Q3 2019 Earnings Call

Good morning.

So I'm not sure third quarter 2000, <unk> earnings conference call.

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George All your question. Please first starting to.

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I would now let's turn the conference over to last Barton Senior Vice President of corporate development and Investor Relations. Please go ahead.

Operator, today's call will be led by CEO , Mandy Ginsburg, and CFO Gary's, whether they will review the third quarter Investor presentation. That's available on our website and then answer question.

Before we start I'd like to remind everyone that during this call. We made its got their outlook in 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 risk and uncertainty in our actual results could differ materially from the views expressed today.

Some of these risks have been set forth in our earnings release at our periodic reports filed with the FTC now over to you Mandy.

Thanks, Lance and good morning, everyone welcome to our 2019 third quarter earnings call.

Our growth accelerated in Q3, which is our strongest quarter yet.

You bet and extremely successful year.

Not only have to team driven a nominal result.

We have the scale margin profile and diversity of brands to deliver a record result.

While at the same time, making new bats, and investments that we believe will drive strong and consistent growth in the future.

Before I take you through some of these growth initiatives I want to briefly touch upon icees proposal to fully separate match group from I see.

As you know our board has formed a special committee of independent directors to evaluate IC proposal, a summary of that proposal and that expected process going forward were outlined in a 13D filed last month October 11.

Unfortunately, there is not really much we can say until the committee has agreed with IP on a structure that they are ready to recommend to the disinterested shareholders of match group. So this call we can't really comment on the transaction, but of course, we can comment on our great result, so with that let's jump right into the presentation starting on slide three.

You've heard me say the key objective for Tinder is to deliver an effective engaging and fun core experience for all of our users on yeah.

That core experiences a fundamental driver of user retention and engagement, which ultimately leads to better user outcomes meeting or matches more days and more relationship.

In addition, we have focused on monetizing opportunities that will give users tools. They find valuable and are willing to pay for because they provide a more efficient and effective experience on tinder.

Slide three illustrates how tenders core experience has led to remarkably high and stable user retention over the long run.

The last chart show that we maintain strong engagement over the last several years at the same time, we've driven user growth in revenue.

85% of our users who are active on any given day return the following month.

And you can see that hasn't changed since we started monetizing tender several years ago.

Our users find real value in the product and they demonstrate that by coming back to the App again and again.

Over 60% of Tinder users are active on it six days per week.

The average tinder users active more than five days, a week and that number keeps growing.

The number of users active every single day the week has increased by 30% this year.

In addition to these healthy retention and daily usage metrics, we've seen a meaningful lift in matches and messages since the launch at Tinder gold two years ago.

These metrics have showed continued strength, even as we branch growth throughout Asia and Latin America.

Revenue growth throughout these regions have been accelerating.

Tender is the highest grossing lifestyle app and roughly 100 countries around the world. Yes. It remains very underpenetrated in virtually all of them.

In particular large markets, such as Japan, India, and South Korea present major opportunities for Tinder, and we've been making meaningful strides in each of those markets.

There's a long list of other countries that individually generate less revenue, but present us with a large opportunity for growth in aggregate.

These countries have strong societal tailwinds as more and more young people are dating and choosing their own partners.

Localizing and marketing the product internationally, the key partner tenders growth strategy.

We believe this will help grow brand awareness shape perception and tap into local consumer behavior.

And the right hand chart shows that these core efforts are driving growth in the business.

If you turn to slide four you will see one of our recent initiatives swipe night.

This demonstrates how we are continuing to innovate to make sure tinder remains the iconic lifestyle brand for young single.

Slide nine it was a big creative swing and product innovation that is a real first in the category.

Ignite isn't in App first person five minute interactive video series were key turning point people use this white feature to decide what happens to them that.

Your choices dictate how the adventure unfold and who you match with.

And we tap profiles of the choices people may degrade natural icebreakers.

The episodes aired every Sunday night and October in the U.S.

Millions of users interact with white Knight, leading to a 20% to 25% increase in life and a 30% increase and matches.

We also saw elevated conversation levels for days after the upsets ran.

And female engagement, which is an incredibly important metric in any dating app increased as a result as well.

There was also a tremendous amount of positive buzz in the press and social media around flight night, highlighting this first of its kind experience.

It's really extended our appeal and resonated with Gen. The users.

We're planning to make season when available on demand soon and we'll roll this out in key international markets early next year.

This effort demonstrates the kind of creativity and team we have a tender and the kind of that we're willing to make.

It's white Knight is just one example, the many innovative initiatives you can expect to see from tender in the coming quarters to continue to grow our employees around the world.

Let's now turn to slide five.

This slide highlights some of the other bets where making across the portfolio.

They include fueling the rapid growth attention growing okay, cubit in India, and beyond and continuing to address specific demos through cheese and be okay.

And just product continues to gain traction with relationship minded millennials.

Its recent new marketing campaigns and given the brand as a stay lift and new users and we expect to continue to invest in their momentum.

We see plenty of room for hinged to grow in English speaking countries, which remains a focus for today.

Until now the hinge team has been focused on user growth and product experience, but in 2020. It we plan to shift the focus to improving monetization.

We expect that these monetization efforts will gradually helped offset the people product and marketing investments, we've been making in that business.

Moving to the center of the page. Okay. Cubin has achieved tremendous growth in India. Since we started investing there late 2018.

They generated significant traction, especially compared to both domestic and international competitors operating in India.

As a result of Okay cubit success in India, We began a similar push in Israel and Turkey This quarter.

And we have plans in 2020 to push into even more countries were okay cubit already have measurable organic traction.

Last.

She started BLK have both been able to achieve strong growth in the U.S. within their respective demos of Latinos an African Americans.

We're in the early innings of monetization at both App, but progress is strong and were optimistic we'll be able to drive solid subscriber and revenue growth at both brands in 2020.

On slide six I want to cover some exciting new initiatives in live video that we've recently launched or will be launching soon and that we think it further expands our addressable markets.

Our company mission is to drive meaningful connections for every single person globally, and we recognize that video can be an important enabler of those connections.

Chatting with friends and family using like video is ubiquitous today.

It's evident that video has become a primary form of communication and expression, especially for Gensix and younger.

But beyond using video with people you know.

Innovative live video experiences offer ways to get to know someone new.

It could be by chatting with someone new on a one to one basis or by watching someone personality shine through as our live streaming to a group.

We know that many singles remain reluctant to use overstating up the meeting people through live video experiences can provide a powerful alibi for fostering new connections.

We're excited by these consumer trends are not in the process of launching a few small task of live streaming broadcast on both plenty of fish and two we have very large global user bases.

In addition to the core matching and messaging experience on these brands our users will be able to join live streaming communities. They can chat directly with like broadcasters or with other users who are viewing the same broadcast.

We think live streaming could be a great feature that helps build community and ultimately more engagement between our users.

In addition to potentially driving higher engagement live streaming offers new potential monetization avenues that don't currently exist in our portfolio.

We did evaluate building this capability in house, but in an effort to get these catch up and running quickly and with minimal startup costs, we ultimately decided to leverage the SDK that two different third party platform.

This is our first foray into live streaming so like closely watching these tasks to understand the adoption rates and how it impacts the overall ecosystem of our two brands in this test.

Moving to the right side of the slide.

Research shows that despite being more connected than ever before people are lonelier just under half of all Americans report failing lonely and this is unfortunately worsen younger demos.

Our product aimed to enable users to make real life connections and get on dates and the real world.

We also think enabling conversations to take place virtually can play a role in creating positive connections and combating low enough.

With these trends in mind, we internally incubated a one on one live video App called Hello.

Oh enables one on one video connections between people from all over the World. This is very different from or other products, which are geared to delivering in person our IR l. dates.

This app allows to people to connect in real time, regardless of location and language. The Apple translate language simultaneously so to people who don't have a language in common can quote unquote talk to each other.

Well has grown to over two and a half million registered users since it launched earlier this year with the vast majority of users under the age 35.

Apple users have embraced the concept of connecting with people from all over the globe. They view it as enabling traveling without having to go anywhere.

Next time, making new friends from other cultures and other Brad background as one of the biggest reason for using the App.

We see people have great conversations about their cultures, where they work best place to travel and they even share their favorite recipes.

We believe obligor gives us a different use case, the on dating and allows us to broadly addressable market.

And we hope it can help our users feel more connected and perhaps even less alone.

It's still early but all of seeing solid retention trends and strong app store ratings. The app is off to a nice start we plan to continue investing in the product and its growth.

This is another example, where we're investing and exciting and innovative products to further fuel long term growth for the business.

Before I wrap up I want to emphasize that across the company. We are launching new and exciting features as well as expanding brand into new markets, where we see opportunity.

I am extremely optimistic about the future and strongly believe we are making smart investments to capture an even larger piece of a growing market and deliver sustained growth at strong levels of profitability.

Gary is going to take you through our fantastic results for Q3, along with an early look at our outlook for 2020, so with that Gary.

Thanks, Andy.

He said we had another terrific quarter in Q3 with accelerated growth on top and bottom line continued excellent performance at Tinder and improvement in non tinder subscriber trends.

We are progressing on our strategic plan to position the company for consistent strong growth.

This year, we're making a significant amount of product and marketing investments that we believe will drive sustained long term global growth for the company through a newer bets and by improving the performance of more mature brands.

These investments we're on track for extremely solid financial performance in 2019.

Let's get into the details from the quarter, then I'll update on our financial outlook.

On slide before we review Tinder performance, which continues to shine.

Q3 year over year growth indirect revenue, 49% accelerated from Q2, 90, driven by 38% growth an average subscribers and 9% growth in ARPU.

A big driver of tuners growth in the quarter with the gold home page redesign, which was released on Android in July following its success on iOS that helped drive a sequential increase of 437000 average subscribers in Q3.

Tend to remains on track at approximately 1.6 million average subscribers this year, which will be our highest ever annual total much of this growth has been driven by a long list of new product features and optimizing existing teed features rather than one large new revenue feature the success clearly.

Rates, what we can do on a platform of tinder scale.

Underlying tutors continued growth is an extremely active and engaged ecosystem of users both free emptied, which mandy highlighted earlier in the call.

On slide nine you can see the year over year growth in average subscribers across the company's brands accelerated in Q3 with overall average subscriber growth of 19% a point better than in Q2 90.

Year over year growth in North American and international subscribers also each accelerated from Q2.

International subscriber growth was particularly strong driven primarily by tinder impairs, but other brands contributor as well.

Non tender subscribers performed better than they had a quite some time.

A number of our more mature businesses as well as our new best buy cans cheese and be okay are contributing to subscriber growth.

All of this gives us confidence that we will have modest non tinder year over year subscriber growth in Q4, a trend that we expect to continue in 2020.

Average subscribers for the quarter were just over 9.6 million slightly over half from outside of North America, We expect the shift to a greater proportion of international subscribers to continue as our international growth efforts at both Tinder and our other brands progress.

Slide 10 shows ARPU trends Tinder ARPU has increased more than 70% over the past three years due to increasing percentage of subscribers, taking the higher price gold package as well as strong our card sales.

Tenders ARPU is now essentially on par with the ARPU of our other brands, which has generally been quite stable.

[noise] Tinders ARPU increased 9% year over year in the quarter more on an FX neutral basis, we don't believe weve reached the ceiling for tinder are.

This quarter overall company ARPU was up two cents year over year to 59 cents.

FX neutral basis total company ARPU was up 6% to 60 cents.

International ARPU was up 7%.

Flipping to slide 11, you can see that the company's Q3 total revenue was $541 million for year over year growth of 22% an acceleration of four points from Q2 90.

Total revenue growth would have been 24% without the impact of FX for total revenue of $550 million on a constant currency basis.

Total direct revenue grew 23% are much smaller indirect revenue decreased 15%, which was an improvement from Q2 year over year results, we expect indirect revenue trends to gradually stabilized overtime.

Margin improved by a point over the prior year quarter, selling and marketing spend declined as a percentage of revenue again this quarter by three points to 21%.

Mostly offset by higher fee growth and higher legal expenses.

Slide 12 shows that we started a time, where IPO with gross leverage of 4.5 times.

From there we've reduced leverage fairly consistently by just over 50% gross leverage.

We ended Q3 19, a 2.2 times gross leverage and 1.7 times net leverage below our targets.

It's notable that we've achieved this de levering despite having paid a 556 million dollar special dividends at the end of 2018, and having used $582 million of cash to buyback our shares over the past two years. We've also you $629 million of cash to net sell employee equity awards and.

Hey employee withholding taxes since 2017.

That's nearly 1.8 billion on cash in aggregate, which certainly demonstrates the enormous cash generating power of our business.

On slide 13, we have our latest financial outlook.

For Q4, 19, we expect total revenue of $545 million to $555 million and $205 million to $210 million EBITDA.

Our revenue outlook includes about $6 million incremental negative FX impact primarily from the euro and pound against the dollar since we provided our last financial outlook in August .

We're anticipating that our Q4 margin will be in line with Q4 18, even though we expect approximately 25 million incremental legal costs and long term oriented product and marketing investments compared to the prior year quarter.

For full year 2019, we're expecting to have both revenue and EBITDA growth in the high teens, well above our expectations when the year began.

Our EBITDA for 2019 reflects investment in hands of approximately $20 million, which we had planned for at the beginning of year.

Our margin for full year 2019 is being impacted by about $60 million expenses, we didnt plan for the outside of the year, which we broadly bucket into two categories.

First we reinvested a portion of our outperformance this year back into our businesses, primarily at Tinder globally, Okay. Cupid in select international markets harmonica to address the Muslim demo globally and pairs engaged to capture some of the Japanese matrimonial market.

We believe these investments will prove the company long term growth and enable us to further capture the large global market opportunity in front of us, especially in Asia.

Second we're incurring higher legal regulatory other non discretionary costs in 2019.

This includes items such as the French digital services tax as well as increased costs related to various litigations, we have underway.

I also did want to call out that Apple made some recent changes to customers subscription management process that has had a negative impact on renewal dynamics across many of our brands.

Those changes are leading to a temporary increase in terminations, which we believe are largely a pull forward of future cancellations. We expect this to impact Q4, and Q1 2020 subscriber net addition levels before the impact tails off the changes are reset so we're still watching the impacts, but we factored into our latest outlook.

We're in the Mystore planning process, but I wanted to share some high level expectations for 2020.

For the year, we expect to achieve mid to high teens revenue growth once again.

We anticipate this will be driven by continued strong growth at tinder as well as by growth in a number of our other businesses.

We expect to see Argus subscriber growth in 2020 from our non tender brands and of course continued strong growth from tender.

Tinder has an ambitious product roadmap again in 2020, they are still in the process of determining the mix between user growth and engagement subscription and Alec heart oriented features.

We expect to continue to invest in 2020 in several of our new beds that are showing strong traction in their markets foremost is hinge, which has tremendous product momentum at increasing brand awareness in the U.S. and other English speaking markets.

Changes user growth is very strong and we're about to turn our focus the subscriber and revenue growth.

In addition to hinge, where we expect a relatively small investment in 2020, we expect to continue to invest to grow okay. Cupid in number of markets globally. We also plan to could you divested BLK cheapest ship outlook and harmonica.

Well, we expect to have incremental year over year legal cost next year, we expect that many of the key pending matters reach conclusions by the end of 2020.

I also want to note that have been proceed with the spinoff, we expect to incur advisor and other costs about $10 million in connection with the transaction.

Even with our investments and some higher legal costs, we expect to achieve mid to high teens EBITDA growth for 2020 with EBITDA margin in line with 29 team.

We remain confident in the 40 plus percent long term margin target for the business. In fact, if you add back the $60 million of discretionary investments and Nondiscretionary items that we are occurring this year, our margins would be at about 40%.

I wanted to share our current thinking about 2020 with you now, but we will be refining our plans through the rest of the year and will provide update at more detail on our next earnings call in early February with that I'll ask the operator open the line for questions.

Thank you we will now become the question answer session.

You asked a question in your press Star then one on your Touchtone phone.

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First question comes from Merck totally Memorial. Please go ahead.

Good morning, Thanks for taking my questions.

First one is can you just give us a little more color on the mix of.

Discretionary and legal or regulatory expenses in 2020.

I'm, just curious whats keeping margins flat next year, a little more color there will be helpful. And then second and its related but.

I'm curious what tinder margins would look like both this year and then what you would expect in 2020, just to give us a sense of.

The leverage that's in the model excluding some of your long term investments in new orbits. Thanks.

Sure.

Let me give that a shot and theres a lot of moving pieces on the margin and I'm going to try to walk you through it.

Relatively clearly and hopefully this will be helpful. So when you look at what's happening for 2020, you got a couple of big things that are helping give us improving margins. The most notable of course is that the tender business is becoming a bigger piece of the overall pie and tinder has higher margins than our other brands in aggregate.

And so we get a lift from having a bigger piece of business be tender.

And I'll talk about to their margins second which was kind of the second part of your question. We've also talked previously about giving users a choice on tinder of on Android of credit cards or using their billing system and given that we've seen some improvement from a margin perspective as users have chosen to pay with credit cards on tinder.

So those two things are helpful to our margins in 2020.

On the other side of the equation, we've got a number of things some of which are discretionary and some of which aren't that are impacting margins.

Most notably in kind of the simplest won is legal and the spinoff costs and I'll come back to legal the spinoff cost if the spin off goes through we're saying, we're going to $10 million of cost next year relate to spin off that would happen in 2020 or not and then obviously.

Wouldn't recur again beyond that.

On the legal side.

If you look at the trends in legal our legal costs. This year are jumping significantly from last year. In 2018, we had about $15 million of legal fees. This year. We've got about 40 more expected for the year. So close to 55 cents a significant jump in 19, and then our numbers.

2020 include additional legal fees, probably in the neighborhood of about 15 or so million dollars. So the jump is pretty significant from 18 to 19, and then incrementally from 19 to 20.

No we don't view those as discretionary we are involved in three significant lawsuits and we are pursuing those with top flight lawyers because.

One of the cases, Bumble, we think Dave infringed our patents and we're.

Expecting to be compensated for that and so we've been pursuing that litigation.

On the other two one related to the FTC and DLJ investigation. We think the claims that have been made in that case, our meritless and we're going to defend ourselves against that vigorously and so that is increasing our legal cost in 2020. It started now in late 19, and that's going to take place over the course.

2020, and the third.