Headwinds taper an otherwise strong year for MatchGroup
(MTCH:Q4 2021 Earnings)
MatchGroup’s fourth quarter turned out to be somewhat disappointing on the whole. Despite the optimism for emerging stars like Hinge, which continues to impress in the wake of a pending international expansion, the quarter was shrowded with talk of headwinds. From mounting app store fees to FX and Omnicron, management’s tone was more sombre than quarters past, a theme which is represented in a conservatively revised outlook for 2022. Revenue growth that was “approaching 20%” for 2022 has been revised to “between 15% and 20%” after Shar Dubey suggests FX & Omnicron will impact prior guidance by ~3% greater than what they first thought. There is a hope that summer will re-energise momentum into the second half of the year, prompting the potential for better than expected results, but management sandbag this optimism with the acknowledgement that the near-term future is providing too difficult to predict. After being “head faked” numerous times these past 24 months, management is managing expectations once again in the wake of greater uncertainty.
On a slightly more positive note, there were a few succulent nuggets in the report to chow down on with Tinder and Hinge continuing to impress. In today’s memo, I will be focussing on headwinds and the MTCH portfolio.
Revenue for 2021 was $2.98B (+24%), coming in slightly below what both the street and MatchGroup themselves were anticipating. Management offered up a number of contributing factors for Q4 here, with the most prescient being weaker mobility on account of Omnicron cases (disproportionately affecting certain regions over others). Marketing spend was tapered during the quarter (down $12M YoY Ex-Hyperconnect) as a result, given that the ROI opportunities were simply not there.
Marketing-reliant brands across the portfolio felt the brunt of this taper with total non-Tinder payers declining 4% from Q3. Tinder still managed to squeeze 200K more payers sequentially, but expect some “meaningful” impact to Tinder payers over the next two quarters as MTCH begin to terminate age-based discount programs in the remaining markets that still offer them. This is expected to be handled in a “revenue neutral” way. Total payers (+15%) look great YoY. Whilst there was a slight decline in established brand Payers across US/EU, the QoQ increase in RPP appears to have propped up revenue here. Greater than expected FX pressures were also cited as a secondary headwind. An additional $9M in FX headwinds were experienced in Q4, outside of what management suspected when providing their outlook in November. Recalling that revenue guidance for Q4 was $815M (mid-point), we can see that Match fell short of expectations here.
EBIT for the full year ($852M) was up 14% with a 270bps decline in the margin (28.5%). It seems (to me) that the acquisition of Hyperconnect is the culprit here, accounting for just under 50% of the increase in YoY total operating expenses in Q3/Q4. Without the 10-K (not yet released), I haven’t been able to fully break down the numbers on that. Guidance for 2022 also leads me to believe that Hyperconnect is suppressing margin, where overall company margins are expected to be flat. Excluding Hyperconnect, an additional 50bps to 100bps of expansion can be expected in the core business. Lower legal expenses and the breathing room from Google’s app store subscription fees (30% to 15%) are cited as tailwinds here. Whilst Google’s loosening of subscription fees is great, it should be considered that Apple’s 30% cut still applies and that the majority of users on apps like Hinge, utilise iOS heavily. App store fees are MTCH’s largest annual expense, projected to be ~$650M in 2022.
Then there is Google’s previously announced requirement to use their in-app payment system which is set to go into effect in April. MTCH believe this would cost the company an additional $50M throughout the year (an item not included in guidance). Google has postponed this effort in the past as well as given exceptions to certain market participants. Considering the regulatory scrutiny they are under at present, Swindler doesn’t think they will go through with it. Something to keep an eye on, however.
Earnings ($276M) were down 53% in 2021 after the company decided to settle the lingering ‘Rad, et al. v IAC/InterActiveCorp, et al.’ case (more on that here) in December to the tune of $441M. Adjusting for that other expense line item, earnings would have been up ~18% or so. Given that this is truly a non-recurring expense, and that case is now behind the company, I don’t see cause for concern. MatchGroup’s $815M cash balance is healthy and has the potential to crank out $1B in free cash flow next year with no debt maturing until 2027.
The MatchGroup Portfolio
Ignoring the (seemingly) temporal headwinds for just a moment, MatchGroup’s portfolio is looking a great deal stronger as we roll into 2022. Tinder direct revenue, which accounts for 55% of consolidated revenue, grew 22% in 2021, supported by both an increase in payers (10.6M/+18%) and RPP which grew 4% YoY. The world’s leading dating app, and MatchGroup’s flagship service, continues to dominate the Americas and Europe in both downloads and consumer spend, and despite not being the most popular app in several Asian countries, continues to excel in consumer spend. Tinder, on a worldwide level, is the number one most downloaded app, with the greatest total consumer spend.
We can debate saturation and rebuke with the argument that network effects are a critical component to dating apps here. Whilst it’s true that the unwinding of a network effect is catastrophic, I don’t see any immediate evidence to suggest that will take place at Tinder for now. On the contrary, at the risk of becoming stagnant, the team has been expanding the value proposition of Tinder of late. First with the launch of Tinder Platinum (which now makes up ~13% of the subscriber base) in an attempt to drive higher RPP, and then second with the unveiling of Tinder Explore, which has attracted a 70% adoption rate amongst users aged 18-24 (64% for those aged 25+) and offers a more immersive experience aside from the somewhat stale “swipe” homepage.
Tinder coin, the-app virtual currency which seeks to incentivise engagement in pursuit of unlocking premium features, is now being tested in 12 countries with plans to be rolled out globally by the third quarter. So, there remains a number of levers to pull here. But despite Tinder’s dominance, there are things to be excited about elsewhere in the portfolio. If you imagine Tinder as the ‘mass market’ offering, where an account takes a few clicks to create, then Hinge is the elevated version of that, where an account may take up to 15-minutes to create, demanding more input and consideration for its users. Tinder is for those seeking a quick entry into the dating market, Hinge is for those who want to find meaningful connections. The app’s revenues ($197M), which grew 119% this year, now account for 38% of the “emerging” brands bucket after expanding RPP by ~60% (~$24) during 2021 and reaching just shy of 850,000 total payers.
Whatsmore, App Annie shows that Hinge is on its way to becoming the 2nd most downloaded app across several key English-speaking markets and was the 4th largest driver of consumer spend in 2021. Over the last year Hinge was the 3rd most downloaded app (and 3rd largest consumer spend) across the US, UK, Canada, and Australia (4th in downloads). Citing that Hinge is not even close to its RPP ceiling, management expects Hinge’s revenue to exceed $300M in 2022.
The kicker is that Hinge is still only available in a handful of English-speaking countries. Whilst the international expansion for Hinge is set to begin this year (EU launch in Q2), it appears the majority of that $300M guide is going to come from existing RPP and Payer growth, as Swindler (CFO) remarked that “we don't have a lot included for Hinge International because those are really more '23 items in our minds than 2022” when discussing 2022 guidance. Prompting me to think that we are not going to see the full tailwinds from the expansion until 2023, ergo another lever to pull.
If we take a look at the revenue composition in 2020 vs 2021, Hinge’s contribution increased from 3.3% (2020) to 6.6% (2021). By next year, that could expand to between 8% to 10%. Meanwhile, Tinder and indirect is relatively flat, and Hyperconnect now equates to 5.5% of 2021 revenues. Established brands (+5% YoY) slipped back 500bps or so as they are being outpaced, and emerging brands (Ex-Hinge and Hyperconnect) declined, with revenues falling 12%.
Established brand growth is mediocre, and so too are the apps themselves. But they serve a certain category of individuals and offer me more comfort than if I were to become a shareholder in the concentrated ‘portfolio’ of a business like Bumble. It seems that management is experimenting with these brands. Both Match and Meetic are the first of the portfolio to begin integration with the Hyperconnect technology (audio/video rooms & 1-1 video chat). At Match, this resulted in the replacement of a third-party technology provider in favour of Hyperconnect. Bringing that in-house allows for cost savings but also gives MatchGroup sharper responsiveness in the face of changes they may wish to make. The results thus far leave management “extremely encouraged”, giving them “more confidence to roll that out on more of our apps”, with Pairs and Plenty of Fish tipped to be next in line.
I believe the intent here is to eventually transfer those learnings into the Tinder platform, where the output could be considerably more profound.
Excluding Hinge and Hyperconnect, and maybe Pairs (a duopoly in Japan alongside Tinder), the remainder of the apps are either mass market and low quality or reasonable quality but so niche that they only serve a fractional portion of their respective populate. I find it preferential to think of this bucket as an “other bets” portfolio, not quite having achieved ‘product market fit’. However, as Hinge has shown, you only need one Hinge per handful of duds.
I find the Azar app to be an interesting prospect. Branded as a ‘friend matching’ app with undertones of potential romance, the app was the 4th most downloaded app globally in 2021 and landed 3rd in global spend behind Tinder and Bumble. Particularly popular in Asia, the app derives its revenues primarily from a' la carte purchases, a theme which the demographic seems to favour over subscriptions. Consider that global dating app spend has grown 95% over the last 4 years, generating $4.25B in 2021. Whilst dating app adoption has reached the 40% range across North America, Europe, and Latin America, it still sits below 20% in most of Asia, showing that there is still considerable runway for MatchGroup’s consistent compounding of top-line and customer acquisition. This region so happens to be MTCH’s fastest-growing demographic.
Azar, acquired as part of the Hyperconnect deal, did face issues last quarter (discussed in “MatchGroup Goes Meta” in lieu of worsening mobility in the APAC region and stalled product roll-outs. These issues are now “stabilising” with Azar Lounge (live streaming) and Hakuna City (another asset acquired in the deal) being launched in Q4. On the whole, Hyperconnect is expected to break even in 2022, but no mention of revenue guidance there. I suspect management is cautious to do so after originally having guided for $300M in revenues at the time of the announcement, only to revise down in the two quarters that followed.
MTCH is guiding for 18%/20% YoY growth in revenue for Q1, equating to between $790M to $800M. For 2022, they cite somewhere between 15% to 20%, with the frequent reminder that they are finding it difficult to see through this Omnicron period. It would appear that management is basing their 2022 guidance on the dating market returning to pre-omnicron levels. The preference is obviously that dating returns to pre covid levels in the future. In essence, this is the guide if things continue to be hazy, but if things turn around in the summer, then an upwards revision may be in order.
Whilst I don’t think MTCH is “cheap”, particularly not when you compare it to opportunities in big tech who are growing at greater clips at lower multiples, I don’t think those cross-comparisons are ultimately useful. MTCH is a unique asset in that it controls the vast majority of the dating market and, to this day, has fought off competition from far larger, better-capitalised, giants like Facebook. As much as the terminal value may be a concern, something has to be said for the durability of their revenue. This is one of the few tech companies that an investor can acquire which faces relatively little outside disruption in its core market. Considering my exposure to advertising and payments, this is a welcome relief. There is the potential for a new competitive dynamic from the shift from mobile to _____ whatever replaces mobile, but this seems to be many years out.
For now, if someone is seeking to find romance, there is a high likelihood they are turning to one of MTCH’s portfolio of apps to do so. So long as that continues to be the case, I am content holding MatchGroup.
Author of Investment Talk