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

Great. Good morning, everyone. Welcome to Day 2 of Barclays TMT Conference. My name is Mario Lu. I'm the mid-cap Internet analyst here. We have the honor of having Match Group this morning. Gary Swidler is the CFO, COO. Welcome.

Thanks, Mario. Good to see you.

Likewise. So before we begin, I have to read, unfortunately, a safe harbor, so bear with us. During this presentation and during the question-and-answer section, 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 the 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. Great. So with that out of the way, let's begin with some macro questions.

So online dating has generally been seen as a somewhat recession-resilient business. But as we started to see some cracks within the à la carte offerings, particularly in Tinder in October, can you provide an update on the consumer health as we close out the year, and what we should expect heading into next year?

I mean I think the trends that we saw when we talked on our last earnings call are pretty much what we continue to see. Generally, the business is pretty resilient from a macro perspective. The last time there was a recession back in 2008-2009, you had a much different kind of business. You didn't have a business that represented kind of a broad cross-section of people the way our business does today, especially Tinder, a lot of younger users, a lot of people with less discretionary income. You also had a business that was primarily a subscription, and now you have a business that includes a significant portion of à la carte revenue, especially at Tinder and Hinge, which are in the 25% to 30% or even a little bit higher percentage of revenue -- consumer revenue for those businesses on the à la carte side. And so it's a different business today than it was back in '08-'09. It's still a small purchase, an average price of $17 a month. It is a product that makes people happy. They get a lot of satisfaction and benefit out of, a lot of bang for their buck. And so we think some of those reasons, I feel we're confident that it was recession-resilient are very much still in play. But I think what we've seen in the last couple of months really is that the à la carte, which tends to be a much more discretionary purchase, not needed to enjoy the product, you can enjoy it with your subscription or even on a free basis, is showing some weakness as people have been tightening their belts, particularly younger users, particularly people who were kind of new to the à la carte purchase. Maybe they were making one here or there, but they weren't a significant à la carte purchaser. And so we've been revamping our merchandising at Tinder to address some of that. It is having some offsetting effect. It's not going to fully cure the impact of macro concerns that some of these consumers may have, but we can adjust our merchandising, showing them lower-cost bundles, lower-cost purchases, especially for those first-time purchasers or purchasers who are kind of modest purchasers of à la carte and help offset some of the impact. But there will be some economic impact from what's going on globally.

Got it. That's a great perspective. So one of your key competitors is making an international push, including the acquisition of a European Gen Z-focused dating app earlier this year. Match is clearly still in the lead with Tinder and your portfolio of brands. But how should we think about market share dynamics across the geos? And how you can defend that share going forward in both the mature and emerging markets?

Well, I mean, we're just getting started with Hinge in these international markets. And we have the #1 player in many markets with Tinder. It is the global player of scale. And now we're going to have another significant player of scale as Hinge moves across the global market. So its success in the English-speaking markets has really been phenomenal. In the U.K., in Ireland, Canada, the U.S., Australia, New Zealand, it's done really, really well. And so the next question for us was, would that product resonate in international markets? And we first started to move it into Germany and some of the DACH region. And we've answered the question that clearly the product does resonate and really drives a lot of organic traction as it expands in these international markets. And so we're translating it, and we're localizing it for certain kind of cultural things in these international markets. And the trends we've seen in Germany and some of the surrounding countries have really been phenomenal. And the overall halo effect that we've seen from Hinge really making a push in Germany has really been phenomenal as well. We're seeing organic traction build in other markets where we're not really yet focusing our growth efforts. So we feel really optimistic about that business, both in its existing English-speaking markets, as well as the newer international markets that it's pushing into. And the plan calls for us to add Spain, Italy and France in pretty short order and really kind of move across Europe. And I see no impediments at the moment in what is clearly a weak macro environment, particularly in Europe, which I think is at more risk than some other regions, frankly, from a macro perspective. But I don't see any real impediments to Hinge as it starts to expand internationally, first in Europe, and then ultimately following that into Asia. So that's our strategy. That's our business of scale. There's lots of little businesses that people can buy or may have in their portfolio, but they're not at scale. There really are only a small -- a very small handful of scaled competitors, of which Tinder and Hinge are 2 of the top 3.

Got it. So just diving a little bit deeper into Tinder. Between the new features coming out for women, Gen Z-targeted features and virtual currency, what are the top priorities now in terms of improving monetization for the brands? Any updates in terms of timings for these initiatives?

Well, I know there's a big focus on monetization. But I think before we get there, there's real strategic imperatives at Tinder to focus on women's experience more generally, just not specifically on monetization, although monetization improvements will be a part of it. But really to focus on the women's experience and to attract and retain women, particularly Gen Z women. And I would say also, similarly, Gen Z overall is a big priority. So those are 2 big strategic priorities for Tinder over the next year, is to really enhance the experience for Gen Z, which tends to date and meet people differently than millennials did. They're certainly very open to it, which is a huge benefit to our platform. But they're looking for some different things than millennials were, and we need to adjust a little bit to cater to Gen Z a little bit better. So that's a key priority for Tinder, as well as enhancing the overall female experience. And I think there's more we can do there to make women more comfortable and to attract and retain them better than we have. Those are 2 big buckets of initiatives, which obviously overlap. Younger women are kind of at the cross-section of those 2 initiatives. And you're going to see Tinder make a lot of moves in that direction over the coming 12 months to enhance the overall ecosystem health. And that's the biggest strategic focus and priority at Tinder at the moment, and it's not going to be a one-and-done. It's going to take time and a long-term focus. But they're going to make some real headway on that in 2023. There will be some aspects of that, that will drive monetization specifically, like packages and things focused on women, but that's a small piece of the overall equation. The goal is really to drive top of funnel to drive users, which then translates downstream into significant revenue benefits, not just for the specific women's initiative that might be focused on monetization, but for the overall monetization features that the product has, which are obviously very vast.

Got it. And what about Tinder Coins or virtual currency? I know that was kind of put on pause this year. Is that still slated for next year? Or is that...

Yes. It's on the road map for kind of middle to back half of next year. It was just delayed is the way that I would think about it. It was pushed from 2022 to 2023 to give it more time to be refined. And that is one of a large number of initiatives, both revenue- and non-revenue-generating that Tinder has for next year. So it's not a bet-the-farm initiative on virtual goods. But it is important because it would mark a new way of monetizing users away from specifically the à la carte features we have with the subscription revenue. Having people be able to gift and to exchange virtual goods would be a step for a new monetization, a new revenue vector. And that's why that initiative is particularly important and something that Tinder is focused on. I think it would be overall a relatively minor contributor to 2023, but should have more impact as we make the turn into 2024 and beyond.

Got it. And just to follow up on those, how do these features tie into the fiscal '23 preliminary guidance for Tinder at the midpoint growth of 7.5% for the year, which we think implies low double digits to mid-teens growth exiting next year. Any additional color you can provide to kind of help us understand the cadence for growth for Tinder next year?

Yes. I mean, look, I think your assumption is right. The plan is to kind of get some modest growth in the first half of the year and improve that year-over-year in the second half of the year. And that's what the plan calls for to get to that 5% to 10% growth range. There's lots of puts and takes that go into the outlook. Obviously, Tinder executing on their product road map and delivering all these features, improving user acquisition and retention is all a critical part of the outlook. The better they execute, the more likely you are to be at the higher end. The less well they execute, the more likely you are to be towards the low end. So that's kind of one set of variables in the guidance related to Tinder execution. There's also macro factors. What is the demand? How much weakness is there going to be in à la carte revenue? Depending on kind of what we think about the economy for next year, that's a big swing factor. We've made an assumption in providing our outlook that the economy will continue to deteriorate, as it has in the last quarter of this year, into next year. But hard to say it's going to be better or worse than what we're currently anticipating. Nobody seems to have a very firm grasp, maybe your economist does, but overall, a very firm grasp on what's going to happen next year. So we laid out our assumptions and then what that led to in terms of the outlook of that 5% to 10%, and so far, that looks on track.

Got it. Great. So shifting back to Hinge. It's one of your fastest growing brands. It's encouraging to see that it continues to expect to see $100 million of growth next year in terms of revenue. In terms of upside to that figure, what magnitude of uplift should we expect from the premium tier that you guys are launching early next year? And how we should think about the drivers of growth? Is it going to come from users mostly or ARPU?

So I think the easiest way to kind of understand that $100 million of growth is there's really 3 key drivers to it. The first is international expansion into new markets, which accounts for a minority -- a significant portion, but a minority of the overall $100 million. Then there's continued growth and success in the existing English-speaking markets, U.S., U.K. and others, which are big and important markets. And that's a significant driver of the growth next year. And the third one is the new tier, a higher-priced tier. And so what is going to be the take rate of that higher-priced tier, what's going to be the pricing of that tier? We just got approval from Apple to launch that, I think, over last weekend. So we've got that out now for a few days. It's too early to say what that looks like pricing-wise. We're going to test a handful of things and take rate. But that's the third key variable. And so each of those 3 accounts for a chunk of the overall $100 million for next year. So it's not relying on one particular thing, but those 3 in aggregate are expected to drive the $100 million. I think the take rate on the new tier will be an important thing to look at, and we should have a lot of data on that as we get into the early part of next year.

Great. And just in terms of overall ARPU growth across all your brands, as we think about BK, obviously it came from Zynga. I cover video game stocks as well. In mobile gaming, there's this term called whales or power users that make a majority of revenues, right, for mobile gaming. I think for dating, the spending is relatively smoother across your users. So how should we think about whether that monetization curve amongst users can translate from mobile gaming with the power users and whales into dating apps without negatively impacting the core experience?

Yes. I mean I think our view has been that there's real opportunity for us, especially a brand like Tinder, with power users. The thing is we haven't really tried to serve them very effectively. So if you want to go spend a significant amount of money on Tinder in a given month, you could, but it's pretty hard to do. There's just not a lot to buy and do that could get you to be a significant spender. We think there's the demand there, but we haven't provided the products to do that. And so one of BK's key initiatives, having learned what he did on the gaming side, is to try to offer more products, more benefits to the potential power users to see if we can drive higher ARPU from that small but important base of users. And so there are a few initiatives on the plan for next year that cater to those power users, who tend to also be macro-economically less sensitive, more affluent people who can afford it, who aren't as affected by the economic downturn. And so it's logical to try to push some of those initiatives with power users over the coming year. And that's what we're going to do, to offer a certain group of people more benefits than they've been able to get so far as just kind of a regular Tinder subscriber, even a Platinum or a Gold subscriber.

Got it. Another topic BK mentioned was advertising, that it could be a large opportunity. I believe right now it's low single-digit percentage of your total revenue. If I think back to Zynga, it was like 15% to 20%, right, of the revenue. So can you help us size a long-term opportunity here with regards to ad revenue? And walk us through any specifics in terms of implementation of that.

So we've given a goal of doubling our ad revenue from around $50 million to about $100 million. We haven't said exactly how long that will take, but it's not a 1-year thing, but it's not a long-term thing either. It's kind of a medium-term thing. And so there's a couple of aspects to it. The first is that Tinder in particular, you only have about 85% of people -- you have 85% of people who are not paying. And so there's real opportunity to try to monetize those folks through users -- through advertisements, especially users who haven't shown the propensity to pay. Maybe they've been on the platform for a while and just haven't chosen to pay. And so using those, especially those who are less beneficial to the ecosystem, and showing them ads or showing them more ads is a logical way to monetize those users. So that's an effort that we have actually underway here in the fourth quarter that will carry over and provide benefits from a revenue standpoint in 2023. We're growing the number of ads that some users on Tinder see, basically. And we have the ability to do that. There's plenty of demand for it. In fact, in this world where tracking is a lot tougher, advertisers enjoy our platform because they generally know they're getting younger users, they're getting single users, and that's attractive to them. So despite the fact you've got some headwinds in the overall advertising environment, which I think will probably get worse in the early part of next year, which is why we're not banking on so much revenue from this new initiative right away, nonetheless, we think we can drive more revenue by just increasing the frequency and the number of people who see ads on the Tinder platform. So that's one important component of it. The second important component is there are certain ad products that have become much more common today than they were a few years ago. And you see them in gaming, things like rewarded video, which Tinder just did not offer. And there's real demand from advertisers to have those products. And so Tinder is committed to building those and offering them in 2023, which we think will be a nice source of additional ad revenue. So those 2 initiatives, increased ad cadence as well as things like rewarded video and just an overall greater focus on the ad side for Tinder next year, we think, will start to increase the revenue. As you said, it's a single-digit percentage actually, kind of in the neighborhood of 2% of revenue. It's been in that 2% to 3% range for a while. So the goal is to slowly start to see that creep up.

Got it. So shifting to margins. The guidance for next year implies flat year-on-year margins. Can you help us breakdown the puts and takes, whether what areas you're ramping up? You talked about changing the marketing strategy for Tinder, for example. And any cost cuts that will help offset that?

So there's a number of things that go into it. And specifically, what we said was our outlook for next year is for flat or better margins. And we are making some concerted efforts to have that goal attained for next year. The company has always had very strong margins, kind of best-in-class margins. And we've always had a very intense focus on profitability as well as free cash flow generation. So this discipline is nothing new to us. We're just redoubling our efforts and making some priority adjustments. In a world that is more expensive, frankly, to run a company for a variety of reasons, whether that's regulatory compliance, whether that's cost of things like insurance and other things that have just gone up, this is for companies the same way they've gone up for people. So we just have to make some adjustments to account for that, and it's a good time to do so. So the most important sort of overarching philosophical thing to understand is that, in this environment, where we have to make some choices, we are adjusting marketing spend levels down for existing brands, where we see less opportunity for growth, Match and Meetic and OkCupid and Plenty of Fish. And we're taking those dollars and moving them into areas where we see more opportunity for growth: Hinge, especially the international efforts, Tinder; The League, which we just recently acquired and we want to invest marketing dollars into because it's got a great product and really little awareness; as well as some new initiatives that we have planned for 2023. And so we're just reallocating or adjusting our resource allocation. And the goal overall is to see marketing as a percentage of revenue be relatively flat, but make those adjustments in where we're spending the dollars. And as you rightly called out, we are planning a significant increase in marketing spend at Tinder next year. We want to make some noise around the brand. We haven't done so in a while. We've got this great new Chief Marketing Officer who moved over from OkCupid. And we think there's lots of things we can do at Tinder to get the brand story out there, which we think will help user acquisition significantly. And so that's the plan at Tinder. And obviously, we've talked about Hinge and the international expansion. So those are 2 big priorities on the marketing side which necessitate us reducing a little bit on some of the other brand spend -- or on other brands' marketing spend. So that's the key thing. And then the next thing is to just look at profitability of some of these brands and just make sure that they're at levels where we think they should be. And so a brand like Hyperconnect, which we acquired and has been basically breakeven, we want to see that get to 10% margins. And so we're trying to pull in spending there to get the business towards 10% margins. I think we can do that. It's going to take some work, but that's part of the plan for next year. And we're also looking for ways to just do more with less. So for example, on the real estate side, given the way people are working now post-COVID, I'm not sure it makes sense to have the full real estate footprint that we have. And so we're looking at ways to adjust that to provide people with a place to work, but also not have tons of empty space sitting around more than it needs to. And so we're trying to be smarter with the space we've got. And just examples like that, which we're looking at, as well as some corporate overhead. In the growth period, every company tends to tack on a few pounds that they don't really need to carry around. We're probably guilty of the same. And so we're looking at places where we might be able to do it just a little bit less. Again, we want to keep investing in our business. Our business is a high-growth business. There's lots of growth opportunities. It's always been very disciplined and successful from a margin standpoint. But there's places where we can focus a little harder, push a little bit more and drive the margins we want to drive, and that's the plan for 2023. Everybody understands that within the company at this point. Everyone is aligned on it. And it's just a matter of implementing it.

Great. That's helpful. In terms of the gross margins, I don't believe the margin guidance for EBITDA includes any potential uplift from regulation. Can you give us the lay of the land right now in terms of where that app store regulation is? And how you think the fees will -- could play out in the long term?

So the Digital Markets Act in Europe is probably the most salient thing that's happened from a regulatory standpoint. It went into effect on November 1. And just kind of the back and forth that happens with these regulations, it's probably going to take most, if not all, of 2023 to see exactly what the landscape looks like in terms of the implemented regulations. You've got to designate the gatekeepers, which obviously would be Apple and Google. Then they have to promulgate the precise rules. And so there'll be some back and forth, and then they have the time to comply, which depending on how they sort of run the clock will get you to the end of 2023 or possibly into the first quarter of 2024. So I think in the next 12 months, we'll have a much, much better sense of what this really looks like. What are Apple and Google going to do in compliance -- to comply with the DMA. It's really a bit unclear at the moment what they're going to do, whether they're going to change their policies on a global basis, whether they're just going to change their policies to adjust in Europe or how they're really going to handle it. As you probably know, Europe is the most prominent and kind of taking the most serious tack on app store policies. But there's other countries that have done the same. India has made moves. South Korea has made moves. The U.S. has legislation that exists, but it hasn't taken it up in Congress yet. That could happen late this year or next year, but we'll see. There's lots of political things that kind of intervene in that. So there is a lot of movement in jurisdictions around the world. And I think Apple and Google are going to have to take stock of that and say, how are we going to comply with what's happening worldwide, how are we going to comply with what's happening in Europe? So like I said, I think there will be much more clarity over the next 12 to 13 months on this topic. We didn't assume any changes for 2023. But I think when you look longer term, the likelihood that the same structure applies to the app stores in 2025, 2026, 2027, as applies today, it's unlikely that's going to be the case. But exactly what the new policy is, what the price is going to be, who pays -- because as you probably know now about 16% of app store developers pay all of the fees and the other 84% don't pay anything. So whether that gets adjusted is a real big question as well. And so we'll see how this ends up playing out. But I think the next 12, 13 months are going to be pretty important to see where the winds are blowing in Europe.

Makes sense. Before we open the mic to live questions, I just want to round out the talk and ask if there's any topics that we haven't discussed or you feel is still misunderstood about the stock that you believe investors should pay attention to heading into next year?

I think the biggest thing is really kind of the improvement in Tinder execution. I think that the execution at Tinder was not where it needed to be in the first half of this year. We made some significant changes to the team as we realized kind of what was happening on the execution in the first half of the year. They've done some really good things already to get the company better organized, better galvanized behind priorities, set strategic priorities. I think they've accomplished a lot in a short period of time. This is something that will take some time to play through into full financial results, but we think it's headed in the right direction. And that's the most important thing that I think we need people to focus on, is really the change and improvement in Tinder product execution that is underway and that will happen through the course of next year.

Got it. Any questions? Great. Well, Gary, thanks for joining us.

Okay. Thanks for having me.