Match Group, Inc. (NASDAQ:MTCH) Q1 2024 Earnings Call Transcript

Match Group, Inc. (NASDAQ:MTCH) Q1 2024 Earnings Call Transcript May 8, 2024

Match Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Match Group First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tanny Shelburne, Senior Vice President of Investor Relations. Please go ahead.

Tanny Shelburne : Thank you, Operator, and good morning, everyone. Today’s call will be led by CEO, Bernard Kim and President and CFO, Gary Swidler. They’ll make a few brief remarks and then we’ll open it up for questions. Before we start, I need to remind everyone that during this call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate, or similar statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. During this call, we will discuss certain non-GAAP financial measures.

Reconciliation to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I’d like to turn over the call to BK.

Bernard Kim : Good morning everyone, and thanks for joining today’s call. I know much of our discussion today will focus on near-term trends and challenges. Both Gary and I will address those headwinds and we will discuss it in Q&A. And while some of the current trends are challenging, it does not dissuade us from what we believe is long-term opportunity. So I want to start with a big picture and that opportunity. As we look at the state of the dating industry today, one thing remains very clear. For those daters looking to go on a date and meet someone in real life, our apps empower people to make meaningful connections like no other platform. In today’s dating scene, many people still hold on to that nostalgic, romantic idea of meeting someone organically.

However, the reality is that chances for a spontaneous meet-cute are becoming increasingly rare. Even in settings like bars, where social interactions are expected, single daters looking to meet someone are actually on their phones using apps to navigate their social and romantic lives. Our apps are strategically designed to bridge this gap, leveraging technology to serve as a springboard to get you on a great date that may not have happened otherwise. That’s why dating apps have become the primary way people meet today, particularly in more developed markets like the US and Western Europe. Surprisingly, there are still so many people who don’t use our apps and many more who aren’t actively dating, creating a massive opportunity and a significant runway for growth as we aim to redefine the meet-cute and create safer places for all singles to find a meaningful connection.

Over the last two years, we’ve made meaningful progress at Match Group. Our brands have executed against well-defined product and marketing initiatives. Tinder continues to be an iconic brand worldwide and the entry point to dating for each new generation. Hinge has been a standout demonstrating tremendous growth based on their brand promise for intentioned daters to get out on great dates. We are more confident than ever that the business is well on its way to generating $1 billion in revenue. Hinge is resonating well in markets that we’ve entered and being very thoughtful about the user experience to help ensure that we’re building a great community and truly delivering on our mission. We have launched several new apps, tailored at select demographics where we see real potential.

And these platforms within our emerging brands portfolio have performed very well. In particular, we want to call out the progress on Archer, which is focused on gay men and demonstrating really strong momentum. The app recently hit more than 700,000 downloads since it launched last year. Engagement is up even more, growing triple digits, which indicates that we have a strong ecosystem and users who are loving it. I also want to point out that we’ve achieved this growth without significantly increasing our investment in marketing since the beginning of the year. The Archer team has revved up and continues to innovate the user experience to make it the most dynamic and engaging app for this community. Across the portfolio we’ve continued to deploy resources more efficiently.

The HyperConnect team is working on projects with most of our other businesses and has fantastic talent that we believe will continue to add value to our various brands. Now we get a lot of questions about monthly active users, and I want to remind everyone that our business’s approach is very different from other social platforms. Our goal is to see real single users find a date and then get off of our apps. We focus on attracting singles who want to make real connections and satisfying our daters who are earnest in their intentions by delivering great experiences. Tinder’s international scale and reach has never been matched by any other dating app. And it’s critical that we keep the ecosystem vibrant. For example, Tinder took decisive action by changing its community guidelines and moderation practices mid-last year, which better enabled the removal of users who are not on the app for its intended purposes.

While the improvements to the ecosystem and benefits to the brand are undeniable, these actions did contribute to some of Tinder’s MAU declines over the past nine months. We believe that actions like these are in the best interest of Tinder’s long-term success. So we are willing to accept fewer MAU in the short-term to create a safer ecosystem and better outcomes for our daters. Diving a little deeper into Tinder, we have heard loud and clear that some users, especially the Gen Z cohort, are looking for more from their dating apps. We have been in this business a long time, and we have consistently adapted our offerings to best serve the needs of different generations and we understand and recognize that expectations of apps are changing. Tinder is working tirelessly to execute against their strategy, and I’m incredibly confident in the team’s ability to satisfy these evolving expectations that users have.

By the end of the year, we expect to have a significantly improved product. Similarly, pressures on discretionary consumer spending, especially among Tinder’s younger user base, have negatively impacted Tinder’s a la carte revenue. The team is doubling down on its efforts to improve the efficacy of its current ALC features and introduce new offerings at affordable price points. We expect to see improvements in ALC trends by the back half of the year. We know we have work to do to satisfy every new generation of daters. The Tinder team is working to improve the dating journey at every point of the experience. Through innovation, especially with AI, we believe we can improve the quality of profiles, matching outcomes, safety features, and the post-match experience to make the entire Tinder platform more modern and deliver on their brand promise.

I’ve asked our Chief Technology Officer and his central innovation team to work even more closely with Tinder’s product team to expedite all these efforts which are underway. And given Tinder’s vast scale and knowledge about relationships and dating, there is no dating app better positioned to take advantage of these advances in technology. Tinder has become an industry defining highly profitable business over the past decade. We have been innovating to solve some of the user pain points. As a result, we will have a healthier, more satisfying, and ultimately more valuable experience for daters to enjoy. And I am confident that Tinder’s momentum will come back. We believe we have real market opportunity and the right teams and strategies in place to get to that next level of growth.

And we are determined to deliver that for all of our stakeholders. We continue to see significant growth runway at Hinge and our emerging brands portfolio. We’re executing on our turnaround plan for Tinder and our central innovation teams are bringing renewed vigor to product innovation. We are excited to continue this work as giving people new, exciting ways to connect is what motivates us every day. And with that, let me turn it over to Gary.

Gary Swidler : Thanks, PK, and hello everyone. Thank you for joining us this morning. Our business demonstrated strong financial performance to start the year, with FX neutral results coming in ahead of our expectations. Match Group’s total revenue was $860 million, up 9% year-over-year, and 12% FX neutral in Q1. Revenue per payer grew 16%, while payers declined 6% year-over-year. We experienced $2 million more in FX headwinds than we anticipated at the time of our last earnings call. We generated $267 million of free cash flow in the quarter. Tinder likewise delivered 9% year-over-year direct revenue growth, 12% FX neutral. Hinge grew direct revenue 50% year-over-year, ahead of our expectations for the second consecutive quarter.

MG Asia’s and Evergreen and Emerging Brands direct revenue declined 6% and 4% respectively year-over-year, although MG Asia was up 7% FX neutral. Azar grew direct revenue 20% year-over-year FX neutral. The emerging brands collectively grew direct revenue 23% year-over-year. We welcomed some new demographically focused apps to the E&E portfolio. Archer continued to show strong user growth, as BK mentioned, and the app experience continued to evolve to better satisfy the target audience. Q1 Tinder direct revenue was $481 million, driven by RPP that increased 20% year-over-year to $16.52 due to the effects of the US price optimizations and weekly packages we rolled out starting in late Q1 2023. There was better stability at the top of the funnel at Tinder in the first quarter, with new users down only 4% year-over-year on a like-for-like basis, factoring in that we exited two countries.

While Tinder also experienced a decline in monthly active users in the quarter, the decisions we made to change Tinder’s policies and moderation practices starting last summer to enable easier elimination of users who are not on the app to really connect led to an approximately 2 million decline in Tinder MAU. This decline included bad actors and users who were some of the least engaged on the platform. We will fight this comp all year, but we’ll have it fully anniversaried by the end of 2024. We believe that these actions are beneficial to the overall ecosystem health, and we are already seeing signs of improvement in key engagement metrics that we track. For example, Tinder’s ratio of daily active users to monthly active users reached some of its highest levels, well north of 40% in Q1, and improvement of 14 basis points versus Q1 of last year.

Although impactful to MAU, we believe this was the right decision for the ecosystem. Tinder’s payers declined 9% year-over-year in Q1 to just under 10 million and were down 255,000 sequentially, just slightly worse than our expectations. While growth and subscription revenue at Tinder was strong at 17% year-over-year, primarily due to the increase in RPP, Tinder continued to experience pressure on a la carte revenue, which was down 13% year-over-year in the quarter. We believe the decline in ALC revenue stems from user declines and lower average purchase volumes, in part due to weaker consumer discretionary spending among its younger user base, among other reasons. The weaker growth in ALC is a continuation of a trend that has been going on for a while now, but has been becoming more severe of late.

Our Hinge brand continues to perform very well. Hinge Direct revenue was $124 million in Q1. Hinge payers were up 31% year-over-year to $1.4 million, while RPP of nearly $29 was up 14% year-over-year. Hinge’s downloads continue to be strong in both core English-speaking and Western European markets, growing approximately 20% year-over-year globally in Q1. We’re confident that Hinge is in the very early stages of its monetization efforts, with Payer Penetration, defined as payers to monthly active users, just above half that at Tinder, providing ample room for expansion. The user growth trends, global expansion opportunities, and monetization runway give us optimism around Hinge’s long-term outlook. We believe Hinge’s on track to become a $1 billion revenue business.

Match Group’s Q1 AOI was $279 million up 6% year-over-year for margin of 33%. Operating income was $185 million in Q1, down 7% year-over-year for margin of 21%. Q1 Match Group AOI and OI each benefited from the increase in revenue as a result of growth at Tinder and Hinge, partially offset by an expected nearly $30 million or 20% year-over-year increase in selling and marketing expenses, and an increase in cost of revenue due to higher App Store fees. The increase in selling and marketing spend was primarily at Tinder, Hinge, and certain emerging brands, offset by declines in marketing spend at multiple other brands. Operating income was further impacted by increased SBC expense due to increased hiring activity to support product development efforts, unusually high forfeitures in the prior year period, and other factors.

While SBC expense rose, the grant value of awards to employees was approximately flat year-over-year, as we focused on controlling the level of new equity awards to employees, which impacts future period SBC expense. Additionally, OI was impacted by a 94% year-over-year increase in depreciation expense due to increases in internally developed software placed in service, including a Tinder and Hyperconnect. We repurchased approximately $200 million of our shares in Q1 at an average price of approximately $35 per share on a trade date basis, reducing our share count by approximately $6 million. This represented a deployment of roughly 75% of our Q1 free cash flow, delivering on our commitment to deploy more than 50% of our free cash flow for share repurchases.

With our net leverage below our target at 2.3 times and $800 million remaining on our shared buyback authorization, we expect to continue returning at least 75% of our free cash flow to shareholders for the remainder of the year. For Q2 2024, we expect total revenue for Match Group of $850 million to $860 million, up 2% to 4% year-o-year, and 5% to 6% FX neutral. We expect direct revenue at Tinder to be $475 million to $480 million in Q2, flat to up 1% year-over-year, up 3% to 4% FX neutral. The user growth and ALC revenue headwinds at Tinder, plus the effect of the anniversary of various monetization initiatives we implemented starting in late Q1 of last year are impacting Tinder’s direct revenue growth rate, which is below our target for the business.

The Tinder team is focused on implementing monetization initiatives to strengthen revenue growth. These initiatives include revisions to existing ALC features and introducing new offerings. We expect our product work to lead to significantly better year-over-year trends in ALC revenue in the back half of this year. These initiatives are in addition to the extensive work being done to improve the app experience and the health of the ecosystem. We expect Tinder payers to decline at similar rates year-over-year in Q2 as they did in Q1, leading to a modest improvement in sequential payer trends in Q2 compared to Q1. We continue to anticipate positive sequential payer additions at Tinder in Q3. Across our other brands, we expect Q2 direct revenue of $360 million to $365 million, up 5% to 7% year-over-year, 8% to 10% FX neutral.

Within our other brands, we expect Hinge to deliver $125 million to $130 million of direct revenue in Q2, year-over-year growth of 38% to 44%. We expect Match Group AOI of $300 million to $305 million in Q2 roughly flat year-over-year and margin of 35% at the midpoints of the ranges. We expect overall Q2 marketing spend to be about $25 million higher than in the prior year quarter, largely due to increased spend at Hinge, Tinder, and some E&E brands. We opted into Apple’s new App Store policies in the EU on April 1, so we expect at least $5 million per quarter of IAP fee savings going forward, assuming no further changes in App Store policies. We’re complying with our settlement agreement with Google which requires us to adopt Google Play billing, user choice billing and-or developer only billing across our brands.

This change is creating some modest conversion headwinds for us, but we are working to adjust to this new reality and Google is making improvements on their end as well. Reflecting our Q2 expectations and the latest trends at Tinder, we currently expect low single-digit year-over-year direct revenue growth rates at Tinder for the remaining quarters of 2024, although they could be higher if some of the product initiatives deliver or ALC revenue or other trends improve beyond our current expectations. This updated rest of year outlook, leads us to anticipate low to mid-single-digit year-over-year direct revenue growth for Tinder for full year 2024. Given this, for the full year we expect total company revenue growth to be near the lower end of our previously stated 6% to 9% year-over-year total revenue growth target range, unless there is a material over delivery of our expectations by our other brands, particularly Hinge.

For both Tinder and the whole company, we currently expect FX to be about a one point year-over-year headwind in the back half of the year. We remain focused on delivering AOI margin of at least 36% for Match Group in 2024. We are continuously evaluating the previously disclosed investments in marketing and product innovation at Tinder, Hinge and in new experiences and will adjust as appropriate. Our outlook is for Match Group to generate nearly $1.1 billion of free cash flow in 2024, and we expect to utilize at least 75% of our free cash flow for capital return for the remainder of the year. We believe that at our current stock price, our shares remain the best investment we can make with our capital. With that, I will ask the operator to open the line for questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Benjamin Black with Deutsche Bank. Please go ahead.

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Q&A Session

Benjamin Black: Great. Thank you for taking my question. It would be great to hear what’s giving you confidence that Tinder net adds will return to sequential growth in the third quarter despite the steady decline in payers we’re seeing today. Is there something that you’re seeing maybe as it pertains to conversion trends that you can point us to then providing this optimism? Thank you.

Gary Swidler: Thanks, Ben, for the question. First of all, in terms of trends that we’re seeing at Tinder, I just want to point out a few different things. So first of all, conversion has improved dramatically. And that’s in part because we’ve lowered pricing — sorry we raised pricing — sorry, we rolled out weekly subscription packages, which, as a result of that are lower prices, and that has led to improved conversion, right? But those subscribers that are signing up for the weekly subscription packages are there for a shorter duration period. So they are in the payer count for less time. So that is one of the trends that’s going on inside of the business. We also have declining user base, we have declining MAU. And so we need conversion to work harder.

We need to generate more payers on a smaller user base. So those are the trends that are happening. If you look at the payers on a year-over-year basis, we talked about how payers declined 9% in the first quarter, and we expect payers to decline at a similar level in the second quarter. I think if you do the math, you’ll see that we need the product initiatives that we have planned at Tinder to improve the user trends and to improve conversion sufficiently that the 9% year-over-year decline in payers, improves a little bit to 8% or 7%. If that happens, the math would show you that you get sequential payer improvement in the third quarter at Tinder. And so that’s what we are focused on. I think we have enough initiatives, enough product work going on to improve MAU to drive up conversion, so that we should see the sequential improvement in payers by Q3.

And the other thing I would point out, which I think is probably obvious, but just want to make sure, is that we’ve had a lot of noise in the Tinder payer count, especially sequentially as a result of all of the payer actions we’ve taken, all the price changes, weekly subscriptions, et cetera, it’s created a lot of noise for the last little while. We’re largely getting that behind us now, right? The big changes that were made in the US, which were very significant, happened starting in the late first quarter of last year and really affected the second quarter. So the payer count information should start to get a lot smoother, a lot easier to understand. There will be less significant changes going forward. And so I think the metrics will be much more clear for people.

So we are looking forward to that as well.

Benjamin Black: Great. Thank you very much.

Operator: The next question comes from Nathan Feather with Morgan Stanley. Please go ahead.

Nathan Feather: Hi, everyone. Thanks for taking my question. So when thinking about how to reignite user growth at Tinder, are there any case studies you draw on internally from the rest of your portfolio, especially with some brands now around for three decades, with brands successfully evolve the product to appeal to the next generation? And how do you incorporate your learnings from that for where Tinder’s at today? Thanks.

Bernard Kim: Thanks, Nathan, for that question. Sure. We have a lot of great examples across the portfolio of products that show true evolution. We’ve consistently seen that true product innovation can lead to material impacts on the user experience. We know that this can appeal to new demographics and expand the total industry. Our portfolio of brands, which have existed for more than 10 plus years, is a major benefit. Years ago, OkCupid introduced the freemium model, which gained traction with late millennials who have not yet embraced the hard paywall business, like Match.com or Hinge. When Hinge launched, it was based on connecting friends of friends for dating. But eventually, Hinge’s growth stalled. So they did a full product tear down which was a really big and bold tough decision and redesigned Hinge from the ground up to focus on creating great dates and an app that’s designed to be deleted.

And users around the world are now flocking to Hinge. And if you look at Tinder, it was a massive innovation for the whole category. Tinder took the mobile phone and created an unprecedented experience that everyone loved. We talk about the swipe, but the double opt-in was also a category changer for women, who are suddenly in much more control of the attention that they received. So we know what works, but also know what doesn’t work. We’re listening to our young daters today and working to address their needs. What we’ve learned from all of these lessons across the portfolio and the learnings that we have from our users is that product changes that we need to make need to be big and bold to drive real change. We can’t make small little changes to product and expect a massive impact.

We’re really lucky because we have people across the entire company that have launched products, love building them and are super motivated to capture the opportunity ahead. So we are going full steam ahead on our strategy, and we’re confident that it’s going to work.

Operator: The next question comes from Ken Gawrelski with Wells Fargo.

Ken Gawrelski: Thank you for the question. Appreciate it. You maintained the margin guidance for the full year despite revenue expected to come in toward the lower end of previous expectations. It would seems from the [Azar] (ph) that you should take the opportunity to invest more in marketing and get Tinder back – Tinder net payer growth in 3Q. What are we missing here? Why not be more aggressive here at this point?

Bernard Kim: Great question, Ken. Like we said earlier, it’s really the product experience that needs to resonate first and foremost. While marketing is a component of top of funnel growth, it needs to be combined with evolving product experience that resonates with users. The answer to your question is that we really don’t see a compelling reason to increase marketing to achieve payer growth. It really needs to come from product innovation. Our marketing today is much more about improving the Tinder brand narrative and making sure that Tinder is top of mind for daters. While we do expect this to have some positive impact on users, particularly women and Gen Z, it’s not a lever we can pull to drive short-term payer growth. And remember, Tinder’s marketing spend is more about brand marketing and not direct response. So it isn’t about spending more just to simply hit a quarterly payer number. Thanks for the question.

Ken Gawrelski: Thank you.

Operator: The next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Jason Helfstein: Thanks for taking the question. Maybe I’ll ask, and some of this you did allude to, but maybe elaborate. So what’s changed specifically since February at Tinder, which is driving the low to mid-teens or low to-mid teen revenue — or the low to mid-single-digit revenue growth versus the prior 6% to 8% as subs are still expected to turn positive in the third quarter? Just elaborate, I mean, obviously you talked about some of the kind of safety things you’ve done to the platform, but just elaborate a little bit more. Thank you.

Gary Swidler: Sure, why don’t I take a shot at that Jason. So a couple of things have changed. I mean one our year-over-year payer growth expectations have come down a little bit, right? We had the negative 9% in the first quarter and we are predicting something similar. We’d like to see obviously improvement in that metric. As I mentioned to Ben, we are confident that all the product initiatives and things we have going on will lead to that in the third quarter. So that’s what we really need to see. And I would point out sort of two specific things that have really changed since we did our last earnings call. The first thing, and we talked a little bit about this in the letter and the remarks. The first thing is that we’ve seen increasing ALC weakness in this economic environment at Tinder.

And so that’s putting pressure on revenue because the purchase volume that a user is making is lower than it was previously. So we have initiatives in place to try to resolve that, but that’s a critical driver of revenue, and that is putting more pressure on revenue than what we expected three months ago. And then because we have declining MAU, and I talked about how we need to drive conversion, we need initiatives to really drive the revenue growth. And so we have those going in a number of different ways across the world, but those have been delivering a little bit less than what we were expecting when we last provided the outlook in February. So we need those initiatives to work a little bit harder. And we’d like to see obviously improvement in MAU as well, that would help offset some of the pressures we’ve seen.

So those are the things that have really moved the ALC degradation, a little bit more severe headwind there, and the fact that some of our monetization initiatives have been under delivering a bit versus what we’d like to see. But as I said to Ben, if we can get modest improvement in year-over-year payer growth that will still lead to the sequential payer growth in Q3. And so sequential payer growth in — and of itself doesn’t lead to year-over-year revenue growth. We need to see year-over-year payer growth and year-over-year revenue per payer growth combined that’s what leads to year-over-year revenue growth. And so that’s what we need to make sure is working the way we wanted to.

Jason Helfstein: Okay, thank you.

Operator: The next question comes from Chris Kuntarich with UBS. Please go ahead.

Chris Kuntarich : Great. Thanks for taking the question. Maybe one around your product efforts. Last year was more focused on pricing, and now that focus seems to be shifting towards product tweaks that should be driving more conversion events. Can you just talk to us about the visibility you have into those monetizations from last year versus the conversion focused product tweak value? Thank you.