Match Group, Inc. (NASDAQ:MTCH) Q4 2023 Earnings Call Transcript
Match Group, Inc. (NASDAQ:MTCH) Q4 2023 Earnings Call Transcript January 31, 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 Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 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 reflect on 2023, I am deeply proud of the accomplishments and progress that we made as a team. Just one year ago, we introduced an entirely new operating structure with several new leaders put in place across Tinder, Hinge, MG Asia and E&E, and it's been working. Together, we deepened our focus on execution and innovation, helping lay the foundation for sustained longer-term growth. At the same time, we recaptured financial momentum, ending the year with strong revenue growth and our third consecutive quarter of record AOI. Before we dive into more detail regarding our ambitious plans and goals for this coming year, I wanted to take a moment to recognize Faye Iosotaluno as Tinder's new CEO, which we announced earlier this month.
Faye has been an impactful leader at Match Group for several years and most recently as COO of Tinder. Her intimate understanding of the online gaming category, as well as her deep expertise in strategy and business development, among many other skills are just a few of the reasons why I believe Faye is best suited to lead Tinder in its next chapter of growth. Faye is also supported by Tinder's strong management team, which we set in place last year, giving me the utmost confidence in their ability to execute together. The plans for Tinder reflect our shared vision, and I look forward to working with her and the team along this journey. Now, taking a step back at Match Group, we come to work highly motivated every day to foster genuine human connections.
But the tools and technologies that people use to connect, match and date today must evolve to meet modern expectations of today's daters. And as Tinder once did a decade ago, it's imperative that we boldly innovate to create engaging, joyful and exciting experiences for users on our apps. There are certain things that are table stakes for us. We need to continue to foster online communities where women and all underrepresented groups of people can show up as their true authentic selves, feel safe and be respected. But this new generation of singles is digital-first and expect platforms like ours to allow daters to showcase their unique personalities in an engaging setting and be shown highly curated matches. In 2024, our road maps are shaped with this in mind.
First, we are working to improve existing dating apps, beginning with our two largest brands, Tinder and Hinge. Leveraging AI, Tinder will focus on creating a more inclusive experience beginning with improving the Gen Z and women's experiences, while solving for key user pain points across the dating journey. At Tinder, Faye and her team are relentlessly focused on modernizing the existing experience. For example, take Tinder's effortless swipe feature. In 2024, Tinder plans to build on the swipe right and swipe left mechanism by adding in more discovery gestures to better align with today's behaviors and expectations. Not only will users be able to like as they always have, but now they will be able to swipe up to engage deeper in profiles and swipe down for a revamped new explore experience.
Tinder is also working on several features that give women real and relevant experiences every time they come into the app. This will include increased trust and safety, more focused on the right primary photos and improved curation of recommendations. By continuously improving the product, building on what works, while modernizing key features will produce an experience that aligns with what the next generations of daters are expecting. 2023 was a year of execution and increased product velocity for Tinder, which set a strong foundation. In 2024, Tinder is adopting a fast-fail mentality, a strategy that prioritizes rapid experimentation and testing. This approach is all about agility. If a new idea or feature doesn't yield the anticipated results, the team is prepared to quickly pivot, absorbing valuable insights and move forward.
We recognize that not every innovation will be a groundbreaking success. However, it's this very willingness to embrace risk and learn from failures that fuels our growth. And when we do strike gold, it not only elevates our business, but it sets a new standard for our users, which we will continually enhance. We look forward to sharing more over time, but I am confident that these changes will meaningfully transform Tinder in 2024 and beyond as it builds on its roots and shapes a product experience that redefines dating yet again. Similarly, Hinge is leveraging AI to further improve its powerful experience by reimagining meaningful connection. Hinge envisions a focused and intentioned experience that places guidance at the heart of a dater's journey.
Hinge will aim to truly understand you and what you're looking for in order to introduce you to the right person sooner. This redesigned experience will utilize the vast treasure trove of insights on profiles, rich interactions and great dates that Hinge has collected over several years. Hinge will help users discover matches based on shared interests and highlight compatibility in addition to many other features with the ultimate goal of improving dating outcomes for its users. This work will begin in 2024, and I can't wait to share more as things progress. In 2023, we established a central innovation team that has been making significant impact. In 2024 and beyond, the team will focus on launching disruptive new brands that will grow the category and bring in those who may not have previously tried a traditional dating app.
Additionally, we're building internal technology capabilities in coordination with our central innovation teams to help improve our overall effectiveness as a company. While AI brings with it cost efficiencies and a potent optimization tool, we view it as far more than just that. AI has played an important strategic role at Match Group for years from trust and safety efforts to our matching algorithms, and I believe it will play an even larger role moving forward. AI enables us to bring groundbreaking improvements across a dater's journey. We expect it to touch every aspect of our apps by improving profile quality, discoverability and matching and even more importantly, creating an even safer environment for our users to connect in. The bets that we are making are bold, and large-scale changes like this do take time.
However, we expect to make tangible progress through 2024 as we roll out AI-driven capabilities and feature enhancements within our existing apps and as new AI-powered standalone apps begin testing in the marketplace. I am confident that early indications of momentum at Tinder, particularly from Gen Z and women, will be evident in the second half of the year as a result of consistent brand narrative, modernizing product and an ecosystem that celebrates human connection and inclusivity. Ultimately, we recognize that our ability to deliver revenue growth and free cash flow is what gives us the freedom to pursue these ambitious road maps. As we push the boundaries of innovation, we will maintain financial discipline. We will grow revenues, maintain or enhance our margins and generate significant free cash flow, which will allow us to return capital to shareholders.
2024 is about both delivering on our short-term commitments and positioning our company for enduring long-term growth. We've always been at the forefront, adapting to technology shifts, and we'll continue to lead this wave of change. At the heart of our endeavors is an unwavering dedication to delivering products and services that delight our customers. And with that, I will turn it over to Gary.
Gary Swidler: Thanks, BK, and hello, everyone. Thank you for joining us this morning. Our business demonstrated strong financial performance again this quarter. Tinder once again delivered double-digit year-over-year direct revenue growth as did the company as a whole. We achieved record quarterly AOI for the third consecutive quarter and record OI for the second consecutive quarter, further evaluating the steps we've taken to strengthen the business. Match Group's total revenue for Q4 was $866 million, up 10% year-over-year, an acceleration from 9% year-over-year in Q3. For the full year, Match Group delivered total revenue of $3.4 billion, up 6% year-over-year with AOI of $1.3 billion, representing margin of 37%. Excluding the $40 million we received as part of the Google settlement, full year AOI margins would have been up 80 basis points compared to 2022, meeting our goal of flat or better year-over-year AOI margin.
Q4 Tinder direct revenue was up 11% year-over-year at $493 million. Tinder RPP was up 21% year-over-year at $16.49 due to the effects of the US price optimizations and weekly packages we rolled out earlier in 2023. We did see a continued pressure on users at Tinder both in the US and globally, during the November and December holiday months, resulting in a mid-single-digit year-over-year decline in new user registrations and reactivations in Q4. Q4 Tinder payers declined 8% year-over-year to 10 million, slightly below our expectations. For the year, Tinder delivered direct revenue of $1.9 billion, up 7% year-over-year with AOI margins in excess of 50%. Our Hinge brand continued to perform very well. Hinge direct revenue growth accelerated to 50% year-over-year, a further 6-point acceleration over Q3.
Hinge Q4 payers were up 33% year-over-year to 1.4 million, while RPP of over $28 was up 13% year-over-year in Q4. For the full year, Hinge delivered direct revenue of $396 million, just shy of our $400 million target primarily due to slower top-of-funnel growth in Q4 than we were anticipating. Historically, Hinge has not seen a seasonal slowdown during Q4 like many brands see. This Q4, for the first time, Hinge did see that seasonal slowdown. That said, Hinge has had a very strong start to 2024 in terms of top-of-funnel in every market and among virtually every age and gender cohort. So there's been a clear bounce back. Match Group Q4 AOI was $362 million, up 27% year-over-year, including $40 million that was returned to us as part of the Google litigation settlement for margins of 42%.
Excluding the $40 million, AOI would have been up 13% year-over-year, and margins would have been 37%. Operating income was $260 million in Q4 for a margin of 30%, 25% after adjusting out the impact of the Google settlement. Q4 2022 included an impairment of intangibles of approximately $100 million, and OI margin would have improved 3.5 points if not for the impairment in 2022. Overall expenses, including SBC expense, were down 11% year-over-year in Q4, down 5% excluding the Google settlement. Excluding the settlement, cost of revenue, including SBC expense, grew 5% year-over-year in Q4 and represented 29% of total revenue, down 1 point year-over-year. Excluding the settlement, App Store fees increased $17 million year-over-year, 20 basis points as a percent of total revenue in the fourth quarter.
Selling and marketing costs, including SBC expense, increased $32 million or 25% year-over-year in Q4, primarily due to increased spend at Tinder. Selling and marketing spend was up 2 points as a percentage of total revenue at 18%. G&A costs, including SBC expense, declined 2% year-over-year in Q4 and 2 points as a percent of revenue to 12% as legal and professional fees declined by $11 million year-over-year. Product development costs, including SBC expense, grew 21% year-over-year in Q4, primarily as a result of higher compensation expense due to increased headcount at Hinge and Tinder and were up 1 point as a percent of total revenue at 11%. For Q1 2024, we expect total revenue for Match Group of $850 million to $860 million, up 8% to 9% year-over-year.
We expect FX to be a 2-point year-over-year headwind in Q1. At Tinder, we expect direct revenue to be $480 million to $485 million, up 9% to 10% year-over-year in Q1. Again, we expect FX to be a 2-point year-over-year headwind. We expect RPP and payer year-over-year trends to be broadly in line with what we saw in Q4, with Q1 demonstrating less than half the sequential decline in number of payers than we saw in Q4. Across our other brands, we expect direct revenue of $355 million to $360 million, up 7% to 8% year-over-year. Within our other brands, we expect Hinge to deliver approximately $120 million of direct revenue in Q1, year-over-year growth of approximately 45%. We believe that macroeconomic conditions and consumers' willingness to spend has remained relatively stable since our last earnings call.
We have not seen any additional impact on our subscription or ALC revenue. We expect Match Group AOI of $270 million to $275 million in Q1, representing year-over-year growth of 6% and margin of 32% at the midpoint of the ranges. We expect overall Q1 marketing spend to increase by approximately $30 million year-over-year collectively at Tinder and at Hinge compared to the levels these brands were spending at in early 2023 as we seek to reinvigorate user growth at Tinder and continue the stellar user growth at Hinge in both core and European expansion markets during our peak season in the first quarter. That said, we continue to monitor closely for marketing efficacy and can pull back if we don't see the desired results. We entered 2024 with solid revenue momentum and believe we're positioned to deliver total revenue of between $3.565 billion and $3.665 billion, representing year-over-year growth of 6% to 9%.
At Tinder, we expect direct revenue of $2.025 billion to $2.075 billion or growth of 6% to 8% year-over-year. We believe this revenue target for Tinder provides the new leadership with sufficient room to focus on ecosystem improvements, product improvements and user growth initiatives to drive sustainable long-term growth. Our outlook assumes modest improvement in Tinder user trends over the course of 2024 but not yet a return to year-over-year user growth. We expect payer growth to improve through the year, achieving positive sequential payer net adds in Q3 and positive year-over-year payer growth by Q4. Across our other brands, we expect direct revenue to be $1.480 billion to $1.530 billion or 6% to 10% year-over-year growth. Within our other brands, at Hinge, we expect direct revenue of $535 million to $545 million, which represents growth of 35% to 38% year-over-year with a continued focus on driving share gains in Hinge's core and European markets.
We've assumed FX to be a 1.5-point headwind to full year '24 total revenue growth. We expect 2024 indirect revenue of approximately $60 million, up approximately 8% year-over-year. For 2024, our current anticipation is for AOI margins to be at least 36%. Our margin will largely depend on the various brands' levels of revenue growth and how we calibrate certain investments that are critical to achieve our organic growth plans. There are several key investment areas that are impacting margins that we'd like to call out. The first is at Tinder in both product innovation and marketing. As we reinvent the Tinder experience, we're putting substantial incremental resources into product to improve the experience and cater better to women and Gen Z and in marketing to build a better brand narrative and higher awareness of the new and improved experience.
For 2024, we estimate $30 million to $40 million in incremental Tinder expense from increased product innovation and marketing spend in '24 compared to '23. The second is AI-related investments in key brands and the development of new AI-centric products, as we believe AI can help improve our users' experience and bring resistors into the category, as well as potentially expand our TAM. We have a long list of product features being rolled out at Tinder and Hinge, as well as plans to test new and different products that leverage AI throughout 2024. Our current expectations for incremental 2024 AI-related spend of $20 million to $30 million across Match Group. And finally, investment in Hinge. We're confident that Hinge can be a $1 billion top line business, and it has an ambitious plan over the next few years to build off its well-regarded product and the traction it has achieved in all markets entered.
While we anticipate significant operating leverage in this business long term, during this hyper-growth phase, we're managing the business to roughly flat AOI margins in 2024 to ensure we're continuing to invest in the product innovation, expansion markets and brand to help us realize Hinge's full potential. In dollar terms, that means that $40 million to $50 million incrementally is going into Hinge's product and marketing in 2024 compared to 2023. All three of these investment areas are elective and can be calibrated as this year proceeds. Because of the cost reduction actions and natural operating leverage of our business, we're able to target margins of at least 36%, while reinvesting roughly $100 million into the three key investment areas, which we expect to not only help us deliver growth this year, but position us for long-term success, specifically to, one, achieve sustained user, payer and revenue growth at Tinder; two, to capitalize on Hinge's full potential; and three, to ensure that we're the ones who introduce the next great innovation in the business of connecting people.
Importantly, we expect to begin to see tangible results from this investment this year, not necessarily full payback on a dollar basis. But as BK outlined, we expect to see better product experience at Tinder, including improved satisfaction among women and Gen Z, and Hinge making progress on delivering its revenue goals and expanding market share. We also expect to see AI-driven features in our core brands, as well as in new experiences. We're positioned to make these investments and move our business strategically forward, while holding our already attractive margins approximately flat year-over-year. As some of you may know, Apple recently announced changes to their App Store fee policies in response to the upcoming implementation of the Digital Markets Act in the European Union on March 6.
We continue to analyze these changes and our preliminary estimate is an approximately $20 million annualized benefit. However, Apple's new policies are merely a proposal and could change materially over time. We expect any savings that we achieved from Apple's changes will help us meet or exceed our margin objective for the year. Given the March implementation date, we don't anticipate significant Q1 impact. Our $20 million annualized estimate does not include the benefit from use of alternative app stores or payment processors nor have we included any benefits from policy changes in geographies outside the EU, which would be substantial for us. We have said before that the DMA was likely to lead to changes to App Store policies in the EU and likely globally.
We have seen the first brick fall in this regard, and we expect more to come. This is in addition to the recent decision by the US Supreme Court in the Epic versus Apple case and Epic's win versus Google in its antitrust case. We have not included any further benefits from App Store changes in our outlook at this time as we want to watch how all of this continues to evolve, though we would point out that the $650 million we paid to App Stores in 2023 provides ample room for reduction. We're pleased by the financial results we achieved in the back half of 2023 in terms of both revenue growth and profitability. We have plans in place to deliver solid 2024 financial performance while enabling marketing and product initiatives to lead to improved user growth and position the business for sustained long-term growth.
We continue to believe that Match Group provides a rare combination of revenue growth, stellar profitability, and substantial free cash flow generation. We have plans in place to supplement our shareholders' return with significant return of capital via share repurchases or potentially other means. We believe few, if any, companies in our space offer this combination of attributes to shareholders. With that, I'll ask the operator to open the line for questions.
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