MATCH-GROUP Earningcall Transcript Of Q2 of 2024
Bernard Kim -- Chief Executive Officer Thank you, Tanny. Good morning, and thank you all for joining today's call. Overall, we are pleased with our Q2 results and the progress we have made across our portfolio. Over my two years, it feels like currents are finally flowing with us, and we have key elements working in our favor across the company. This is the beginning of a broader transformation as Tinder continues to show stabilization. Hinge is a rocket ship, expanding rapidly. Azar continues to perform strongly and marketing at Pairs has driven user strength, and we're executing on a number of great initiatives throughout the entire company. Over the last several quarters, Tinder has been working hard to improve the user experience, and we're now starting to see initial signs of progress. User and payer trends are stabilizing, and we expect them to continue to improve from here. We expect strong sequential payer growth in Q3 and better year over year MAU trends in the second half of the year. As the largest dating app in the world, it's Tinder's job to deliver for its users, which in turn helps attract new users. Tinder is building on its fun legacy and its iconic swipe experience by continuing to increase authenticity and realness and by setting the industry standard for trust and safety. We believe this will address some of the concerns that users have been vocal about more recently. Over the next 12 months, Tinder intends to integrate AI more deeply to make the dating journey simpler and more effective such that we expect daters to look at Tinder and see an exciting, innovative and fresh experience. Tinder is already making strides as it works to achieve this vision. They've been working tirelessly to clean up its ecosystem, enhanced tools are being tested to increase authenticity with more to come in Q3 and AI-driven tools like Photo Selector are being deployed to make the Tinder experience easier and more effective. Next year, I expect an even bolder evolution of product to vastly improve its core matching experience. You've heard a constant theme of innovation from us and it's happening. But keep in mind, when you have a $2-plus billion revenue business and nearly 50 million MAU globally, all interacting in a connected and delicate ecosystem, innovation requires some pretty elite level of gymnastics. This effort requires a willingness to reimagine the core while building off of what already makes Tinder, Tinder. It's what we began doing with a major ecosystem cleanup initiated mid last year. And while the results weren't entirely predictable and certainly not linear, we believe they are paying off. We expect Tinder's initiatives to be iterative and continue to build off one another and to be coupled with continued strong marketing. There is even more to come in the second half of this year and into 2025, and I'm excited to share further progress with you at our investor day. Hinge continues to show remarkable performance, growing direct revenue nearly 50% year over year in Q2. It continues to rapidly grow its share of downloads in most of its markets. New product features like Your Turn Limits are driving higher quality conversations. It's AI-enabled Top Photo and Photo Finder are making the user journey meaningfully better and users are getting out on great dates even faster. Hinge's new marketing campaigns are also resonating, driving new user growth and getting incredibly positive press coverage. We expect that over the coming quarters, Match Group will own both the leading dating app in the world with durable growth and the fastest-growing at-scale dating app intention daters, as well as a host of growing brands behind them. We're also nurturing other growth brands across the portfolio. Azar's user growth and financial momentum are strong, driven by cutting-edge AI product innovation and a successful expansion into Europe. We also continue to add demographically focused emerging brands to our portfolio. We see clear opportunities to build new social experiences and leverage the latest in technology. Our unyielding commitment to trust and safety, along with our utilization of AI in a safe and responsible way will clearly benefit users across our entire portfolio. In other areas of our business, we're refocusing our efforts to play to our strengths. We decided to exit live streaming services in our dating apps and sunset Hyperconnect's Hakuna app, which provides live streaming services, primarily in Korea and Japan. While live streaming services brought some benefits to our portfolio end users, a couple of things have changed since we undertook these businesses, which have made them less beneficial. Since the pandemic with people sitting on Zooms all day, the novelty of live streaming video has declined. Additionally, these businesses require significant further investment and our financial profiles are below what we'd ultimately like our brands to achieve. We expect exiting live streaming along with other initiatives across the portfolio will result in a workforce reduction of approximately 6% globally, which we expect to result in incremental annual cost savings of approximately $13 million, which is in addition to our previously disclosed cost saving expectations from our tech replatforming efforts. It is important to reiterate the value that Hyperconnect has brought to Match Group, including a strongly growing -- Azar and world-class AI expertise. The Hyperconnect team has been integral in creating several of the AI inhibitors that have been introduced across our brands, including Tinder's Photo Selector and Hinge's Top Photo and Photo Finder. This is just one example of how we're leveraging common technologies across our portfolio, but tailoring them to each specific brand. With this in mind, we plan to redeploy some of our retained Hyperconnect talent to Azar, Tinder and Hinge especially given the significant opportunity that we see to further embed AI-driven capabilities into our brands. We recognize that shareholders rightfully expect both near- and long-term results. We not only embrace that challenge, but we think it's exactly how innovation should occur. At Tinder, innovation in a large scale ecosystem makes it difficult to predict exactly which features will succeed and when. But the market opportunity is there, the vision is clear and the team is executing. Hinge's momentum is undeniable and is on its path to become a $1 billion revenue business. And we're being financially disciplined in undertaking all this product innovation, which we expect will result in sustained user growth. Moreover, where we don't see as clear a path to growth, we're cutting back on cost as is the case with our evergreen brands. We understand that if we can't deliver a return to solid sustainable growth, other choices will need to be considered. We think that doomsday scenarios around dating apps are way overblown, and you can start to see that in our results this quarter. We have product work to do, but once we do that, we are confident that the growth potential for our business is significant. Dating apps are still the best way for people to meet and we intend to continue to capture that opportunity. We welcome shareholder input, and we remain committed to the delivery of increased shareholder value. We expect demonstrable progress quarter over quarter in our innovation and product development efforts. We believe return of capital can be a nice component of shareholder return given the highly profitable and cash flow generative nature of our business. And we've been buying back our stock aggressively because we believe it represents a terrific long-term investment. We look forward to sharing a deeper dive in our first ever investor day in December, where I'm excited to showcase the management team behind these incredible apps. With that, I will hand it over to Gary. Gary Swidler -- President and Chief Financial Officer Thanks, BK, and good morning, everyone. Thank you for joining us today. We exceeded our expectations in Q2 on both the top and bottom line despite some unexpected headwinds. Match Group's total revenue was $864 million, up 4% year over year, while our FX-neutral total revenue was $892 million, up 8% year over year. We experienced $6 million more in FX headwind than we anticipated at the time of our last earnings call. In the quarter, revenue per payer grew 9%, while payers declined 5% year over year. Tinder delivered $480 million of direct revenue, up 1% year over year, up 4% FX neutral. Tinder payers climbed 8% year over year to approximately $9.6 million, an improvement from the 9% year-over-year decline last quarter and above our expectations. Payers were down 78,000 sequentially. Tinder's Q2 RPP increased 10% year over year. While growth in subscription revenue at Tinder was solid at 7% year over year in Q2, Tinder continued to experience pressure on à la carte revenue, which was down 17% year over year in the quarter. Tinder is rolling out various initiatives to address the ALC weakness, including unbundling current features such as Passport and See Who Likes You into ALC to attract users who may not be as open to subscriptions. Both are in test now. Additionally, the team will shortly be testing two new ALC features, one that contextualizes someone's likes and another that helps foster ongoing engagement after matching. As a result, we're optimistic that Q2 will be a trough for declines in year over year ALC revenue and that trends will gradually improve in the second half of the year. Hinge Direct revenue was $134 million, up 48% year over year in Q2. Hinge payers were up 24% year over year to nearly 1.5 million while RPP of $30 was up 19% year over year. MG Asia's direct revenue declined 4% to $74 million, up 9% on an FX-neutral basis. Azar direct revenue declined 1% in the quarter, but was up 14% year over year FX neutral despite still not being able to access the Saudi market as its European expansion continued to contribute to results. Payers direct revenue fell 2% in the quarter, but was up 2% year over year FX-neutral. Evergreen & Emerging Brands direct revenue was $161 million, a decline of 8% year over year driven by the Evergreen brands, which declined 13% year over year, while the Emerging Brands collectively grew direct revenue 17% year over year in Q2. Focusing on user trends, we saw sequential stability in Tinder's MAU, which were down 9% year over year in Q2, as was the case in Q1. MAU at Tinder have now been relatively stable since March. A large decline in MAU began in July of last year, driven in large part by changes we made to Tinder's trust and safety policies to remove people who are not truly on the app -- That has now begun to stabilize. With much of this impact now behind us and given Tinder's various ongoing product and marketing initiatives, we're confident Tinder's year over year MAU declines should continue to moderate as this year passes. Hinge's user growth continues to be very strong across its key markets with 14% year over year download growth and 21% year over year MAU growth in Q2. The app gained significant share in Q2, ranking as the No. 2 dating app across its collective English-speaking markets in May and June, including No. 1 in the U.K., Australia, Ireland and Canada and No. 3 in the U.S. In its European expansion markets in aggregate, Hinge ranked No. 2 by downloads in June and jumped up the charts in most of the key countries/regions, including France and Germany. Switching to profitability. Match Group Q2 AOI was $306 million, up 2% year over year for a margin of 35%. Operating income was $205 million in Q2, down 5% year over year for a margin of 24%. Q2 Match Group AOI and OI each benefited from the increase in revenue as a result of growth at Hinge and other brands and lower cost of revenue, partially offset by higher selling and marketing expenses, higher G&A expenses, which was primarily due to the new Canada digital services tax and higher product development costs which was primarily due to increased headcount in product at Tinder. The increase in selling and marketing spend was primarily at Hinge, Tinder and certain Emerging Brands, partially offset by declines in marketing spend at other brands in our portfolio. Operating income was further impacted by increased SBC expense due to higher headcount and lower forfeitures of equity awards in 2024 than in 2023 and higher depreciation expense due to increases in internally developed software place in service, including at Tinder and Hyperconnect. In Q2, we repurchased 6.4 million of our shares at an average price of approximately $31 per share on a trade date basis for a total of $197 million. Year-to-date, we have deployed just slightly more than 100% of our free cash flow for repurchases, well above our latest commitment to deploy more than 75% of our free cash flow buybacks. Since we resumed buybacks in May 2022, we have repurchased 35 million shares or 12% of the then outstanding shares. This would be 28 million shares or 10%, net of newly issued shares for employee equity plans. With our net leverage below our three times target at 2.4 times and $844 million in cash and cash equivalence and short-term investments, we have ample financial flexibility to continue returning at least 75% of our free cash flow to shareholders for the remainder of the year, which remains our objective. For Q3 '24, we expect total revenue for Match Group of $895 million to $905 million, up 2% to 3% year over year, which would be 4% to 5% FX neutral. This range reflects the lost revenue from our exit of live streaming, which we estimate will be about $8 million for the quarter, given we are exiting it mid-quarter. Note that FX headwinds for the second half have worsened by about one point since our last earnings call. For both Tinder and the whole company, we currently expect FX to be nearly a two-point year-over-year headwind in the back half of the year. We expect direct revenue at Tinder to be $505 million to $510 million in Q3, roughly flat year over year and up approximately 2.5% FX neutral. This range reflects improving year over year MAU and payer trends and moderating year over year RPP gains. It also reflects the improvement in year over year ALC revenue trends I mentioned earlier due to new initiatives in this area. We expect -- payers to decline at around 5% year over year in Q3, a further improvement from Q2 year-over-year levels, leading to positive sequential payer additions in Q3 of approximately 250,000. We expect continued improvement in year-over-year Tinder payers in Q4, though we expect typical seasonality to impact Q4 sequential payer additions. Across our other brands, we expect Q3 -- revenue of $375 million to $380 million, up 5% to 6% year over year, up 7% to 8% FX-neutral. Within our other brands, we expect Hinge to deliver approximately $145 million of direct revenue in Q3, year-over-year growth of 35%. And as Hinge strength continues, but it anniversaries the introduction of several impactful monetization initiatives in the back half of last year. We expect Match Group AOI of $335 million to $340 million in Q3, up slightly year over year and margin of 37.5% at the midpoints of the ranges which would be stronger than our margins in the first half of the year. We expect overall Q3 marketing spend to be up about 6% year over year as we continue to roll out the latest Tinder marketing campaign to play marketing dollars to support our growth brands, including Hinge, Azar and some Emerging Brands, but reduce marketing spend at other brands. Our AOI range for the quarter reflects approximately $6 million in in-place severance and other charges relating to the exit of live streaming, as well as approximately $1 million for Canada's new digital services tax. We expect Q3 OI to be impacted by roughly $50 million of impairments of intangibles and other charges related to the exit of our live streaming services. After accounting for the exit of live streaming services and based on our latest FX expectations, which have worsened by about one point since our last earnings call, we expect Match Group to deliver year over year total revenue growth of approximately 5%, up about 7.5% year over year FX neutral and Tinder to deliver roughly 3% year over year direct revenue growth, up approximately 5.5% year over year FX neutral for full year '24. We calculate that had we not elected to exit live streaming and FX headwinds not worsened, we would be on pace to deliver better than 6% total revenue growth for the year. We continue to expect to achieve our payer company AOI margin target of 36% despite growing approximately $6 million of severance and other charges related to the exit of our live streaming businesses and $9 million of full year cost related to the Canada digital services tax, none of which was included in our initial outlook for 2024. I know there is a significant focus on our longer-term consolidated AOI margins and free cash flow, so I want to make sure to outline the key considerations in this regard. As you heard BK talk about, we think the opportunity for our business remains significant and worth investing in, particularly at Tinder and Hinge. Our goal is to return the company to sustained revenue growth, which requires us to invest in the product experience and in marketing. We are judicious in how we allocate capital and we'll continue to exercise sound discipline. We believe we're already in the process of making important efficiency moves at our E&E brands at Hyperconnect, which will result in margins more consistent with our consolidated levels. At Tinder and Hinge where we see significant global growth opportunities, we want to put the right building blocks in place around marketing, product and tech, particularly around AI, given how game-changing we think it can be. We believe this will be critical in remaining the leader in helping people spark meaningful connections over the next decade. As we make those important investments, especially in AI talent for which competition is intense, we expect our AOI margins will continue to improve, but only modestly in the near term. Our expectation is that as revenue growth reaccelerates and we remain disciplined on cost, we will see additional expansion in our AOI margins even before any potential relief in app store fees. We fully recognize though that if the top line growth does not materialize as we expect, we'll need to consider all options, including reduced investment and other alternatives. That said, we remain very confident that we're on the right track. Our expectations are to deliver nearly $1.1 billion of free cash flow in 2024. We expect our 2024 AOI to free cash flow conversion level to be elevated compared to prior and future years due to an expected additional app store payment this year and we expect our free cash flow conversion rate to return to more normalized levels in 2025. As I mentioned, we expect to utilize at least 75% of our free cash flow for capital return via buybacks for the remainder of the year. We believe that our current our -- our shares remain the best investment we can make with our capital. Given the opportunities we see in front of us and the current price of our stock, we believe repurchases will be highly accretive and represent a terrific long-term investment. We'll have much more to say on the growth, margin and free cash flow expectations at our investor day later this year. With that, I'll ask the operator to open the line for questions. Operator Questions & Answers: |
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