They're nervous about the economy. They're spending less. And so we are a barometer for the consumer to some extent.

Yes, okay. On the last earnings call, you mentioned that you had seen a slowdown in October versus September, which we heard from pretty much every company as earnings season went on, has that improved at all in November? And how are you assuming the macro backdrop evolves in the fourth quarter -- changes in the fourth quarter and your initial '23 guide as well?

Yes. I'm not seeing a significant change in trend one way or the other thus far since our last earnings call. I'm expecting that things are going to trend pretty much as they have been now through the rest of this year and into next year. We're not assuming some miraculous second quarter recovery nor are we assuming some very miserable downturn. We're assuming a consistent kind of trend in a negative direction through 2023. That could prove wrong. But generally, the way we forecast is what are we seeing? And right now, we're seeing this slightly negative trend, and we're assuming that, that continues. If you tell me, you're much more pessimistic, I'm going to tell you our forecast is probably wrong. If you tell me, I don't know, you're much more optimistic, I'm going to tell you our forecast is probably wrong. But right now, based on what I see kind of continued deterioration in a tough -- especially first half of next year is kind of what's baked into our forecast.

Okay. Maybe digging into '23 a little bit more. I think investors look out to the initial 5% to 10% revenue guide and say, there's so many upside levers. You have the Tinder product rollout and road map coming. You have Hyperconnect upside. You have Japan reopening upside. You have Hinge premium subscription international upside. Maybe talk what's embedded in the initial guide and where you see the greatest upside levers.

Yes. I mean I think you point out some of the bigger ones. We've made pretty reasonable assumptions, modest assumptions, I would say, around the Hinge new subscription tier. There's more upside there than there is downside. We should be able to achieve what we've assumed and certainly could surpass it. We just got it through app store approval, and so we're getting it out into the market. So in the next 6 weeks or so, we might get a much better sense of what's pricing on that product because we'll test a handful of pricing levels, and what's the take rate on that product. So we'll see kind of where that takes us. That's clearly one thing we're monitoring closely. Japan, which is a big market for us, has kind of been more than for 3 quarters now. Eventually, that market will snap back. We have not assumed that for next year. Like I said, we don't assume things that we don't see. And so I don't see that right now. But at some point, that will be wrong, too. And so we'll see a snapback. That provides us with some nice upside. Tinder execution and getting product out the door and having successes is a big swing factor. If they can achieve their road map for next year, we'll be at the higher end of our range. If they can't, we'll be at the lower end of the range. So those are factors in the guidance. That's why we have this 5% to 10% range. Some things will go better than we expect. Some things will go worse. Obviously, we're also trying to leave ourselves room for the economy deteriorating. Don't know exactly what the effects are going to be or how long or how severe. So that's another factor that goes the other way. And what we've tried to do is kind of keep enough upside levers and knowing that there's some downside possibilities, and hopefully, those will equate out in some way. The other one that people don't focus on as much, we have a $500 million-ish budget for marketing spend. And at the beginning of COVID when most advertisers fled the market, we kind of had the market to ourselves, we saw real marketing efficiencies and got real upside from that, real tailwinds from that. And then the market got very competitive, and it's kind of stayed competitive for the last 2 years, really kind of a frothy market with high prices and Apple ATT and everything else that you know has gone on. The market has kind of held in surprisingly well despite the economic turmoil. I don't know how much longer that can last. We haven't forecasted any material degradation in CPMs in marketing -- improvement and marketing efficiency for next year, but that feels overly pessimistic to me. I think it's likely we're going to see some relief on the ad side because the economy is probably going to turn, to some extent, in the first and second quarters of next year, and you should see rates start to come down. I don't think what we see now is sustainable for much longer. Maybe it will sort of eke its way out through the Christmas season, but I think then you'll start to see some real improvement. So knowing that we have a high seasonality business in the first quarter and expecting to see marketing budgets kind of cut for others in the first quarter, I'm optimistic that we'll see some more opportunity from that. But we haven't baked in a lot of upside from that, but it could be a real driver for us in the first part of the year.

Okay. You said last week at a different conference that you expect the Tinder product rollout should be fully backed by 1Q. Maybe let's dig into that. What is the difference between the Tinder product rollout being fully up to speed versus when that should translate into revenue growth?

So just to be clear kind of on how this works, right, we weren't happy with the way Tinder executed in the first half of 2022. We made a series of management changes. The new team came in, reprioritized, readjusted, built its strategy. We basically said you have 2 quarters in the back half of '23 to really kind of get yourselves organized. They've done all of that. We've been through it. We know what they're planning. We like their plans for next year. We think that they're achievable. And so now it's up to them to kind of get the wheels moving and get things out the door. The sooner and better they get that accomplished, the more that -- quickly that will translate into results: top of funnel strengthening, improved revenue generation and ultimately improve bottom line. And so we want to see that get going. I'm optimistic that they're set up to get that going in the first quarter, and it will kind of roll progressively from there. The more they get done more quickly, it will be more beneficial from a revenue standpoint. The slower they are, it will be less beneficial. So we want them to hit the ground running and hard. They appear to be positioned to do that, and so we'll see that. I think you'll start to see some metrics improve, more products shipped, more product successes, user growth improvement and then ultimately translate into revenue growth more back half-weighted.

Okay. And we do start to see that translate to revenue growth. Should it be more on the paying user side or on the ARPU side or a combination of both?

I mean, normally, we try to target a combination of both. It depends how you're looking at it because, obviously, FX is hitting the ARPU side pretty significantly. So without adjusting for that, I think that our ARPU or our revenue per payer growth will be relatively muted. Most of it will come from the payer side. But if you look at on an FX-neutral basis, I think you'll see it from a revenue per payer base as well. The general sort of formula we've applied is to try to target double-digit payer growth and single-digit RPP. I'd like to see us get back to that in the late part of next year. That's the goal.

Okay. And are any of these time lines dependent on appointing a new Tinder CEO? And is there an updated time line on that?

They're not dependent on appointing a new Tinder CEO. I feel like the team, which has really kind of changed over, is firing on all cylinders. They have a plan. They're executing on the plan. And so don't see a need to add to that team. But if we could find someone that we thought would be really additive, it would be great. Someone who's a real product visionary, who has experience in our kind of space, who's got real CEO experience and gravitas could be added to the Tinder team, we'd love to add them. But if we don't find that person who we think could be a real game changer for the long term, then we'll just kind of continue as we've been going. And so that's the balance. As BK and I have been interviewing, every candidate we're trying to say, is this person a real game changer, is really going to add over the long term? If so, we want to bring them in, even if that causes some short-term disruption and kind of slows things down because every new CEO wants to review what's going on, I think this, I think that. So we have to factor that in. If we don't find that person we think is worth taking that little bit of a step back to bring them onboard, then we'll just kind of keep chugging away the way we are. And I think that's working fine.

Okay. Maybe let's dig into some of the product initiatives. Tinder has obviously very successfully monetized its male user base, perhaps maybe because men tend to be more focused on quantity and the females tend to be more focused on quality.

You've said it that way.

Yes, I know. You talked about improving the female experience. What are some of those product features? Which ones will be behind paywalls? And the relationship intent filter specifically, I think, is intriguing to some, will that be behind the paywall?

So the women's experience is probably the #1 thing that the Tinder team is focused on for next year. We need to do a better job with women at Tinder, particularly younger women. So we're focused on Gen Z generally and women within Gen Z specifically. And so there's a number of initiatives, and it's a broad list of things that we think can help improve the women's experience. So making them feel safer and more comfortable is part of it, right? Reducing the amount of bad behavior on the platform is part of it. We're always doing that, but we can turn that up even more and make the behavior better. That has nothing to do with specific revenue generation ideas, but just the overall health of the ecosystem, giving them more control over their experience. As you said, helping them find the matches that they're looking for as opposed to just being inundated with a lot of matches. That's something that we're trying to control for and improve. And there might be certain features within that improvement in the experience that we think women will find valuable and might pay for. But that is a small sliver of what we're trying to do, that's not the overall goal. The overall goal is to make improvements to the ecosystem, the experience and the product to drive a better experience for women. And that's going to be a theme through all 4 quarters of next year. You're going to see a broad array of things to do that. And so there might be a small number of things that go behind the paywall, but that's really not the key focus of the women experience improvement.

Okay. I guess if some of these paid features were successful, I imagine that very small changes in female conversion could be pretty meaningful for revenue. Is there any way to think about that?

They could be, although that's not going to really move the needle materially on the year next year. I think the first goal is to strengthen top of funnel to attract and retain more people, particularly women, particularly younger users. That's job one. That then will ultimately have a downstream effect, which will be revenue generative. And that, to me, is the most important. And I would say that, overall, when you look at Tinder's road map for next year, first of all, it's got a lot of initiatives on it. There's a lot of things they can do. We're not making a bet the farm on 1 or 2 or 3 things, it's a broad array of small things that are contributing a small amount of revenue that in aggregate add up to a lot. So that's kind of one strategic decision that the new team has made. We want to take lots of shots on goals. Some are going to be more successful than we're anticipating, some will be less. But we can deliver the revenue we want to deliver as a result of taking those shots. So that's kind of a key part of our strategy. The other thing is there hasn't been enough done to really maximize the platform in the last 6 or 9 months when execution hasn't been what it needed to be. And so they're going back and they're making adjustments, what some people call low-hanging fruit, stuff that's obvious that should have been done, that hasn't been done that they can tweak and adjust. So a lot of their initiatives for next year do fall into the category of optimizations, pricing adjustments, things like that, that we know will work if they do them. So there's not a lot of risk in achieving that aspect of the road map for next year. Then there are some things that are a little bit more innovative that require a little bit more leap of faith that they've got to accomplish. I think they can do all of those, but we're going to see how those play out. And they're also thinking about the big picture, how to transform the experience, how to adjust it to capture more Gen Z users, younger users, women in particular. So there's sort of a bunch of different kinds of things going on. We want to make sure that there's a base of revenue that drives our 5% to 10% goal with upside from there, depending on how they execute on some of the bigger, more complicated shots on goal. That's the strategy.

Great. I would be remiss not to ask about Hinge. As you begin to enter non-English-speaking markets, how long does it take for a new market to kind of get to the scale from a user base perspective that you can start to monetize that region?

Yes. We have to reach some level of scale, such that it makes sense for the user to pay. If you go on a dating app and there's 2 other people, the reason to pay to stand out is not very high. But if you go in and there's 100,000 people, it's okay, there's enough choice here, that's worth me finding ways to stand out and pay. So this is a thing that we've done very successfully in the U.S., in the U.K. and some other developed markets. Over the last few years with Hinge, we've built the user base so that people solve value in paying for the features of standing out and giving themselves some advantages. And now we have to go do that in these international markets as well. The good news is, as we've entered these markets, what we're seeing is very good organic traction, which is driving user growth very successfully. The product is resonating in all of these international markets that we're going into Germany, Sweden, Austria, et cetera, some of the other Nordic countries. And so we're seeing real organic traction, which we're then supplementing with marketing spend, let's call it, over a 6- to 9-month period, start to see enough scale of users and you can really start to drive monetization and pay yourself back for the marketing and other investments you've made in the products. So that kind of time line and pattern is going to play itself out in market after market or region after region throughout Europe. We're going to go Spain, Italy, France in early 2023. And then ultimately, 2024 will be Asia. And so that will get Hinge across the world. I don't see any impediments. It's just a question of time and sequencing, but we've got the team. We're ready to go, market after market. And I think there's a lot of upside for Hinge as it expands into these markets.

Great. Let's pivot to margins for a minute. It feels like there's greater focus on expense discipline and maybe scrutiny around incremental investments more so than over the last couple of years as long as I've been following the business, but you're also at the same time increasing marketing at Tinder and Hinge. So maybe talk about the magnitude of that marketing step-up. And from a timing perspective, how should we think about margins through the course of the year? Will there be sort of lumpiness as we think about marketing around specific product launches or just sort of cadence of the year?

Yes. So those are all good questions. I think that, ultimately, we've always been a business that's been focused on profitability and cash flow. We've always had strong margins relative to peers and others. We've always had strong cash flow generation. But the scrutiny is just higher now, as you rightly said, because the environment we're in is different. And so it's forcing us to make some changes, some adjustments, some nip and tuck here and there and some choices that you no longer have the ability to sort of spend on everything everywhere and you have to just make some priorities. And so what we're doing kind of a simple philosophy in a way. We're taking some from the slower growing businesses or business that aren't growing, and we're allocating those dollars to businesses where we see growth or growth potential, which basically means away from the established brands towards Hinge, Tinder and some new initiatives like The League and some other things that we want to build out, and we think can grow into the future. And so those are the choices we're making. We're not eliminating marketing spend at the established brands, we're just trying to put the hurdle on returns at a higher place so that the bar to spend is higher. And that will allow the business to continue to probably modestly decline, but not significantly decline. And then we will ramp up marketing at Hinge for the reasons we talked about to drive the growth in the international markets, where we clearly see that opportunity. And then at Tinder, we want to take better control over the brand narrative. We think that the market for too long has defined Tinder as a hookup app, which is really too unidimensional for what Tinder is. It's a much broader ecosystem. People meet their spouses, they meet their boyfriends, they meet their girlfriends, and no one really ever talks about that. People just talk about Tinder as a hookup app. So we need to seize the brand narrative around Tinder, and we're going to spend some dollars to do that starting in the early part of 2023, starting in the key markets, U.S., U.K. in particular and kind of go from there. And we think that will have real effects on user growth and the perception of Tinder. And so to enable us to do that, we're kind of reallocating resources from elsewhere in the business. We're also trying to cut back on some corporate expenses and some real estate and some other things that we don't need, given the world that we live in today. And so it's just a question of kind of going through everything and trying to figure out how we're a bit more efficient. And that doesn't assume that we get the marketing efficiencies that we talked about earlier, which would be -- make it a little bit easier for us from a spend perspective.

Okay.

Nor app store really, which I know is always a hot topic.

Maybe just one, as we start to wrap up. You -- from a capital allocation perspective, you generate close to $1 billion in free cash flow annually. You've historically been focused on acquisitions, but you did start to buy back stock for the first time this year. How are you thinking about uses of cash going forward? Is there a scenario where you would become more aggressive on buybacks? And from an acquisition perspective, what characteristics of a potential target are you looking for?

So we're very comfortable with our leverage kind of at these levels. This is where we wanted to get to, and we got there. So we do generate a lot of cash, and we have the ability to keep buying back stock. We think the stock is very attractive at these levels, and so we've been betting on ourselves. It doesn't require any due diligence. It doesn't require any antitrust approval or anything else, so we can keep buying back our stock. And that's what we've been doing the last couple of quarters. The thing that started to happen now is that people have had a reset around valuation expectations. So targets that we just talked to, who were still thinking about 2021 prices, have adjusted to 2022 prices, and that's made acquisitions more compelling from our standpoint. And as I think you said, we've done a good job with acquisitions in the dating space. The Pairs and the Hinges of the world have really been very value accretive for us. So if we can find some of those, we want to go back and do them again in the dating space, in what we know well, right in our core business. And I think people are running out of cash. In some cases, if you're a smaller company, a startup, it's hard to fund yourself. And if you're a bigger company where there's a clear price for you, you've adjusted and you said, okay, I thought the multiple is x and now I think they're half of x or whatever the math might be. And so we've been looking at some things. They tend to be on the smaller side in that kind of $50 million to $500 million range is kind of where most of these acquisitions are. So they're not going to materially impact other things that we might do, whether it's buybacks or other acquisitions, but we're going to try to figure out where we can maximize the returns and try to both buy back stock and ultimately look at the acquisition opportunities, too. There will be some internationally, Asia. Japan is a market that's really struggled where we see some opportunity for growth if you take a long-term horizon. India, Southeast Asia are all pretty interesting. Elsewhere in dating, there's pockets here and there. If someone has an interesting innovation, we'd like to try to galvanize it. We bought The League, it's a good example. Not a super expensive acquisition. We paid about 2x revenue for that company, 15 people, a founder-led company, good at what they do, but lots of things that we can bring to the table to turbocharge that business. If we can find more things like that, we'd love to do that.

Great. We have about a minute left. What are you most excited about as we head into 2023?

Well, it's interesting. In the upturn, it's sort of more fun in a way to manage your company, but it is a lot easier. In the harder times, I think companies can separate themselves out. And this is a company that has a lot of experience through a lot of different cycles, a global perspective. And so I think it's an interesting challenge for us to really navigate and manage the business well, and I think we're up for the challenge. So I'm really optimistic that we can perform really well from here, and then you'll start to see that in 2023.

All right. Thank you so much for your time.

Great. Thank you.

And thank you everyone for joining us.

Thanks so much.