Today we are going to break down the latest in acquisitive activity concerning MatchGroup, whereby the company have announced their decision to purchase Hyperconnect, a leading social discovery and video technology company based in South Korea. This deal bolsters MatchGroup’s presence in areas outside of dating and will allow them to land-grab in the social discovery market, which is growing at a faster-clip than dating. Based on the trends observed over the last few years, management state that the social discovery category is growing more than twice as fast as dating.
The announcement was made on Tuesday February 9th, and after some time to soak in the news, and dig a little deeper into Hyperconnect, these are my findings and thoughts. Today we are going to be discussing the announcement, as well as some insight into who Hyperconnect are, some thoughts on the special analyst call the company held for this deal, and how this acquisition can benefit MatchGroup.
We will be referring to some items discussed in the MatchGroup Q4 & FY20 earnings review, so if you have not had the chance to read that just yet, I will leave a link below:
1.0 The Announcement
The deal, announced February 9th, 2021, implies that MatchGroup have reached an agreement to acquire Hyperconnect in full for $1.725 billion in cash and stock. The acquisition is expected to close during the second quarter of FY21.
The deal will also see MatchGroup absorb and retain the existing leadership team and employees at Hyperconnect, with Sharmistha, CEO, emphasising the ground-breaking work that the team has been in involved in with respect to video technology. The Hyperconnect team were one of the first to develop and commercialise low cost, high-quality video chats with low latency which functioned even on low-end devices, this being especially important in Asia. This ball was rolling as far back as 2014, so these innovations are ingrained in Hyperconnect’s organisation.
Considering that MatchGroup reported $739 million in cash as of December 31 December, I would suspect that the deal with contain a hefty portion of stock being offered as currency in the deal. The announcement declared that the consideration is currently 50% cash and 50% newly issued shares, with MatchGroup having the option to pay up to 100% in cash at the close of the deal.
In my opinion, this is the smart move, as MatchGroup’s share price has run up significantly over the course of the year. It would not be outlandish to suggest that MatchGroup’s common stock is trading at a lofty premium, therefore capitalising on that fact is a coy move. The cash portion of the deal is expected to be funded through cash on hand, as well as the revolving credit facility that MatchGroup possess. This facility allows MatchGroup to withdraw ~$750 million in credit, of which none has been tapped as of December 31.
So, this will likely add some leverage to MatchGroup’s capital structure, but management have stated they expect to remain on track for the target of net leverage being below 3 X by the end of FY21.
During the Q4 & FY20 earnings review, I set aside a segment to discuss the potential in non-dating applications for the company, with the likes of Ablo, and the social insights from live video. Hyperconnect feels like it fits in that bucket of opportunity.
Moreover, during the Q4 earnings call, management fielded questions surrounding the Asian market penetration and their revenue goals. Gary Swindler, COO, acknowledged that their target of 25% revenue composition from Asia which was expected to be met by 2023, could have been pushed back one year as a result of the disruption of the pandemic. They even went as far to state that South Korea, in particular, was an area they had not yet launched a product but felt there was potential in that market. Then, a few days later, announced they are acquiring a South Korea based company. The devil is in the details, and management certainly delivered on their promise.
Hyperconnect’s revenue base is derived largely from the Asian continent, with between 75% to 80% of revenues coming from the region. So, this deal has the sense of a one-two punch in that MatchGroup will be gaining share in Asia, as well as pushing forward on that revenue target of 25%. For context, the full year, 2020, contribution of Asia for the revenue composition was ~18%. There was a comment made in the analyst call suggesting that Hyperconnect’s revenue in the South Korean market was 10 X that of MatchGroup’s, which goes to show the land-grab opportunity here.
MatchGroup’s CEO, Shar Dubey, had the following to say about the deal:
"As more of our lives move online, people are looking for richer and deeper experiences. Hyperconnect's live video and audio engagement technology is a powerful tool that enables users to connect with new people and cultures on a global basis.
Hyperconnect's engineering team is relentlessly imaginative and creative. With more than 75% of usage and revenue coming from markets spread across Asia, their product suite and regional footprint squarely complements our own. We will leverage our deep bench of expertise to help accelerate Hyperconnect's already-impressive growth, look to deploy Hyperconnect's technologies across our existing portfolio, and continue to invest in their growth." - Sharmistha Dubey, MatchGroup CEO
These comments echo similar sentiments shared by Shar during the recent Q4 earnings call. As well as capturing the online dating market, MatchGroup are clearly looking to make waves in the social discovery space.
So, for some of our readers there may be those of you who are not aware of Hyperconnect. I can assuredly state that I fell into this category. Therefore, in this segment we are going to provide some brief context into the operations of Hyperconnect, as well as the value opportunity for MatchGroup.
Hyperconnect are a South Korea based application developer leading the way in social discovery and video technology with proprietary video and AI technology. The company currently operate two flagship products in Azar and Hakuna Live.
The company was founded in 2014 by Sam Ahn and Eddie Yong. In the same year, the team developed the world’s first mobile version of WebRTC and launched their flagship platform Azar. The company then received seed-funding of $8 million in 2014, with a further $8.6 million in 2015.
In 2016, the company launched the world’s first real-time voice translation function for use in a communication environment, in partnership with Google, and established their Singapore subsidiary. The following year they founded their Japanese subsidiary and surpassed a milestone of 100 million downloads for Azar.
In 2018, Azar reached 200 million downloads, in the same year that founder Samn Ahn won the EY entrepreneur of the year award. The following year, Azar doubled their downloads once more, reaching 400 million, and the company launched the Hakuna app through their Japanese subsidiary.
In 2020, Azar hit the 500 million download mark, with Hakuna breaching 10 million downloads after one year, and the company established their first overseas office in Germany. Fast forward to the current day, and the company are now months away from being absorbed by new parent company MatchGroup.
Now, unfortunately I do not speak or read Korean. Therefore, I am somewhat limited in my ability to examine their financials. However, management have stated that the company is profitable. Moreover, with $200+ million in revenues for FY20, which grew 50% on the year, we can see that the company is growing their top line at an attractive pace. MatchGroup’s management are anticipating similar top line growth for FY21.
As we stated earlier, ~80% of those revenues are derived from the Asian market, with ~90% of revenues stemming from a la carte items, similar to the fashion that MatchGroup’s existing offerings generate a portion of their revenues. For reference, Tinder typically generates ~30% of revenues from a la carte items.
Staying with this for a moment. MatchGroup currently monetise through two mediums, in subscription models that allow for ‘pay for access’ as well as a la carte offerings which tend to be consumable one-time purchase events. The gulf of difference in a la carte revenue composition between an app like Tinder (~30%) and Hyperconnect as a whole (~90%) is suggested to be a regional difference, in that Asian consumers respond better to consumable offerings as opposed to subscription-based models. This being synonymous with the idea of gifting on these platforms. Shar suggested that the propensity to spend is far greater for these a la carte style models in Asia, but acknowledged that there will be shared learnings across each market.
With respect to profitability, Gary Swindler, COO, suggested that last year Hyperconnect were running on margins in the ~10% range, stating that they are investing heavily in growth. So, as you would expect those operational expenses will be significant during this phase, at the expense of earnings. Gary went as far to say that they do not intend to manage this business specifically for margins over the short-term as a result. I thought this was a fair comment. It would not make sense to curb internal investment as the company is growing so rapidly. Suppressing earnings with increased operational spend is the best way to grow rapidly.
Over the medium-term, management are suggesting the goal is to elevate that margin up to the upper 20% to 30% range, which would be a similar ballpark to existing MatchGroup products.
Hyperconnect currently capture their largest audience across the Gen-Z/Millennial cohort, with 69% of their users being under the age of 30.
As stated, the vast majority of their users are based in Asia, with a 17% weighting in Europe, and a moderate 6% based in the Americas. This geographic split mirrors the revenue composition with the vast majority stemming from Asia, followed by Europe, and then the Americas.
2.1 The Management Team
Hyperconnect are a founder-led team, with ~400 employees, of which ~50% are engineers, with a track record in launching and commercialising tech products via their in-house Hyper-X incubation lab, whereby they state that they are a product-first unit.
The Hyper-X lab is essentially a dedicated team of engineers, product managers, and designers, that are in control of product development at Hyperconnect.
Hyperconnect’s efforts in R&D back in 2014 led to significant innovations in the development of real-time communication (WebRTC). In fact, they were one of the first to commercialise WebRTC through their scalable, low-cost video technology which was both high quality and low latency. In addition to this the Hyper-X lab is responsible for creating award-winning on-device AI, which enables enhanced user privacy, on-device moderation for safety, and personalised matching.
They have been able to leverage these innovations into their current flagships Azar and Hakuna.
For some investors, founder-led management teams are a core value-add, and in this case, we have those original founders leading the way with 17+ years of experience under their belts.
Sam Ahn, CEO & Founder:
Co-Founder, Sam Ahn, currently operates the CEO role at Hyperconnect where he has over 17 years of experience across the social, dating, and gaming industry.
Sam had the following to say about the acquisition:
"As the social discovery space continues to expand, the timing couldn't be better to partner with a global operating expert like Match Group. Match and Hyperconnect draw from a common philosophy: utilise technology and know-how to drive meaningful connections through trusted brands that users love. Hyperconnect is proof that technology can create global opportunities – even for a small start-up from South Korea – and we're thrilled to have found a partner that values this thinking." - Sam Ahn
Eddie Yong, CTO & Founder:
Second Co-Founder, Eddie Yong, currently operates the CTO role at Hyperconnect where he also has over 17 years experience in the tech industry.
Phil Yoon, Head of Platform:
Finally, Phil Yoon, head of platform, comes with a whopping 19 years+ of tech industry experience.
Hyperconnect is a company that has the track-record and management team that had the optionality to consider external funding, or an IPO to ensure independent growth. I find it a positive that MatchGroup were able to meet an agreement that allows Hyperconnect to be absorbed into the MatchGroup ecosystem, as this company certainly had the option to go it alone.
Moving on to the offerings of Hyperconnect now, we can discuss the current flagship products in Azar and Hakuna.
Azar, launched in 2014, is an interactive video chat platform that allows users to connect with like-minded others across the world, adopting a swipe feature similar to that of Tinder’s. Additionally, the app also allows for direct messaging, emojis, filters, and all the other common features on video and messaging applications.
Azar stands as the highest grossing one to one live video and audio chat app globally. Since launch in 2014, Azar has accumulated over 540 million cumulative downloads.
The app features live-translation, similar to MatchGroup’s Ablo product, as well as in-app currency which powers the monetisation aspect of the product. You will recall from the Q4 Earnings review that I discussed the roll-out of in-app currency for existing applications in MatchGroup’s portfolio such as Ablo. Management have vocalised that this model suits the Asian market. After postponing this roll-out in FY20, it appears that MatchGroup will benefit from the experience of the Hyperconnect team with respect to in-app currency dynamics.
Across the Google App Store, where the app is more frequently downloaded, the app boasts a 4 star rating after 1.62 million cumulative ratings. I am sharing the Google Store data here, as the Asian demographic, where Azar is most prominent, typically use Google’s app store, as opposed to Apple’s, due to the higher premium on iPhone products and the relative economic conditions of the Asian region. For instance, if we observe the Apple Store data, the US in the region where Azar has the most ratings. I felt this might be a tad misleading.
Across the communication categories, Azar is consistently within the top-10 of highest grossing apps across most of the larger Asian markets.
Having been established long before Hakuna, it should come as no surprise that Azar generates the vast majority of the revenues for Hyperconnect. However, management did state that an increase share of revenue composition is coming from Hakuna, having only been created in 2019. Moreover, they did highlight that Hakuna’s revenues are growing far more rapidly.
In terms of other metrics, management were fairly hush-hush, stating that we would learn more as the deal comes closer to the closure and everything is squared away. So, we have that to look forward to.
2.3 Hakuna Live
Hakuna Live, launched in 2019, is an application that centres around social live streaming and represents the more nascent of the two offerings, but boasts accelerating user growth and revenues that are growing at a faster clip than Azar.
Hakuna allows for live group video and audio broadcasting, including in-app virtual gifting, the ability to build communities, AR powered avatars, and profile enhancement. Hakuna has been downloaded more than 23 million times since launch, with particularly strong momentum across South Korea and Japan.
There is also the choice for users to adopt Hakuna premium, which is a subscription-based offering, which allows users to receive monthly diamonds (for gifting), additional diamonds with each purchase, bonus stars when receiving gifts, live boosts, as well as increasing benefits relative to the extended duration of subscription.
I would say the core component of the application is the ability to host live-streams, either alone or with three additional friends, and grow an audience of ‘guests’ who can communicate with the hosts via the chat function, or by sending virtual gifts. These gifts being purchased with legitimate currency of course. The application advertises the fact that users can generate income from their hosting, so I am assuming there are some reciprocal benefits to the host here as well.
There also exists some augmented reality (AR) functionality within Hakuna, which is an area MatchGroup are yet to really venture into. AR allows hosts and guest to engage in activities that range from adding small accessories to their avatar to creating and adopting new completely new personas when communicating with other users.
For those of you who have experienced virtual reality, I think you would not have to stretch too far to imagine why this could be an attractive proposition to users. I was unable to attach the video within Substack, but for those of you who wish to see this in action, I would highly recommend watching this short clip of two users interacting through AR on Hakuna.
Across the Google App Store, the Hakuna app currently has 61,900 rating and exhibits a 3.67 star rating. Similar to Azar, the app features more prominently across the Asian segments in relation to grossing and download metrics.
Hakuna is said to be very early with respect to its trajectory but is rapidly scaling users and revenue across a number of markets, most notably South Korea and Japan. As stated, they are largely monetised through in-app purchases such as gifting, as well as subscription-based offerings.
After sampling both applications on my own device, I find Hakuna to be far superior. I would consider Azar to be a mash-up of SnapChat, Ablo, Messenger, and Tinder. Whereas, Hakuna has an authentic feel, which is less so relatable to any other app.
2.4 Hyperconnect Enterprise
Hyperconnect also own a corporate live video broadcasting platform powered by Hyperconnect Enterprise, which offers some further optionality to the MatchGroup portfolio.
Covering interactive broadcasting, intuitive chatting through in-app tools, as well as an immersive media engine that allows stakeholders to harness live media technology through APIs.
This enterprise unit has features which can attract a vast array of potential suitors in spaces such as E-commerce, education, live sports, telehealth, entertainment, as well as social communities.
This offers a sumptuous proposition for MatchGroup, who currently use third-party vendors to power all of their one-to-one and live video capabilities across all of their platforms. Having the ability to power their video functions in-house could be a significant benefit of acquiring the Hyperconnect Enterprise platform given how focused the team are on video technology.
During the call, Shar was hesitant to voice any direct response to questions surrounding this possibility, but did suggest it is something they will be looking into. Quite understandably, she suggested there would be more to say as the deal comes closer to closing.
This is an area I am perhaps most excited about, as it presents itself as an area that is most outside of MatchGroup’s current offerings, but still within the confines of their expertise. To add to that, the management team at Hyperconnect will remain within the MatchGroup team, bringing their experience with them.
3.0 Why This Deal Makes Sense
This deal makes perfect sense for several reasons. We will keep this segment brief, only shining focus on those points which exemplify the value proposition to the largest extent.
• MatchGroup are acquiring a land-grab in the Asian market, an area that they are specifically looking to have generate 25% of their revenues by 2023. Currently, as of FY20 that composition stood at ~18%.
• The acquisition adds diversity for MatchGroup’s product offering. Comprised largely of dating platforms, this will bolster their social discovery portfolio, alongside apps like Ablo.
• This acquisition comes with two established, and high-growth social discovery applications that are already monetised, and boasts growing user bases.
• In acquiring Hyperconnect, the company are also acquiring the existing, founder-led, management team, who bring decades of experience in the tech, gaming, and dating industries, as well as the Asian market.
• MatchGroup have been vocal about launching in-app currencies as part of their Asian strategy, and both Azar and Hakuna contain in-app currencies, situated primarily across Asian users.
• The functionality of the on-device AI within Hyperconnect can be leveraged to further increase trust and safety within MatchGroup’s existing offerings, something which management were significantly vocal about during the Q4 earnings call.
• On a trailing revenue basis, the acquisition price is ~8 times sales, and ~6 times sales on a forward revenue basis. Which, in the current market does not present itself as an outlandish valuation to pay for a high-growth tech company. Hyperconnect are also profitable, with management suggesting revenues could be between $280 million to $300 million in FY21, representing a 40% to 50% increase year over year.
• Hyperconnect comes with scalable video technology that can be utilised across all other products in MatchGroup’s arsenal.
• The Hyperconnect Enterprise unit also offers some interesting potential for in-house video hosting.
4.0 A Few Notes From The Call
MatchGroup hosted a call with analysts to discuss the acquisition on the day of the press release, February 9th. In this segment, I have cherry-picked some of the responses that I found to be most interesting.
1) The Total Addressable Market of Social Connectivity
“So you mentioned that the TAM is more than twice of dating. But I guess the question is more on the strategy of implementing the live streaming and social connectivity within your core dating apps. I believe you've done that already with Plenty of Fish. So can you comment on whether you saw increased engagement from that? And if that drove further engagement within the dating app itself? Or was it somewhat cannibalistic between the 2 functions?”
Sharmistha Dubey, CEO:
“Yes. So the social discovery space is actually a pretty fast-growing and large space in Asia, in particular, and it's growing in other parts of the world. And as I've mentioned, we've been sort of testing the waters with our Ablo product as well as POF Live. And the reason we got more and more interested in this area and Hyperconnect, in particular, is because of a mutual synergy that we see. So POF Live is entirely accretive to the POF experience. And we also think within the social discovery applications, there is a use case of dating that happens as well. And so that's how we think our world sort of make all the sense to be together because both are technology in the pursuit of meaningful connections. I hope that's helpful".”
2) Hazar and Hakuna’s Scale & ARPU
“We want to know if you can give a sense of the scale of the user base at Azar and Hakuna? And then how that user growth versus ARPU is contributing to that top line 50% growth in 2020?”
Gary Swindler, COO:
“So Hakuna's user base is small, but -- relatively small but growing quite quickly. So that's really driving a lot of the success there, and kind of monetisation is ramping up relatively quickly at Hakuna as well.
The Azar MAU base is actually quite substantial into the double digits. And so that's definitely a piece of it. We think we can further accelerate the growth of MAU there as it expands into more geographies and becomes more of a household name in Europe and in the Americas. And again, I think there's room on the ARPU side as well to continue to increase ARPU and drive growth. So it's going to be both prongs of things as we develop both apps.
But Hakuna -- you should understand that Hakuna is much, much, much earlier stage. Azar has been around for a few years now, although still growing very nicely.”
3) Leveraging Video Across the Match Portfolio
“I guess from a time line perspective, how quickly do you think you can leverage some of Hyperconnect's technology and product features to other Match portfolio apps?
And then, I guess, beyond Ablo and POF, which apps do you see sort of the greatest opportunity to leverage some of this video technology, too?”
Sharmistha Dubey, CEO:
“If you think about it, in 2020, pretty much all of our platforms deployed video in some shape or form. And we just think that's the beginning, and there are going to be both one-to-one use cases that will make sense on some platforms. The more higher intent platforms will probably have richer one-to-one experiences. In the other platforms, we do think both a combination of one-to-one and one-to-many video applications will make sense.
And so obviously, I can't sit in here be able to say exactly when, the time line. But that is something we will -- as soon as we close the deal, we will be working to figure out what the right testing of experimentation with their SDK, et cetera, would be. But it is an exciting thing for us to be able to have that technology of that quality within in-house versus having it as a third-party component.”
4) Potential for Hyperconnect to Grow Outside of Asia
“Just as it relates to the geographic diversity, where you think longer-term Hyperconnect can live and be successful outside Asia, can you talk to that?”
Sharmistha Dubey, CEO:
“In terms of sort of geographically where they can go. So they -- obviously, their main footprint is around Asia, 75% to 80% of their user base and revenue comes from Asia. There are a couple of areas that we think we can immediately help leverage our skills and presence on the ground. One is they've started seeing some traction in Europe, which we think we can turbocharge with our presence with -- in Europe that we have. We also think there is a real large opportunity for us to go grab in Japan, where, again, we have real talent and skills on the ground to be able to help turbocharge that as well. And then once we've sort of played out those parts, then Americas remains a white space for us as well.”
5.0 Concluding Remarks
I think the closing remarks from Shar say it a great deal better than I could:
“We're buying a great team with a like-minded philosophy and view of the global opportunity and market evolution. They have a tremendous track record of innovation and commercial success with capabilities in video and AI that we can leverage across the combined portfolio. Their experience in virtual currency, a la carte and gifting as well as their broad footprint and base in India, which are areas we've been looking to expand in, makes this transaction a great strategic fit. We can also help increase the momentum of their business as we have done the prior acquisitions of Pairs and Hinge by leveraging our expertise and experience, especially in markets that are newer to Hyperconnect. I very much look forward to working with the Hyperconnect team and reaping the benefits of this combination for many years to come.” - Sharmistha Dubey
There are, however, a few concluding remarks that I would like to include, as I have pondered over this deal these last few days.
To me, this echoes the Pairs acquisition in 2015. Prior to this, MatchGroup’s presence in Japan was so-so. Fast forward to 2021, and they now dominate the Japanese dating market with both Pairs and Tinder, with the former having grown revenues at ~600% over the past 5 years. In essence, they performed a suitable land-grab to capture that Japanese market share.
Today, whilst perhaps not land-grabbing the Asian continent (hard feat) they are essentially grabbing some significant share across segments of Asia, most notably in South Korea and Japan. However, this time it pertains to the market of social discovery.
There also appears to be some synergy (I hate that word) in that Hyperconnect have their foot in the door of the European market, an area which MatchGroup have their entire head breaking through the door, much like Jack Nicholson in the Shining.
Lastly, and shoutout to @JerryCap (great follow) for sharing this piece from the Korea Herald dated back in 2019 where Tinder’s then CEO, Elie Seidman, stated that Tinder was a ‘social discovery app’.
As a result of the stigma-culture surrounding online dating in emerging markets such as Asia, which we referenced in the Q4 review, MatchGroup were forced to adopt a different stance, instead promoting Tinder as a social discovery app, allowing users to expand their networks as opposed to finding a soulmate or fling. This localised campaign across South Korea promoted the app with the slogan: “Find Friends on Tinder.”
It does not take much imagination to imagine platforms such as Tinder taking on more of a social discovery role in all markets in the future. Still remaining a platform whereby one can find a match, but perhaps also a place where one can find a friend, host live video streams, share gifts, use a messaging application, and so on. For me, a large part of my investing process is seeking to ascertain what direction a company could be heading.
As we now see MatchGroup investing more in social discovery, video technology, AR, AI, and even enterprise, it draws away from that narrative that MatchGroup is simply a dating-app conglomerate. It also has the practical implication of diversifying the product portfolio, but narrative is important too. If an investor can identify potential narrative shifts, which then materialise into reality, then I find that prospect appealing to my own process. This is what I believe may be happening at MatchGroup.
Until next time,