Match Group, Inc. (NASDAQ:MTCH) Q2 2023 Earnings Call Transcript

Match Group, Inc. (NASDAQ:MTCH) Q2 2023 Earnings Call Transcript August 2, 2023

Operator: Good day, and welcome to the Match Group Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tanny Shelburne, SVP 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. With that, I’d like to turn the call over to BK.

Bernard Kim: Thanks, Tanny. Good morning, everyone, and thank you for joining today’s call. As I look back on the first half of this year, I’m even more motivated by the numbers we’re going to discuss today and the efforts we’ve undertaken to lead to this record quarter. I’m a firm believer in the teams that we now have in place. I’ve spoken at length about the changes we’ve undergone. Through all the change management, I believe our teams have gelled well and have become stronger together. However, I also believe that gelling well is not enough. Leaders need to be intelligent, determined and have the right goals and people around them. We must challenge our teams to inspire and deliver. It’s apparent that we have all those key ingredients to make an organization good, but we also have the most important ingredient to make our teams great, and that is grit.

Grit has been evident in our team meetings, product roadmap execution, marketing, and budding AI efforts. Our teams are buzzing with excitement and I am too. Although our numbers are great, we are just at the beginning of our turnaround. There are still many single people who have yet to try our services and many more who need to come back to our apps. I am certain that if we keep executing and innovating, we will achieve our goals of helping our members get out there in real life, make new connections, and enjoy their dating experience. The energy in our L.A. office where many Tinder team members are located is completely different than it was a year ago. People are back in the office, collaborating, solving problems and forging ahead. The teams are executing on their product roadmaps and marketing initiatives, and the results of their hard work are clearly showing.

We have product and marketing momentum and people are starting to think about Tinder differently. Our new “It Starts with a Swipe” marketing campaign is delivering; most importantly, by increasing overall new user sign ups and reactivations at Tinder and is having an impressive impact on our brand consideration and intent. The Tinder roadmap we showed you last year was not the sexiest as it delivered on core experiences and optimization, but it was the right one as our results now show. Our product and design teams are preparing an exciting refresh of the Tinder experience in the coming months. We want to make the app more relevant, fun, and relatable to a younger demographic. We’re relentlessly focused on making sure Tinder stays true to what makes it special while also elevating the experience to be more modern and enjoyable for our members.

These innovations will be amplified by great marketing. We are excited about the future of Tinder and we believe we’re just getting started. Hinge continues to fire on all cylinders, leading to exceptional user and revenue growth. Hinge is now a top three most downloaded dating app in 14 countries. And while we’re driving new users and growing as expected, we’re also taking the learnings from our other brands and applying them at Hinge to maximize growth. Our businesses in Asia are solidly course correcting now. Azar’s revenue momentum has been driven by their new AI-enabled matching algorithm, and Hakuna is in the midst of a pivot to deliver a better experience for content creators and audiences, which we believe will lead to increased engagement for users.

In Japan, we’re ready to roll out ads on TV for the first time ever. We believe this channel unlock will help improve user trends for the category. Our Evergreen & Emerging brands have unified so that the teams are sharing key learnings more effectively. The teams are now innovating on new features and also putting products on the same platform, which should lead to improved efficiency, innovation, speed to market and cost savings. One of our teams just launched Archer, a social-first dating app built for gay, bisexual and queer men, which is now live in New York City and is planned to roll out nationally by the end of this year. I’m really proud of Archer and the team that has brought it to life. The app is beautiful and speaks directly to the needs of the community and we’re excited to see it flourish.

Last point before I hand it over to Gary, every tech company needs to innovate to stay relevant. I’ve outlined a few areas of innovation already, but we’d be remiss to not talk about generative AI and the enthusiasm and concern it’s created for industries at large. This technology is tremendous, but we’re approaching it very thoughtfully as dating requires unique considerations. It’s imperative that our features and tools enhance trust, authenticity, and respect, and ultimately lead to better matches and dates in real life. I believe this technology is also really fun and engaging, and when applied correctly, can drive curiosity and make the dating journey more enjoyable. By the end of the year, we expect to have launched a number of initiatives that will use generative AI to eliminate awkwardness, make dating more rewarding and surprise and delight users, all in a way that focuses on authenticity and maintaining the highest ethical and privacy standards.

We remain committed to innovation and providing our users with the best possible dating experience. It’s full speed ahead at Match Group, and we’re energized, motivated, and feeling really good about our future. And with that, I’ll turn it over to Gary.

Gary Swidler: Thanks, BK, and hello, everyone. Thank you for joining us this morning. Our financial performance in Q2 improved dramatically as a result of the strategy we implemented when BK became CEO in mid-2022. In particular, the focused product and marketing initiatives at Tinder have really started to deliver financial results. We firmly believe the momentum there plus continued strong performance at Hinge and thoughtful operating adjustments and financial discipline across the company position us well for the future in terms of growth, profitability, and free cash flow. Match Group’s total revenue for Q2 was $830 million, up 4% year-over-year. This represented record quarterly total revenue for Match Group. FX was a notable headwind once again and $3 million more severe than we anticipated at the time of our last earnings call.

Total revenue for Match Group would have been $844 million, up 6% year-over-year on an FX-neutral basis. Q2 direct revenue, which is revenue we earn directly from our users, was $816 million, up 5% year-over-year, 6% FX neutral. This was driven by a 10% year-over-year improvement in RPP to $17.41, while total payers were down 5% year-over-year to 15.6 million. On an FX-neutral basis, Q2 RPP was up 12% year-over-year company-wide. Tinder outperformed our expectations in the quarter as the revenue momentum we saw from price optimizations in the U.S. and weekly subscriptions over delivered. Q2 Tinder direct revenue was up 6% year-over-year at $475 million, up 7% FX neutral. Tinder RPP was up 10% year-over-year at $15.12 due to the U.S. price optimizations and weekly packages.

Tinder saw solid year-over-year subscription revenue momentum throughout Q2 with June direct revenue growth reaching 8% year-over-year. Tinder payers declined 4% year-over-year, 184,000 sequentially, as the price optimizations in the U.S. led to conversion declines. After testing pricing changes in Canada, the U.K., the EU, Australia, and Japan in Q2, Tinder opted to leave pricing largely unchanged in those markets as prices there were largely already optimized, but did roll out weekly packages there. Tinder also saw improved new user and reactivation trends in the U.S. in the quarter following the launch of the new marketing campaign “It Starts with a Swipe”, and we saw lifts in other geographies as well. The lift has been pronounced among females and younger users, Tinder’s focused demos.

Many of Tinder’s upcoming initiatives are aimed at further strengthening top-of-funnel in key markets around the world. Our Hinge brand continues to perform very strongly. Hinge grew direct revenue 35% year-over-year, an 8 point acceleration over Q1. Hinge experienced strong user growth in both core English speaking markets and its European expansion markets, leading to 50% year-over-year download growth. Hinge payers were up nearly 25% year-over-year at nearly 1.2 million, while RPP of over $25 was up over 8% year-over-year in Q2. Our MG Asia business saw direct revenue decline 4% year-over-year in Q2, a vast improvement from double-digit year-over-year decline in Q1. Direct revenue was up 3% FX neutral. At Hyperconnect, Azar grew direct revenue 24% year-over-year as implementation of a new AI-driven matching algorithm led to meaningful increases in engagement and conversion.

Azar also saw some stronger-than-expected seasonal trends in Q2. While Azar has been a real bright spot, Hakuna and Pairs saw year-over-year direct revenue declines in Q2. The Japanese market continues to experience subpar user growth. Although we’re optimistic that being able to start to market on TV this fall could improve trends. At Evergreen & Emerging, direct revenue declined 5% year-over-year, which was also a notable improvement compared to Q1. The Emerging brands, including Chispa and BLK, continue to grow direct revenue strongly year-over-year. Indirect revenue was $13 million in Q2, down 7% year-over-year, but consistent with Q1’s total, as prices per ad impression declined year-over-year. Operating income was $215 million in Q2 for a margin of 26%.

Q2 adjusted operating income, or AOI, was $301 million, exceeding $300 million for the first time ever. It was up 5% year-over-year, representing a margin of 36%. Q2 AOI and margins were above our expectations, as Tinder outperformed and we continued to achieve cost savings across the company. Overall expenses, including SBC expense, were up 4% year-over-year in Q2, excluding depreciation and amortization/impairment of intangibles. We incurred approximately $6 million of severance and similar costs in the quarter. Cost of revenue, including SBC expense, grew 4% year-over-year and represented 30% of total revenue, flat year-over-year. App Store fees increased $18 million year-over-year, including the $8 million escrow payment to Google. The last required escrow payment of approximately $3 million was made in July.

Selling and marketing costs, including SBC expense, increased $11 million or 9% year-over-year, primarily due to increased spend at Tinder and at Hinge as it continued to expand internationally, offset by lower spending at multiple other brands. Selling and marketing spend was flat as a percentage of total revenue at 16%. G&A costs, including SBC expense, declined 3% year-over-year and dropped 1 point as a percentage of total revenue to 13% as legal and professional fees declined. Product development costs, including SBC expense, grew 9% year-over-year, primarily as a result of higher compensation at Tinder and Hinge, and were flat as a percent of total revenue at 11%. Reduction in force and capitalizing more product development costs in Q2 than in the prior-year quarter, mostly at Tinder and our Emerging brands, helped lower these expenses in the quarter.

Interest expense increased 12% year-over-year in Q2, primarily due to the floating rate structure of our term loan, but interest income also increased meaningfully given higher rates we’re earning on our cash balances. We ended the quarter with $741 million of cash, cash equivalents, and short-term investments on hand. Our gross leverage was 3.4 times trailing AOI and net leverage was 2.8 times at the end of Q2, below our target of less than 3 times. We repurchased 1 million of our common shares in May and June at an average price of approximately $32 per share, totaling approximately $33 million, which utilized a small portion of the recently implemented $1 billion share buyback program. We began buying back shares in the open window after our last earnings call, but we weren’t able to buy back as many shares as we had intended over the past three months due to the strong stock price run up, which occurred after the window had closed.

We will revisit buybacks again after this call, mindful of our updated capital allocation policy. For Q3 ’23, we expect total revenue for Match Group of $875 million to $885 million, up 8% to 9% year-over-year. We expect a significant acceleration of year-over-year RPP growth in Q3 compared to Q2, particularly at Tinder due to the U.S. price optimizations and weekly packages. We expect FX to be less than a 2 point year-over-year tailwind in Q3. At Tinder, we expect direct revenue to be up close to 10% year-over-year, with FX slightly more than a 2 point year-over-year tailwind. This level of growth would be a quarter ahead of our expected pace. The building momentum gives us confidence in achieving solidly double-digit year-over-year direct revenue growth at Tinder in Q4.

We expect Tinder payers to decline mid-single digits year-over-year and to be down sequentially in Q3, but by less than in Q2. This is better than we had been anticipating, in part due to the decision not to implement pricing optimizations in several international markets. We estimate that Q3 sequential payer additions would be positive, absent the effects of U.S. price increases and weekly subscription packages globally. The year-over-year payer decline is also due to Tinder’s new user trends still being below desired levels, as well as the fact that pricing changes are still rolling through the U.S. payer base. While user trends have improved notably over the past few months, we remain focused on returning to user growth through marketing and product initiatives in order to drive better payer and revenue growth.

We believe strongly that we are on the right track in this regard. Note that pricing changes and weekly subscription packages creates short-term volatility in our payer numbers. Weekly packages lead to bumps when introduced as conversion increases, then declines when these shorter duration payers roll off. Over the coming quarters, we expect this to even out. We’re confident that these shorter packages are long-term revenue accretive and bring other meaningful benefits such as increasing conversion, especially among younger users and females. We expect Hinge to deliver meaningfully accelerating year-over-year direct revenue growth again in Q3, driven by continued strong performance in English speaking markets, continued European expansion, and various monetization initiatives.

We remain confident that Hinge’s momentum will lead it to deliver approximately $400 million of direct revenue in 2023. We expect Match Group Asia direct revenue to be close to flat year-over-year in Q3. We expect modest improvement in year-over-year direct revenue growth rates for Hyperconnect and limited change for Pairs in Q3 compared to Q2. We expect our Evergreen & Emerging brands direct revenue to decline low-single digits year-over-year in Q3, with moderating declines at the Evergreen brands and continued strong growth at the Emerging brands. We expect Q3 indirect revenue to be up modestly year-over-year in Q3 as we begin to see some overall improvement in the ad sales market and we continue to broaden ad opportunities across our platform.

We expect AOI of $320 million to $325 million in Q3, representing year-over-year growth of 13% to 14% and margin of 37% at the midpoint of the ranges. We expect overall marketing spend to increase year-over-year in Q3 by about 2 points as a percentage of total revenue compared to Q2. We’ll be spending up at Tinder and Hinge as well as some of our newer growth apps, including Archer and The League. We expect IAP fees to continue to be a year-over-year headwind in Q3, though we have stopped placing funds into the Google escrow after July per the terms we agreed to. We expect to continue to be cautious on spending in all other categories within our control. We expect to incur approximately $2 million of severance and similar costs in Q3. For full year 2023, Match Group is on pace to achieve 6% to 7% top-line growth and deliver better AOI margins than we did in 2022, as Tinder’s revenue continues to reaccelerate and we remain very cost disciplined overall.

We’re excited by the momentum we’ve seen in the business over the past few months. We’re confident that the strategies we’ve implemented, changes we’ve made, and approach we’ve taken are setting us up for more consistent top-line growth at strong levels of profitability. While we are pleased with the progress, we recognize there is more to do, especially at Tinder, where delivering stronger user trends and sustained payer and revenue growth is squarely in our focus. We’re confident the company is headed in the right direction and look forward to continuing to provide our stakeholders with updates on our performance in the coming quarters. With that, I’ll ask the operator to open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Cory Carpenter with JPMorgan. Please go ahead.

Cory Carpenter: Hey, thanks for the question. I think for Gary, could you expand on what you saw on testing that led you not to raise Tinder prices in international markets? And then, just any way to help quantify how big of an impact that specifically you expect it to have on Tinder payers and RPP in the second half of the year? Thank you.

Bernard Kim: Cory, this is BK. I’ll take the first part of that question and then Gary can take the second part of the question. When our new management team took over Tinder, we asked the teams to go and extensively test pricing globally. What we wanted to do was really kind of understand the member value that we are providing versus the price points that were live in the marketplace. This led to micro decisions around rollouts of pricing optimizations. So, we did test our pricing in the U.K., Canada, Australia, EU and Japan, and we did not see the revenue benefits that we saw in the United States. Part of this was due to that these markets were already priced competitively, like Gary mentioned in his comments. The reality is that the U.S. actually hadn’t adjusted prices for quite some time, so there wasn’t as much room for optimization versus where we were in the international markets.

So, I think that generally our price points were already higher in the U.S. versus where we were internationally. An example I can give is, on Gold pricing, one-month subscription, in the U.S., after pricing optimizations, were actually at parity from where we were priced in the U.K. We tested this throughout the entire quarter before making this decision to stay put in international markets. Gary?

Gary Swidler: Yes. So, Cory, on the payers, there’s a lot going on there and I’m going to try to unpack it for you a little bit, because you’ve got variability that’s been introduced by price optimization, you’ve got variability that’s been introduced by the weekly subscription packages, and they’re rolling out at different times. First, we have the effects from the U.S. ones, and then from the international ones. So, there’s a lot of movement in the numbers. Obviously, they are better as a result of deciding not to roll out the price changes in the international markets, and they’re meaningfully better than they would have been had we done that. But what’s also happened since the last time we chatted on an earnings call is that we’ve more slowly rolled out the pricing changes in the U.S. market.

And so, right now, that’s affecting the Q2 payers numbers. It’s going to have some lingering effects in Q3 and likely into Q4 as we continue to slowly show those pricing changes to the U.S. payer base. So that’s kind of one thing that’s happening a little bit more slowly than we initially expected, but we obviously test and adjust and we think that’s the right thing to do. And then of course, the change that you mentioned around the weekly — around the payer — the pricing changes not having been introduced internationally. So there’s a lot of different pressures going on here. It will continue to roll through over the coming quarters. I do think that overall the third quarter sequential trends are going to be meaningfully better than what we saw in Q2, which was down 184,000.

And overall, I think once we get through this year as we turn the corner into 2024, the noise that has resulted from all these changes, which are in our control, around introducing weekly subscription packages and price changes will have largely burned through and will be into a much more normal cadence of payer additions.

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

Gary Swidler: Jason, are you there? It doesn’t sound like we have Jason. Operator, maybe we should move to the next one.

Operator: Our next question comes from Youssef Squali with Truist. Please go ahead.