Match Group, Inc. (MTCH) Q2 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Match Group Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lance Barton, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'm joined on the call by our CEO, Mandy Ginsberg and CFO, Gary Swidler. They will review the Q2 investor presentation that is available on our IR Web site and then will take questions. But 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 uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release, in our periodic reports filed with the SEC. Now over to you Mandy.

Thanks, Lance and good morning everyone. Gary will review our financial results in detail, but I want to begin by highlighting how truly exceptional our financial performance continues to be. I’ve been in this role for nearly eight months and it is really exciting to post the best first half performance in our history with 36% topline growth and 60% EBITDA growth. I’m proud of the team for all of the hard work they’ve put in, which has enabled us to achieve results that few other companies are able to match. And with that, let’s jump into the business update. Starting on page four, Tinder remains the growth driver of our business. Direct revenue in the second quarter of Tinder was up 136% compared to last year as subscribers grew 81% and ARPU rose 33%. Four quarters after the initial launch of Tinder Gold, we continue to see very healthy adoption rates of Gold, both among new users purchasing Gold as well as existing Tinder plus subscribers upgrading to Gold. As a result, the percentage of Gold subscribers continued to increase in Q2 and is above 50% of the total Tinder subscribers. As Gold continues to drive revenue, the team at Tinder is in focus on improving the user experience through a number of both visible and under the HUD [ph] initiative. We don’t often talk about these under HUD -- initiatives because it’s not a glamorous as the exciting consumer facing features we’ve allowed but extremely important to understand that much of the work we do consists of making analytically driven enhancements that lead to improved product performance and modernization. So as an example, some of the AI driven enhancements to the recommendation engine have resulted in marked improvements and the experience of new users globally which led to real strength and retentions and subscriber conversions in Q2. We believe there’s a lot more opportunity for similar performance, optimizations which should continue to improve the user experience and monetization. On the monetization front, in July we started testing Picks, which is the new revenue feature we’ve been talking about and if you turn to the next page, you can see more detail about this feature that is available on iOS and Android in nine countries around the globe. Picks provide Gold subscribers with a tailored daily selection of four to ten interesting and popular users. We highlight their hobbies, interest and passions all derived from profile information using small tags on each profile, tags such as foodie, military, scholar and traveler. Picks are here today and are gone tomorrow, so users need to come back daily to see the latest selections. On the last call, I mentioned that a big objective at Tinder is to give users more reasons to come back to Tinder and to use the app more often. Viewing daily Picks is a great reason for users to come back frequently. Picks is the revenue feature designed to build upon Tinder and particularly growth momentum. Tinder monetization is really hitting on all cylinders from the progress we made last year. We are testing Picks in several markets as an added benefit to increase the value of Tinder Gold. While it’s still very early we are seeing indications of strong resonance among users. We anticipate that Picks will increase conversion rates as well as drive up ARPU through higher Gold uptake. It also potentially provides us the opportunity to demand higher prices for Gold in certain markets and we think it can be another example of the continued success we've had with monetization over the past three years at Tinder. Tinder places is the location feature we launched last quarter, is another feature that creates daily reasons to come back. You may recall that places a new way for users to see potential matches go to the same places they do. Where you go, there’s so much about who you are, especially in a highly mobile, young, and social community. On average, our users go to 20 to 25 social places a month. With places, Tinder users can see who else went to their favorite new Italian restaurant, independent bookstore around the corner or the dive bar down the street. We've been testing places and a few markets with positive early results for our users. Two people that match this feature are 20% more likely to engage in a conversation. Thus far users who enable places enjoy the feature and retention remains high, and we believe places is the first step in a broader focus on location driven features at Tinder. I also had briefly mentioned Loops, which is not on the slide, we’ve talked about before are our two second user generated Video Loops are now available on iOS in 26 markets including the U.S. and add another dimension to the user profile. A Loop really makes the user come to life more than a static photograph, but without the awkwardness of the lengthy video. Users who include a Loop in their profile experience high, right fight [ph] rate, match rates and conversion rates. We also recently announced Tinder’s integration with Snapchat, Snap Kit, enabling users to use Bitmojis. Tinder is one of the first app and the only dating app to integrate this way, but Bitmoji users have a playful new way to engage with matches and Bitmojis give users the opportunity to show more personality. In addition to these features, we are excited to introduce something new at Tinder to an important viral and influential community, college students. Five years ago at college campuses around the U.S, students first heard about Tinder through friends. Tinder spread like wildfire, because it was a really fun and easy way to meet people who went to school, but you didn’t know personally. Keep in mind, prior to Tinder, people in their late teens and 20s simply didn't use any products. Tinder brought in a new audience that was young, social and mobile. While Tinder’s audience is filling [ph] and the vast majority of users are in their 20s. We believe it is critical that Tinder maintains a strong foothold at universities around the globe, especially given that every 18-year-old who starts college is building a social life from scratch making new friends and starting new relationships. Next week, we are launching Tinder U. This is a student focused experience inside the Tinder app. This allows students to get the full fleet of Tinder’s features while interacting with other college student on their campuses or on campuses nearby. For example, in Boston, users will see students from Harvard, MIT, Boston College task [ph] and all of the other colleges in the Boston area. The college years are incredibly social. Tinder U provides a powerful way for college students to interact on a daily and weekly basis, centered around going out and meeting up, which should really enhance college social life. To support Tinder U, we will launch a major marketing campaign on college campuses throughout the U.S. Tinder has become an iconic youth and lifestyle brand and we think with this new and app experience we will keep Tinder fresh and exciting for the 20 million student on U.S. college campuses plus millions more globally. Let’s look at slide six. We believe that as a market leader in dating, we should consistently incubate new products internally and make strategic acquisitions where we can leverage our expertise. As we think about incubation, we are mindful that startup success rates are low. For every Tinder, there are countless failures. Despite the overwhelming odds against success, we should continue to make rational bets on internally incubated ideas with the belief that one of these brands might succeed as a standalone brand or may become an innovative feature within an existing brand. It’s about backdrop that I highlight a couple of early innovation. Chispa, a mobile app that we launched in cooperation with Univision to serve the Latino community has seen some early traction. In its first six months, it has grown faster than many competitors dating apps despite its narrow focus on one segment of the U.S. population. It’s very early, but we like what we see and if we can continue to attract and retain users, it could someday be an interesting platform to begin monetizing and potentially take the Spanish-speaking market outside the U.S., like Mexico. Another new product Crown came out of an internal ideathon. Crown has the unique dating concept where users select between two potential matches at a time, and a tournament style bracket of 16 potential matches, until they have crowned a winner for the day. The user interface is fun, and it’s engaging and Crown launched earlier this summer it generated a fair amount of PR buzz. Again, it's far too early to say this recent traction will grow into something meaningful but we plan to continue to make these types of bets. On the acquisition front, last month we announced we had acquired 51% of Hinge. Hinge is an early-stage innovative product that is showing great momentum in the U.S. We’ve been fair [ph] to the product since they redesigned it late 2016. We developed an early point of view that the pivot was working and invested a small amount of capital in September 2017. Our initial investment gave us a board seat [ph] and allowed us to work closely with Hinges passionate and talented team, led by founder Justin McLeod. Since our initial investment, there has been fantastic consumer traction and momentum, particularly among young cosmopolitan singles. The new Hinge product is modern and lightweight, yet naturally encourages depth in profile content and user interactions. The user interface has been a hit with relationship mind and millennial leading to strong word-of-mouth growth. Over the past year, Hinge’s monthly downloads increased by 400%. The momentum was compelling enough for invest, further increase our initial stake to 51% and we have the option to acquire the rest of the company. As we did with Tinder and with pair acquisition Japan, we plan to bring all our resources to bear to help Hinge become the next breakout success in the category. We plan to meaningfully ramp up marketing spend in the second half of 2018, and capitalize on the natural momentum the product is showing, particularly with sophisticated young users in big cities like New York, Boston, Chicago and LA. I’m bullish on what we can achieve with Hinge. In addition to incubation and M&A, we also see large opportunities for us to build presence in additional international markets where there’s a large and growing single population. Tinder have a toehold in many of these markets and we have a strong business in Paris, and Japan. There's room for us to have more products in more market. In particular, we see massive opportunity in certain Asian and North African Middle Eastern markets that have very young and highly mobile savvy populations and plan to share, build share their overtime either organically or through M&A. On Slide seven, we thought it would be useful to take a step back and briefly summarize the evolution of the dating category; she can better understand our portfolio today and our strategy going forward. We believe in like – stating one size does not fit all, making multiple products necessary in the market. And today, young people are using more than three dating products at a time. We believe that our 20 years in the dating category gives us significant insight into behavior in this category. Only the track record of success in both innovating exciting new products and bringing our skills to great products that we have purchased to create additional success. In 1995, Match created the first online dating site in the U.S. and Meetic followed soon in Europe. Despite being founded so long ago, both brands have really withstood the test of time and remain number one in terms of unaided awareness among singles and their respective markets. Both of these brands have always attracted users age 30 and above, who are willing to pay for dating products. Today, we remain very focused on making sure that both brands remain the top choice for people in the 30s and 40s, who are looking for serious relationship. We have been making progress testing product changes to increase the value for users of these brands, to just streamline – streamlining the subscriber experience, producing ads and providing a higher level of customer service. We know people do not mind paying to find more serious relationships. We just have to make sure that we provide great value for the money. With Match and Meetic making the products deliver a better overall experience is key to meeting our objective. We are working to ensure that Match and Meetic continue to serve the serious, slightly older premium price dating community. The next suite [ph] of change hit our category in early 2000. From PlentyOfFish and OkCupid became the first to offer a free product and monetize through ad. Many observers expected this free alternatives to dominate the category and to kill Match, but what ultimately transpired is that free products brought new people into the category who were previously reluctant to pay for dating products. This influx of new users lowered the category stigma and drilled organic growth of PlentyOfFish and OkCupid. Today OkCupid 20 and PlentyOfFish both have strong positions in the market with growth opportunities ahead. Because these businesses haven’t traditionally marketed their products, their brand awareness is fairly low. We see opportunity to invest in markets and marketing to drive user growth in a variety of markets. You recall that at OkCupid, we ran a series of bold and exciting ads on subways and billboards earlier this year and got people talking, which drove higher awareness in our key markets. Encouraged by that early traction, last month we expanded the advertising campaign to five more large cities across the U.S. and are seeing similar results with increased new user growth in markets -- and substantial. Fast forward to 2012; smartphones and the app economy took off in the incubated Tinder to bring dating to get another new audience. The users in the early 20s is the largest single population of all on smartphones. Tinder’s viral growth around the globe was unparalleled in this category and it truly is, and only by itself. It is the only brand created in the last decade to be in the top five in terms of unaided awareness among all signals in the U.S. and is the number one brand for singles under the age 35. On the heels of the success of Tinder, investment started to flow into the category with many competitors focusing their marketing dollars towards relationship mind and millennials as a way to differentiate from Tinder, despite the lack of product differentiation, which brings us back to Hinge. Our of the many new and emerging players, we believe Hinge has distinguished itself with a unique product experience and is already resonating with its core demographic of cosmopolitan relationship minded millennials. We believe that with our focus, Hinge will be able to emerge as another meaningful player in the category with through staying power and success. In addition to feeling Tinder’s massive traction, and Hinge’s emerging momentum, we have seen success with geographic expansion, specifically in Japan with our Pairs brand. Japan had a large economy and high per capita income and that due to some lingering segment, dating products have been slower to catch on than the U.S. However, the Japanese market is now growing quickly. Under Match’s group ownership, Pairs has become the number one dating product in Japan and is a great example of driving growth by combining our in-depth knowledge of monetization and marketing with the local team that knows our market intimately. We believe, we can take this recipe for success to other key geographies over time. Reviewing the evolution of the dating business makes Korea [ph] our strong and lasting position as a leader in global and growing category. Tinder’s achievements have been phenomenal. We have a diverse portfolio of other brands to serve varying dating needs and we are making new pass through innovation and thoughtful acquisition. As a result, we are very well positioned for the future. And with that, Gary is going to take you through the numbers.

Thanks, Mandy. Match Group had another very impressive quarter of financial performance in Q2, with continued outstanding momentum at Tinder and overall stability at our other brands. We experienced very strong topline growth in Q2 and continue to see operating leverage result in a meaningful jump in margins. We are off to a fantastic start to 2018 and our outlook for the rest of the year is extremely positive. Let's review the details. On slide nine, you can see that average subscribers reached over 7.7 million, up 27% year-over-year and up a point from Q1 2018s year-over-year growth rate. North America grew average subscribers 20% year-over-year, a level we have not seen in three years pro forma for our acquisition of PlentyOfFish. International grew average subscribers 36% year-over-year. Note that Tinder's rapid growth has a bigger impact on our international business because of the bigger piece of the pie internationally. Tinder continued to be our growth engine. It has 1.7 million average subscribers year-over-year and a 81% growth rate, and 299,000 sequentially. Tinder’s sequential subscriber growth was slightly stronger than we had expected as new user conversion and re-subscription rates were both stronger than we had anticipated. We expected to decline from a 360,000 sequential additions in Q1, which was indeed the case, but Q2 sequential net ads remain well above our historical averages from the period prior to the introduction of Tinder Gold. Subscriber trends at our brands outside of Tinder were similar to what we had seen in Q1, 2018. We specifically call out outstanding performance in our peers business in Japan and OkCupid continued to make solid progress. Subscriber declined at our affinity brands also continue to moderate. In all, subscriber’s ex-Tinder were down slightly year-over-year, but the year-over-year trend improved relative to last quarter. Overall company ARPU is up $0.04, 8% year-over-year to $0.57 as ARPU expanded both domestically and internationally. International ARPU did benefit to some extent from FX rates, but EBITDA on a constant currency basis, International ARPU was up 9% to $0.53. Overall ARPU was up $0.03 or just under 6% on a constant currency basis. The $0.01 decline in ARPU sequentially was driven by FX. Tinder Gold had a major impact on ARPU once again this quarter. As Mandy noted, Tinder’s ARPU in the quarter grew 33% year-over-year as Gold subscribers are now over 50% of total Tinder subscribers. Tinder’s ARPU which is approaching the overall company ARPU has also been driven by strong à la carte of both boost and Super Like. Flipping top slide 10, you can see that the subscriber in ARPU growth led to total revenue growth year-over-year of 36%, in line with the year-over-year growth we saw last quarter. Excluding FX impact of $8 million, year-over-year growth would have been 34%. We demonstrated strength in all components of revenue in Q2. North America grew direct revenue, 24% and international where Tinder comprises a larger portion was up 53%. Indirect revenue grew strongly once again at 33% year-over-year as we continued to see growth in programmatic revenue at Tinder and we increased direct ad sales. EBITDA grew 60% in Q2, due to the revenue growth and operating leverage, in line with the growth rate we had achieved in Q1 of this year. EBITDA margins were 42% in the quarter, up significantly from Q2, 2017 showing over six points of improvement. Overall expenses as for the percentage of revenue were 64% in Q2, down from 73% in the prior year quarter. Of particular note is sales and marketing expense for the quarter declined to 21% of revenue from 28% in Q2 2017 reflecting the ongoing shift to brands like Tinder and OkCupid with relatively lower marketing spend as a percent of revenues. Marketing expense this quarter includes year-over-year increases at Tinder and Pairs, as well as from the inclusion of Hinge in our Q2 results. In Q2, we under spend some marketing dollars that we have been anticipating at Tinder and OkCupid as our plans to spend those dollars in the quarter got delayed slightly. This resulted in better-than-expected, EBITDA end margins in the quarter. Product development cost increased $9 million in the quarter, largely due to increased headcount at Tinder as we continued to invest in that business. Total stock-based comp expense, which is included in each category of expenses was just under $17 million in the quarter, up slightly from the prior year quarter and in line with our expectations. Operating income grew 81% in the quarter, driven by the higher revenues and reduced operating expenses as a percentage of revenues. The operating income growth rate exceeded our EBITDA growth rate to lower stock-based comp expense, depreciation and acquisition related continuous expenses as a percentage of revenues. Operating income margins rose 8 [ph] points to 36% compared to 27% in Q2, 2017. On slide 11, you can see that the business continues to generate significant cash. Free cash flow for the first half of 2018 was up 65% to $229 million. For the second quarter, free cash flow increased 106% year-over-year to $111 million. Our cash balance of 630 of $310 million provides a solid financial flexibility for additional strategic M&A opportunities, stock buybacks for other uses. In Q2, we used $85 million of our cash to repurchase shares to offset dilution from employee option exercises and to pay withholding taxes on the option exercises. In 2018, we have repurchased a total of 2 million shares under our 6 million share repurchase authorization. By using cash to pay withholding taxes, and by net settling options, we issued 1.3 million fewer shares in Q2. The business also continues to delever, our current trailing 12-month leverage is 2.2 times on a gross basis, and 1.6 times on a net basis. On slide 12, we discuss our outlook. For Q3, we expect revenue of $430 million to $440 million or 27% year-over-year growth at the midpoint. We expect Tinder to continue to be the revenue growth driver with aggregate stability at our other brands. We expect $160 million to $165 million EBITDA in Q3 or proximally 36% year-over-year growth at the midpoint, and margin of approximately 37%. As I mentioned, we under spent a little marketing in Q2, but we have shifted some of those dollars to be deployed in Q3. We expect additional marketing spend in Q3 to primarily be a Tinder with more modest increases at Pairs, PlentyOfFish, OkCupid and Hinge as we support strong product momentum for these brands in their key markets. As Mandy discussed, the Tinder wrap [ph] in marketing spend has time to coincide with the back-to-school season for college students, who form a critical piece of Tinder’s target demographic, and particularly to support the launch of the new Tinder U and app experience. I had mentioned on last quarter’s call that Q3 would contain elevated marketing spend levels, so you can see that translating through the numbers here. We’ve been planning this Tinder marketing effort thoughtfully and are optimistic that this spend will drive meaningful benefits at Tinder overtime. The Hinge spend is something that wasn't in our forecast previously. We’re planning to increase Hinges digital marketing spend, to more fully introduce the product to a broader set of users seeking serious relationships. We see a strong product market fit in a highly desirable demographic with a lot of natural momentum. We think this is the right time to supplement Hinges natural momentum with marketing dollars and grow the product in a number of larger metropolitan markets. We expect that Tinder will add a similar number of subscribers in Q3 as it did in Q2, around 300,000 sequentially, above our historical averages, but below the levels in the back half of last year, when Gold drove a massive lift, but as we emphasized many times, Tinder clearly is much more than a subscriber growth story with revenue growth that exceeds subscriber growth. It has multiple growth drivers. Tinder also has opportunities to optimize price and merchandise more effectively, and we continue to make real progress in these areas. For the full year, we are increasing the top of our revenue range by $20 million to $1.72 billion and the bottom of our range by $80 million to $1.68 billion. This reflects the strong performance we've experienced year-to-date and our optimism for the rest of the year, particularly at Tinder. In terms of revenue, the range in our full year outlook relates largely to Tinder Picks. As Mandy said, we are testing adding Picks to the Gold subscription tier, which we expect will drive conversion and ARPU hire and therefore grow revenue. The precise impact of this will affect whether we are near the top of our range or even above it. The tests are early and we expect picks to be rolled out fairly slowly, as we make adjustments along the way, based on test results. We are updating our EBITDA range to $625 million to $650 million and expect to be at or near the top of this range. Our EBITDA outlook for the full year reflects that we intend to invest meaningfully in Hinge, which we expect to drive a low double digit millions drag on EBITDA. We are now consolidating Hinge and it is incorporated into our full year outlook. Aside from revenue, the largest variable on our EBITDA outlook is the exact amount of marketing spend we deployed at a handful of our brands to support their growth, particularly at Tinder to support Tinder U and the brand globally. I want to highlight that Tinder continues to experience meaningful momentum and operating leverage with strong and expanding margins. In fact, Tinder is on pace to exceed $800 million in revenue in 2018, a phenomenal achievement in less than four years of monetization. Stepping back, we really could not have hoped for a stronger start to the year. The Q1 performance was phenomenal and the trends have resulted in Q2 that was as good, or arguably even better. Our expectations have largely come to fruition. Tinder success is driving stellar growth and our other businesses are stable overall. The business continues to demonstrate operating leverage. This is particularly the case at Tinder and as we shift to businesses with relatively lower marketing spend as a percentage of revenues. We have added Hinge to the portfolio at a modest purchase price. While Hinge will be a short-term drag in profitability, as we made -- make both marketing and headcount investments in a product that shows strong momentum, we believe it can be a meaningful long-term growth contributor for the company and ultimately carve out a strong position in the more serious end of the dating app landscape, backed by our monetization and marketing know-how, that will be fun to watch. With that, we’ll now answer any questions you may have. Operator, please open the line to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jason Helfstein of Oppenheimer. Please go ahead.

Thanks, two part question Tinder Picks. One, can you confirm that Picks is the main new product for the second half of 2018 or is there another major product coming? And then, on Tinder Picks, the feature would appear to be aimed at improving your hit rate as a dater versus the main value of Gold, as it gave subscribers more bats. And I know you said that early indications on Picks is positive, but it would seem that the incremental financial impact would be much lower than Gold, so just any color around there just given the comparison on ARPU in the back half of the year? Thanks.

Okay, Jason. Try to answer both of your questions. So on Picks this is the revenue feature that we had been planning for in the back half of the year. It's not the only feature we're going to rollout at Tinder, obviously we've talked Tinder U, we've talked about Loops, we've talked Snapchat integration. We're working on places. So there's a lot of product momentum, generally a lot of new features in fact Tinder U is a new thing we haven't talked about previously. But in terms of revenue and clear customer facing features designed to drive revenue Picks is what we've been focused on. In terms of your question around churn and how we think about the Gold impact from Picks compared to what we saw in Gold. You're right. Gold was a new feature that came out last year and created a massive uplift because it was a new SKU and it was something we hadn't seen before. The Picks feature that is going into Gold is more incremental, and so we're expecting to see a more incremental impact than what we saw with the initial pop last year. But as we're thinking about what Picks is going to do, we're expecting that over time it's going to lead to higher conversion just like Gold did. We saw massive increase in conversion when we rolled out Gold and we're expecting incremental conversion lifts from Picks as well. In some markets we're going to price up the Picks feature and we'll see lift from that. We're going to see lift as more Gold subscribers come into the system. We're going to see more la carte purchases as well. So there's going to be a system-wide lift from the Picks feature that's rolled into Gold. And we're testing a variety of ways to roll it out and we're going to be testing it for a few weeks, but as we see how those tests work we're going to figure out the ways to maximize the overall revenue impact, that's where we're particularly good at. We will toggle between the price list and the conversion list and drive revenue at Tinder and while it may not have the same impact that Gold had last year when it was first introduced. We expect there to be incremental left from Picks and we're optimistic that's one reason we've raised our guidance and that's one of the reason why we're very optimistic for the rest of the year.

Thank you.

Okay. Next question please.

Our next question comes from Anthony DiClemente of Evercore. Please go ahead.

Good morning and thank you for taking my questions. Gary, free cash flow was really strong and well ahead of expectations. Can you talk a little bit more about your strategy for capital allocation going forward? I think in your prepared remarks you mentioned M&A. Just wanted to ask about ways you can use your free cash flow and strong balance sheet position to either invest in new products either organically or via M&A? And then how you're thinking about share repurchases as part of your capital allocation strategy going forward? And then for Mandy, you spend a couple of minutes highlighting Crown in your prepared remarks. So we were curious just -- the tournament or March Madness-style product here dating apps and how those fit into the portfolio? As time passes which milestones are you looking to on Crown before it starts to kind to click in and move the needle on monetization? Thanks.

Okay. Why don't I start with Crown then you can fill in the others. So, as I mentioned in the remarks, Crown is just one example of our incubation in our R&D efforts. I mean, it's clearly in very early stages and we're experimenting with the number of themes. So, from dating psychology to technology and also geographic themes like what's going to work in different regions around the globe. And then these learnings informs us either if these become ultimately standalone brand or if they actually get embedded into our existing brands whether there's scale. So, for example our incubation team worked on a location feature is that ultimately became the feature they got rolled into Match which is miss connections. So we really look to see what's happening with traction and where we think it best fit. And then in terms of monetization, we don't really set milestones out the gate for sure. Chispa for example which I talked about, we are not monetizing through subscription, but we're just starting to test la carte just to see what the take rates are and does it add incremental value to the user experience. And then if you look at Tinder, for the first two years of Tinder we've really – we didn't monetize it at all. We really focused on growth and user growth and we felt two years that was the right time to start testing monetization and we think it's important for any of these ideas to have liquidity and really test out whether or no these products work either like I said standalone or embedded into a product we scale.

In terms of the free question, Anthony, you're right, our free cash flow in the quarter results show at, first half of the year has been phenomenal from a free cash flow perspective, so we're very pleased about that. In terms of what we might do with the cash, look, we feel that the portfolio is in great shape. It's obviously running and also -- and there's a pretty close to that. And so we don't have any obvious hold in the portfolio from an M&A standpoint. But we are constantly scouring the globe for opportunities and where we see a strategic fit that makes sense with economic that makes sense, we will try to do that acquisition. That's the case in Hinge most recently We are particularly focused in international markets. We think there is a large growing single population there with access to technology. We love you capture more share in the international market, so we're particularly looking there. The Pairs deal that we did which is firing on all cylinders right now is a good case study for us where we can bring our know-how to an acquisition and really build share in a market. So that's kind of the same thing that we're looking for to deploy on the M&A front and if we find these opportunities we've got the cash, we've got the resources do it and we won't hesitate, but as you know we're discipline in this regard and so we're sticking to that discipline and looking for those right opportunities. If we don't find M&A opportunities that make sense for us, we will continue to do some what we've been doing over the course of the first half of this year which is investing in ourselves and buying back stock especially in situations where we think the market has really under priced the company because its worried about certain external factors or other things that are outside of our control. We're driving the business and if we don't think market reflects the true value and potential of the company then we use the cash, we have to buy back stock and so that's what we've been doing. We'll see kind of how things shake out after we get off this call and post these results. But we've got the resource to buy back stock if that's what makes sense and so more to come on that front.

Thank you very much.

Our next question comes from Brandon Ross of BTIG. Please go ahead.

Good morning. Thanks for taking the question. One for Gary, as recently as last quarter I think you reiterated that 40% margins were reasonable long-term target for the business, but you're already approaching that number this year and I think Tinder should be steady-state mid-50s margin business and that's taking significant share. Is there any reason not to reassess that longer-term 40% margin vision?

Well, Brandon, I think actually if you go back to what I've said about long-term margin trends, what I said was that we think we could achieve 40% plus for the overall company and so that plus is a pretty important little sign in that -- we are very confident in that 40 as you say, we're trending in that direction and I think there is room to go. Tinder has more operating leverage that we're to continue to see. We talked about margins that Tinder being north of 40% last quarter. For the past two quarters we said they're strong expanding this quarter. So you can model out what you think makes sense from a Tinder margin perspective, but I'm confident that we're going to continue to expand margins there and the overall company is healthy as well and benefiting from operating leverage as the OkCupid and PlentyOfFish in the world where marketing spend is a much smaller percentage of revenue, continue to be a bigger and bigger piece of pie along with Tinder. And so as a result of that feel very confident in that 40% plus. We haven't given more specific guidance on that, but we will continue to see marketing -- to continue see margins expand over time, may not happen every single quarter for example in Q3 of this year, we're going to spend up heavily on marketing because we've got some key initiatives and key product innovation that we're going to support. But if you look at the trends that have occurred on the marketing spend line we expanded, we reduce marketing spend as percentage of revenue in 2017 over 2016 and when you look at 2018 over 2017 its going to be something like two, three points where marketing spend, percentage of revenue comes down. So there clearly is significant leverage particularly on marketing spend side.

Great. Thank you.

Our next question comes from Brent Thill of Jefferies. Please go ahead.

Thanks. Good morning. Mandy, can you touch a little bit on the non-Tinder assets and specifically what brands you are seeing the most growth potential, the non-Tinder portfolio is mostly like flat, when do you think that can return to growth?

Yes. So, I'll start off. I think that as I said during the call, we've got a broad portfolio that address lot of that customers needs. And then in that portfolio there are number of puts and takes. So we're seeing strong momentum in businesses like OkCupid, and Pairs to name a few. We believe that – and for some of these businesses for example, Match and Meetic that have been in the past really dependent on television advertising, they still continue to be pressure on the top of the funnel for sure, but we think over time we can not just stabilize but grow these businesses moderately. Do you want to add?

Yes. I mean, I think as I mentioned in remarks and I think you are aware, we look at the performance net business in the non-Tinder business overall as stable, and that's what we talked about was the goal for 2018. I think we've achieved that. In fact if you look at kind of the year-over-year sub-growth it was better this quarter than it was last quarter and it was better last quarter than it was the prior quarter and that trend has been the case for three or four quarters now. So it is stable. We continue to make progress in those businesses. As Mandy said, there is different rate of growth happen in various businesses. We've talked about Pairs doing very well in particularly, OkCupid having traction. We're also making a certain number of decisions in the non-Tinder businesses that are affecting the overall trend. So in some of the Affinity businesses we're not spending up in marketing, they are small businesses. We don't see the LTVs and so we're pulling back and we talked about spending marketing judiciously at some of the businesses do like Match and Meetic where we don't the marketing spend reaching our ROI thresholds and therefore you're going to see some knock-on affects on sub-growth, but overall given where the company is we think that all make sense. So those sub-trends are affected by things we're making and we think that maximizing revenue and ultimately profitability. But we're happy with where we gotten the business to so far this part of the year. We think it will be stable in 2018. And then our goal is to continue make some new bets and make some product enhancement and ultimately drive some growth out of the of the non-Tinder assets, so can't tell you exactly when, can't tell you exactly the order of magnitude, but we're plan to go from a stable business to something that over time can be positioned for growth.

Thank you.

Our next question comes from Peter Stabler of Wells Fargo Securities. Please go ahead.

Thanks very much. A follow-on to Brent's question. So, Mandy could you help us think about the future of the hard paywall businesses. A lot of us have done survey work. Match.com has unbelievable unaided brand awareness yet the model, the pay model is one that falling out of favor with more introductions of premium products and your purchase of Hinge, a product you've said its position towards more serious daters would seem to be in another potential threat to Match. So, as you step back and think about the overall hard paywall businesses, I mean it sounds crazy maybe, but would you ever consider changing those or migrating those businesses to soft wall – paywall, given the massive brand dominance that Match has? And would it possible for you to size the total hard paywall businesses as a percent of total revenue at Match Group? And then if I may one more, you mentioned previously TV efficiency waning a bit; could you offer any updated thoughts on that? Thank you very much.

Okay. Sure. So the first thing I would say is that Match and Meetic which are some of the hard paywall business you mentioned with strong brand awareness. Both of these businesses tend to skew little bit older for people in their 30s and 40s. And what we found is that when it comes to people who are a little older and who have serious intent, the hard paywall is not the constraint, people are willing to pay money to enter into serious relationship, so we don't think – in fact its actually a signal, people think that actually it signifies serious intend to those communities have a little bit of a gate, so when you are reaching out to people and talking with them you actually understand what their intentions are. So I think that that is important to mention, I think that, for that 30 to 40-year old audience we think that both Match and Meetic have a very strong long-term position and sort of squarely fit into that portfolio. You also mentioned how that fit in with Hinge because we talked about serious intent with Hinge. Hinge tends to skew a lot younger, so its definitely people and they're sort of still in their 20s maybe a little bit older late 20s, so we don't think there is as much sort of risk to Match and Meetic where its really generally people in their 30s and 40s sort of between 30 and 50. So, we do still think that hard paywall businesses are relevant. It's more important for us that we evolve the product to make sure that were continuing to create real value for the money and if we do that people like I said really are willing to pay, and if you think about it like in this country 35% of marriages are the result of dating apps and people don't mind paying 20, 30, 40 bucks a month for the hope of finding someone that they can fall in love to marry. Do you want to take it?

Yes. Little bit about kind of the sizing. We don't really disclose specifically how much is one particular brand or how much is hard paywall or so. We're not going to get into that here, but obviously as Tinder becomes a bigger piece of the pie as OkCupid and PlentyOfFish grow, the "hard paywall" businesses are becoming a smaller piece of the pie. But that said, they are still very important piece of the pie. They're still strong cash flow businesses, high margin businesses. And so we continue to focus on them and believe that we can drive performance there, but they are less meaningful in terms of the overall company.

Thank you.

Our next question comes from Douglas Anmuth of JPMorgan. Please go ahead.

Thanks for taking the questions. Mandy, you highlighted women's first features as an area of focus over the past few quarters. Could you just give us an update on the progress you're making there in particular around the type of impact and message-first features having and driving women's engagement or subscribers and then perhaps anything else on other female first products in the pipeline to highlight? And then Gary, can you just clarify the Hinge contribution on those revenue and EBITDA for the remainder of the year? Thanks.

Okay. So let me take the solving for women. What I'd say is sort of after decade in the category that it's imperative, people have a business or apps. If you don't solve for the female experience, so something we think about all the time. They are number of features at Tinder that we really think through impact to women and solve for the impact to women. So everything for making the recommendation stack more relevant to looking -- giving women more control which you mentioned before. So Loops is an example to make that profile richer and women really like Loops and responded well to Loop. So men who have Loops on their profile get it lot more right swipes from women. So a lot of the features that we are introducing in Tinder really have sort of the female experience in mind. We look very closely at user behavior and the female experience after we launch these features. To address the message first question, it's not a feature, its really a setting and if that setting, people can go under their settings and they can choose who makes that first initial communication. We've rolled out a couple of international markets and the early results show that there were no negative impact to the ecosystem which we are watching for and no really impact on two-way conversation rates but adoption is low. So we're going to have to watch and see what adoption is. Ultimately what I said is that we want to give people the ability to choose and then really it's up to them to decide how they engage with the product. And then second question you ask, what are other products are we launching? We launch, I think I talked about before the gentlemen badge in Europe, his grades [ph] are still high, men who have the gentlemen's badge it really signifies good behavior, see an increase in likes as well as communication. So overall I think it just – it's not something that we do special on the [Indiscernible] basis, but something that we're embedding into everyday thinking of our products.

Doug, in terms of the Hinge contribution, you know, Hinge is at this point a user story. It is not a subscriber story or revenue generation story. So its contribution from a top line perspective to us is really fairly negligible. But what we're saying is that we're investing in the business. We're investing in the team. We're investing in marketing. We're going to make a significant potential investment in marketing here in the back half of the year. So I would expect close high single-digits close to $10 million and its probably going to cost little bit bigger drags in that overall in full year 2018 as we invest in that business. So that's kind of the order of magnitude and that's kind of the case for a little while. We're not focused on monetizing in the shorter-term. We're going to continue invest and build that user base and then we'll turn our attention to focus on monetization.

Great. Thank you both.

Okay.

Our next question comes from Dan Salmon of BMO Capital. Please go ahead.

Hey, Good morning everyone. Mandy, I was hoping we could return to Tinder U for a moment. I think it's fair to come on most people's radar screen through the early part of the year and it was highlighted in the deck last quarter. And the way we start which maybe was incorrect, was as more of a promotional initiative, I think there was a promotion with the Cardi B contest, things like that. It sounds like this obviously evolves and now will roll out more as a product feature. But just maybe first can you just sort of walk us through the sort of history of the Tinder U initiative and how we're looking at that sort of correctly? And then second, as you think about the product feature rolling out later this year, you talked a lot about targeting the teen user, the college user prior to the 20s. Do you think about it primarily as you focus on that demographic and making sure that your user growth and eventually your sub-growth there is strong and comparable to the 20 something demographic? Or is it much about developing new experiences around the college experience and sort of features potentially monetize features for college oriented students specifically, I know it doesn't to be one or the other but any high-level thoughts on the balance between that would be great?

Okay. Let me start out and if I forget someone remind me. So, you are right. First of all, five years ago Tinder started on college campuses and that's how people found out about as they were talking to their friends on college campuses. And so we have continue to have a foothold, real presence in college campuses, but this is really about kind of doubling down in this college presence. We have talked about Tinder U and its right, it was more marketing related. We kick-off and aggressive ambassador program this past academic year and we've seen some nice momentum and then we also as you mentioned we did a big swipe contest where colleges across country were swiping and winner won a Cardi B context. We actual [Indiscernible] for the top schools, we saw an increase in 350% in terms of new sign-ups and so there was a lot of excitement and buzz around the marketing efforts. But it occurred to us that this can be even more compiling as of product experience. The ability for a student on a college campuses to toggle between the experience on Tinder which is sort of the broader audience as well as being able to just swipe and engage, interact and us e all of the rich features like Places and Loops interacting with just students, so I'm just on your college campus but on college campuses around you. And in terms of how we think about it, its not -- every year you've got 4 million, 5 million new freshmen not just in the U.S. matriculating and those 18 years old they are starting out new relationship, new social circles et cetera and we think that the product really lend itself to that audience particularly with Places. I mean, this audience go out a lot and we think that Places is going to be very compelling to be able to see who went to your favorite [Indiscernible] in the college campus. And I have focused a lot – we're focused a lot on not the monetization aspect of it, but how do we stay relevant, exciting – relative [ph] exciting brand because I know, is thing kind of life on market or -- you got to stay really cool for the younger audience and we think that this can help stay incredibly relevant. So we're excited about it.

Great. That's really helpful. Thanks.

Our next question comes from Eric Sheridan of UBS. Please go ahead.

Thanks for taking the questions. Going back to the team of optimization and improving retention and conversion of users, I want to understand the product side versus the marketing side, where you making those key investments to improve those optimizations and what should we think that investors think that means for the P&L longer term whether it would be margin efficiency, lower churn, higher ARPU, just how should we think about the output of that? Thanks.

So, obviously we're focused on both aspect of it. From a marketing standpoint we've talked about driving users particularly in international markets where we have tiny share and see massive opportunity and there's work to do in developed markets to continue to enhance the Tinder brands reputation and drive users there as well. So that's the double prong approach on the marketing side. Of course product is key to attracting users as well and that's why we have so much product momentum at Tinder and we continue to enhance the features at Tinder and drive users to the product based on what they see and what they find exciting about the Tinder product and Tinder U is yet another piece of that pie and so, you can see that the product continues to evolve and headed in a number of different directions whether its location-based, whether its Tinder U and so forth. I think also what we've really accomplished if you kind of take a little bit of step back with Gold, is that Gold really lifted our metrics both in terms of conversion and in terms of resubscription rate and we saw a very significant pop from Gold and what Gold brought to the table. And we saw that pop initially and then it settled down, but it settles down at levels that were higher than the baseline that came in pre-gold. And so throughout this whole year so far we've seen very sustained lift in conversion resubscription rates and so that product work continue to reset our metrics. Now on top of that higher baseline for conversion and for re-subscription rates, we're bringing out Picks. And Picks should have some additional impact on conversion. Picks is also designed to provide ARPU lift by bringing in more la carte purchases of both of -- of all of our la carte products and we're going to lift that way as well. So we're going to see conversion lift and we're ultimately going to see ARPU lift either through a higher uptake of Gold and that Gold becoming a higher percentage of the overall subscriber at Tinder or our higher rate. And so we are driving better performance and ultimately more revenue through these product innovations. And ultimately that what's translating down into topline growth and what's enabling us to continue this quarter and also last quarter to raise our guidance and outlook for the year as the product worked really takes hold. So that's how we're attacking growth at Tinder and creating growth. It is that double prong approach with marketing and product driving new users and seeing lifts in the metrics through the product work and that's our job and we'll continue to execute as well as we can and as well we have been hopeful on those – on both of those front.

Thanks.

Our next question comes from Ross Sandler of Barclays. Please go ahead.

Great. Two kind of less conventional questions, Mandy, first, you had some changes to your comp plan in the 8-K filed a couple weeks ago around a change in control. What's the read-through on that if any? And then Gary, the buyback cadence declined a little bit from 1Q to 2Q, so just curious given the dislocation after the Facebook news, why didn't we see more there? Any update on just the overall philosophy on buyback would be helpful? Great. Thanks.

Ross, I'll take the first one. So I wouldn't read too much of it. I'm the head of the comp committee for a publicly traded company and they are pretty standard change in control provisions and executive contract, so that sort of addresses that question.

Yes. And just real quick, since we're running out of time. On the buybacks I would say that the amount that we bought back in 1Q and 2Q were fairly similar, I think actually if you look it pretty closely, we slightly more in Q2 than it was in Q1, but its order of magnitude is pretty similar and really we've been pretty disciplined about it and watching kind of where we think values are and so we'll continue to do that. I don't think -- we have a general philosophy on how we think about buyback and where we see the value we’re going to go in. So we're sitting on the bunch of cash as one of your colleagues pointed out. And if we see further opportunities we'll go back into the market. But overall the trends have been pretty stable, steady levels of buybacks as the year has progress.

Okay, we're going to wrap it up there. But thank you everybody for joining and we look forward to talking to you next quarter.

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