Q2 2022 Match Group Inc Earnings Call
[music].
Good morning, and welcome to the match group's second quarter 2022 earnings Conference call.
All participants will be in listen only mode.
Please note this event is being recorded.
I would like to turn the conference over to Penny Shelburne.
As VP of Investor Relations. Please go ahead.
You operator, and good morning, everyone. Today's call will be led by CEO , Bernard Cam and CFO and COO, Gary slip or 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.
Thanks, Tony Good morning, everyone and thank you for joining today's call. This is my first earnings call as match group CEO and I wanted to start off by thanking everyone at the company for such a warm welcome.
I truly believe that love connections and relationships are the pillars to a happy and fulfilling life.
I'm elated to work with the team that's responsible for creating joy through connecting millions of people around the world.
I've been on the job for two months and I've been fortunate enough to travel to many of our global offices with Gary and the rest of the management team at each stop I've conducted all hands ask me anything meetings to convey what I will bring to the table and what I expect from the team in return.
As I told my colleagues I'm passionate about people culture and product.
Promise the teams there will always be authentic honest and act with integrity and I expect our employees to bring those same values to work every day.
I've been learning as much as possible about our business assessing what's working and what's not and beginning to build our strategy I'm very impressed by the team's experience and their growth mindset as well as strong financial discipline.
This balance will serve us well as we forge ahead.
I also want to thank Gary who has been a great partner during my Onboarding as COO and CFO . He's made key strategic recommendations that we see eye to eye on and we've been able to move quickly and decisively to unlock value across the portfolio and set up the next phase of growth.
There is no doubt that there are challenging macroeconomic factors at play.
Over the past two and a half years people have been forced to isolate then adjust to society reopening and I don't believe the behavioral impacts of Covid are fully understood yet, but what I do know is that human real world connections are imperative and our apps are the best way to create those.
Connections, it's our responsibility to innovate and provide the best experiences and that creates a real opportunity for our business.
In our shareholder letter I was able to share my initial observations about the business market opportunity and our portfolio of products. I also touched upon my management style, noting that we have to be decisive and set up the right teams with long term growth in mind.
In two months, we have made immediate steps to unlock and maximize tenders true long term potential.
Tinder is the go to App in the industry available in 190 countries and over 40 languages. It is a global phenomenon that has transformed dating culture in western markets over the past 10 years and it's still early in its journey and non western markets.
I believe that innovating tinder will only enhance its ability to continue to transform the dating experience for the next generation of singles around the world.
With the current tender CEO stepping down I've put a new leadership team in place who will report directly to me, while I lead the recruiting efforts for a new CEO .
This team has a great working dynamic that's already apparent and brings proven expertise to tenders next phase of growth there.
They are passionate strategic leaders, who are also able to get into the trenches experiment lead by example, and get things done I am confident that this new team will work well together to build product enhancements and innovation.
But I do want to acknowledge that there have been some misfires and turnover on the team that have led to delays in product and execution in the first half of the year.
I believe that our new team can write that ship, but it will take some time to execute and build momentum.
I've been impressed by the diversified dating experiences throughout the portfolio as part of match group hinge has been a breakout star.
The team has executed on building a strong brand, including they're designed to be deleted campaign that resonates with our user base.
They have elegant differentiated product that I believe will be just as successful in international markets as they have been in English speaking ones.
While our other brands continue to face their own challenges I'm working closely with the teams to ensure that we're organized to tackle them and set up the brands for long term success.
While the Hyperconnected acquisition had not gone to plan in our first year, we finalized the acquisition during Lockdowns.
My trip to Korea last month was the first time the teams were able to sit down together since we completed the deal.
There are core products have struggled with increased competition and adjusting to the elimination of IBSA, but the team is strong and I've been impressed by the entrepreneurial spirit and innovation.
The Hyperconnected has built technologies that have been introduced in our products around the world.
This collaboration is something that I expect to see more of across our teams.
We continue to increase adoption and acceptance of our products in markets like Japan, we.
We have a team on the ground, ensuring our two products tinder and pairs have marketing messages that are resonating with our users.
And our other established brands, we are ensuring right sizing marketing spend to ensure long term profitability.
And when we think about new opportunities and demographics to serve we found a great business in the league.
Our founder and CEO Amanda Brafford has built a brand that people love and continue to return to.
We've been impressed by the leaks user base as they are willing to pay significant premiums for this service.
From my experience product innovation always drive user adoption and engagement, we have great products, but I want to speed up product delivery bring new dynamic features to life and set big audacious goals at.
At Tinder, we need some time to regain product momentum.
I am committed to product innovation that will give our users more reasons to come back more often and for new singles to sign up and start dating.
This is only my 63rd day on the job, but over the next few months I'll be building out more plans as Darin I continue to work with the teams and on future calls I will share more details about our developing strategy.
The team's understanding and execution on building subscription models is unparalleled I bring expertise on the Ala carte side of the business, which will be a great complement to our products.
We will push our teams to innovate collaborate and drive more growth on our platforms in the future.
I bet on people and feel great about the team's ability to transform the way people connect with others around the world together I expect we will drive long term shareholder value be decisive and always strive to win and with that I'll turn it over to Gary.
Thanks, Dk Hello, everyone I'm excited for my in Bk's first call. It together there is a lot to cover this quarter, so I'm going to get right into it.
We had a solid Q2 with total revenue of $795 million up 12% year over year.
The Q2 FX headwinds were severe as our revenue would have been $842 million.
Up 19% year over year on an FX neutral basis.
The FX impact in Q2 was $13 million worse.
And then what we expected when we provided our Q2 outlook on our May earnings call.
Our direct revenue grew 12% year over year.
<unk> grew 9% year over year in the Americas with strength of Tinder hinge BLK and <unk>, coupled with declines at the established brands.
It grew 6% year over year in Europe , but 19% on an FX neutral basis.
Europe continues to be impacted by the war in Ukraine as well.
Direct revenue grew 32% in APAC and other 49% on FX neutral basis, driven by Hyperconnected.
Total payers were $16 4 million, an increase of 10% from the prior year quarter.
Payers were up 4% year over year in the Americas, 5% in Europe , and 32% in APAC and other which was aided by the acquisition of hyper connect.
Tinder payer additions came in stronger than we had expected while our established brands, including match match affinity brands.
Okay, Cupid and plenty of fish, so year over year payer declined over 10% in aggregate.
RVP was up 3% year over year to $15 86 in Q2.
Our PBT was up 5% in the Americas, reflecting higher average rates for subscriptions increased average Ala carte purchases at Tinder and hinge.
RPT was up 1% in Europe , where contributions from Tinder and Hyperconnected were partially upset by the strength of the dollar compared to the euro and the British pound.
Our <unk> was flat in APAC and other were contributions from Hyperconnected were offset by the strength of the dollar relative to the yen in lira.
On an FX neutral basis, <unk> was up 9% companywide and 13% in both Europe and APAC and other.
Tinder performed well in the quarter delivering direct revenue of $449 million.
Up 13% year over year, 20% on an FX neutral basis.
Tinder had payers growth of 14% year over year, adding $1 3 million payers to $10 9 million and a.
1% RVP decline year over year in the quarter, which again shows the impact of FX Tinder RP was up 5% on an FX neutral basis.
All other brands grew direct revenue, 12% year over year in Q2, driven by 10% RVP growth and 2% payers growth.
<unk> continued to drive the growth.
Some of the pressure on our established brands payers in direct revenue in the quarter was attributable to difficulties finding marketing opportunities that met our ROI thresholds.
There were a couple of other specific trends as well.
Plenty of fish, which tends to serve a lower income demographic users had benefited from COVID-19 related government stimulus in Q2, 'twenty, one, but we saw weaker payer and RVP trend in Q2 2022 as the benefits of the stimulus abated.
The match brand so some lingering impacts from its new business model and <unk> saw some conversion softness.
In Asia Hyperkinetic contributed as we expected in Q2, but its revenue was heavily impacted by FX, especially against the Turkish lira and the Japanese yen as well as by typical Ramadan related seasonality.
Pairs in Japan saw a burst of new user strength. After COVID-19 restrictions were lifted but only a modest sustained improvement in revenue and other trends in Q2.
Indirect revenue was $14 million in the quarter up 7% year over year as we continue to see strong demand for ads in our products and rates increased year over year.
We had a $10 million operating loss in Q2, as the intangibles primarily related to the Saar and <unk> trade names were impaired by $217 million or roughly half the intangibles that were attributed to them at the time of the acquisition.
The impairment stems from a lower financial outlook for the two apps, including FX impacts in certain of Hyperconnected key markets as well as the use of higher discount rates and the DCF calculations, given rising interest rates generally.
Adjusted operating income grew 9% year over year to $286 million.
Representing a margin of 36%.
Overall expenses, including SBC expense grew 62% year over year in Q2, but we're only up 9% excluding hyperconnected.
Excluding the impact of Hyperconnected cost of revenue grew 14% year over year, primarily due to higher app store fees, including the initial 5 million dollar amount placed into escrow related to the Google litigation.
Cost of revenue represented 29% of total revenue.
Sales and marketing spend excluding hyperconnected decreased $13 million or 10% year over year, the second straight quarter, where we saw year over year reduction as we continue to reduce marketing spend at our more established brands and to show ROI discipline overall.
Sales and marketing spend was down three points year over year as a percentage of total revenue to 15%.
For the first half of the year sales and marketing spend X hyperconnected declined $21 million year over year.
G&A expense, excluding hyperkinetic rose $3 million or 3% year over year.
G&A comprised 14% of revenue unchanged from the prior year.
The increase in G&A expense reflects lower legal fees and an increase in travel expenses.
Continued to return to a more normal cadence of business travel.
Product development cost, excluding Hyperconnected grew 51% year over year and were 10% of revenue as we increased head count, particularly at Tinder and hinge in a highly competitive labor market.
Our gross leverage declined to three five times trailing adjusted operating income and our net leverage was three times at the end of Q2.
These leverage levels reflect the payment of $441 million.
Related to the settlement of the former Tinder employee lawsuits and arbitrations those matters are now results.
We ended the quarter with $473 million of cash cash equivalents and short term investments on hand.
We deployed approximately $216 million in Q2 to buyback approximately $3 million of our shares at a <unk> <unk>.
Over $73 per share on a trade day basis.
We currently have approximately $9 3 million shares remaining under our buyback authorization.
As we stated in the letter.
There are a number of key factors affecting our performance and outlook.
First is FX, which significantly affected the first half of the year and we expect will impact the second half of the year as well.
We use the forward curve to provide our outlook and the curve has consistently underestimated the dollar's strength. This year, which is largely why we have been behind our outlooks for Q1 and Q2.
Leaving aside FX impacts it's become clear that COVID-19 created some unusual trends in our business.
The established brands benefited from a less competitive marketing environment in the early days of Covid, which drove incremental growth and their users also benefited from savings and government stimulus payments, which patras monetization.
As these factors have abated these businesses once again face growth challenges.
Tinder experienced a very strong second half of 2021 as people began to socialize more after being vaccinated.
Additionally, <unk> made several beneficial paywall and other optimizations in Q3 dollars 21, which drove record sequential payer additions and strong revenue in that quarter.
We're now lapping these challenging comps. Moreover, some of the tinder product initiatives and optimizations that we've been counting on for revenue growth in the second half of 2022 are not delivering as we'd expected and we are delaying some launches.
Our plenty of fish livestream business is showing a slowdown in revenue growth after a period of strength in part driven by stimulus spending.
And we haven't seen a sustained rebound in performance in Japan, where data has remained reluctant and COVID-19 cases continue to rise.
Taken together these factors lead us to expect relatively muted revenue growth for the second half of 2022.
On the cost side, we're feeling the financial impacts of the tight labor market, which caused us to raise compensation levels as well as a marketing environment, which is not yet fully adjusted to the economic realities.
As such we have significantly slowed our hiring and are sticking to our ROI discipline.
Our marketing spend even at the expense of some revenue growth.
The App store fees also continue to be a headwind app store fees, including the escrow amount related to the Google play store were 19, 5% of our revenues in Q2 'twenty two up over two points from Q1 2020.
We remain optimistic that the app stores will be required to adjust their policies as the DMA in Europe goes into effect in 2023, and we prevail in our lawsuit against Google in the U S, which should create a much fair app ecosystem for all.
For Q3, we expect total revenue for match group of $790 million to $800 million.
Essentially flat year over year.
We anticipate over $60 million of year over year FX headwinds in Q3, meaning the total revenue growth would be over eight points higher on an FX neutral basis.
We expect tenders direct revenue to be up mid single digits low teens on an FX neutral basis in Q3, while all other brands direct revenue is expected to be down mid single digits, but up low single digits on an FX neutral basis.
We expect <unk> will continue to drive the growth, helping offset declines in the established brands.
We expect adjusted operating income of $255 million to $260 million in Q3, representing margins of about 32% at the midpoint of the ranges, we expect lower year over year sales and marketing spend a much lower year over year growth rate.
Product and development and in Q2, 2022, and a continued increase in App store fees.
The lower than expected revenue contribution from Tinder, which is our highest margin business has a meaningful negative effect on our overall company margins.
For the full year, we're now estimating a $195 million of year over year, FX impacts, which is $72 million more than at our last earnings call and $163 million more than when we first gave our thoughts about 2022 back in November of 'twenty one.
We estimate FX is causing a six point reduction in year over year revenue growth for full year 2022, two points worse than at the time of our last earnings call.
For Q4, we expect limited improvement in our year over year top line growth rate and modest improvement in our margins compared to Q3.
While we expect the second half of the year to be below our growth targets. We believe the company remains positioned to deliver accelerating revenue growth as we move through 2023, driven by improved project execution at Tinder.
The biggest unknown, we face relates to the macroeconomic environment and its impact on our business.
The consumer is facing significant pressure from rising gas and food prices constraining purchasing power.
Our product is a small purchase and one that leads to happiness.
So consumers are loathed to stop or reduce it.
If the economy continues to worsen.
We expect our business to remain resilient.
But we may see modest effects at some of our brands, particularly those are catered to lower income consumers.
We believe subscriptions, which constitute the vast majority of our revenue will remain sticky, but it's possible consumers will pullback modestly on Ala carte purchases, which tend to be more discretionary.
We expect our hinge business to remain largely immune from overall consumer spending pullbacks, given it's more affluent user base and have seen no impact to date.
We will continue to monitor these trends and provide an update on our next earnings call.
Our category provides ample runway for growth, which we can achieve by growing users and by increasing payer penetration and RVP.
It is up to us to execute on the opportunities.
The recent changes we've made a tender should better position us to perform the way we have historically.
While the business is facing some temporary challenges.
We will remain disciplined on costs, especially in marketing and hiring.
Our longer term prospects remain bright and our goal remains to deliver strong consistent growth and profitability for our shareholders.
We believe our combination of growth and profitability as well as our free cash flow generation is one that few other companies can achieve.
With that I'll ask the operator to open the line for questions.
Thank you.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
At this time.
Momentarily to assemble our own.
Our first question comes from.
Hi, Julien.
Please go ahead.
Okay. Thank you <unk>, let me try a question on Tinder. Please so what are you looking for in the new tender CEO and why has there been this much turnover and Ceos.
Thanks Schweitzer for the question first of all I wasn't expecting to have to manage a CEO transition. So early in my tenure and I know, it's not ideal to have two tinder Ceos in two years.
But with were not his departure I wanted to act quickly and be decisive and put in a team that I felt confident in.
We've assembled a team of all stars from Tinder and match group and we also brought in Mark at CPO, who I've known for over 15 years.
<unk> is moving into a newly formed position as COO of Tinder and will improve execution across the entire organization.
Tom has done a great job of leading engineering for the last five years at tenders and we're delighted that he's going to continue to lead our engineering teams.
Melissa is an award winning CMO, who has done great things at Okcupid, and we're really happy that she is bringing her expertise to our biggest business and Mark joined Tinder. One week. After I joined match group and he is my top choice to lead product as I've worked with him at electronic Arts.
And I've admired his accomplishments leading product teams.
This team in place is already working really well together and driving the business forward and we think the new CEO once in place.
Going to really enjoy working with their strong team.
When it comes to finding the new CEO first and foremost I want to break the cycle of short tenured leaders at Tinder.
I want someone who has experienced.
Creative leader that inspires and motivates team, but it's also aligned with our growth vision for the business.
I will be personally leading this search but in the meantime, I'm really excited to immerse myself in Los Angeles with the Tinder team.
With leadership change comes tremendous opportunity and I really look forward to taking its team and tinder to the next level of growth.
Okay. Thanks P J.
Our next question comes from Cory Carpenter with Jpmorgan. Please go ahead.
Thanks for the question sticking with Tinder in the shareholder letter in the prepared remarks, you talked a lot about disappointing execution. So our question is could you just talk about what went wrong at Tinder and how quickly you think it can be turned around thank you.
Thanks, So much Cory for the question Tinder did not deliver on its product roadmap for the first half of the year.
And execution on a number of initiatives had been delayed that we were counting on for growth in Q3 and Q4.
Typically tender works on big initiatives on the first half of the year that materialized and payer and revenue growth in the second half of the year, but that didn't happen. This time around so we don't expect the same revenue bump that we typically see.
As an example, a lot of time with building was spent building explore it as a strong gateway with high engagement, but we haven't succeeded yet on innovating the user experience and then also building monetization features to maximize its potential.
I do believe that there is a lot of market opportunity and great product ideas at tinder, but it's all about execution.
I think now with the new team in place I feel confident.
In it that we will deliver on the product roadmap and it gives me a lot of optimism that this is all fixable and a short term problem for tinder.
Our next question comes from John Blackledge with Cowen. Please go ahead.
Great. Thanks on the <unk> revenue guide maybe maybe this one for Gary can you provide more color on the puts and takes of the <unk> revenue guide and also thoughts on <unk> revenue growth and your confidence in the expected revenue Reacceleration in 2023.
Okay.
Sure John I'm happy to take it thanks for the question.
Here's the way that I kind of think about the back half of the year generally Q3, and Q4, which is between what we expected to deliver now for the back half of the year and versus what would have resulted in our hitting our recent guidance, which was low end of the 15% to 20% range for 2022, there is a gap there.
It really results from three areas. The first which is about a third of the gap is from additional FX headwinds, we talked a lot in the prepared remarks about how much that has gotten more severe and so about a third of the gap comes from that.
Of the rest.
About half of the rest are one third of the total comes from Dk, just talked about which is tender mis execution and the lack of delivery of initiatives not having hit product roadmap and delivered as we expected in the first half of the year.
And the other piece comes from a variety of other factors across the business weakness in APAC, especially Japan weakness in live streaming and the established brands and generally some effects of macro weakness, we think might be in that bucket as well. So those are the three buckets, which are the total GAAP I think each account for about <unk>.
One third.
And now while we're not expecting much improvement in Q4 compared to Q3, we do expect momentum to build after that and to carryover and improve as we move through 2023.
Okay.
Thank you.
Youre welcome.
Our next question comes from Alexander Junior Staiger with Goldman Sachs. Please go ahead.
Great. Thank you for taking my question two on hinge if I can so despite the accelerated launch timeline you reiterated the $300 million in revenue contribution for this year could you maybe help us understand how you think about the monetization ramp into the second half of this year and also in terms of revenue growth next year given.
The faster rollout and then second could you maybe give us a sense of like where we sit in terms of hinge margin trajectory and the cadence of investments going forward. Thank you so much.
And she has been very successful in many markets already and we've created great user experience that intentions single loss.
We've seen it excel in marketing and product development, driven by hinges awesome team and culture, coupled with matches expertise.
And just great momentum and I see two vectors for accelerating <unk> growth.
One there is still ample runway on monetization and user growth in core markets. As we continue to rollout features and marketing campaigns to drive this growth or.
For example, we're really excited about the next monetization feature which is a premium subscription tier.
Second is capitalizing on product market fit that hinge has created and translating that into as many markets as fast as we can.
This will help accelerated international expansion, which will drive stronger revenue growth in 2023 and beyond.
I think the combination of these two growth opportunities setup hinge for multiple years of strong revenue growth.
And let me jump in on the margin question I want to point out a couple of things as it relates to Hanjin and margins. The first thing is while we are being very judicious and cautious about marketing spend across the company.
As well as on hiring now and going forward, we recognize that hinge is the brightest spot in the portfolio and it is our strongest growth business. It's a very important business to us and we are going to continue to invest at the right levels in that business both on the on the on the.
On the marketing side as well as in product and development and people.
So we're being judicious, but we're being thoughtful.
And we want to make sure a hinge has the resources it needs to continue on its growth trajectory and I don't see issues. There in terms of the way we are.
Treating expenses as it relates to marketing or head count I think hinge has the resources to continue to grow exactly as we're planning for it to grow.
I want to make sure people understand the nuances there and the distinctions between businesses that are struggling more to grow where we're going to be more judicious on marketing and hiring versus a business like <unk>, which is growing strongly and we're investing in.
As far as what kind of margins we can achieve.
I think that we are still very smart and efficient with our marketing spend.
We are spending where we see traction in the business like now in a market like Germany, we see the organic traction we're investing into it with marketing spend that has been our playbook and continues to be our playbook at hinge.
And we think that hinge is already in position to achieve.
Margins that are close to the company levels of margins and we think that that's what hinge can achieve over time and so we don't think hinge will be a drag on our margins.
At Haynesville contribute nicely to the overall company margins and still grow at the levels that we've been talking about as we've been providing our outlook, which as we say is 50% for this year and we think will be very strong into 2023 as well.
So hopefully that answers your questions.
Yes. Thank you so much.
And we go to the next one please operator.
Our next question comes from Benjamin Black with Deutsche Bank. Please go ahead.
Good morning. Thank you for the question. So in the past you've been a mid teens to high teens revenue growth company understood that there was some volatility in 'twenty two given the leadership changes when it turns around sort of the product rollout, but when we looked at 'twenty three how should we thinking about the growth algorithm.
What gives you the confidence in returning to more meaningful growth. Thank you.
Sure, let me jump in and take that and thanks for the question and as I talked about a little bit with the answer to John's question as well about 2000 22023, so I'll try to weave.
That together first of all I want to say off the bat, we remain confident that this business can return to mid to high teens revenue growth. There is a lot of opportunity for us and it really comes down to execution and right now we didn't execute as we needed to and as we expect it to in the first part of the year.
So we need a few quarters to rebuild the momentum in the business and as BK has talked about extensively in particular, we need a few quarters to get the tinder team to improve their overall execution and deliver on their product roadmap and so as you know.
That takes place we need to build back into stronger and stronger growth I think that will happen as we move into and then through 2023.
At a measured pace in terms of improving the growth obviously, our goal is to deliver more than that but our goal is to at least deliver strong and improving growth as we move through the quarters starting in 2023.
We will provide more details and specifics on what I think we can deliver for 2023.
Upcoming calls as is our custom so we'll give you a better sense of what exactly the cadence is going to be like and what levels. We think we can get to but our goal is to get back to where we have been we think there's opportunity to do that and as long as we execute and in particular, the tinder team execute on that we do think we will get there.
Great great. Thank you.
Sure.
Our next question comes from Warren Cheng with Morgan Stanley . Please go ahead.
Great I wanted to ask about tinder coin.
Aspects of that product testing were disappointing relative to your expectations and I am curious as to why that sounds like it's the primary driver of the weaker second half outlook at Tinder I think previously you said there wasn't much if any benefit from those new products in the back half though.
Bridge the gap there and then just lastly on the shorter term subscription packages. They passed weekly pass any other commentary that thanks, so much.
Thanks, I can take that one.
Alright, thanks for the great questions I feel confident that coins and virtual goods are a compelling offering and tinder and can lead to significant monetization of power users who I believe are currently under monetized.
Mark and I have spent most of our career in gaming focusing on building such ecosystems and we bring this expertise to the table.
Above the idea of virtual goods and currency and tender, but I believe it hasnt been approached in a completely logical way for instance, my experiencing gaming demand for virtual goods and collectibles are rolled out first and then you launch the currency to get these items later.
While it is frustrating to pause the efforts I think it's super important that mark and I deliver the right value proposition. So this can be a long term revenue stream.
In terms of your question around shorter term subscription packages historically match group has not offered these.
We are going to start testing a variety of short term subscriptions at different price points to see what works.
We plan our initial rollout of these programs this upcoming fall.
And then maybe I can just jump in on the second half.
Outlook I want to clarify something that you said, which is that implies we are counting on coins or even virtual goods for the second half delivery of our of our revenue targets and that isn't the case there wasn't much if anything baked into the second half outlook around coins and virtual goods. So the fact that we're delaying that is not the dry.
Ever of the shortfall versus our expectations for the second half.
But there were a series of other.
Yes.
Les keynote kind of initiatives and optimizations that were expected in the first half of 2022 to help us deliver the second half revenue and also more initiatives in the back half of the year to help deliver the second half revenue and it's on that series of initiatives kind of less sexy less known.
<unk> initiatives are still very important initiatives that really has not taken place and it explains why changes.
And the team at Tinder have been made to try to make sure that we deliver more fully on the initiatives and optimizations that we have in our plans.
And so it's that kind of shortfall and delay that's really causing the issue I think if you look back where we were in May we still believe that we were going to deliver those initiatives.
And right now I think our confidence in that happening in the back half of the year has come down we've made the changes and we think we'll be positioned to have more momentum as we get out of 2022 and into 2023.
And if you look back into last year Youll note that we had a very strong performance in Q3 and Q4 as I called out and the reason for that is we did deliver on significant initiatives, not particularly massive initiatives, but a series of important initiatives and optimizations in the early part of the year as well as in.
Q3, and I talked about in the remarks and that really propelled strong payer additions in Q3 and into Q4 and strong revenue growth that materialized in 2021, and it hasnt materialized in 2022, and we need to deliver on those kinds of initiatives and product improvements to drive the revenue growth and the team at tinder needs to do that and we.
We will now be positioned to do that again.
Very helpful. Thank you.
Our next question comes from Jason Holstein with Oppenheimer. Please go ahead.
Maybe kind of a bigger picture question. So so far this earning season, we're seeing companies that have more affluent customer base has performed better in the quarter and with our third quarter outlook.
I think historically online dating it's been procedures recession resistant kind of like alcohol and tobacco I guess VK kind of what's.
What's your perspective on this and I guess as you're thinking about.
Are the headwinds that you're facing more self inflicted or do you think that theres aspects of the vertical that are now mature enough.
Perhaps at younger users, who have less discretionary income might cut back in spending during a recession or some of the inflationary pressure we're seeing thanks.
Hey, Jason why don't I jump in and try to take this one.
As I said in my remarks, I think is a category. We believe that dating is relatively resilient to economic downturns and.
And we expect our business would be minimally impacted in a downturn as well I think as you rightly point out if there were any impact it would be at the brands that serve lower income consumers with less discretionary income.
We wouldn't expect to see for example effect at our business like hinge, which tend to have a much more affluent customer and so far at hinge, we definitely have not seen any impact from from the overall macroeconomic environment. We also think that the subscription nature of our business does is more sticky and does provide us with some.
Halation from an economic downturn, but on the other hand, there is some ala carte revenue and that's more discretionary and probably would be at more at more risk in a downturn. So well right now we don't see any real impacts to our business from macroeconomic factors.
We are watching for them closely it's something we want to monitor as we get out of the year. Because we do think there are a lot of cross wins going on globally.
But I would say that I don't see much downside to our 2022, even if things.
Did continue to deteriorate I think we've.
Kind of assumed the right level of.
Potential risk there as well in our 2022 outlook. So we'll see what what materialized in the next six months, but I think that your view of kind of the resiliency of our business the way that affluent consumers in particular are more insulated.
The risk more on the on the people with lower income more discretionary spending I think is the right way to think about our business.
Your next question comes from Youssef Squali with Jefferies. Please go ahead.
Great. Thank you very much. This is actually a follow up question to the one that was just asked but so because I think you said in the letter that People's willingness to try online data and for the first time Hasnt, yet returned to pre pandemic level.
And this is really at a time when our experiences are taken budgets over from things like retail et cetera.
What again, what kind of gives you the confidence that this is not structural in nature, particularly when it comes to tinder, maybe maturing and if it's not just what products are you. Most excited about that you think can really start moving the needle and cause growth to reaccelerate in 2023 as you guys are talking about thanks.
Okay.
Thanks for the Great question, let me hit this.
Like write off.
Do not believe that the category is saturated I wouldn't have taken this job if I thought it was as we shared in the letter more than half of singles in developed markets such as U S and Western Europe have not even tried dating apps. So and there is even a greater opportunity in APAC and the rest of world.
We have demonstrated that product innovation leads to product adoption, which drives overall category growth.
It is important to continue to innovate on our products in order to introduce online dating to new users.
A great example is that change it has great user momentum and had strong top of funnel growth directly driven by exciting new features such as voice prompts.
Tinder has not seen that same level of product innovation recently, but we feel like we have the right marketing and product teams in place now to innovate and drive its next level of growth.
Okay. Thank you best of luck.
Our next question comes from Mario Lu with Barclays. Please go ahead.
Great. Thanks for taking the question so how one on the third quarter margin guidance.
It looks like you're guiding four point year on year decline.
EBITDA margins at the midpoint.
Larry you touched upon this earlier, but can you help break down further.
Much of that year on year compression is from the higher <unk>.
Versus product development spend.
And then secondly, when shall we expect product development to deleverage again. Thank you.
Sure I'm happy to take it let me just make sure that everyone understands kind of our outlook and theres clarity around that so we're basically saying at the midpoint of the ranges in Q3 there'll be about 32%.
Margins and then we're expecting some modest improvement from there, which I think you could read as 100 to 150 basis points of sequential improvement in Q4.
In terms of the overall year over year change in the margin drivers, let me see if I can kind of do this off the top of my head and so I would say app store fees are probably a point and a half of headwinds. So there is still a meaningful headwind.
On year over year margins in Q3, and probably head count is maybe two five points of headwinds you have four points of headwind.
From the App stores and the head count move.
Moves that we've made you probably get about a point of benefit from sales and marketing on the other hand, and I would say, there's probably some small other effects from other items and thats, probably a little bit of a headwind so I, probably am around three and a half or so.
Of year over year decline, so that probably rounds tier, 4%, but I think its primarily the head count and the App store fees with some offset from the lower marketing spend.
In terms of your second question I don't expect there to be significant leverage on the product development line.
Upcoming quarters, but I do think that as we turn the corner into 2023, we'll start to see the effects of the pullbacks in hiring that we're making and also we'll start to see stronger revenue growth stronger revenue generation from Tinder in particular as the new team really starts to accelerate and build momentum.
And that will help drive momentum on the product development side as well it should help overall company margins because as I mentioned in my remarks, the fact that Tinder, which is a very high margin business is not contributing as it has been does have a significant effect on the overall company margin so getting Tim.
They're going it's important not only from a revenue growth perspective, but also from a margin improvement margin acceleration perspective. So it is the key it's the reasons. We've made the changes we are driving to and I think we have optimism as we turned the corner into 2023 on on all of those aspects of the business.
Okay. Thanks, Gary.
Sure.
Our next question comes from Brent Thill with Jefferies. Please go ahead.
Good morning, Gary you bought back 3 million shares in the quarter. You said you are expecting the increase in share repurchases can you just say what that implies relative to are you going to take a breather and M&A and secondarily can you just follow up on Japan It feels like.
As your second largest market youre not seeing that open to the magnitude you'd like what.
If you have the Crystal ball, what do you think needs to happen and ultimately kind of when do you feel like that gets back to more normal.
Okay. So let me I'll take both of them, let me take the second one first because I have a tendency to forget them. If I don't do it that way in Japan, I think the thing Thats important to understand is that they really put a lot of restrictions into place in that market five states of emergency over a period of a year or so.
And you have a conservative culture, I think still kind of a reluctant dating culture still getting used to dating apps and I think that has frozen.
Their behavior to a large extent.
And so while we did see some initial improvement once the restrictions were lifted that was probably people who had pent up demand where kind of eager and wanted to get out there and we're waiting for their strength to lift. So you saw a little bit of a bump a little bit of improvement out of the gate, but then there was no follow on from that.
And that is kind of the case to today and unfortunately that market. You also have COVID-19 rising again, which is only made people again more conservative in their behavior. So I think it's going to take a few quarters more than normalized in Japan, I think all the macro trends that have always made that a good market for us.
Low marriage rate hard to find your partner in that market.
I think are all still there, but some of this needs to normalize and I think as <unk> said in his remarks, we haven't quite seen a full return to normal behavior and I don't think we have a full understanding in every market of kind of the impact of Covid on People's behavior. So Japan I think is a really important case study and given how severely.
They took their response to Covid, it's going to take some time for it to bounce back and I think that we're expecting.
In our outlook and I think that's the right way to look at it based on everything we see now obviously, we're hoping it bounce back faster we will do everything we can to try to make that happen, but I think that that is what we're dealing with in the Japan market.
In terms of kind of buybacks and M&A.
I want to point out in data and in particular, we think we've done a lot of good acquisitions. If you look at hinge in particular, it's a homerun acquisition, just a phenomenal acquisition and there's much more we can do with that business and if you go prior to hand, you look at the plenty of fish acquisition, you look at the pairs acquisition in Japan. Despite.
The recent trends in that market those have been very very strong acquisitions for us as well.
We're very optimistic about the league, which has the most recent acquisition we've made in the dating space. So if we're able to find more compelling targets in the dating space, we absolutely we'd like to continue to act on them and we won't hesitate to do so we have the financial flexibility to do them. So there's no issues there.
By contrast, when you look at the acquisition that we made outside of dating it Hasnt gone. The way we would have hoped we are working on it. We think the team is still fantastic. There's more we can do with that business, but there's no denying that that acquisition of Hyperconnected has not worked out the way we had hoped at least in the first year.
So the bar has been raised around non data acquisitions, that's not to say that we wouldn't do them, but we need to be.
More and more convinced in both the growth that can be derived from those kinds of acquisitions as well as the profitability levels and we need to see a clear path to profitability if not immediate profitability. So I think the standards will be higher for an acquisition outside of dating so that's kind of how we think about.
Our overall acquisition strategy and expanding that PK and I have spent time chatting about it and we will continue to refine our thinking around kind of M&A because it is a core element of our toolbox and something that we have been good at.
All that being said right now the way we look at it we generate a lot of excess capital probably $1 billion or so a year, maybe a little bit more maybe a little bit less but that's a good number to think about and so we need to figure out what to do with that capital and use it in the most effective way and right now given the market dislocation and where our stock.
Price is betting on ourselves is our best bet. It's our highest returning bet that we can make and we're going to continue to do that aggressively with our excess capital and we will always be dynamic in this this is a fluid set of decisions M&A buyback shares whatever makes sense, we constantly discuss this internally with our board.
And we want to maintain that flexibility, but in the environment that we're operating in at the moment, we think that betting on ourselves is absolutely. The right thing to do we did it in the second quarter and we expect to continue to do that in the third quarter as well.
So hopefully that answers your two questions I know, we're getting a little bit close to time, So why don't I turn it over to BK for a couple of closing remarks.
Thanks, Gary.
Before we close the call I want to thank the employees the board and our investors for trusting me with this opportunity theres, so much potential and runway ahead.
We will work tirelessly to push the business forward.
And as a vote of confidence.
Plan on buying $1 million worth of match group shares in the open market Tomorrow.
I'm committed to building long term shareholder value and I'm really looking forward to speaking with you again in November . Thank you all.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.