Match Group, Inc. (MTCH) Q3 2018 Earnings Report, Transcript and Summary

Good morning. And welcome to the Match Group Third 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 third quarter investor presentation that is available on our IR Web site and then will open it up for 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 and our periodic reports filed with the SEC. Now, I’ll turn the call over to Mandy.

Thank you, Lance and good morning everyone. At the outset, I think it’s worth pointing out that this was our fourth consecutive of year-over-year top line growth, exceeding 25% and we are in pace for full year revenue growth of about 30%. As we have discussed previously, the comps do get tougher for us starting in Q4, since our last year’s Q4 was the full quarter attributable, but we have a lot of exciting of what's happening at Tinder and across the portfolio that I will talk about today, which I expect will enable us to continue driving our growth for 2019 and beyond. And Gary is going to talk you through the details on our financial performance and outlook. So with that let’s start with Tinder on Slide 4. Tinder remains the center piece of our growth story. Direct revenue at Tinder was up nearly 100% in the third quarter compared to last year and subscribers grew 61% and ARPU rose 24%. Even though we launched Tinder Gold over a year ago, it continues to have a meaningful impact on the business. More than 60% of the 4.1 million subscribers on Tinder are now Gold subscribers, up from 50% plus in the second quarter. One strategy to increase Gold subscriber penetration is to add more features to Gold subscription package, making it even more compelling to our users. In early Q3, we started testing Picks, which is an incremental feature that we introduced as part of the Gold package to enhance our subscription. Picks provide Gold subscribers with a personalized daily list of interesting users. We rolled Picks out to all Tinder users in September. This has helped drive more users to sign up for Gold subscription level, leading to an increase in ARPU since Gold comes at a premium price. This implementation of Picks resulted in increased ARPU but less of a conversation benefit. As is any new revenue feature, we will continue to refine our implementation and balance the trade-off between ARPU and the number of additional subscribers. As we have said before, ultimately, the goal of Tinder is to maximize revenue not drive a particular KPI, and we continue to accomplish that very effectively. Last quarter, I talked about how our under the hood product initiatives have led to improved out performance, user outcomes and monetization. We are particularly focused on improving success rates for customers, including optimizations like what potential matches they are shown by our recommendation engine and the post match messaging experience. Let’s take one example on matching. In New York City, people base in much higher radius than for example Austin, Texas. In cities and places like Brazil and India, specific neighborhoods has to be taken into consideration, small improvements to the recommendation engine taking into account the new characteristics of specific locations to potential matches, can increase match rates meaningfully. And match rates are a critical driver of engagement. In fact, getting a match on day of the user experience is single most important driver of the user retention. We also think there's role opportunity to drive revenue optimization. We are still early on at Tinder when it comes to testing price elasticity, specifically at a country-by-country level. We believe that we can also drive revenue by fine tuning our merchandizing in areas such as how and when to show either gold class or al carte pay. Given this opportunity, there is a real focus on all these optimizations on the product roadmap. Turning to slide five, we highlight two product innovations at Tinder. They’re both showing promising improvements and engagements. The first is Tinder U, which we launched in late August and is now available at over 1,200 colleges and universities throughout the U.S. Tinder U is a student only experience inside the Tinder app, to give students user access to the full suite of product features, while facilitating in our actions directly with other college students on their campuses or on campuses nearby. We created Tinder U to both attract new college students to the Tinder experience and reengage students who have been part of the Tinder community in the past. Ultimately, we see it as a way to deliver more value to the college user by providing more relevant recommendations, which helps to increase engagement. We’ve seen strong early traction with Tinder U, both in terms of driving higher flight rates and higher retention. On the right side of the slide, I want to rest the progress we have made on our user feed. We first launched the feed to all Tinder users in March. It was aimed at enhancing the post match experience to facilitate users starting more conversations with their matches. The feed gives users better glimpse into their matches' lives, and showcases people's passion and adventures, leading to better conversation and deeper connections. After the initial successful launch, we have been adding more content and context to the feeds. This continues to drive increased engagement and better outcomes for our users. Conversations triggered by feed are noticeably longer, higher quality and result in about 35% more offline connections. This is by no means an exhaustive list of all the product innovation underway at Tinder. Our work on location based features continues as well. In addition, we began localizing the product as evidenced by our recent launch of My Move in India, which enables single users to decide whether they want to be the first one to initiate the conversation. Slide 6, demonstrates how marketing has been deployed to reinforce our brand and product messaging and momentum. Our marketing efforts on college campuses began in March with 64 schools competing for a chance to host a Cardi B concert. That momentum from the spring semester has continued as we have leveraged social media influencers, on campus brand ambassadors and digital channels to support the launch of Tinder U product when students come back to school in the fall. As a result, college age users are now the fastest growing demographic in the Tinder ecosystem in the U.S. This is incredibly important as we want Tinder to stay fresh, exciting and relevant in this young and trend setting audience. Tinder has also launched its first ever brand marketing campaign. Tinder was such phenomenal at launch and spread so quickly that the market defining brand versus the business defining the brands. Tinder particularly resonated with 18 to 25 years old, because it provides a fine and easy way to meet people. Tinder sometimes gets the bad rep for being casual. But keep in mind that people in their late teens and early 20s are not looking to settle down. It is trying to date, explore and discover yourselves while meeting lots of people and being social. It's all about the single journey and Tinder reflects the way this group meets and socializes. The new marketing campaign is centered around celebrating the single lifestyle of this generation. The campaign can be seen on billboards across number of major cities throughout the U.S., as well as on digital channels. We've also started publishing content relevant to the single lifestyle, such as stories and tips related to dating, style, travel and food, with the aim of further reinforcing how Tinder can enable users to make them most of this fun and adventurous time in their life. Turning to next Slide. Tinder isn't the only brand we are investing in as we see opportunity for long term growth in many of our other brands. Last quarter, I spent time talking about how we are making investments and growing the business internal incubation and M&A and that work continues. If you look on Slide 7, you can see many of the product and marketing related investments we are making across the portfolio in our existing brands. High awareness brands like Match and Meetic are undergoing a product refresh, designed to increase value for the premium and high intent users. These changes provide better outcomes and value for our subscribers by improving algorithms, reducing cluttered ads and including add-ons that we historically charge for separately in the subscription package. In addition, we are investing in customer service to provide a higher experience for these premium users. We also continue to right size our marketing spends at these two brands to reflect the current reality of declining TV viewership and efficiency of TV advertising in general. Given that we have been reducing our TV spend, we expect short-term pressure on subscribers at Match and Meetic. However, there are early signs that indicate our enhancements to the customer experience are leading to improved organic registrations due to stronger word-of-mouth marketing. We are optimistic that these organic trends will eventually offset pressure from the reduced TV spend. At a number of our smaller brands, we are seeing positive growth trends. At OkCupid, registration growth has been strong and markets exposed to our provocative ad campaign. And as a result, we expanded this campaign into a number of key cities throughout the U.S. last quarter. On the product side, OkCupid has always had a strong and thought provoking personality as it ask polarizing, lifestyle style and political questions of its users. For example, OkCupid recently asked questions related to the Supreme Court appointment process, legalization of marijuana and exercising the rights vote during yesterday's midterms. We've elevated these questions and the product experience in a modern and dynamic way, and it is resonating well with our user base. OkCupid has traditionally been a U.S. focused brand, primarily because so much of the brand image has been tied to these provocative, political and lifestyle questions that may not always be relevant globally. Despite this, OkCupid has seen moderate organic growth in a handful of non-U.S. markets, including India. We've recently made some adjustments to the product to tailor the app, particularly the questions, to the Indian audience. We are in the early testing phase to see whether OkCupid can gain traction in the market, which has an enormous potential. The early momentum we've previously highlighted at Chispa, our Latino focused app continued in Q3, and we started testing monetization on the platform through al carte purchases. We're particularly encouraged by the efficiency we're seeing a marketing spend aimed at attracting young Latina and Hispanic women. In our category such efficiencies typically translate to a big boost in ecosystem and bode well for long-term growth. And Japan, our Pairs business is one of the top after the market and continues to grow strongly as we expand our marketing efforts. We believe there is real potential for future growth in Japan as the category stigma continues overtime. In Europe, we are building share in the 50 plus segment for the OurTime brand in key markets. This has been a long underserved demographic in the region and the team there has done a great job at aggressively pursuing that opportunity. Last but not least, turning to Slide 8. Due to overview of the momentum we are seeing at hand, which will be a big area of investment for us for the rest of this year and into 2019. The product itself has been able to capture the lightweight approach inherent in mobile first apps like Tinder while managing to provide a depth that higher intent users are accustom to on brands such as Match and OkCupid. There is a strong product market for Hinge in a previously underserved audience of 20-something looking for serious relationships. The Hinge profile in the U.S. is clean and simple and encourages users to be more thoughtful in their initial conversations. Hinge's product has really resonated in the market and proof of that product efficacy is in the numbers. Hinge downloads have increased 5 times since we made our initial investment in the company. Hinge had a stronger presence in New York City and is gaining traction in major cities throughout the U.S. and in global cultural centers, such as London. We see real opportunity to invest meaningful dollars in both the product and marketing at Hinge to drive long term growth. Before I hand things over to Gary, I want to emphasize that we have a diverse portfolio of leaning products in growing global categories where singles are increasingly using multiple products. We have the resources and the expertise to invest smartly to further differentiate ourselves from those competing against us in the heavily fragmented and competitive landscape. We are executing on our plans as we head into 2019, and we look forward to extending our exciting line of Tinder, continuing our long history of product innovation and driving growth by enhancing our brands around the world, all while delivering for our shareholders. And with that, I'll turn the floor over to Gary.

Thanks Mandy. We had a phenomenal Q3 and I am going to review the details of our performance and then provide our outlook for Q4, as well as some preliminary thoughts on 2019. So let's jump right in. On Slide 10, you can see that average subscribers reached nearly 8.1 million in Q3, up 23% year-over-year. North America grew average subscribers 18% and international 29% year-over-year. Tinder's rapid growth has a bigger impact on our international business, because it’s a bigger piece of the pie internationally. Tinder drove our growth again this quarter with aggregate stability at our other brands. Tinder added 1.6 million average subscribers year-over-year, a 61% growth rate and 344,000 sequentially. Tinder's sequential subscriber growth was stronger than we'd expected as Gold continued to power the business, Picks enhance Gold's appeal and product optimizations began to bear fruit. Tinder Gold helped by Picks drove Tinder ARPU up 24% year-over-year and overall company higher by 6% year-over-year, up $0.03 to $0.57. ARPU expanded both domestically and internationally. International ARPU is unfavorably impacted by strength in the U.S. dollar compared to certain international currencies. On a constant currency basis, international ARPU would have been up 11% to $0.57. On a constant currency basis, Company ARPU would have been up $0.04 or 8%. Looking to Slide 11, you can see that the subscriber and ARPU growth led to total revenue of $144 million for the quarter, year-over-year growth of 29%. Excluding FX impact of $8 million, total revenue would have been $452 million, 32% year-over-year growth. We demonstrated strength in direct revenue in Q3 with growth of 31%; North America grew direct revenue 25%; international, where Tinder comprises larger portion, was up 38%. One stop to spot was indirect revenue, which declined 7% year-over-year. We had a decline in impression at the non-Tinder brands coupled with an impact from GDPR on our ad sales in Europe. In terms of overall EBITDA, we saw year-over-year growth of 38% in Q3 to $165 million due to the revenue growth and operating leverage. EBITDA margins expanded 2 points year-over-year, continuing a solid trend to 37%. Overall expenses as a percent of revenues were 68% in Q3, down from 73% in the prior year quarter. Of particular note in sales and marketing expense for the quarter, declining to 24% of revenue from 28% in Q3, 2017, reflecting the ongoing shift to brands like Tinder and OkCupid with relatively lower marketing spend as a percentage of revenues. We did spend up in total dollars on marketing in the quarter, driven by increases at Tinder, as well as paired OkCupid and Hinge. Product development costs increased by $7 million in the quarter, largely due to increased headcount at Tinder as we continue to invest in that business and investments in some of our other brands as well. Increased litigation expense and some costs related to the acquisition of Hinge were two unforeseen items that we incurred in Q3. These aggregated to $4 million. Total stock based comp expense, which is included in each category of expense, was $16 million. Q3 '18 SBC expense was down 19% from the prior year quarter, which included an unusually large settlement SBC charge. SBC expense for Q3 '18 was in line with our expectations. Operating income grew 54% in Q3 to $140 million, driven by the higher revenues and reduced operating expenses as a percent of revenue, partly offset by higher in-app fees. The operating income growth rate exceeded our EBITDA growth rate due to lower stock based comp expense. Operating income margins rose 5 point to 32% compared to 27% in Q3, 2017. On Slide 12, you can see that we are announcing a special dividend of $2 per share of Match Group common stock and Class B common stock. The dividend will be paid December 19th to shareholders of record as of December 5th. We constantly analyze various ways to return capital to our shareholders. The dividend is something that we’ve been contemplating for some time and we felt that now is the right time to provide capital return to shareholders by this method. To fund the $2 per share special dividend, we intend to use cash on hand, which was $403 million as of 9/13/18 and has grown since, as well as the meaningful debt capacity we have. This could include a draw on our revolver and/or new issuance of unsecured or secured debt. You can see from the top right chart on Slide 12 that our leverage has declined noticeably over the last three year since our IPO from over 4 times to 2 times. Our target growth leverage is 2.5 to 3 times. We started the year in this range, but we’re now well below. So we have plenty of room to finance a portion of the dividend, M&A and potential future return of capital. We would go above the range for compelling M&A, assuming a reasonable deleveraging period. The business has generated $404 million of free cash flow year-to-date, up 94% year-over-year. At that rate, the dividend is just over 12 months of free cash flow generation. Our number one priority when we think about capital allocation is to invest in our businesses for growth as we’re doing across the Company. Even so, we have significant excess cash to deploy. Our second priority is accretive M&A. M&A is a core part of our DNA and we’ve always been a disciplined acquirer. We intend to continue to pursue M&A vigorously across the globe but because to this point we haven’t deployed a large amount of cash for M&A, we are retuning some of our cash to shareholders as a dividend. We believe the special dividend is evident that we're responsible stewards of capital who deliver on our promises. At the time of the IPO, we said we would de-lever and we've done exactly that. We're confident that we have sufficient flexibility to do what we need to do; to invest in our business and to make acquisitions to further strengthen our portfolio, when compelling opportunities present themselves. In the future, we expect to continue to apply the same analytical framework and rigor to our capital allocation decisions. On the bottom right of Slide 12, you can see the year-to-date and 2018 we've spent $86 million to buy back just over 2 million shares under our 6 million share authorization as we continue to offset dilution from employee equity award exercises and take advantage of the occasional dislocation in our stock price. The average price of repurchases year-to-date is $42.85. If you then add the $560 million that we expect for the special dividend, the $86 million spent on buybacks, we'll have returned $646 million of capital to shareholders in 2018. On Slide 13, we discuss our outlook. For Q4, we expect revenue of $44 million to $450 million, or 17% year-over-year growth at the midpoint. We expect Tinder continue to be the revenue growth driver with aggregate stability at our other brands as has been the case all year. I want to point out that anticipated FX impacts have reduced our expected revenue for Q4 since our last earnings call by about $6 million. We expect indirect revenues to continue to feel the effects of GDPR and lower impression volume, as well as some changes to the economics of our fan arrangements. The lower impressions are primarily driven by product changes we are making at the non-Tinder brands. We expect $165 million to $170 million EBITDA in Q4 and margin of 37.5% at the midpoint of our ranges. There are a few notable items that are contributing to the lower EBITDA growth rate and margin than we typically see in Q4. In this year's Q4, we expect year-over-year marketing spend to be up by about 20%, driven primarily by Tinder. As Mandy discussed, we have two major marketing campaigns underway at Tinder; one for Tinder U and the other, the broader brand campaign. We're also increasing marketing spend at a few of our other brands, including Hinge to continue to drive awareness in major U.S. markets and Pairs in Japan. Our Q4 outlook also reflects an additional $3 million of expense related to litigation, including our intellectual property claim against Bumble and the Tinder lawsuit. We strongly believe our IP is worth protecting. We believe that Tinder law suit is without merit and we have moved to dismiss it, but defending it does have a P&L impact. We expect that Q4 Tinder average subscribers will increase somewhat less sequentially than they typically have, which has been in the 200,000 to 250,000 range. The reasons for this are a combination of two items. First is the anniversary of the largest surge of Tinder Gold subscribers from Q4 last year. All the subscribers from that surge who took 12 months or two successive six month packages, will be expiring subscribers in Q4 '18, so terminations will be much higher than typical. Second, the way we have merchandised Picks has thus far been to drive ARPU through higher Goal take up, not increase the number of new subscribers. As a result, there will not be sufficient subscriber editions offset the large increase in terminations. Tinder will continue to drive its ARPU higher, albeit at a less dramatic pace than has been the case recently. As the subscriber mix continues the trend gradually towards our higher price Gold subscription tier. For the full year 2018, we expect to come very close to the $1.72 billion top end of our revenue range. This reflects the strong performance we've experienced year-to-date and our outlook for Q4. It's notable that our revenue range began the year as $1.5 billion to $1.6 billion. So we are very pleased with how the year has played out. In terms of EBITDA, we expect to come within $5 million of the top-end of our previously outlook for the full year. There are two items I want to point out, which are impacting EBITDA compared to our prior outlook. The first is the increase in the litigation cost, which can be very difficult to estimate since the timing and intensity of litigation is unpredictable by its nature. The second is the Q3 cost related to the acquisition of Hinge. The total of these two items is $7 million for full year 2018. Even with these items, we are pleased with the meaningful margin expansion and we are on pace to deliver in 2018. Recall that our initial 2018 EBITDA outlook was $550 million to $600 million. We expect SBC for the full year 2018 to be between $65 million and $70 million, slightly below our initial outlook of $70 million. As we look ahead to 2019, we are optimistic that we can continue to deliver strong financial performance. Similar to what we said at this time last year, we believe we will be able to deliver top-line growth in the mid-teens. We expect Tinder's growth to remain the story in 2019. The step change created by Tinder Gold will be difficult to replicate, but we plan to optimize and innovate on the product and enhance our marketing efforts, especially internationally, to drive continued strong growth at this iconic global brand. We expect that work we are doing on both product features and on optimizations will lead to sequential increases in Tinder average subscribers to return to Tinder's typical levels in 2019 compared to the lower level that we in Q4, 2018. We expect the non-Tinder brands to remain fairly stable in aggregate in 2019. As Mandy detailed, we are making product and marketing investments in a number of these brands to drive longer term growth. In particular, we expect to be investing heavily in Hinge, which we believe is a differentiated product experience that will be a long term growth driver for us. We expect Hinge to reduce our EBITDA by $25 million in 2019 as we ramp marketing spend to build share in key markets. In the current environment, we do expect regulatory compliance and litigation costs to continue to rise. As I already mentioned, these costs are difficult to predict and we currently expect they could total additional $10 million to $15 million in 2019. Long term, we are confident that 40% plus margins remain attainable for the Company. In fact, we're making more progress towards this goal in 2018 than we had anticipated. We're still in the midst of our planning process for 2019, and we'll provide much more specificity regarding our outlook for '19 on our next earnings call. In closing, we've had a stellar first three quarters of 2019. We're investing in our businesses to drive growth for the long term. We believe that as we continue to scale, we can become increasingly profitable. In fact, few tech companies offer the growth, margin and free cash flow profile that we do. We also continue to demonstrate that we're responsible stewards of capital, evidenced by today's announcement of a significant return of capital to shareholders by a special dividend. We continue to look to expand our TAM and market share globally, either through M&A or by developing new products. And we have the resources and track to do so. With that, we'll now answer any questions you may have. Operator, please open the line to questions.

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Brent Thill with Jefferies. Please go ahead.

Mandy, as you think about the non-Tinder brands going forward. What growth do you expect for that portfolio as we head into 2019? And I had a quick follow up for Gary on the softness in the fourth quarter guide. If you could just parse out how much of that impact is external rather than any fundamental slowdown in the business? Thank you.

So, the first part of the question, we’re seeing nice strengths at Pairs in Japan, which we’ve talked about in OkCupid and POF. And in terms of the future upside and where we see opportunity. We talked about Hinge which we're excited about and plan on real investment, both on the marketing and product side. And then smaller brands like Chispa where we see real opportunity to address a different demo. And then our time has been this underserved audience, particularly in Europe where we think there is opportunity as well. When we think about -- it’s really under three buckets; the first one is new products, and Hinge is an example of that and some of the other incubators that we’ve talked about in the past; new demos, which is like the Chispa example; and then new geos, which Pairs is an example, but we’re also -- we think that the international market is very promising. We’ve learned a lot about those markets in the last couple of years, particularly with Pairs strength and Tinder strength and understanding dating dynamics in those markets. And we think that that’s still a relatively under-penetrated part of the world, particularly in Southeast Asia and South America. And think there is real upside in these markets as social norms are changing. And the last thing I'd point out is that the Match and new Picks is part of our portfolio, despite the fact that we are being prudent in reducing TV spend and we’re not seeing efficiency. We think we can get those businesses back to growth after 2019.

And then Brent if you talk about what we’re looking at in Q4. We don’t consider it to be a negative at all. In fact, we look at it at the top end of our range, which as you pointed out in lot of your reports we’ve been doing better than the top end of our ranges. But if you look at the top end of the range, I think we’re trying to achieve that 19% year-over-year growth. So while it’s not as strong as the growth we’ve achieved the last three, four quarters as Mandy pointed out, we’ve got tough comps from Tinder Gold over that period of time. So now that we’re back to a more normal period, 19% growth is top end still looks pretty good to us and we’d be excited to deliver that. So we feel good about how we’re positioned. If you take the top end of the range of $450 million and you add that from a revenue perspective to what we’ve done so far, you end up just slightly above the top end of our range for the full year at $1.723 billion. So, we feel good about delivering beyond the top end and remembering of course that we’ve raised the guidance range for the year twice as the year has gone on. And that’s all despite a good amount of FX in the back half of the year. Since we guided last time, we have about $6 million of additional FX impact on that Q4 number. So, despite that FX impact we still feel we’re positioned to deliver strong guidance in Q4 and for the year as a whole. So when we look at how the business is performing, we’re very pleased. It’s not organic slowdown or any other organic effects that you'd be concerned about. The business is performing very strongly. There is some FX, which obviously we can’t do anything about other companies are facing the same issue. And I think if you look at year-over-year probably going to be about $8 million of FX effect in Q4 on a year-over-year basis. So, that’s the external impact.

The next question comes from Douglas Anmuth with JP Morgan. Please go ahead.

I have two questions. Can you talk about the adoption that you’re seeing in Tinder Picks relative to the early trends you saw at Gold last year? Just how should we think about the potential impacts on both net adds ARPU in 4Q and as you go into 2019. And then just second on the special dividend hoping you can just elaborate a little bit more online as to right time, talk about your thought process there. And just in terms of your special dividend versus obviously continuing with the share repurchase program that you have been doing? Thanks.

Thanks, Douglas. It's a little hard to hear you. So I'm going to repeat the questions. The first -- the second one was actually about the dividend and why now and how we think about it. I'm going to take that one first and the other one was on Picks and what we're seeing on Picks. On the dividend, which I tried to go through in my script in as much detail as I could about our thought process related that, obviously, something we've been thinking about for a long time. We thought about carefully. For a while now, a number of quarters we've been getting questions, from investors, from analysts about capital allocation, what are you going to do, your leverage levels are down and how are you thinking about that. It's a constant topic that we hear about all the time. And I think we've been pretty clear. We've been looking at M&A opportunities around the globe. And we've considered some fairly seriously. But we haven't found one that we thought made economic sense. And seller expectations are very elevated, the market has been at high levels, and we decided not to stretch for those M&A opportunities. And so we built a lot of cash, the business is extremely cash generative. And we ended a quarter about $400 million. Fourth quarter is an even stronger cash flow quarter for us. We're probably sitting around $460 million of cash right now. So the questions are going to be loud again. But what are we going to do with the cash? And as we look at it, having not accomplished the major M&A deal, we spent a modest amount on Hinge, but other than that, we haven't really done anything on the M&A side to this point rather than sit on it -- sit on the cash as a lot of tech companies do. We said we should give that cash back to the shareholders. We'll build up more cash into 2019. I'm very confident we have the flexibility we need to do M&A to invest in the business and do everything we need to do. So the question is sitting on $400 plus million of cash, what do you do with it? When you look at our ability to do buyback, it's constrained at those levels. We can't put $400 million or $500 million into buybacks given the size of our flow. So that's not a realistic outlook. We're still doing ordinary course buybacks and we'll continue to do that. But from a perspective of returning a lot of capital to shareholders, we thought the dividend clearly was the most logical way to go. Most of it will come out of cash on hand but we have the opportunity to go into the debt markets. And if they stay favorable here post elections, raise money to help fund the dividend at very favorable rates on a historical basis. And I think we'll look back and say, we were happy to have raised that debt capital at the rates that currently prevail in the market. So, we'll probably go out and raise $300 or so million of debt, take our leverage levels back up to the place that we think they should be in that 2.5 and 3 times gross leverage and go from there. I don't think it changes one thing regarding the growth outlook of the company, or its flexibility to invest in the business or do M&A. So, that's how we think about the dividend. In terms of Picks, I think that people have to distinguish a little bit between what we expected from Picks versus how we thought about Gold. Gold was this step function event. It's a feature embedded first in Gold, Likes You that's very effective for users. Users like that feature a lot. And we saw massive uptake of Gold and massive increases in conversion as a result of Likes You. We had much more modest expectations for Picks. We think it's a feature that people -- it still resonates with people but it was not going to have the same as Gold. We've known that that's what's been -- what's baked into our guidance and our expectations for the year and into 2019. And it has been brought out not as much as a conversion driver, but it's something that enhances the value of the ARPU -- of the Gold subscription package to users. And as a result of that drives ARPU. You see how much ARPU continues to rise at Tinder and at the Company as more than 60% of people are now taking the Gold package. We're seeing massive improvement in ARPU. I think it's up probably 40% or so since we rolled out the Gold package four-five quarters ago. So significant increase in value of the subscribers we're seeing at Tinder. So as a result of that, you don't see as bigger lift in the number of subscribers but you see revenue impact and ARPU impact from Picks having been rolled out. And this is a feature that we'll continue to refine. I think the second feature is always a little bit harder than the first feature to refine, because you've got a lot of different effects going on in the business. Tinder has become a bit more complicated from that standpoint to manage all the pieces of monetization. But we're working hard at that and it's only been out for a number of weeks. And I think as we go forward, we'll find some ways to continue to optimize Picks, to optimize the overall center monetization efforts and to we continue to maximize revenue, it's something that we're very good at. So we feel very good about where Picks stands. We've got this effect of the significant number of terminations coming from people who were in the surge of Gold last year in the fourth quarter. That surge will see some of the 12 monthers, or some of the people who took a couple of six month packages terminate. And so I think you'll see that effect working through subscriber additions at Tinder in Q4 of this year. And then I think I'd said we're on pace to add somewhere between 200 to 250 adds at quarter at Tinder, so 800,000 to 1 million subs next year, which we think is going to be a phenomenal number.

The next question comes from Ross Sandler with Barclays. Please go ahead.

Gary, one quick follow up on the answer you just provided. So, can you just walk us through the package mix at Tinder? How many of the subs there are these six months rolling programs or 12 months versus the monthly. And there is a dynamic, just to be clear, that will drop low 200,000 for 4Q and then rebound to 200 to 250 as we get into 1Q. Just want to clarify that. And then second question it looks like Facebook has introduced the dating product into a second market recently and this is the first call we've had since the initial market launch. So just any update on what your thoughts are on that product and the competitive environment. Do we still perceive this to be largely benign? And then on the guidance, you mentioned some changes at TAM impacting 4Q. So just elaborate on what those changes were? I know you guys recently signed a partnership with Google. So just what's the ad opportunity going forward with all these changes happening on the ad side? Thank you.

Ross, let me take Facebook first and then Gary can follow up with the others. So basically as you mentioned launch in Columbia. Columbia is a pretty small market for us. That said, Tinder is still the number one dating app there in terms of both downloads and revenue and we've been looking pretty closing, obviously, at all the metrics pre the Facebook launch in Colombia and post. Everything from downloads, activity engagement, new users and we have not seen any impact on the business. Like I said, it's small but we still don't see any impact. We're keeping a close eye on the product, both from an advantage point of consumers down in Colombia, as well as keeping an eye on what Facebook is introducing in the product. And really nothing changes our view, I mentioned a couple of quarters ago. So not surprising that we don’t see an impact in Colombia just because we said we don’t think Tinder users are going to lead Tinder to go to Facebook. We also think that our business was -- we have 1,500 people around the globe and our single focus is really on this category, which we think gives us an advantage, enables us to compete, not just with small players in this pretty fragmented market but also with large scale players. So, we feel confident.

I think on the fan question, Ross, let me just take that one. You got away with the Facebook. I think a couple of things. One, we’ve gotten some attention for what we’ve done with Google on the ad side. We did it in Europe to use their tool on a piece of our direct programmatic sales. So it’s a small piece of ad tech with Google. It’s not a fundamental change, doesn’t really impact our fan relationship. So I think people maybe are reading a little bit more into that than they should. With fans specifically, we had a very favorable economic arrangement with fan for a while. They had the ability to alter that arrangement if they so chose, and now they have chosen to make some alternations to that and reduce some of the economic attractiveness to us of that arrangement. And so we have different options to try to offset that, and we’re trying to figure out what, if anything, we want to do to try to offset that. There is obviously the other players in market we can go with, there is other things that we can do. So we’ll see what’s going to happen and you’re seeing some of that impact in Q4 and obviously, our plan is to try to find ways to offset that impact as we turn the corner into 2019. On the Tinder subscribers, a couple of things. One, I would say it varies by channel, by platform, whether it’s iOS, Android, once a precise breakdown is in one monthers versus six monthers versus 12 monthers. But one monthers do tend to be very heavy just given the demographic. I would guess, it’s an 80% one monthers 20%, 12 and six monthers if you want to look for an average, it's something like that. But the thing that you need to understand is that given how many subscribers were added in Q4 of last year with that 20% ish six month and 12 month package take up. All of that comes up for renewal now and the renewal rates on this are going to continue to be strong, they've been beating our expectations all year. But you do see a big of terminations from people who took those initial six -- the initial 12 or the 2. 6 pace and it’s enough to offset what would otherwise be pretty good sub-additions number in the fourth quarter. So that’s just ebb and the flow of additions and terminations and what we’re dealing with, it’s a onetime effect from the surge of a year ago, nothing more to read into it than that. We'll deal with it as one of the KPIs we look at in Q4 and then we go right back to strong additions and starting in Q1 and beyond as we get pass this hell of terminations in Q4. And so you heard the guidance right. We’re going to have this onetime decline a little bit below our averages in Q4 and then back into the range of averages and more typical numbers starting in Q1 and going through next year.

The next question comes from Dan Salmon with BMO Capital. Please go ahead.

Maybe one for Mandy one for Gary. Mandy, just to build on what we just came off of -- couple of specific comments about Facebook's products in Columbia and your relationship with the modern advertising basis. And obviously you advertise on their properties for your product, so it's a dynamic relationship. Just high level, how are you thinking about that these days as these changes in the marketplace continue to evolve? And then Gary, you reiterated the view that you can still get to 40% plus margins eventually. When we look at Tinder and see the branding campaign there. Is that something that you anticipated along the way? Is that view to 40% margins changing certain things, looking a little better, a little bit worse, would love to just hear you expand on that a little bit more. Thanks.

I'll take the Facebook questions. We've had a long relationship in history with Facebook in a couple of different areas. The first one is we advertise on their platforms with businesses, particularly like Match and Meetic. If you look at across all of our companies across the Match group portfolio, it's still a pretty small percentage of our registration, like around mid single-digits. So there's not a lot of dependency there and we're continuing to advertise. And until it doesn't make sense, we will continue to do so as these platforms are reached to reach potential new users. On the product side, in the past there has definitely been more connectivity between Facebook in particular businesses like Tinder where the only way over a year ago to sign up on Tinder was through Facebook. And we have looked hard at the dependencies, especially as Facebook announced they're moving into dating to make sure that we do not have those dependencies. And across all of our platforms, we know offer all users the ability to sign up through SMS or through an e-mail. And I talked about a couple of quarters ago that people coming into Tinder, more than 75% of them are opting to sign up through SMS. And so we don't see a lot of concern in those dependencies. And the last one, which we've talked about before is that Facebook audience network and the relationship we've had in the past. And for now it's working and there's lots of other opportunities and partners that we can work with. And so we don't really see much of a dependency. And so for right now, I think a little bit wait and see and we'll continue to manage and run the relationship until it makes sense -- it doesn't make sense for us in those areas.

Dan, on the margin question, I've got a lot of confidence that we're going to get this business to 40% or better margins over time. I think there's tremendous operating leverage, particularly at Tinder where the margins are going to be very, very strong over time. They're strong already. So I feel that good about it. Our job is to make these tradeoffs between longer term investments that might be hurtful to margins but long-term beneficial verses not. If you look at Hinge, for example, that's the place where we're going to invest significant dollars in 2019. And it's going to hurt margins but we think there's massive long-term opportunity there and we want to invest into that. So, that's our job is to make those allocation decisions and we're going to keep doing that. If you look at '18, we had significant -- we're on pace to have very significant margin expansion, probably 2 points, which is more than we had expected this year. So we're over delivering in 2018. I think 2019 is going to be more modest than that. But again, we've got to balance out the opportunity with Hinge, the opportunity Pairs, new brands that we're working on that we think there's real opportunity with that we'll invest in. We've got a number of different things that we're trying to do on the investment side. So that's who we've been entrusted to do. We obviously take that seriously but long-term feel extremely confident that we can get this business to 40%. It's just going to be a question of what the pace is. And again, I think it was faster in '18 and we'll see what '19 brings and we'll certainly guide more specifically on that when we get to our next call. The only other thing I want to add, Dan, is on Tinder specifically what you asked about, marketing campaign, the brand campaign was expected. All of Tinder's marketing spend in '18 we had anticipated. We knew Q3, Q4 were going to be heavy marketing spending quarters. So there is no surprise there different than the pattern that we normally do from a marketing perspective maybe, but we had fully expected that. I would say that at Tinder as we turn into '19, I will be surprised if marketing expense grew faster than revenue. I think more likely than not, it's going to grow slower. We've got a lot of international opportunities at Tinder and we'll see if we can drive that with marketing if we can, we would spend into that. But I would expect that that trend will be such that marketing spend at Tinder will start to come down as a percentage of Tinder's revenues.

The next question comes from John Blackledge with Cowen. Please go ahead.

Just on Hinge, how many subs did you have in ending the third quarter and how should we think about the potential for Hinge sub adds with marketing investment next year. And just longer term thinking about Hinge, if you can frame it up a little bit more. And then just on Tinder, any thoughts on potential release from app store fees or take rates? Thank you.

So Hinge is pretty early in its monetization and so it has a small number of subscribers. In terms of where it sits into the portfolio for us, we think it addresses a great gap in the market. If you think about -- when Tinder came into the market six years ago, it brought whole new audience of young users, in particular college age users. And as they start to age and they're now in their mid-20s and getting a little bit older, having a product that’s oriented to serious but in mid to late 20s, I think it is really compelling for us. And then I'd say we're excited about the growth of Hinge. We've seen great download growth, which you've all seen and also phenomenal user growth. And the plan right now is that we are going to be investing in marketing, because for Hinge despite the fact that like New York, for example, there is very, very high awareness, there are so many places around the country where there is low awareness. And we know when people hear about it and try it, they love the product and it get that flywheel going in terms of word of mouth marketing. So it's a combination of really making sure that that young audience is aware and making sure it exposed to places where it's just not as much awareness of Hinge. In terms of monetization and subscription growth, the plan is that as we start investing in marketing in Q4 and really drive that growth into next year, we're also going to start testing and getting a little bit more aggressive with monetization probably into next year.

And then the question on app store. John, obviously, there is a lot of noise out there from other companies about the 30% take rate by Apple and Google, and trying different things on that front. We have a very mutually beneficial relationship with Apple and Google. And we've been leaving with the 30% for a while. Obviously, we'd love that number to be less. We have lots of conversations with them. And we're watching all these developments carefully and we'll see what happens. But right now, all of our go forward assumptions are that the 30% or roughly 30%, because you get a little bit benefit for some longer term subscribers. But that roughly 30% continued. It's obviously a huge number for us. I mean, when Tinder on page view 800 plus of revenue this year, 30% to $240 million and then you got all of our other businesses as well. So a cut in that 30% rate would be a massive benefit to our bottom lines. We're incredibly mindful of that but right now our assumptions are that that continues to be the case and the fee remains at 30%.

The next question comes from Eric Sheridan with UBS. Please go ahead.

Maybe coming back to Tinder, you obviously are using product development to tease out engagement and also tease out adoption of monetization at higher levels going forward. Could you just help us understand a little bit of what you’ve learned in the back part of the year on balancing engagement versus the monetization and how that feeds into thought process around '19, around things like product development versus maybe exploring pricing power in the business model overtime. Thanks guys.

I think as we’ve talked about with Tinder all the time, we view it as a product driven business. And there is a lot of different things that we try to accomplish with the product but driving user growth and driving engagement are at the top of the list. And most of the work that we do around Tinder is focused on driving users and drive engagement, and we’ve been very successful at that. And so it doesn’t get quite as much focus from analysts and investors as the monetization features do. But it’s a bulk of where we spend our energy. So you got things like loops, you got things like the feed, which we talked about today. All those things are designed to continue to improve engagements and make matching more successful and to get feel better outcomes and get them to engage in the product. Mandy talked about today how important it is to Tinder to get matches on day one, matches on day one lead people to have greater satisfaction and to stay in to be retained. So those are all things that we spend a lot of effort and time on. And the revenue features are a small piece of what we do but obviously critically important since that’s how we make money. And if you look at this year, most of the work was done on user and engagement features with Picks being the primary one on the revenue side. I would expect that there might be some balancing out of that as we get into 2019, because we’re going to have some smaller revenue features. And so we’ll have several more regular cadence of smaller revenue features over the course of the year, as well as a number of features designed to driver users and drive engagement as well. So, you’re going to continue to see rapid product momentum at Tinder. It's a story about velocity next year, I think, in terms of both user focus, features, as well as monetization features. We do still have pricing power at Tinder. We’re still very early in dynamic pricing and testing price elasticity. We need to do that more on country-by-country basis, as well since Tinder is in pretty in much every country in the world. We need to get more sophisticated at that. So we see a lot of opportunity to do that as we turn the corner into '19. And we will make progress in that but we’re very early and we’re studying that all very carefully. But I would expect you’ll see continued upward movement in Tinder’s ARPU as you go into 2019, not nearly where it was over the last four, five quarters, but you’ll still some nice growth in Tinder ARPU.

The next question comes from Kunal Madhukar with Deutsche Bank. Please go ahead.

Two, if I may. One related to the specially cash dividend and the other one on the Tinder U. On the special your cash dividend, I want to better understand that rationale for the $2 per share. Why not do a dollar now and another dollar maybe six months out the road where you don’t need to borrow to make the dividend? And on Tinder U, you talked about the 1,200 plus campuses in the U.S. How many campuses have you rolled out abroad? And can you -- you talked about the strong engagement and the swipe rate and what have you. How has that engagement translated into potentially more subscribers and maybe higher ARPU?

I'll take the Tinder U one. So we launched Tinder U -- we really started focusing on universities and marketing on universities like last spring, and then in August, we launched Tinder U. We think that 18 to 22 audience is really important. If you look at their market, there's really no product that captures that 18 to 25 young lifestyle adventurous time in people's lives. All the products that are introduced in the market over the last couple of years really tend to focus on much more serious relationships. So we thinks it's a great area to continue manage and maintain. We have launched Tinder U across about 1,200 campuses in the U.S., which really lead to single dating social life. And then we're evaluating universities outside of the U.S., including Western Europe where university campus life is a little bit more similar. And then there's also other parts of the world where we have ramped up marketing efforts, not Tinder U but marketing efforts to college age students and that will continue, because we think there's an important opportunity to target people right out of high school and into their early college years. And then the last point in terms of engagement. We have seen swipe rate increase and it's obvious because you're showing people more swipe rates, they're just showing more relevant users people. And so as engagement increases and people are on the apps for longer, we will see it increase in subscribers from that audience. And as I said, Kunal, we're excited because that really is our effort that really is the fastest growing cohort across the ecosystem and we're going to continue to focus there.

And I think just quickly on the dividends because we're running out of time. I think as you can imagine, we look at every permutation of the dividend, every dollar amount, what it did to our leverage levels, took into account our free cash flow, or our future free cash flow generation. And we basically analyze all that include that $2 now made sense. It doesn't preclude us from doing something else down the road. It doesn't require us to do something else down the road. So, this is what the analysis led to at this particular point in time and we feel good about it. And we will continue to analyze this periodically. And we'll make decisions based on where we stand at that point around the dividends. But the analysis made it feel like we were below suboptimal leverage levels and we could declare this dividend, return back to more optimal leverage levels and go from there. And so that's how we came to that conclusion.

Thanks Mandy. Thanks Gary.

Okay, you're welcome. Thanks everybody for joining. We appreciate it. And we'll talk to you next quarter.

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