MatchGroup Q4 & FY20 Earnings Review

(Subscribers Only)

Good morning,

Today we shall be diving into the Q4 FY20 and FY20 earnings for MatchGroup. This marks the first routine earnings review for MatchGroup, as the position is relatively new within my own portfolio. You can find the original coverage, where I shared some insights into the long thesis below.

MatchGroup reported earnings on Tuesday 2nd February.

Recent Coverage:

MatchGroup: The Thesis


1.0 MatchGroup: Q4 Key Highlights

The following information will be as of Q4 FY20, unless stated otherwise. Any percentage comparisons will be on a YoY basis, unless otherwise stated.

• Revenues: $651.4 Million +19%

• Direct Revenue: $634.8 Million +19%

• In-Direct Revenue: $16.5 Million +35%

• Operating Income: $212.5 Million +17%

• Net Income: $140.5 Million +49%

• Total Average Subscribers: 10.9 Million +12%

• Total ARPU: $0.62 +5%

MatchGroup finished off the year with an amicable performance, given the circumstances. Revenues for the year stood at $2.4 billion, up 17%, with Tinder carrying $1.4 billion of that revenue, up 18% on the year.

The performance of MatchGroup during the last quarter of FY20 demonstrates their swiftness with respect to the ever-changing landscape of the global economy under the pressures of the pandemic. The latter half of Q4 faced some strong headwinds as the corona virus cases experienced a strong resurgence across many of MatchGroup’s key markets, the UK in particular. Speaking from first-hand experience, the UK has been completely locked-down since the latter half of Q4, with restaurants, gyms, cafes, and most other public services remaining closed until later notice. These conditions are expected to be lifted as we approach the end of Q1. These conditions will have notable impacts on MatchGroup’s first-time subscribers numbers.

In other markets, such as India, where MatchGroup also experienced significant friction in the quarter, there have been some positive green-shots of recovery in first-time subscriber trends as India’s case-rate fell by 80%. With this decline in cases, subscriber trends began to strengthen, providing some optimism for other markets as cases fall and restrictive business measures loosen.

Management stated that despite there still being some drag across their seven largest markets for their brands, each one the brands within the portfolio experienced revenue growth during the quarter.

I suggested that the leadership team have been swift in the face of these dynamic market changes. This was demonstrated in their decision to shift focus during Q4 into increased marketing spend across markets experiencing less of an impact to the resurgence in cases found in the world. Marketing expenses as a percentage of revenue stood at 21% for the quarter, up from 18% one year prior. The introduction of ‘video dates’ within PlentyOfFish also demonstrates the need for flexibility in tailoring solutions to combat the impediments caused by lock-down measures.

Sometimes in life, we are forced to make the best of the environment we are handed. During these trying times, there can often be opportunities to identify unique insights that would possibly have been overlooked. Sharmistha stated that consumer behaviour is changing. With national lock-downs reducing the mobility of users, thus their ability to connect online, and then eventually meet-up offline, the way in which they use MatchGroup’s products will obviously adapt to the environment.

“So as I look ahead, one thing I do see that 2020 has done, in particular, is a real step change in user behaviour, not the least of which is how much of our lives and activity has moved online. And while I do think, as the world gets back to normal, some of this online, offline behaviour will re-balance, but parts of this online shift is definitely here to stay. And this, of course, has implications to our products, both in terms of how we evolve the experiences on our apps as well as looking at new use cases we offer to help people connect, and we think this is going to be a big area for us this year.” - Sharmistha Dubey

One thing is clear, in that MatchGroup will be learning about their users during this time, as well as their own product offerings. Whilst there can be no argument to suggest that corona was a positive for the company, there is sufficient strength in the argument that MatchGroup will receive substantial silver-lining dividends over this period through learning.

Usage and engagement over the past year has clearly continued to improve, despite the environment. Ignoring the market valuation of the company, I would assume that MatchGroup stand to gain a lot from the re-opening of the economy. As public festivities resume, humans will want to socialise and date offline once more, and the trend data has already proven that the most popular method of finding potential partners, is by first connecting with them online.


1.1 The Asian Market

Moving on now, and the importance of marketing and pushing for strong brand adoption across emerging markets cannot be understated. Emerging markets such as Japan and greater Asia represented a significant opportunity for MatchGroup. The issue they face in these markets is the stigma attached to online dating amongst the older generation of inhabitants.

Whilst gently corroding, it still remains relatively high with respect to the western perception of online dating. Since their acquisition of Pairs in 2015, Match have opened new marketing channels that further this goal of reducing the stigma. Management expressed that they are becoming increasingly optimistic about the prospect of broad nation-wide TV branding campaigns across Japan to further normalise online dating in this market. Japan in particular is an area where MatchGroup is excelling.

Revenues for Pairs has grown over 600% over the last 5 years, and when we consider that Japan is MatchGroup’s second largest market, this is an incredible feat.

Management have stated, in the past, that the revenue composition target for the Asian region was ~25%. During the full year, 2020, this contribution was in the ~18% range. In prior earnings calls the ballpark date for reaching 25% was suggested to be 2023, however during the earnings call for this quarter Gary Swindler, COO, stated that it is highly likely that this target has been delayed by one year after the impact witnessed from corona.

This delay is understandable. In markets such as India, where MatchGroup have Tinder and OKCupid, who witnessed peak corona cases in late September, it made little sense to push hard in this market during the disruption. With cases now looking a great deal more stable in India (image below), management expressed that they will be pushing hard in this market in the first quarter of 2021, with emphasis on their efforts with OKCupid, which they feel has gained great traction in that market.

In other areas of Asia, such as South Korea, MatchGroup are yet to roll-out an offering but feel there is potential there. They stated that they are toying with a multi-product strategy in South Korea which would include an assortment of Tinder, OKCupid, Pairs, and the Pairs Engage product which is focused on matrimony. In fact, this is a model they are potentially adopting across Asia as a whole.

Let us not forget MatchGroup’s other cog in the Asian market, in Hawaya the platform aimed at single Muslims seeking life long partners. This culturally tailored approach solves some significant issues regarding the Muslim dating scene, and provides a safe environment where single Muslims can connect in an environment that respects traditions and culture. This could be a significant opportunity in Asian markets with large Muslim populations. With over 60% of the world’s Muslims dwelling in Asia, countries such as Indonesia, Pakistan, and India would be the obvious candidates for adoption. Management suggest that Hawaya is somewhat more of a long-term play, but is something they are actively focused on and working on.

Before we move on to discuss security & safety, its worth reminding ourselves that MatchGroup have additional plans to roll-out an in-app currency across their Asian marketplaces. An in-app currency supposedly aligns with the way that Asian consumption behaviour presents itself across other platforms in the region. This was due to roll-out in 2020, but management felt it best to postpone it. However, they have acknowledged that 2021 is the year where they will implement this offering. First, across a few Asian markets to gauge sentiment and engagement, allowing them to assess if it will be something they roll-out further.


1.2 Focus on Security

The narrative coming from MatchGroup’s management is one that, once again, emphasises the need to ensure this industry is governed by a focus on the security and safety of its users.

“In the real world, we've developed laws and enforcement tools and acceptable codes of behaviour and rules over hundreds of years. The digital world by contrast is barely a couple of decades old, and its popularity really has only increased in the last decade. So it is going to take leadership from tech companies, regulators, law enforcement and the community at large to work through the acceptable rules and norms of this digital world. You're going to see us have increased collaboration with law enforcement and regulators around the world in order to be -- continue to be a leading voice on trust and safety in the digital world.” -Sharmistha Dubey

Developing an environment where users feel safe is obviously a critical aspect of the online dating space. Without this security and assurance, the adoption of online dating would never have replaced the traditional forms of romantic interaction. The classic chart that everyone shares regarding this shift in trend can be found below.

The company have already been making some in-roads in this space with some of the features rolled-out across their portfolio such as selfie-verification tools for users, ID verification and personal alarms.

In terms of regulatory matters, this includes working with both federal and state bodies across various jurisdictions. Within the US, MatchGroup recently partnered with EARN It and Protecting Our Kids Acts, providing safeguards for users, as well as protecting innovation.

The company also have open discussion with experts in this space, with the intent on seeking to understand where they can leverage technologies to create safer environments within their products. Examples include a recent partnership with RAINN (Rape, Abuse, and Incest National Network).

Additionally, leadership have expressed their intent to funnel investment into their efforts to strengthen security, trust, and safety. There are some obvious motivations for these investments, as Sharmistha details in the above quote.

However, there are also factors at play here relating to the stigma of online dating across various regions in the world such as international markets. Online dating has largely begun to become ingrained into the fabric of society for younger adults in larger western markets such as the US, UK, and EU. However, in areas of Asia there still exists a stigma surrounding the legitimacy and safety of online dating applications. These emerging markets are where these safety tools become especially important, to drive adoption. Ensuring that MatchGroup’s offerings are perceived as a safe and trusted environment can create some spill-over effects regarding legitimacy and societal adoption, or normalisation, in these regions.

In Japan, MatchGroup have been rolling-out similar safety features such as verification, and enhanced community and customer care processes. In addition to this, they have been working alongside regulators and authorities, as well as activities relating to outreach and education through the use of marketing and public relations in Japan. As we know, MatchGroup have a stronghold on Japan with the two leading dating apps being Pairs and Tinder.

Gary Swindler, COO, put it eloquently by stating that MatchGroup possess a “great one-two punch with Tinder and Pairs” in Japan.

“When you look at it, I think Asia being such a big market, you've got to take it in pieces. And so as we did say, Japan is going extremely well for us. We've got a great team there on the ground, a great one-two punch with Tinder and Pairs. And we think there's much more opportunity.”- Gary Swidler

The work that the company are putting in to understand the Japanese market, as well as strengthening the brand image in this region has allowed them to open up new marketing channels, as well as fashion additional offerings tailored to domestic tastes. For instance, the company are now considering advertising across several digital channels, including television advertising in the coming year. In terms of additional offerings, this led to the release of the matrimony product that exists in Japan, with management stating that it is a product that makes sense for that market.

In other high-stigma markets, such as India, MatchGroup are also working on altering the perception of online dating for the long-term to drive a narrative shift of sorts. This involves the inclusion of moderation and safety features, as well as accelerating engagement in these markets through further outreach with other organisations, partnerships with non-profits, as well as working with regulators and law enforcement.

The idea of security and safety across MatchGroup’s portfolio is a goal that CEO, Sharmistha Dubey, is clearly committed to on a personal level.

“I think it's important. I'm personally committed to this, and there is a lot of work and leadership we can provide in this area more generally for digital platforms.” -Sharmistha Dubey

It’s an important challenge that MatchGroup must tackle. With the marketplace being relatively monopolised by a small number of leading firms, and MatchGroup being far out in-front of the pack, they must lead by example and set the tone for what this marketplace eventually becomes.

Online dating is not new. However, we are about to witness a generation of new adults enter adulthood who are already predisposed to the idea that online dating is normalised in social culture. At least, for most western economies. In high-stigma marketplaces, there exists some potential for significant tailwinds as online dating is normalised in these markets too.

Therefore, it is not a stretch to suggest that this marketplace is going to experience higher ARPU, as well as a significant influx of demand and engagement over the coming decade. Note here that I am not suggesting MatchGroup will be the only benefactors. The basics of microeconomics would suggest that as profits increase, and value is apparent, new firms will enter the market in an attempt to capture some of this value. That is almost a given.

If MatchGroup can lead the way, as they continue to do, growing brand-trust, as well as a killer portfolio of applications, across various global markets, then they will be in good stead to remain placed atop of the market over the same time.


1.3 The Potential in Non-Dating Applications

Before we move onto performance, and a glance at the fundamental developments in MatchGroup’s fourth quarter, I wanted to take a moment to discuss the potential for non-dating applications in the company’s portfolio of offerings, as well as a quirky story shared in the earnings call.

You may be aware that MatchGroup currently own Ablo, which offers users the ability to create friendships from other users around the world.

Ablo is interesting as it offers a service that is somewhat detached from MatchGroup’s core offerings in that it currently contains no direct dating functionality within the platform. The core focus of Ablo is essentially a social platform that centres around video, text, social feeds, and even live video. The discover the world feature allows users to search for connections across the globe, with a live translation feature for in-app texting.

Users can connect around themes like food, culture, interests, and hobbies, allowing for deeper connections and potential breaks from the loneliness that some face in the modern world, particularly in the current lock-down environment. Ablo can be classified as one of the emerging brands in MatchGroup’s portfolio.

In terms of monetisation efforts, Ablo will likely lend itself to the in-app currency efforts (expected to roll-out in 2021) as well as consumables such as gift sharing. Gift sharing would likely behave in a similar way to Karma and gifting within the Reddit platform, where users gift each other items using virtual currency, paid for with real money. We can expect to see some progression on this front fairly soon.

Whilst it is true that the communication within Ablo might lead to relationships forming, both romantic and platonic, it is interesting to see that MatchGroup are experimenting outside of online dating, with applications that the company can still leverage their strengths in.

Sharmistha, CEO, had the following to say when asked about the monetisation efforts of Ablo:

“So we're -- it's still early days, and we're going to try a bunch of different things. We do obviously prefer direct-to-consumer revenue as opposed to ad-based models. And so that's going to be, of course, part of the work that we're going to do over the coming year.” - Sharmistha Dubey

Another example of the ability to monetise non-dating aspects of the company’s portfolio comes from an interesting snippet shared in the earnings call pertaining to PlentyOfFish.

Management shared the following interesting anecdote:

“There was very recently one of the users on POF Live with a homeless man who started building a community, and his entire -- he's trying to turn his life around with the power of the message of positivity, and he's built a real community around it. He talks to people about positive thoughts. And he's made 100,000 on POF Live, and it's turned his life around. One of the other sort of top streamers there is an ex-vet who was suffering from deep PTSD, who's managed to turn that around and engage and build a network and a community on POF Live, and he attributes it to having saved his life. So this is the type of sort of human connection that we're trying to enable, which is in the context of our mission, which is of helping people make meaningful connections.” - Sharmistha Dubey

So, here we have a few users adopting the platforms, but with more of an emphasis on social discovery, making use of the live sharing features of POF, as opposed to dating. Management feel that these kinds of interactions will become more frequent across their range of offerings, and so are looking for ways to further drive that kind of engagement. They explicitly stated that they are looking into this space for expansion.


2.0 Performance

Let us now switch the focus to the performance of MatchGroup for the fourth quarter of 2020, where the company boasted a respectable quarter and full year of operating results, despite the obvious headwinds that were placed in their path.

The number of average subscribers across the company grew 12%, on an annual basis, from 9.8 million in Q4 FY19 to 10.9 million in the current quarter. Across the Northern America segment, average subscribers grew 9% to reach 5 million, whilst the International segment grew 14% to reach 5.89 million. Growth in Average Subscribers was primarily driven by Tinder, Hinge, Meetic, Pairs, BLK, and Chispa.

Tinder average subscribers grew 800,000 on an annual basis, up 14%, whilst non-tinder brands grew the average subscriber base by 300,000, growing at 8% on the year. Important to note here, that Q4 typically represents MatchGroup’s weakest quarter for subscriber growth.

Average revenue per user (ARPU) increased 5% on an annual basis, standing at $0.62 as of December 31 2020, with International APRU growing 4%, and North American APRU growing 7%. The APRU for International and North American segments currently stand at $0.58 and $0.66 respectively.

Management noted that Tinder ARPU was down slightly on the year, partly as a result of the softness in their a la carte offerings. The roll-out of Tinder Platinum was expected to be rolled-out to all users in FY2020, however management made the decision to limit the roll-out only to existing users for the time being.

Contrary to the lagging performance of Tinder, non-tinder brands increased APRU by 16% on the year, marking impressive growth. Management state that impressive non-tinder ARPU was a benefactor of pricing optimisation at Hinge and OKCupid, as well as the launch of Hinge’s a la carte features, and the roll-out of PlentyOfFish live streaming, which significantly impacted non-tinder APRU in Q4.

Revenues for the quarter grew 19% at $651.4 million, with FY20 revenues standing at $2.4 billion, up 16.5% from FY19.

Direct revenues, those derived from subscriptions and a la carte options, grew 19% on the year, standing at $634.89 million for Q4, or ~97% of total revenues. Direct revenues across North America and International markets were fairly evenly split at $315.8 million and $319 million respectively.

Tinder direct revenues were up 13% on the year, with non-tinder direct revenues up 28% on the year, showing once again that they had a stellar year. Management stated that “all major non-Tinder brands contributed year-over-year direct revenue growth in Q4. This was the third consecutive quarter of non-Tinder brands showing growth in aggregate. Pairs, as well as our newer brands, Hinge, Chispa, BLK and PlentyOfFish live streaming all grew rapidly in the quarter”.

Indirect revenues, stemming mostly from advertising, amassed $16.5 million for Q4, up 35% from the $12.2 million last year. So, clearly advertising revenues are making some nice ground. With respect to the IDFA roll-out expected in the coming quarters, from Apple’s IOS update, MatchGroup are less severely impacted from these updates than one might think.

Firstly, advertising revenues are a small portion of revenues at ~3%, and secondly the impact is likely going to be felt in MatchGroup’s advertising spend as opposed to their incomes. The company do make use of targeted ads within their marketing operations, and so with IDFA these targeted ads might yield less bang for their buck in future. Put simply, the efficiency of MatchGroup’s advertising might decline as users of IOS decide to opt-out of sharing data for targeted ads. Whilst this presents issues, it is a positive that MatchGroup’s revenues are not heavily weighted towards the effectiveness of ads. However, we must acknowledge that the effectiveness of their marketing efforts will inevitably have direct effects on brand awareness and net new subscriber growth. So, this is something we can monitor over time.

Operating income grew 17% for the quarter at $212.5 million, and 17% for the year at $745.7 million.

We can see a notable increase in marketing expenses this quarter, representing 21% of revenue versus 18% last year after growing 34% on the year.

Marketing spend was amplified in the latter portion of Q4 as the company pivoted towards brand exposure in less-effected regions after the resurgence of corona in the quarter. This included embarking on new channels in Japan, as well as the well-received Match Made in Hell advertising campaign, where Satan finds love in a female who represents the year 2020.

With respect to other operational expenses, everything appears to be relatively stable on a year-over year basis, with operational expenses accounting for 67% of revenues, identical to the previous year.

Net incomes from continuing operations stand at $140 million for the quarter, up 17% on the year, with FY20 net earnings standing at $533.9 million, up 8% on the year.

When we zoom out and look at the net earnings, on an annual basis, including the discontinued operations (related to IAC), we can see a $366 million loss there, which pulls down full year net earnings to $128 million for the year. Obviously, this is a non-recurring item and should not be considered as a part of MatchGroup’s current operations. We can witness similar impacts in the Basic and Diluted EPS figures after accounting for discontinued operations as well.

In terms of the continued operations, MatchGroup have reported a fairly strong set of P/L accounts for both the quarter and the year. We would anticipate a strong FY21 based on the apparent tailwinds that should be underneath MatchGroup during the latter half of the year. Management, however, are not anticipating tailwinds, and have offering some conservative thoughts on the matter.

Before we move on, I wanted to highlight some comments from MatchGroup’s COO, Gary Swindler, pertaining to their outlook for FY21. We will cover the full extent of forward guidance in a later segment, but the company are issuing guidance for $2.75 billion to $2.85 billion in revenues for the coming year. This would reflect an increase of ~19% on FY20’s sales figure of $2.39 billion.

During the earnings call, Gary was asked to elaborate on their outlook with respect to the extent of ‘baked-in goodness’ concerning their numbers. In short, the analyst was asking where management see the broader landscape heading over the year, and to what extent have MatchGroup have embedded a ‘return to normal’ second-half of the year into their guidance.

To this question, Gary responded that they are taking a conservative approach with their outlook, and not assuming any resurgence of demand, or pent-up demand for dating activity in the latter half of the year. You can find the full response below.

“So right now, when you look at kind of the year, for the first quarter, we gave specific expectations, which obviously assumes continued COVID headwinds. For the second quarter, we're still assuming some COVID headwinds, and it will be an easier comp in Q2 over last year because, obviously, there was severe impact from COVID in the second quarter. So that's something we're factoring into our growth thoughts for Q2.

When we get to the back half of the year, which is obviously still pretty far out, we have assumed some reduction in the current COVID headwinds, but not a full return to normalcy for the back half of the year. And we certainly haven't assumed any major resurgence from pent-up demand for dating activity in the second half of the year. It's certainly possible that, that could happen. I know there are people who believe that that's what's going to happen. It's just too hard to predict. And so in our normal way of providing an outlook, we haven't assumed an abnormal level of dating activity, a major burst from pent-up demand in the back half of the year.” - Gary Swindler

There are two big reasons why I like this from MatchGroup.

1) This conservatism is the best way to under-promise and over-deliver

- Consider that MatchGroup generated a 19% growth in sales in FY20, during a year where the corona disruption plagued the ability of users to fully utilise the applications that MatchGroup offer, as well as other obvious headwinds. To suggest that MatchGroup will only match that effort in FY21 suggests management are being overly conservative. The fact they are not assuming any pent-up demand for their services if economies do open-up in Q3 and Q4, means that in the event there is pent-up demand, it is quite likely they can smash their $2.85 billion guidance for sales.

2) Management are maintaining a realistic outlook

The fact of the matter is that 2021 still remains up-in-arms. Nobody can be certain how it will pan out, and with the potential headwinds of further lock-downs, and IDFA coming their way in 2021, I like that management are staying humble. After all, a 19% revenue increase at the end of FY21 will still be a nice accomplishment.


2.1 Liquidity

With respect to liquidity, MatchGroup appear to be fairly solid. With total current liabilities standing at $500 million, their $739 million in cash, plus $137 million in receivables and $144 million in other assets covers their short-term obligations by a factor of 2 times. We can largely ignore to annual comparisons in some respects, as this was a period whereby MatchGroup were still connected with IAC.

On a sequential basis, the total amount of cash on the balance sheet has increased ~85% from the $398 million they held during Q3 FY21. The current ratio (CA/CL) has also improved over this period from 1.5 times to 2.04 times.

In terms of liquidity, the ability of the company to pay their current obligations, MatchGroup are looking fluid. However, you may notice a substantial portion of term debt on the balance sheet standing at ~$3.5 billion as of December 31 2020. A significant portion of this debt pertains to exchangeable notes (~$1.7 billion) from the separation from IAC. The $750 million credit facility that MatchGroup have available is currently not being utilised.

Due to the fact MatchGroup have not yet released their 10-K for the current period, I am standing without the term structure of their current term debt, but I have pulled up the term structure for the debt as of September 30 2020, which stood at $3.51 billion, so roughly the same.

Let’s break this down a little to understand further. We can see that MatchGroup own various maturities across their senior & exchangeable notes, spanning from 2022 to 2030, in addition to a term loan and a credit facility. Most of the outstanding debt relates to the IAC separation.

Pertaining to the separation between MatchGroup and IAC in Q2 2020, the former MatchGroup (under IAC) was merged with MG Holdings II, with the new entity (current MatchGroup) taking on the previous MatchGroup’s role as borrower under the credit agreement and assumes all obligations thereunder.

The 4.625% Senior Notes were issued by MG Holdings II on May 19, 2020. The proceeds from these notes were used to redeem the outstanding 6.375% Senior Notes, to pay expenses associated with the offering, and for general corporate purposes. At any time prior to June 1, 2023, these notes may be redeemed at a redemption price equal to the sum of the principal amount, plus accrued and unpaid interest and a make-whole premium set forth in the indenture governing the notes.

The 4.125% Senior Notes were issued by MG Holdings II on February 11, 2020. The proceeds from these notes were used to fund a portion of the $3.00 per common share of Former Match Group that was payable in connection with the Separation. At any time prior to May 1, 2025, these notes may be redeemed at a redemption price equal to the sum of the principal amount, plus accrued and unpaid interest and a make-whole premium set forth in the indenture governing the notes.

The 5.625% Senior Notes were issued by MG Holdings II on February 15, 2019. The proceeds from these notes were used to repay outstanding borrowings under the Credit Facility, to pay expenses associated with the offering, and for general corporate purposes. At any time prior to February 15, 2024, these notes may be redeemed at a redemption price equal to the sum of the principal amount, plus accrued and unpaid interest and a make-whole premium set forth in the indenture governing the notes.

The 5.00% Senior Notes were issued by MG Holdings II on December 4, 2017. At any time prior to December 15, 2022, these notes may be redeemed at a redemption price equal to the sum of the principal amount, plus accrued and unpaid interest and a make-whole premium set forth in the indenture governing the notes.

The 6.375% Senior Notes were redeemed on June 11, 2020 with proceeds from the 4.625% Senior Notes. Therfore there is no value in the cell for those notes.

In relation to the exchangeable notes, dated 2022, 2026, and 2030, these were all issued whilst the former MatchGroup were part of IAC, and have transferred over the new MatchGroup. A convertible note is a debt instrument that is convertible into shares of the issuer or another entity. They offer investors the downside protection of a debt instrument and the upside potential of an equity investment, but in return typically offer lower interest rates than straight debt instruments.

These notes will be exchangeable into common stock, cash, or a combination of the two, under the following circumstances:

1) During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days during the period of 30 consecutive trading days during the immediately preceding calendar quarter is greater than or equal to 130% of the exchange price on each applicable trading day.

2) During the five-business day period after any five-consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the exchange rate on each such trading day.

3) If the issuer calls the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date.

4) Upon the occurrence of specified corporate events as further described under the indentures governing the respective Exchangeable Notes.

So there is scope for some equity dilution here, should the notes be exchanged, which is something to consider. However, with favourable maturity horizons, and the company pumping out $745 million in free cash flow this year, as well as evident de-leveraging, I am satisfied that the company has the ability to meet their long -erm borrowings.

The latest Standard and Poor’s credit rating for MatchGroup is ‘BB’ for the issuer, which would be junk status.

“An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate capacity to meet its financial commitments on the obligation.” - Standard and Poor’s Global Ratings Definitions

It is worth considering that this report was filed back in May 2020, whereby the outcomes have likely been a great deal more positive that Standard and Poor’s would have anticipated. The primary reasons for the lower credit rating, centre around the tough market environment for dating apps, the dependence on revenue growth to full cash flow generation, which could then decelerate the pace of their de-leveraging efforts.

It is my opinion that we could see a revision of the credit rating in time, as MatchGroup continue to de-leverage.


2.2 Cash Flows

Moving on to cash flows, and MatchGroup generated $788.5 million in operational cash flows for the quarter, due to the $553.9 million in net income adjusted for non-cash items such as $102 million in stock-based compensation, $44.2 million in depreciation, $44 million in accretion on notes, as well as an improvement in working capital.

Removing the $42.3 million in capital expenditure from the operational cash flow leaves us with $745.17 million in free cash flow for the twelve month period, a 23% increase from the $608.9 million produced one year prior.

Outflows stemming from investing activities stood at $3.92 billion for the year, primarily at the expense of $3.87 billion in outflows relating to the net cash distribution pertaining to the separation of MatchGroup from IAC. It would be prudent to note here that this is a non-recurring item.

Cash inflows from financing for the year stood at $1.78 billion, largely as a result of a $1.42 billion inflow from stock offerings, $20 million in borrowings from a credit facility, $1 billion in proceeds from notes issuance, and partly offset by $420 million in credit and debt repayments, $132 million in share repurchases, and some additional outflows related to the separation of MatchGroup from IAC.

We can be rest assured that the cash flow statement should look cleaner during FY21 after the costs of cutting ties with IAC are no longer present.

What I can see here, and what I consider most important, is that MatchGroup are growing their free cash flow at an attractive rate, yielding ~31% on their revenue of $2.4 billion for the year. Looking past some of the murky IAC outflows, this looks healthy to me.

We mentioned in the liquidity segment that MatchGroup contain a decent chunk of debt, at ~$3.5 billion, with $1.7 billion of that tied up in exchangeable notes. As the trailing twelve month leverage ratio depicts, MatchGroup’s gross and net leverage has fallen to 4.3 times and 3.5 times respectively, compared to 4.8 times and 4.6 times in June 2020, at the time of their separation from IAC. Therefore, there has been some attempt to de-leverage.

We will get a cleaner picture of the cash flows as 2021 continues.


3.0 A Few Notes from the Call

Here i wanted to share a few interesting quotes from management during the conference call. During the question and answer session.

I have cherry picked some of the responses i found most interesting and useful for you.

1) Tinder Revenue Growth Drag Longevity & Tinder Platinum

Question:

“"I have 2, a couple on Tinder. I'd be curious to -- if you could dig a little bit more into the source of the revenue growth slowdown in the quarter and perhaps how sustainable the drag is likely to be in the first half of '21.

And then secondly, on your product road map, it'd be great to hear the latest on the Platinum rollout more broadly to nonsubscribers. And how should we think about the impact it will have throughout 2021?”

Sharmistha Dubey, CEO:

“So let me maybe first give a broader picture of how the second wave of COVID resurgence is playing out, and then I'll get into Tinder-specific impacts. So the second half of the -- of Q4 in particular and into the new year, as we saw, there's been a surge in COVID and lockdowns and reduced mobility in many markets. In fact, as I mentioned in my remarks, a normal peak season looks a little different this year. U.K., that we called out specifically, looks to be one of the worst impacted, a combination perhaps of both COVID and Brexit there, but there are also less severely impacted markets throughout Europe.

Same story here in the U.S. As we saw before, California and New York, more impacted than Florida, Arizona, Texas, for instance. Again, few markets in Asia and LatAm have been impacted. And sort of similar to what we saw earlier in the year, the impacts are on both new users as well as propensity to pay, particularly a la carte. And it, of course, varies by market. So with all of that said broadly, Tinder specifically, obviously, the geographic exposure is greater. And so if you think about even just markets like India and Brazil alone could create 100,000 swing in subs at Tinder. And then there is the impact to a la carte, which is when propensity to pay goes down a little bit, it -- that's the first one that gets impacted, and it hurts Tinder more because it does have a higher portion of its revenue as a la carte compared to the other brands.

So with that all said, that hopefully answers the question of what we saw in Q4. We do -- as I mentioned, the new year is seeing an impact from COVID, but we are optimistic that as the quarter goes, Tinder is going to see accelerated growth rates here on. The -- based on everything that we saw over summer and what we're seeing in markets like India, in particular, in more recent weeks as lockdowns ease and mobility increases, people do turn to our apps.

On Platinum, we've always said it's an ARPU play, and because it is a higher-priced product, given the current environment, we have chosen to not roll it out to all users. In fact, it's currently available for current and previous subscribers only, and we will evaluate when it makes sense to roll it out to all users. For the user set that we've rolled it out to, it has gone as we expected. The good news is it has meaningfully improved the efficacy of the product in terms of driving messages and matches, which was the intention of this package tier. So we do believe it is a good product, and we will be watching to see the right time to roll it out fully.”

2) The Sustainability of Non-Tinder Performance

Question:

“On the non-Tinder brand performance, as Gary called out, we saw further acceleration in non-Tinder brands in 4Q. Can you just discuss the kind of the key drivers of growth in the quarter? And then kind of thoughts on expected contribution of non-Tinder brands in 2021 and longer term would be super helpful.”

Sharmistha Dubey, CEO:

“We laid this out last quarter. Our non-Tinder performance is driven by 3 main vectors. First, the legacy brands, like Match, Meetic, OkCupid, North America, et cetera, they continue to accelerate through product and marketing work. Then there are the new brands, like Hinge, Chispa, BLK, which have seen tremendous user and monetization growth. Pairs has been a great contributor. It's opened new marketing channels, which pose -- which sort of puts it in a really good position for 2021. And then there are new revenue initiatives, like POF Live, which became meaningful contributors, and they -- basically, you had 0 revenue at the beginning of the year.

So we do believe that all of these growth drivers and non-Tinder brands are sustainable, and they will continue to make strong contributions in 2021. And even beyond 2021, these brands are positioned to contribute a meaningful amount of our growth as our current drivers get further supplemented by emerging brands, like Hawaya, Ablo and Upward, for instance. So all in all, we feel very good about a broad set of drivers for growth within our portfolio.”

3) Hinge & The Impacts of IDFA

Question:

“I guess as we look to Hinge specifically in '21, how are you thinking about balancing further ARPU growth versus an acceleration in subscriber growth or payer penetration rates? Sort of any key KPIs or milestones that you can offer about that business exiting 2020? And then just a follow-up on your comments on IDFA, obviously, a lot of unknowns, but just any sort of range of scenarios or outcomes that you're contemplating in terms of the rollout of IDFA would be great.”

Sharmistha Dubey, CEO:

“About Hinge, our first goal at Hinge was to establish a strong subscription product, and then we have since launched 2 solid a la carte products. The Rose and Standouts, which is the equivalent of Super Likes on Tinder, and that has already surpassed the take rates relative to Super Likes on Tinder, for instance. Roses, interestingly, are not just a revenue product, they're actually a fairly effective engagement product that they're getting 2.5x more likely to lead to a conversation off the platform.

So now ALC revenue at Hinge is already becoming a meaningful component of revenue. And it's important to note, at the beginning of 2020, it was basically 0. And so in 2021, there's a full road map to make, both the subscription product richer and then focus on making the overall product engagement features. The other thing, of course, for Hinge is user growth. And towards that end, in addition to the existing markets that we already play in, Hinge is testing a select few international markets, but with this broader view of a broader international rollout in 2022. All in all, we're very pleased at how Hinge has been executing on their plan, and all the confidence in the world that 2021 will be a great year for them.

On IDFA, so obviously, since we're not an ad-supported business, the impact to us is mostly on the marketing spend and the user acquisition efficiency. And so there are a lot of puts and takes, and it is a little bit unclear how this all shakes out. For instance, if the targeting becomes weaker, it will have an impact on marketing efficiency. At the same time, it's unclear to what extent rates may or may not come down.

In terms of how we measure and our spend -- and marketing spend attribution framework goes, we do have experience in evaluating brand spend like out-of-home and TV, et cetera. So net-net, I don't think we know quite how the market will sort itself out. I do believe it will eventually sort itself out. In the short term, what sort of dislocation happens is unclear, particularly in terms of what the impact will be to our marketing spend efficiency. So we're not really currently building it into our outlook yet.”

4) The Asian Market Penetration & In-App Currency

Question:

“I had few questions on Asia, and you touched on this a bit just now around trust and safety. But could you talk about some of your key initiatives and brands more broadly in the Asian region this year? And then secondly, you mentioned Japan is your second largest market today. Should we still think about Asia being 25% of revenue longer term in the region? Or based on your early progress, could it potentially end up being a much bigger part of the business?”

Gary Swindler:

“Look, in terms of kind of Asia and percentage of revenue, 25% does remain our kind of medium-term target. We didn't make as much progress on that in 2020 as we would have liked. Because of COVID, we're probably in that 17%, 18% range. But Asia is still very strategically important to us. We think there's real opportunity there. We've got a lot of different ways of attacking it product-wise. And we think we ultimately will get there and perhaps surpass it. But I think the intermediate term goal is to kind of get to 25%. We had said that would be in 2023. I think maybe we've gotten 1 year delayed from COVID. We'll see how things kind of play out.

When you look at it, I think Asia being such a big market, you've got to take it in pieces. And so as we did say, Japan is going extremely well for us. We've got a great team there on the ground, a great one-two punch with Tinder and Pairs. And we think there's much more opportunity. We've got a matrimony product as well, which we think makes a lot of sense in that market. And we think there's more opportunity in Japan to work with multiple brands. So that's a major focus for us.

India also continues to be a big focus for us. It's a bit of a longer-term play. We've got Tinder there, which has been very successful as well as OkCupid. I think OkCupid has gotten good traction. But with all of the COVID cases in that market in 2020, we really didn't push as hard, but we are pushing hard again at the start of 2021 with our OkCupid business in India. And we remain optimistic that we have some good products to work in the India market.

And then we've got other markets like South Korea. That's a market we haven't quite cracked with a product yet. We think there's real opportunity there, and we need to keep trying to find something that works. So there's a -- it's a multiproduct strategy, Pairs, Tinder, OkCupid, the matrimony product, Pairs Engage, across the Asian continent. And then we've got Hawaya, which we're still working on the product and feel very good about. That could be a real player in Asia over time, especially in countries where there's large Muslim populations like Indonesia, we think Hawaya could gain significant share there. So again, a bit of a longer-term play, but something that we are actively focused on and working on.

And then we talked last year about Tinder rolling out in-app currency to focus on the Asia market, which we think is important to the Asian market and the way Asian users pay and use the products. We didn't roll that out in 2020 mostly because of COVID, but we are planning to resume that initiative for 2021 and expect to roll out in-app currency at first in a couple of Asian markets and kind of go from there. So again, something that got delayed because of COVID, but we are planning to bring that back in 2021. So a lot going on in Asia. Remains a big focus for us. Our goals remain the same, and we're hoping to make more progress as we just turn the corner here into 2021.”


4.0 Forward Guidance

Regarding forward guidance, Sharmistha stated in her opening remarks that MatchGroup were without the usual Christmas-spike normally experienced at this period of the year. She did follow up by suggesting that they are targeting further growth during Q1 FY2:

“We're still expecting to see all of our major brands grow revenue again in Q1. And as we saw last summer and in countries that emerged from periods of lockdowns, I do expect that as vaccines roll out and things look better on the pandemic front, we will see more people pick up their dating activities and turn to our apps. One of the areas I wanted to talk about is an area of incremental investment and focus we're planning to make this year, which we called out in our letter. It's in our trust and safety efforts. This has been an existential area for our category since the very beginning, and here's how I think about it.

And so we're planning to increase investments in our own platforms. But more importantly, you will see us make an increased effort in broader initiatives, like partnerships with third-party organizations, technologies, nonprofits. You're going to see us have increased collaboration with law enforcement and regulators around the world in order to be -- continue to be a leading voice on trust and safety in the digital world.” - Sharmistha Dubey

MatchGroup’s COO, Gary Swindler, then followed up with a more technical overview on the company’s outlook. This dialogue was somewhat long, so I have taken the liberty of condensing his points below.

• Expect COVID will continue to be a headwind for subscriber growth in the first half of 2021, but are hoping for improvement as the vaccine rollout gains steam.

• The company believes they can generate $2.75 billion to $2.85 billion of total revenue in 2021, representing another year of mid to high-teens top line growth.

• They anticipate strong contributions to growth by both the Tinder and non-Tinder brands.

• They expect a combination of low double-digit subscriber growth and single-digit ARPU growth to drive company direct revenue growth. Their outlook also assumes indirect revenue is essentially flat year-over-year.

• While the company expects Tinder subscriber net additions to gradually improve as 2021 progresses, their Q4 performance is testament to the fact that growth is no longer dependent on Tinder subscriber additions.

• They cite that they are now are a business with multiple growth drivers, and that they expect the combination of these will drive strong growth in the foreseeable future.

• 2021 EBITDA to exceed $1 billion with mid to high-teens year-over-year growth driven by the revenue growth and additional spend in product development, trust and safety and somewhat higher legal costs. The legal cost increase includes cost to defend the lawsuit by former Tinder employees, which is scheduled to go to trial late this year.

• Incremental product development spend will be focused in 3 buckets: one, continued investment in emerging brands such as Ablo, Hawaya and Pairs Engage, the latter 2 of which are targeted primarily at growth in Asia; two, adding to tech and video capabilities as they expand their product use cases; and three, supporting growth at Tinder, Hinge and other key brands.

• Given the investments above, the company think they may not expand margins this year. Underlying that is an assumption that conditions will create an environment where their anticipated spend levels, particularly in marketing, makes sense, and that is far from certain in the current tumultuous climate.

• In 2021, they expect to again derive meaningful growth from newer brands, such as Hinge, Chispa and BLK, which have recently reached or are close to reaching profitability.

• 2021 capital expenditures of approximately $80 million as they build out new office space in New York and L.A.

• Free cash flow conversion levels in 2021 to be similar to those of the prior 2 years. They do not expect to be a full U.S. federal cash taxpayer until 2023.

• They expect stock-based compensation for the full year 2021 to be approximately $100 million, and depreciation and amortisation to total approximately $45 million.

• For Q1, they expect total revenue of $645 million to $655 million, which will represent 18% to 20% year-over-year growth. In Q1, we expect continued 20-plus percent year-over-year revenue growth levels at the non-Tinder brands and slightly stronger year-over-year growth at Tinder than they saw in Q4.

• They expect EBITDA of $210 million to $215 million in Q1, which reflects margins that are consistent with typical Q1 levels.

Lastly, before we move on to the summary, Gary stated that these outlook numbers do not factor in the potential headwinds caused by IDFA, stating that the impacts remains unclear as of right now. If you recall, IDFA is the roll-out of Apple’s IOS update which prompts users to opt-in to sharing data across various apps, as opposed to the current status quo that requires users to opt-out.


5.0 Summary

Overall, a solid year for MatchGroup, who can now roll into FY21 as an independent company, free from IAC. In a year where we would expect the activity of online dating to decline, engagement and usage, as well as APRU, have all grown.

Humans seek interaction during periods when they are forced to stay indoors, and despite being unable to meet in-person, MatchGroup’s offerings still provide that human desire for communication and affection. As the economy opens up, events being to open, and people start to travel once more, the in-person component of MatchGroup’s products should flourish. Thirst is eternal.

Despite conservative outlook from management, I am satisfied that the company should, at the very minimum, meet the projections for FY21. However, I have a feeling they will eclipse the $2.85 billion in revenues for the year, with tailwinds expected in the second-half of 2021.

There is a solid argument to suggest that common shares in MatchGroup remain somewhat elevated at ~$160, trading at 15.5 times earnings.

However, for me, when I consider that we have a leader in this online dating space, with clear monopolies in some of their markets, as well as a proven track-record of monetisation, I find it an appealing prospect. To add to this, MatchGroup have a strong cohort of new emerging brands coming through the pipeline such as Ablo, Hinge, and Pairs. Therefore, a market cap of $43 billion has me pondering what this company will be valued at in 5/10 years time. Which, in my opinion, is how we should view the company.

Over five years, if we assume that MatchGroup can grow revenues at 19% for three years, and 15% for the following two years, revenues would stand at ~$5.4 billion for FY25. Assuming an average gross margin rate of ~73%, that would generate close to $4 billion dollars in gross profit.

When we make these arbitrary assumptions, we can see why, at 15 times sales, the company may be viewed as expensive, when prior to the covid crisis, investors were typically paying ~4 times sales for the company’s shares.

Assuming a price to sales of 15 in 2025, market cap could be ~81 billion. However, assuming a reversion to 4 times sales in 2025, would leave the market cap at ~$21.6 billion. Think of this more as a thought exercise, as opposed to any significant deduction. We should always respect that the market is a voting machine, and just because something trades at a premium today, it does not mean they will in five years time. A sceptic, would assume there is a great deal of downside here. If we can’t fathom MatchGroup maintaining, or improving, their current high double-digit growth rates, then the bear case is fairly easy to identify. If the pre-corona price to sales multiple was attached to MatchGroup it would trade closer to $45 today.

In some sense, we are assuming that MatchGroup’s price to sales premium does not fall back to these levels. We would be placing some weight into the idea that the multiple expansion will continue as the market realises that online dating is a prominent trend, which should be woven into the upcoming generation’s way of life.

This is why market timing can be so treacherous. The objective for me, is to pay a reasonable price, and follow the fundamentals. Should they continue to improve, we can largely ignore the market price fluctuation. By my own admission, there is likely a relatively smaller margin of safety in my own cost basis of MatchGroup, relative to some of my other positions.

However, it is my belief that the monetisation of online dating, under MatchGroup, is still young. With only 10 million subscribers, and the clear success of Tinder’s monetisation efforts back in 2016 until now, I remain convinced that there is still some significant runway for APRU in this space.

Overall, MatchGroup had a suitable performance for FY20.

Until next time,

IT