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Q2 2019 Earnings Call
Aug 7, 2019, 8:30 a.m. ET” data-reactid=”23″ type=”text”>Match Group, Inc. (NASDAQ: MTCH)
Q2 2019 Earnings Call
Aug 7, 2019, 8:30 a.m. ET
Good day and welcome to the Match Group Second Quarter 2019 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to Lance Barton, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.
Thanks, operator. Today’s call will be led by CEO, Mandy Ginsberg and CFO, Gary Swidler. They will review the second quarter investor presentation that is available on our website and then answer questions. Before we start, I’d like to remind everyone that during this call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate or similar statements. These statements are subject to risks and uncertainty, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC.
Over to you, Mandy.
Good morning everyone and thanks for joining our Q2 2019 call. Our second quarter results speak for themselves. Our growth accelerated and our momentum enabled us to increase our full year outlook, while investing in the future. I’m going to leave the financial details for Gary to cover, I’ll cover a number of big picture strategic items, as well as product initiatives across our businesses. I’m thrilled to say that our businesses are executing very well on their strategies and we’re pushing into a number of exciting new areas and new geographies. Before I jump in, I want to mention a research study called Disintermediating your Friends by Professor Michael Rosenfeld at Stanford. You can easily find the draft form of a study online. It gives a sense of the macro impact the dating categories having on relationships and US society.
Now, for those of us who work in the industry or if you’re 22 year old and half of your friend met their significant others on dating app, what I’m about to tell you, won’t be a surprise. But for a lot of people, the findings of this research are eye opening. The study details how couples meet in the US and reinforces many of the trends we are seeing today. The research found that meeting online is now by far the most common way for couples to meet. Today nearly 48% of relationship start online. There has been a massive acceleration in this trend over the last 10 years due to the rise of smartphone and mobile dating apps like Tinder. Meanwhile, meeting offline at bars, parties or through friends or family has declined significantly. And what’s happening is people meet online, they meeting people outside their social circles.
This study found that for couples who met online, nearly 98% met people who are complete strangers. They were not connected through any friends or family. For me personally, the most important thing to note, as that the study found, the relationship quality among couple who met online was no different than people who met through existing networks and more traditional channels. We have been talking about this trend for a while and this study reinforces what we’ve seen in Western markets. We firmly believe this trend is poised to sweep Asian and Middle Eastern markets also. Younger people in these geographies are now opting to take their own partners and our business will continue to benefit from these societal tailwinds. We can bring our long-standing capabilities in dating to these markets. And we know that we have to do this in a way that reflects evolving technology and online behavior, while most importantly being cognizant of regional and cultural differences. This is why we’ve been increasing our focus on Asia, which if you recall from last quarter, represents roughly half of our total addressable market.
Let’s turn to Slide 3. On this slide, you will see that we’re taking concrete steps to execute on our global growth strategy. I’ll cover how we’re building and investing in new brands and extending our existing brands. Four years after acquiring Pairs, it’s now the time of the market leader in Japan. The Pairs team has accelerated growth and growing steadily as category stigma rose. In fact, growth of both Pairs and Tinder are significantly outpacing the competition in Japan. We have combined our unrivaled products, marketing and monetization expertise with our local team’s extensive knowledge of this market. The senior management team and I just returned from a week in Japan. We were struck by the country’s aging population and low marriage and birth rates, which makes dating and relationship products critical.
Less than 20% of Japanese singles are open to the category and we think these numbers will go up, especially as brand and category awareness increase. Paris has a lot of additional runway and we hope it can have a meaningful impact on this society. Given the strength of our local team plus the growth opportunity we see in Japan, we are extending the Paris franchise by launching a new digital product called Pairs Engage. This new product will leverage technology to serve the local matrimony market than it has historically been conducted offline and physical stores. We believe, we can offer a more efficient and less expensive service geared to those who are highly motivated and want to get married within a year. Most people on this call are in the US and we don’t really have a comparable matrimony market here. In Japan, however, we estimate the matrimony market is already a $0.5 billion. And we believe our new product can capture share of that market. A move like this could just grab more traditional matrimonial players. This is one more way the Pairs team can provide real value for Japanese singles.
Moving to the right side of the slide, we bought out existing investors and made a majority investment in a small app called our Harmonica. Harmonica was developed by a team of entrepreneurs, based in Cairo, Egypt servicing that market. They saw an opportunity to leverage technology to enhance the matchmaking process. In fact the CEO was influenced by watching his friends and his family go through the traditional arranged marriage process. He wanted to create a product for young and modern audience that still respect local tradition and cultural norms. Young people want to meet others with similar backgrounds and values. The shift is now they want to choose their partner versus having their partners chosen for them. Essentially, the CEO created an app that some one like his sister could use.
It’s clear that young single Muslim audience is a massive and growing market. There are 1.8 billion Muslims in the world, this is 24% of the world’s population and it is expected to grow by more than 70% in the next three decades. And today, dating products don’t adequately address their needs. And it’s important to work closely with entrepreneurs and a local team that truly understands the challenges singles in these regions are facing. Harmonica gives us a great base to build on, and it enables us to better serve the 33 countries throughout Asia and Middle East that have large Muslim population.
We brought on all 12 Harmonic employees and plan to leverage our resources and our knowledge to help the team in Cairo further develop their product and scale their business. So the business is small today, this local approach is similar to what we did in Japan with tremendous results. There is no denying the opportunity in front of us across Asia, the Middle East and North Africa the Middle East and North Africa, and we’re moving quickly to ensure that we capitalize on this opportunity as the market evolves.
Let’s turn to Slide 4 and talk about Tinder. We rolled out a number of monetization features at Tinder the last few years. As we mentioned on the past few calls, a big priority for us in 2019 was to optimize our existing features to drive revenue growth. Tinder’s performance this year highlights just how impactful these sometimes in perceptible changes can be on a platform of Tinder’s scale. These changes fall into three main categories. First , improving new recommendation engine to drive more engagement for all of our user. Second, bringing more sophistication to our approach on paywalls and pricing. And third, improving where, when and how we merchandise Tinder Gold. As a result of these changes, we’ve been able to increase subscriber additions and accelerate revenue growth beyond our prior expectations.
We highlighted features our users find valuable and by doing this more users choose the more feature rich and high priced Tinder Gold subscription package. Optimizations at Tinder will be a never ending process just like other brands that have been around for more than 20 years. I’m confident we’ll continue to improve the Tinder platform to drive continued growth. In addition to all the wins we had achieved on the product optimization front, we’ve also introduced a few new consumer facing features that may go into. Some of these features are unique to Tinder because unlike any products in the category, Tinder has a global audience.
First, let’s discuss Tinder Lite, for some members of our global audience, the cost and speed of data is a big concern. Tinder Lite will run faster, consume less battery and reduce network usage by about 20%, lowering data cost for users. It also is a drastically smaller app to download in the first place, which again reduces data cost for our users. We’ve rolled it out on Android in Vietnam and will be rolling it out across Southeast Asia over the coming quarters. In addition to Tinder Lite, we introduced a credit card payment option on the Android app at Tinder in Q2. Most of our other brands, as well as our competitors offer users the option to use credit card payments on Android and now Tinder is doing so as well. To roll this out, we first have to build a web-based payment infrastructure to be able to accept credit card payments. We did the work because we believe it’s important to provide users with choice of payment options.
Let’s move to the third image on the right. We also launched Tinder Traveler Alert for our Global LGBTQ users. We are by far the largest app to launch this type of warning to protect the users in nearly 70 countries that still have discriminatory laws criminalizing people who are LGBTQ. Whether you live in one of these countries or are using Tinder while you travel, this is one of the many steps that we’re taking to protect our users around the world. It’s been a busy quarter at Tinder. We’ve also launched two new monetization features. Super Boost is a feature we think has particular appeal to a member who is a bit less price sensitive and is willing to pay to increase his or her activity on Tinder. Read Receipt is another a la carte feature we introduced. We knew users would find this feature valuable based on learnings from our other apps. These a la carte features will help drive ARPU and revenue.
Before I wrap up the Tinder section, I want to emphasize one point. We have talked a lot about Tinder monetization, but delivering a fun, free and effective base experience for all users on Tinder remains critically important and it’s what fuels stickiness and morality. We expect to continue to drive growth over the long run by both innovating the free, fun experience and introducing new features that provide an enhanced experience for those willing to pay for them. Tinder is demonstrating the ability to deliver what young singles want. The team is hard at work evolving the product to ensure it remains the unparalleled choice for this global audience of digital native.
On Slide 5, we highlight OkCupid, which has undergone quite a turnaround over the last 24 months. After a product revamp in late 2017, OkCupid has executed successful marketing campaigns and monetization efforts throughout 2018 and into this year. This is led to OkCupid reinvigorating revenue growth in 2018 and we’re on track to do it again this year. The OkCupid team is now diligently exporting the brand to markets outside the US, targeting geographies where they have seen some early organic traction. Their first foray was India in late 2018 where they localized parts of the product and deployed a modest amount of marketing dollars. This increased focus in India led to OkCupid quickly surpassing both local and global players who are spending significantly more in marketing. Given OkCupid’s momentum, we’re ramping marketing spend and launching OkCupid’s first ever brand campaign in India.
The campaign is focused on young Indians who want to take charge of their lives, including finding their future partner. Take a look at the image on the far right, the tag line Find My Kind is juxtaposed against the arranged marriage newspaper ads which feature religion, family background and appearance. OkCupid is focused on matching people beyond just appearance and family background and emphasizes what truly matters. Based on consumer testing, we think this message is going to really resonate. The campaign goes live this week. In addition to OkCupid efforts in India, we see an opportunity in other global markets. We believe the team can replicate its playbook to expand into additional international markets in the coming quarters.
Let’s turn to Slide 6. Hinge continues to have excellent momentum with strong user growth in the US and in key international markets. Global downloads in the second quarter increased more than three times year-over-year. Hinge is quickly becoming one of the top dating apps in the US and the UK with strong popularity among younger, more serious daters. They value Hinge’s in-app [Phonetic], yet modern product experience.
We know that Hinge users are looking for serious relationships and to ultimately get off dating apps, that’s why Hinge’s new tag line Designed to be Deleted is resonating with consumers. This quarter Hinge is launching a big marketing campaign, which we expect to drive accelerated user growth. Marketing creative that supports the tag line line Designed to be Deleted and emphasizes higher relationship intent will be seen in digital channels and offline later this month. The marketing campaign follows organic press covers that Hinge received, thanks to the Presidential candidate Mayor Pete Buttigieg, who met his husband on Hinge. This has increased national attention on the brand, as provided more about to the already strong growth we’re seeing.
Moving to the right of the slide, the Match brand continues to evolve its products and improve customer satisfaction. It’s on a relentless mission to provide a premium experience, both in price and service for relationship minded singles in their ’30s and 40’s. The second quarter Match launched a distinctive new feature called AskMatch, where subscribers could access a live personal dating coach. We know that for singles looking for a relationship, some of the ups and downs of dating come after they match with someone and take things offline. This is the first time, we’re aware of a dating app combines technology with a platform of experts to help users improve outcomes. Feedback from people who have used the feature has been great. After a session with one of our coaches, a recommend Match to a friend rate goes up by more than 50%. The efficacy of these short, but really impactful sessions make us optimistic about scaling the service effectively and differentiating Match.
We reduced marketing in Match again in Q2, but we are ramping up brand spend in Q3 to support a fun and edgy new campaign. The new add feature actress Rebel Wilson and they went live last week. In the ad Rebel hosts a podcast and risks on the trials and tribulations of dating. And who knows better how to address the needs of people looking for a serious relationship than Match. This is a great time to build AskMatch [Phonetic], given the past few quarters we’ve made real strides in the product experience. We believe that with a truly revamped products, improved monetization and a clear differentiator and AskMatch, the brand is positioned well for the long run.
To wrap things up, we had a stellar quarter, growth is accelerating. We’re continuing to connect more and more people that meet partly to friendships, great dates, relationships, marriages and even families. All the time we hear if it weren’t for your app, I wouldn’t have met my group of friends in college through Tinder or I never would have meet my husband, my wife, my girlfriend, my mom wouldn’t have met my step dad and one of my favorites. I wouldn’t have a house full of kids if I didn’t meet my spouse through your app. These are the stories that we hear every day, whether it’s to meet new people when you move to a new city after college or you want to find your soul mates. And these stories motivate us to develop products that create these meaningful human connections for our users.
We’re investing heavily for the future to further distance ourselves from the competition, both here in the US and globally. Finding your person through an app didn’t definitely become more common even 10 years ago. That said, we think it’s going to become even more mainstream and is common for example as going online to book travel. If I’m right, then we would expect to have many more quarters like this ahead of us and even more importantly, many more relationships to taut.
With that, I’ll turn it over to Gary to discuss Q2 financial performance and our outlook.
Thanks Mandy. As Mandy said, we had a terrific quarter with strong growth at Tinder, solid progress on many of our strategic and product initiatives, and an improved outlook for the year. Let’s get right into the specifics from the quarter, then I’ll update on our financial outlook.
On Slide 8, you can see that Tinder direct revenue grew 46% year-over-year in Q2, an acceleration from 38% in Q1. As the cumulative effects of paywall and pricing changes, various product optimizations and the better Gold merchandising on our iOS had a real impact. We’ve been saying for some time now that 2019 would be about a series of product initiatives and optimizations on the Tinder platform, which would drive strong results. Tinder’s performance in the first half of 2019 certainly bears that out. In Q2, Tinder subscribers grew 39% year-over-year to just over 5.2 million. Tinder added nearly 1.5 million subscribers year-over-year and 503,000 subscribers sequentially, second best in Tinder’s history. The only quarter where Tinder had seen a higher level of subscriber additions was right after we first introduced Tinder Gold in late 2017. Tinder’s ARPU was up 6% year-over-year as reported, but on an FX-neutral basis was up about 10%. Gold subscribers as a percent of the total continued to climb and now exceeds 70% of the total subscribers at Tinder.
On Slide 9, you can see that average subscribers across the company’s brands reached over 9 million in Q2, up 18% year-over-year. Tinder drove our overall subscriber growth again this quarter with payers also contributing nicely. Hinge’s user growth is starting to generate subscriber growth, even though monetization hasn’t yet been a real focus for us at Hinge. For the first time in our history, the number of international subscribers exceeded North American subscribers. We expect this trend to continue as our international growth efforts, both at Tinder and elsewhere, continue to gain steam. As we’ve talked about before, about two-thirds of our addressable market lives outside of Western markets. And we expect the steps we’re taking to address that massive opportunity will continue to manifest in our subscriber numbers.
We continue to spend down on marketing at the Match brands in Q2, which impacted its subscribers. Marketing spend at Match was at its lowest level in more than five years, down double-digits year-over-year in the quarter. That said, as Mandy talked about, the product refinements at Match continue to gain traction and we’ve launched a new marketing campaign in Q3 to begin to get the Match story back out. As reported, ARPU for the company was up a penny year-over-year to $0.58, it was up 4% in North America and up 1% internationally. On an FX-neutral basis, international ARPU was up 7% and total company ARPU was up 5% year-over-year to $0.60.
Flipping to Slide 10, you can see that company’s total revenue growth was 18% year-over-year, reaching $498 million of total revenue for the quarter. Total revenue growth would have been 22% without the impact of FX, for total revenue of $514 million on a constant currency basis. North America grew direct revenue 13%, driven by 9% subscriber growth and 4% ARPU growth, while international direct revenue increased 27%, driven by 27% growth in subscribers and a 1% ARPU increase. International subscriber growth was particularly strong, driven by primarily by Tinder, Pairs and better meeting performance. Indirect revenue, mostly from ad sales decreased close to $3 million due to continued declines in ad impressions coupled with the impact of changes to the terms of our relationship with Fan.
We expect indirect revenue growth to improve over the coming quarters. Operating income grew 15% to $173 million. EBITDA grew 16% to $204 million, the growth was driven by the higher revenues and lower overall marketing spend as a percent of revenue, partly offset by higher in-app fees, $9 million of higher legal, regulatory and compliance costs. And in the case of operating income, higher stock-based compensation expense of $5 million. Stock-based comp expense in the quarter was $22 million, primarily due to the acceleration of certain awards and the granting of new awards, particularly at Tinder. Given the higher than expected level in Q2, we now expect $80 million to $90 million of SBC expense for the full year.
Marketing spend declined as a percent of revenue again this quarter. Tinder’s marketing efforts, particularly in several Western European countries are going very well. Our cash flow generation remains excellent and our balance sheet remains very healthy. In the quarter, we spent $84 million of cash to buy-back stock and to net settle employee equity awards. Even with this, we ended with $266 million of cash on hand. Our 12 month trailing leverage ended Q2 at 2.3 times on a gross basis and 1.9 times on a net basis. Year-to-date we have spent a total of $215 million of cash on buybacks and withholding taxes related to net settling of equity awards.
On Slide 11, we have our latest financial outlook. For Q3 ’19, we expect total revenue of $535 million to $545 million and $200 million to $205 million of EBITDA, representing year-over-year growth rates in the low 20% range on both metrics. Our Q3 EBITDA reflects significant incremental marketing spend compared to Q2 ’19, as we simultaneously ramp campaigns at a number of brands including Hinge, Match and OkCupid. As Mandy noted, Hinge is expanding its Designed to be Deleted campaign, Match recently launched a new campaign featuring Rebel Wilson and OkCupid is undertaking its first brand campaign in India, all in Q3. We also expect to begin marketing at Harmonica, Pairs Engage and in other international markets at OkCupid in Q3 and we’ll invest further at Tinder globally. We expect a sequential growth in marketing spend to be north of 20%.
Given our strong performance in the first half of the year, we now expect full year 2019 revenue growth to be in the high teens, up from our prior expectations of mid-teens. This implies accelerating growth rates in the back half of 2019 compared to the front half, which is consistent with what we’ve been anticipating. We are also refining our expected EBITDA range to $770 million to $800 million for the full year, given improved confidence in our full year performance. As I mentioned on the last call, we’re planning a number of discretionary long-term oriented investments in the back half of this year to reinvest some of the outperformance in the business. We’re very pleased to have the financial flexibility to make these investments, which we believe will improve the company’s long-term growth outlook.
Where we fall in the EBITDA range will depend significantly on the level of discretionary investments we choose to make in the last two quarters of the year. On the back of record performance, we’re planting seeds for future growth and to further capture the large market opportunity in front of us. Many of these investments are intended to further our growth efforts in Asia. So let me give some color on a few of that. You heard from Mandy about are investing in the Harmonica app and bringing on the team to better serve the large Muslim demographic globally. We plan to invest several million dollars this year to build out the team, further develop the app and market it in several markets. This has not been incorporated in our outlook previously.
In addition, Mandy mentioned, the new Pairs Engage product, which is designed to be a digital Matrimony product serving the large marriage focused market in Japan. We’re optimistic about the prospects for this newly created product and are investing further in it, following its recent introduction to the market. Additionally, we’ve talked several times about the organic momentum that OkCupid has achieved in India. We’re increasing our investment in OkCupid in that market and in several other markets in Asia and the Middle East, where we believe the brand can achieve similar traction. Aside from these key initiatives, we’re also investing even more heavily in Tinder product and marketing to drive product awareness, especially in a number of global markets, where we see meaningful longer term opportunity, including in South East Asia opportunity including in Southeast Asia. And we’re considering investing additional marketing dollars in a number of our newer bets in the second half of the year, including [Phonetic]Cheese Bob, Be OK and Ship. Last and most important, we’re investing in our employees globally including enhanced 401(k) matching to help employees save more for retirement. Our parent company IAC has champion these efforts and we were excited to roll these benefits out recently.
Aside from our growth-oriented investments, we’re incurring higher legal, regulatory and compliance cost globally. As an example, France recently passed a new 3% digital services tax, which primarily impacts our Meetic and Tinder businesses and is retroactive to January 1st of this year. We expect this to impact us by $3 million in 2019 with three quarter of it taken in Q3. Other countries are also considering following France’s lead. It is clear that we, like many tech companies, are operating in an environment with higher scrutiny around our activities and we’re investing to make sure we stay ahead of this trend, especially in areas that protect our users’ data privacy and safety.
With the success of Tinder is various product initiatives, for the full year 2019 we now expect subscriber additions at Tinder to be approximately 1.6 million, well above our previous expectation of greater than 1 million. The rollout of better Gold merchandising on iOS create upward momentum in subscriber additions in Q2 and we expect a lift in Q3 from the rollout of this initiative on Android. For Q3, we expect more than 400,000 average subscriber additions at Tinder quarter-over-quarter.
We’re thrilled to have delivered a solid first half and a strong outlook for the full year. Our Tinder business continues to grow meaningfully around the world and we’re investing to supplement that growth. We’re taking steps across the portfolio to capture the large opportunity in Asia and we’re executing on our numerous strategic and product objectives. I am confident all of this puts us in a terrific position to continue to deliver solid financial performance for our shareholders.
With that, I’ll ask the operator to open the line for questions
Questions and Answers:
[Operator Instructions]. Our first question today will come from Nat Schindler of Bank of America Merrill Lynch. Please go ahead.
Good quarter, guys. Thank you very much for taking my question. In earlier — around March, we noticed a change in the payment flow on your Android apps on everything under the Tinder Gold. We then saw on a third-party data set that tracks Google Play Store revenue that your revenue on Google Play Store collapse, which obviously didn’t happen. Given how well you did in the quarter. The obvious conclusion here is that you’re skipping the place or you’re getting payments directly. But that didn’t seem to show up in your cost of goods, is there something we’re missing here?
Okay, thanks Nat for your question and for the compliments on the quarter. So, you’re right. I know this is a big topic. So let me try to step people through this a little bit. You’re right that in April, we introduced an option on Tinder on Android to offer — use a choice whether to use Google Pay or credit cards. As Mandy mentioned in her remarks, it’s something that we’ve been planning for. It’s something that we have on many of our other brands and so it’s not particularly new, but it was new to Tinder, we did do some work to get there and we accomplish that and then we’re able to roll it out. You know, this is really something that is for new transactions and so the benefits of this will sort of build over time. It’s a relatively small amount of benefit in Q2, but it’ll be larger in Q3 and then as we move to 2020 and beyond, it should increase from there. You can notice it in the cost of goods, as you mentioned. If you go back over time in our cost of goods, you’ll see that percentage has been increasing, relatively significantly for many quarters and in this quarter we had a slight change in that trend. And we’ll see as we go forward some impact on that percentage as well. So, I would say, it’s kind of single digits in this quarter, the benefit, but it will be increasing. I think that answers your question.
It does, and maybe just a quick follow-up.
Would you expect to see this happen on iOS as well? And what do you think the response will be from Google and Apple?
So if you look historically, Google has been a more open platform. And as I said, we’ve been offering this option on many of our brands. So, I’m going back a fairly long time. So this is not new from a Google perspective.
Apple has tended to be more restrictive. And so we’ll see what happens with Apple, we love to offer the same kind of choice on Apple as we do with Google, but it’s not clear to us if or when that’s actually going to be able to happen.
Great, thank you.
Our next question will come from Eric Sheridan of UBS. Please go ahead.
Thanks so much. Maybe diving in a little bit in terms of the narrative broadly overseas and what you’re seeing in Asia and what you’re seeing in the Middle East. Want to understand a little bit of the nuance about how you might be taking different approaches to marketing, positioning brands in those markets, how we should be thinking about ROIs on investments in those markets to get the subscriber growth opportunities. So maybe see if we could go a little bit deeper in the opportunity you see, especially in the Middle East and Asia as you called out in the slides? Thanks guys.
Okay, I’ll take that Eric. So, if you look at these markets, which are more under-penetrated market, there is definitely more secular tailwinds. I mean these are markets where there’s big population growth and we’re still seeing Internet penetration increasing and mobile usage increasing and I think one of the most important things to point out is sort of that stigma is eroding which we think is going to help really increase usage across the brands. Because of these dynamics in the market, it really gives us the opportunity to take a number of our apps into these markets, depending on the segment that we’re going after. And we’ve really tried to be holistic and thinking about a market. So for example, I mean India, Tinder has been present in India, little large player in India, but we recently introduced OkCupid because we felt there a hole in the market in terms of a more serious-minded relationship app.
Japan is another market where there is Tinder, there is Pairs which we’ve seen tremendous growth. And now we’re offering a third product as of a few weeks ago with Pairs Engage. And then the — one we talked about today, which is Harmonica is really around looking at kind of cross-geo demos, where we can serve the Muslim population. So we’re excited. We don’t think in these markets, there’s winner takes all. We think by offering different apps for different segments, there is a real opportunity for growth.
And then you asked me about how do we think about marketing. We approach marketing a bit based on brand lifecycle. So, as we launch new products in new markets, we generally tend to spend more money on brand spends and measure awareness and then over time is brands and products become more mature, we tend to start shifting more to performance marketing. We’ve got a really good track record in the past for being smart and prudent and we need to take some bets as well. And I think that balance of brands and performance marketing has served us well.
Thanks so much.
Our next question today will come from Ross Sandler of Barclays. Please go ahead.
Hey, guys. So, Gary, a question on the guidance for back half. So, we’re obviously seeing, as you mentioned, the second highest net adds for Tinder in company history. So tons of momentum, but the guidance implies a little bit of tailing off of the net adds in 3Q and 4Q. So is that from the new merchandising playbook having less dramatic impact on the Android? Is it from higher churn or just higher rate of drop-off or is that just usual conservatism? Any color there would be helpful. Thanks.
Sure. So, I think as you know, if you kind of looked historically, when we roll out new features that are focused more on monetization or we’re focused on optimizations. You do see a particular bump in the quarter where we roll it out, from a net adds perspective. And so if you look in Q2 at the high number of subs that we added, at Tinder, you could see that’s been driven by the iOS optimizations that we did, the merchandising changes that we did. We’ve rolled that out now in Q3 on Android. We talked before, I think, about how Android it doesn’t quite have the same impact as iOS when you roll out something new like this, but we’re seeing in our guidance for Q3, on net adds, that there still is a nice lift still is a nice lift from kind of normal levels in Q3 that we’re expecting when we’re guiding to north of 400. So you can see the impacts there of those changes in Q2 and Q3.
At the moment, we don’t have a plan to do something that we think we have this kind of impact in Q4. So that’s why we’re expecting a smaller number of net adds in Q4 than we’ve seen in the first three quarters of the year. And so I think you’re right, your math is we’ve guided to a 1.6 million for the year if you add up the quarters. Which is one, two and the guidance for three, you end up with a smaller number in Q4. However, it’s also important to note that we’ve rolled out some new a la carte features and we’ve been adjusting pricing and the percentage of Gold subscribers is increasing. So, a lot of who like to focus just on subscribers, but as we often say it’s a revenue focus at Tinder, not just a subscriber story and so the subs is a piece of it, but we’re also focused on driving ARPU higher, which we’ve been able to do and we’re expecting to have solid year-over-year growth in ARPU in Q3 and Q4 as well, which will drive improved revenue at Tinder. So that is the other piece of it, we’ve just rolled out these two new a la carte features that Mandy mentioned, I think you’ll see some lift on the ARPU side, as you see the results for Q3 and Q4.
Anything else, Ross, otherwise we’ll move to the next one.
No, that’s super helpful, thanks.
Okay, great, thanks.
Thank you. Our next question will come from Brent Thill of Jefferies. Please go ahead.
Good morning. Mandy, can you just maybe walk through some of the core Match improvements and the early results. And for Gary, there is a lot of questions around, can it grow or are you going to run that core business just for profits, if you could add a little more color around the financial dynamics that you see going forward for core Match?
Okay, morning, Brent, so let me take that first part. So, when we take a step back and think about how the — the audience that Match serve is really focused on ’30s and ’40s in the US that are looking for a serious relationship. And for people over 35, it’s the brand that still brings the highest number of new entrants into the category. We have made a lot of progress over the last couple of quarters, satisfaction rates are up, conversion is up, we’re feeling really, I’m optimistic. And then we also introduced a new feature called Ask Match, which I talked about, we think it’s highly differentiated and so we felt good enough that this is really the time to bring attention back to the brand, which is why we launched this new campaign that I talked about. Our goal remains to turn the brand to growth, similar to what we did at OkCupid over the last couple of years. And we are cautiously optimistic that we can turn Match around and return it to growth. So, we’re feeling good about that brand.
Yeah, I think if you look at Match itself, as Mandy said, our goal is to get that brand back to growth from a subs and a revenue perspective. If you zoom out a little bit away from just Match and look at the non-Tinder brands, which is I know we’ve been talking about is kind of been flattish from a revenue perspective. We think we have a lot of different weapons inside the non-Tinder portfolio that will return those brands in aggregate to growth in the not too distant future. So, we’ve talked a lot about Hinge, we talked a lot about what’s going on at OkCupid, we’ve talked a lot about the positive momentum at Pairs and I could go on. But our expectation is that the non-Tinder brands will start contributing to the revenue growth of the company, hopefully by the end of this year, if not then very early next year.
You are welcome.
Our next question will come from Youssef Squali of SunTrust. Please go ahead.
Great, thank you very much and congrats guys. Gary, can you size what you term to discretionary long term oriented investment? I think you guys have talked about $10 million previously and just how will those costs look into next year, whether these costs basically remain in the P&L next year? Or whether we anniversary them and move on? Thanks.
Yeah, I don’t think I’ve actually ever given a size around these discretionary investments, I think last quarter I basically just said we were contemplating making them. And so let me try to take it kind of in two pieces. Just given the overall strong performance and the strong performance of Tinder, we want to reinvest back both in Tinder and in some of these other initiatives. I can’t really remember a time when we’ve had so many great investment opportunities. So many assets to invest in, when you look at Harmonica for the Muslim market, when you look at Pairs Engage, which we’re really excited on the Matrimony market in Japan, it’s a place we’ve never tried to attack before. So we’ve got a lot of really interesting opportunities in front of us, and given the strong performance this year, we got the ability to go make these investments. So we’re trying to do a bunch of different things here in these last couple of quarters of the year.
And so if you look at it, we’re going to invest a bunch back in Tinder marketing into new geo’s where Tinder historically hasn’t marketed before, that includes some in Asia. And we think there’s room to expand the geo’s where Tinder has been marketing and put some real dollars to work there. So that’s a piece of it. And then as we’ve kind of gone through, there’s probably four, five, six other buckets, OkCupid in some of the international markets, including India that Mandy references, Harmonica which I referenced, as well as Pairs Engage. If you take all of those other buckets plus Tinder, you’re probably looking at, I would guess about, $25 million or so of EBITDA impact from all of these investments that we want to make this year yet. So it’s a pretty big number.
As far as whether it will continue, we don’t know yet what the impact of all this is going to be. So we’ve got to look at is the Tinder marketing effective? Is Pairs Engage gain the traction we wanted to get? Is the Muslim market product getting the traction we want to get. So I don’t know what it portends for 2020 yet, but our hope is that, that marketing and those investments will have real impact and we want to continue them and ultimately, they will lead to revenue and ultimately EBITDA benefits. But it’s going to be some time before we see what the real impact of all these investments is. We’re making them cautiously, we’ve thought about them for a while now, and we’re starting to make those investments, we have a pretty good ability to figure out where to invest. And we’ll have to see, but we don’t look at them as kind of one-time once and done investments, for the most part, they are things that are meant to drive the business going forward. And that discretionary bucket, which is a large bucket and has a lot of different components is on top of or in addition to money that we’re spending around regulatory and making sure that user stay safe and their data is protected. So there is another bucket on top of that. So you aggregate that up, it’s a pretty big impact on our EBITDA in 2019.
Hopefully that helps you.
Okay, that’s super helpful. Thanks, Gary.
No problem. Next question please.
Our next question is from Dan Salmon of BMO Capital Markets. Please go ahead.
Great, thanks for taking the question, good morning, everyone. Mandy, I just wanted to ask a little bit more about Asia broadly and maybe you could just considering most of us on the call a little bit more US focused. You could maybe just refresh us on the competitive environment there and how it may differ from what you see in Western markets in terms of local players or maybe some changing dynamics lately that you’d highlight. And then secondly, I’d just like to drill down a little bit more on Pairs Engage and what you noted is sort of attacking the matrimony business specifically and which obviously is all part of relationships, but a little bit different than some of your apps, and there certainly businesses that are taking a different approach there. Could you just spend a little bit more time on Matrimony services specifically and where that opportunity may also be in Asia beyond Japan is I think that’s fairly common in India and South Asia as well? Thank you.
Okay. Good morning, Dan. All right, so let me take that. So, we talked about Asia opportunity, but Asia is obviously very multifaceted. And so I’ll talk about it in a couple of different areas. We really look at developed markets like Japan and South Korea, and then we look at developing markets Southeast Asia and India, so I’ll break those up. From the developed markets, there is a real social need given low population growth and low marriage rates, and people are looking for ways to meet people, especially outside of their social circles, because there is a little bit more shyness around meeting people through friends. In Japan where the category is growing only about 17% of singles are open to using a relationship or dating app that’s low, I mean, it’s about 50% in North America and Europe. So that dynamic is a big change, so we think there is a real opportunity to increase user adoption.
And I think it’s pretty interesting in these markets where social stigma is changing, but I think part of — one of the opportunities that we think regarding stigma is historically mainstream media, I’m talking television, billboard, radio, they have not traditionally allowed dating apps and relationship apps to advertise and I think those barriers are totally collapsing, which I think will further help erode stigma help erode stigma and make it much more normal in society to use the apps.
And then the one other dynamic I just point out is these more developed markets is a — monetization is really different, I mean in many of these markets, particularly Japan, it’s even better monetizing in some Western market, so that dynamic is really an advantage for us. People are willing to pay for products. If you look at developing markets, it’s definitely a little bit different. So these are where population growth is exploding and Internet and mobile penetration is still growing meaningfully faster than anywhere else in the world. There’s a couple of factors in these markets, which I think are interesting and are really compelling to us. So there is highly populated cities and in those cities there is large segments of young educated affluent users, which we think there is an opportunity for us to offer our products, like Tinder and others.
And then you asked about the competitive set. There are definitely well fortified competitors in some of these markets, both global players that we’re seeing, as well as local or regional players. I think in terms of our position in the market, I don’t think it’s a winner-take-all market; in the US we’re seeing people use multiple apps. I think that’s going to continue to be a trend, not just in the US and Western Europe, but I think we’ll see that happen over time as well. So, I do think it’s possible that as these new entrants come into the market and spend heavily along with us having a presence in these markets, it could open up the market and further erode stigma, which I think would sort of lift the whole category up, but regarding how we’re competing. I think we’re really well positioned. We’ve got a track record of creating products that really resonate with young audience that are looking for a relationship. We’ve also done a — I think a good job in identifying and finding and investing in local teams, which we think is even more important over the next five years and then extending existing brands into the market. So overall, we feel like we’re in a great place.
I’ll talk a little bit about the marriage market, because I think that is relatively new, just launched Pairs Engage honestly weeks ago. So, it’s still super early. So there are — the matrimony markets are pretty large and a number of markets like India and South Korea and Japan, among others, these businesses because a lot of us don’t have direct exposure to them, most of our offline, they are brick and mortar. So they have storefronts, they’re generally pretty high price for consumers and it’s pretty expensive to service these consumers, especially given kind of the brick and mortar footprint I mentioned, and often they have sales people and a lot of service-oriented people within this brick and mortar stores.
So the parent team, which we’ve talked a lot about has done a great job in building this Pairs business over the last few years. And what they have — really a strong asset is an engineering team that has the ability to leverage the latest technology plus the Paris user base and we think the combination of these two things is — could have the ability to really potentially disrupt this marriage market, which we talked about, which is pretty large market in Japan. And it’s really early. We just launched the early [Phonetic]Texas Grey, we’ve gotten a lot of press and really early signals that this — there’s going to be a lot of user interest. And I think, as you know, as we expand over the next few years in Asia, I can imagine that these are the types of solutions that can translate to other markets. So we’ll see, but I think that certainly one more product and one more and sort of tool in our arsenal to be able to address that market.
That’s great, thank you for all that color, Mandy. I appreciate it.
Our next question will come from Ben Schachter of Macquarie. Please go ahead.
Hey guys, congrats again on the good execution, Gary, going back to the in-app payments and the impact on COGS. As you noted, it fell sequentially as a percentage of revenues for the first time in many years. And I think you mentioned that the IAP change had single digit impact and will grow, but single-digit what? Can you clarify what you meant there? And basically would you expect that COGS to continue to fall as a percentage of revenue for the foreseeable future? And then secondly, related to that, for modeling purposes. Can you help us understand what the percentage of total revs are currently originating on Android and how you expect that to evolve over time? Thanks.
Sure. Sorry if I wasn’t clear on the answer earlier, you know what I was responding to actually was, Nat had put out a report that he thought the change by adding credit card added $10 million to EBITDA, I think is what he said, and I was talking about, it was less than that, it was kind of in the single digits in this quarter. So that’s what I was responding to. So it was an EBITDA contribution kind of number. But you’re right, this is the first quarter in a while that we’ve seen — if you look at the sequential trends in COGS, it’s down about 50 basis points. So that is a change in trend. I think we’ll see how this kind of plays out over the next few quarters, but my expectation is that there’ll be some level of stability, maybe be up a little bit, maybe be down a little bit, but if you look sequentially in the next few quarters, you’re going to see more stability, less of an increase than what we’ve been seeing sequentially for the last many, many quarters. So that’s kind of the change from the impact of adding the Google credit card option.
As far as kind of how do we think about the breakdown between iOS and Android on Tinder. As you might expect, it is more iOS heavy at the moment, it’s more than a majority. iOS, but as we expand internationally, especially into some of these developing markets where Android is more popular, I think that that balance will shift over time . So, we could see some more parity there over time. But right now, it does lean more heavily on the iOS side, from a revenue percentage perspective.
Thank you. One quick housekeeping. The tax in France and other taxes that may come. Is that going to be counted to the contra-revenue, G&A or is that just part of the income tax line?
Yeah, it’s not an income taxes, it’s an above the line item. So, it is an expense item.
Quick last question.
Our next question is from Benjamin Black of Evercore. Please go ahead.
Hi guys, thanks for sliding me in here. I was just wondering if you could talk about your capital allocation priorities, given your renewed push to ramp presence in APAC. And secondly, perhaps, could you highlight the near and long-term market opportunity and the competitive environment you see in the Middle East and how well Harmonica has penetrated there?Thanks.
Okay. From a capital allocation perspective, I think if you go back, it’s probably about a year ago or so now we laid out how we think about capital allocation, we laid out four priorities, which were in order, if I get them right, organic investment in the business, M&A, return of capital to shareholders, and debt pay down, and that is our way of thinking about capital allocation. Obviously there’s a lot of different factors that go into it and we constantly analyze it, but that has kind of been our framework. And fortunately, what we’re seeing in this year, given the outperformance that we’re experiencing is that we’ve got the ability to really invest in organic growth, which is our number one priority and that’s what we’re doing and we’re doing it in a bunch of different ways. We’re doing it at Tinder by expanding its marketing into more geographies. We’re doing it at OkCupid by expanding it into a bunch of new markets in India and elsewhere in Asia. We’re doing it at Pairs. And so it’s really in a number of ways where we’re reinvesting capital that we’re generating.
And then as I kind of alluded to earlier, we’ve got new assets as well, which we’ve either brought on board like Harmonica or built in-house like Pairs Engage that we can invest in as well. So we are really kind of hitting that number one priority of investing organically in our business in a big way on multiple fronts and we’re excited to do that, but as we’ve also shown over time, if we don’t have a capability in-house that we think we can do better by making an acquisition or investment, we’ll do that too. So Pairs was an example in Japan that we did initially and that’s worked out really well by combining their know-how and our know-how.
And we’re hoping that the same will hold true at Harmonica, where it’s a very small app really focus on the Egypt market at the moment, but we’re going to try to build it out and expand it and get it into other geographies and invest in it, both product and marketing and we think there is real opportunity just given the size of the Muslim demographic that Mandy talked about, and how quickly it’s growing that we think we can position ourselves over the next while to capture more and more of that opportunity. So, it’s early, this kind of product is really new in this market. There is a couple of other competitors that exist out there, but we feel good with a good team on the ground and our knowledge and resources of — in the dating space that we shouldn’t really be able to be highly successful in the Muslim demographic, which we think gives us a huge opportunity to massive runway, but it’s going to take time and so, if you’re going have to be patient, I think to see the results from that investment in Harmonica, but it’s one that we’re excited to be making.
Great, thank you.
Okay. I’m going to leave it there since we’re out of time. I appreciate everyone joining and we look forward to talking to you again next quarter. Thanks so much.
[Operator Closing Remarks].
Mandy Ginsberg — Chief Executive Officer” data-reactid=”192″ type=”text”>Mandy Ginsberg — Chief Executive Officer
Nat Schindler — Bank of America Merrill Lynch — Analyst” data-reactid=”194″ type=”text”>Nat Schindler — Bank of America Merrill Lynch — Analyst
Ross Sandler — Barclays Capital Inc. — Analyst” data-reactid=”196″ type=”text”>Ross Sandler — Barclays Capital Inc. — Analyst
Youssef Squali — SunTrust — Analyst” data-reactid=”198″ type=”text”>Youssef Squali — SunTrust — Analyst
Benjamin Schachter — Macquarie — Analyst” data-reactid=”200″ type=”text”>Benjamin Schachter — Macquarie — Analyst
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