Match Group, Inc. (MTCH) Q2 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Match Group’s Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode [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 Corporate Development and Investor Relations. Please go ahead.

Thanks, operator. Today’s call will be led by CEO, Mandy Ginsberg; and CFO, Gary Swidler. They will review the second quarter Investor presentation that is available on our website and then answer questions. Before we start, I’d like to remind everyone that during this call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate or similar statements. These statements are subject to risks and 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. Over to you, Mandy.

Good morning, everyone, and thanks for joining our Q2 2019 call. Our second quarter results speak for themselves. Our growth accelerated and our momentum enables us to increase our full-year outlook while investing in the future. I’m going to leave the financial details for Gary to cover; I’ll cover a number of big picture strategic items as well as product initiatives across our businesses. I’m thrilled to say that our businesses are executing very well on their strategies and we’re pushing into a number of exciting new areas and new geographies. Before I jump in, I want to mention a research study called Disintermediating your friends by Prof. Michael Rosenfeld at Stanford. You can easily find the draft form of a study online. It gave a sense of the macro impact the dating category is having on relationships and U.S. society. Now, for those of us, who work in the industry or if you’re a 22-year-old and half your friends met their significant others on dating app. What I’m about to tell you won’t be a surprise. But for a lot of people, the findings of this research are eye-opening. The study details how coupled meet in the U.S. and reinforces many of the trends that we’re seeing today. The research found the meeting online is now by far the most common way for couples to meet. Today, nearly 40% of relationships start online. There’s been a massive acceleration in this trend over the last 10 years due to the rise of smartphone and mobile dating apps like Tinder. Meanwhile, meeting offline at bars, parties or through friends or family has declined significantly. And what’s happening is people meet online? They’re meeting people outside their social circles. The study found that for couples, who met online, nearly 90% met people, who were complete strangers. They were not connected through any friends or family. For me personally, the most important thing to note is that the study found the relationship quality among couples who met online was no different than people who met through existing networks and more traditional channels. We’ve been talking about this trend for a while and this study reinforces what we’ve seen in western markets. We firmly believe this trend has poised to sweep Asian and Middle Eastern markets also, younger people in these geographies are now opting to pick their own partners, and our business will continue to benefit from these societal tailwinds. We can bring our longstanding capabilities in dating to these markets. And we know that we have to do this in a way that reflects evolving technology and online behavior, and most importantly being cognizant of regional and cultural differences. This is why we’ve been increasing our focus on Asia, which if you recall from last quarter, represents roughly half of our total addressable market. Let’s turn to Slide 3. On this slide, you will see it and we’re taking concrete steps to execute on our global growth strategy. I’ll cover how we’re building and investing in new brands and extending our existing brands. Four years after requiring Pairs, it’s now become the market leader in Japan. The Pairs team has accelerated growth and growing steadily as category stigma rose. In fact, growth at both Pairs and Tinder are significantly outpacing the competition in Japan. We have combined our unrivaled product marketing and monetization expertise with our local teams’ extensive knowledge of this market. The senior management team and I just returned from a week in Japan. We were struck by the country’s aging population and low marriage and birth rates, which makes dating and relationship products critical. Less than 20% of Japanese singles are open to the category and we think these numbers will go up, especially as brand and category awareness increase. Pairs has a lot of additional runway and we hope it can have a meaningful impact on the society. Given the strength of our local team plus the growth opportunity we see in Japan, we are extending the Pairs franchise by launching a new digital product called Pairs Engage. This new product will leverage technology to serve the local matrimony market than it’s historically been conducted offline and physical stores. We believe we can offer a more efficient and less expensive service geared to those who are highly motivated and want to get married within a year. Most people on this call are in the U.S. and we don’t really have a comparable matrimony market here. In Japan, however, we estimate the matrimony market is already a $0.5 billion and we believe our new product and capture share of that market. A move like this could disrupt more traditional matrimonial players. This is one more way that Pairs team can provide real value for Japanese singles. Moving to the right side of the slide, we bought out existing investors and made a majority investment in a small app called Harmonica. Harmonica was developed by a team of entrepreneurs based in Cairo, Egypt servicing that market. They saw an opportunity to leverage technology to enhance the match-making process. In fact, the CEO was influenced by watching his friends and his family, go through the traditional arranged marriage process. He wanted to create a product for a young and modern audience that still respects local traditions and cultural norms. Young people want to meet others with similar backgrounds and values. The shift is now they want to choose their partner versus having their partners chosen for them. Essentially, the CEO created an app that someone like his sister could use. It’s clear that young single Muslim audience is a massive in growing market. There are 1.8 billion Muslims in the world. This is 24% of the world’s population is expected to grow by more than 70% in the next three decades. And today, dating products don’t adequately address their needs. And it’s important to work closely with entrepreneurs and a local team that truly understands the challenges singles in these regions are facing. Harmonica gives us a great base to build on and it enables us to better serve to 33 countries throughout Asia and Middle East that have large Muslim populations. We brought on all 12 Harmonica employees and plan to leverage our resources and our knowledge to help the team in Cairo further develop their product and scale their business. So, the business is small today. This local approach is similar to what we did in Japan with tremendous results. There is no denying the opportunity in front of us across Asia, the Middle East and North Africa. We’re moving quickly to ensure that we capitalize on this opportunity as the market evolves. Let’s turn to Slide 4, it talks about Tinder. We rolled out a number of monetization features at Tinder, the last few years. As we mentioned on the past few calls, a big priority for us in 2019 was to optimize our existing features to drive revenue growth. Tinder’s performance this year highlights just how impactful these sometimes imperceptible changes can be on a platform of Tinder scale. These changes fall into three main categories; first, improving the recommendation engine to drive more engagement for all of our users; second, bringing more sophistication to our approach on PayWalls and pricing. And third, improving where, when and how we merchandise Tinder goals. As a result of these changes that we’ve been able to increase subscriber additions and accelerate revenue growth beyond our prior expectations. We highlight features our users find valuable and by doing this, more users choose the more feature rich and high priced Tinder Gold subscription package. Optimizations at Tinder could be a never ending process just like at our brands that have been around for more than 20 years. I’m confidence we’ll continue to improve the Tinder platform to drive continued growth. In addition to all the wins we’ve achieved on the product optimization front, we’ve also introduced a few new consumer facing features let me go into. Some of these features are unique to Tinder, because unlike any product in the category, Tinder has a global audience. First, let’s discuss Tinder Lite. For some members of our global audience, the cost and speed of data is a big concern. Tinder Lite will run faster, consume less battery and reduce network usage by about 20% lowering data costs for users. It also is a drastically smaller app to download in the first place, which again, reduces data costs for our users. We’ve rolled it out on Android at Vietnam and we’ll be rolling it out across Southeast Asia over the coming quarters. In addition to Tinder Lite, we introduced a credit card payment option on the android app at Tinder in Q2. Most of our other brands as well as our competitors offer users the option to use credit card payments on android and now Tinder is doing so well. To roll this out, we first had to build a web-based payment infrastructure to be able to accept credit card payments. We did the work, because we believe it’s important to provide users with choice of payment options. Let’s move to the third image on the right. We also launched Tinder Traveler Alert for our global LGBTQ users. We are by far the largest app to launch this type of warning to protect users in nearly 70 countries that still have discriminatory laws criminalizing people, who are LGBTQ. Whether you live in one of these countries or are using Tinder while you travel, this one of the many steps that we’re taking to protect our users around the world. It’s been a busy quarter at Tinder. We’ve also launched two new monetization features. Super Boost is a feature we think has particular appeal to a member, who is a bit less price sensitive and is willing to pay to increase his or her activity on Tinder. Read Receipts is another a la carte feature we introduced. We knew users would find this feature valuable based on learnings from our other apps. These a la carte features will help drive ARPU and revenue. Before I wrap up the Tinder section, I want to emphasize one point. We’ve talked a lot about Tinder monetization, but delivering a fun, free and effective base experience for all users on Tinder remains critically important and it’s what fuels, stickiness and morality. We expect to continue to drive growth over the long run by both innovating the free fun experience and introducing new features that provide an enhanced experience for those willing to pay for them. Tinder demonstrating the ability to deliver what young singles want. The team is hard at work evolving the product to ensure it remains the unparalleled choice for this global audience and digital natives. On Slide 5, we highlight OkCupid, which is undergone wider turnaround over the last 24 months. After a product revamp in late 2017, OkCupid has executed successful marketing campaigns and monetization efforts throughout 2018 and into this year. This is led to OkCupid for reinvigorating revenue growth in 2018 and they’re on track to do it again, this year. The OkCupid team is now diligently exporting the brand to market outside the U.S. targeting geographies, where they have seen some early organic traction. Their first foray with India in late 2018, where they localized parts of the product and deployed a modest amount of marketing dollars. This increased focus in India led OkCupid as quickly surpassing both local and global players, who are spending significantly more in marketing. Given OkCupid’s momentum, we’re ramping, marketing spend and launching OkCupid first ever brand campaign in India. The campaign is focused on young Indians, who want to take charge of their lives, including finding their future partner. Take a look at the image on the far right. The tagline, Find My Kind is juxtaposed against the arranged marriage newspaper ads, which feature religion, family background and appearance. OkCupid is focused on Match people beyond just appearance and family background and emphasizes what truly matters. Based consumer testing, we think this magic message is going to really resonate. The campaign goes live this week. In addition to OkCupid’s efforts in India, we see an opportunity in other global markets. We believe the team can replicate this playbook to expand into additional international markets in the coming quarters. Let’s turn to Slide 6. Hinge continues to have excellent momentum with strong user growth in the U.S. and in key international markets. Global downloads in the second quarter increased more than three times year-over-year. Hinge is quickly becoming one of the top dating apps in the U.S. and the UK with strong popularity among younger, more serious daters. They value Hinge’s in-depth, yet modern product experience. We know that the Hinge users are looking for serious relationships and to ultimately get off dating apps. That’s why Hinge’s new tagline Designed to be Deleted is resonating with consumers. This quarter Hinge is launching a big marketing campaign, which we expect to drive accelerated user growth. Marketing creative that supports the tagline designed to be deleted and emphasizes higher relationship intent will be seen in digital channels and offline later this month. The marketing campaign follows organic press coverage that Hinge received thanks to the presidential candidate Mayor Pete Buttigieg who met his husband on Hinge. This is increased national attention on the brand and provided more of both to the already strong growth we’ve seen. Moving to the right of the slide, the match brand continues to evolve its product and improve customer satisfaction. It’s on a relentless mission to provide a premium experience both in price and service for relationship minded singles in their 30s and 40s. in the second quarter, Match launched a distinctive new feature called AskMatch, where subscriber could act as a live personal dating coach. We know that for singles looking for relationship, some of the ups and downs of dating come after the match with someone and take things offline. This is the first time, we’re aware of a dating app combined technology with a platform of experts to help users improve outcomes. Feedback from people, who have used the feature has been great. After a session with one of our coaches, the recommend natural friends’ rate goes up by more than 50%. the efficacy of these short that really impactful sessions make us optimistic about scaling the service effectively and differentiating Match. The reduced marketing and math again, in Q2, but we are ramping up brand spend in Q3 to support a fun and edgy new campaign. The new ads feature accessed rebel Wilson and they went live last week. In the ads, rebel hosts a podcast and risks on the trials and tribulations of dating and who knows better how to address the needs of people looking for a serious relationship than Match. This is a great time to build buzz of Match given the past few quarters, we’ve made real strides in the product experience. We believe that it was a truly revamp product, improve monetization and a clear differentiator in askMatch. The brand is positioned well for the long run. To wrap things up, we had a stellar quarter. Growth is accelerating; we’re continuing to connect more and more people in these sparkly to friendships, great days, relationships, marriages, and even families. all the time, we here, if it weren’t for your app, I wouldn’t have met my group of friends in college through Tinder or I never would’ve met my husband, my wife, my girlfriend, my mom wouldn’t have met my stepdad and one of my favorites. I wouldn’t have a house full of kids if I didn’t meet my spouse through your app. These are the stories that we hear every day, whether it’s to meet new people when you move to a new city after college or you want to find your soul mate, and these stories motivate us to develop products that create these meaningful human connections for our users. We’re investing heavily for the future to further distance ourselves from the competition, both here in the U.S. and globally. Finding your person through an app has definitely become more common than even 10 years ago. That said, we think it’s going to become even more mainstream and it’s common for example, as going online to book travel. If I’m right, then we would expect to have many more quarters like this ahead of us and even more importantly, many more relationships to touts. With that, I’ll turn it over to Gary to discuss Q2 financial performance and our outlook.

Thanks, Mandy. As Mandy said, we had a terrific quarter with strong growth at Tinder, solid progress on many of our strategic and product initiatives, and an improved outlook for the year. Let’s get right into the specifics from the quarter, then I’ll update on our financial outlook. On Slide 8, you can see that Tinder direct revenue grew 46% year-over-year in Q2, an acceleration from 38% in Q1 as the cumulative effects of PayWall and pricing changes, various product optimizations and the better gold merchandising on iOS had a real impact. We’ve been saying for some time now that 2019 would be about a series of product initiatives and optimizations on the Tinder platform, which would drive strong results. Tinder’s performance in the first half of 2019 certainly bears that out. in Q2, Tinder subscribers grew 39% year-over-year to just over 5.2 million. Tinder added nearly 1.5 million subscribers year-over-year and 503,000 subscribers sequentially, second best in Tinder’s history. the only quarter, where Tinder had seen a higher level of subscriber additions was right after we first introduced Tinder Gold in late 2017. tinder’s ARPU was up 6% year-over-year as reported, but on an FX neutral basis was up about 10%. gold subscribers as a percent of the total continued to decline and now exceed 70% of the total subscribers at Tinder. On Slide 9, you can see that average subscribers across the company’s brands reached over 9 million in Q2, up 18% year-over-year. Tinder drove our overall subscriber growth again, this quarter with pairs also contributing nicely. hinge’s user growth is starting to generate subscriber growth even though monetization hasn’t yet been a real focus for us at Hinge. For the first time in our history, the number of international subscribers exceeded North American subscribers. We expect this trend to continue as our international growth efforts, both at Tinder and elsewhere continue to gain steam. As we’ve talked about before, about two thirds of our addressable market lives outside Western markets and we expect the steps we’re taking to address that massive opportunity will continue to manifest in our subscriber numbers. We continue to spend down on marketing at the match brand in Q2, which impacted its subscribers. Marketing spend at match was at its lowest level and more than five years down double digits year-over-year and the quarter. That said, as Mandy talked about, the product refinements at Match continue to gain traction and we’ve launched a new marketing campaign in Q3 to begin to get the Match story back out. As reported, ARPU for the company was up $0.01 year-over-year to $0.58. It was up 4% in North America and up 1% internationally. On an FX neutral basis, international ARPU was up 7% and total company ARPU was up 5% year-over-year to $0.60. Flipping to Slide 10, you can see the company’s total revenue growth was 18% year-over-year, reaching $498 million of total revenue for the quarter. Total revenue growth would have been 22% without the impact of FX for total revenue of $514 million on a constant currency basis. North America grew direct revenue, 13% driven by 9% subscriber growth and 4% ARPU growth, while international direct revenue increased 27% driven by 27% growth in subscribers and a 1% ARPU increase. International subscriber growth was particularly strong, driven by primarily by Tinder, pairs and better meeting performance. Indirect revenue mostly from ad sales, decreased close to $3 million due to continued declines in ad impressions, coupled with the impact of changes to the terms of our relationship with fan. We expect indirect revenue growth to improve over the coming quarters. Operating income grew 15% to $173 million. EBITDA grew 16% to $204 million. The growth was driven by the higher revenues and lower overall marketing spend as a percent of revenue, partly offset by higher in-app fees, $9 million of higher legal regulatory and compliance costs and in the case of operating income, higher stock-based compensation expense of $5 million. Stock-based comp expense in the quarter was $22 million, primarily due to the acceleration of certain awards and the granting of new awards, particularly at Tinder. Given the higher than expected level in Q2, we now expect $80 million to $90 million of SBC expense for the full year. Marketing spend declined as a percent of revenue again, this quarter. tinder’s marketing efforts particularly in several western European countries are going very well. Our cash flow generation remains excellent and our balance sheet remains very healthy. In the quarter, we spent $84 million of cash to buy back stock and to net settle employee Equity Awards. Even with this, we ended with $266 million of cash on hand. Our 12-month trailing leverage ended Q2 at 2.3 times on a gross basis and 1.9 times on a net basis. Year-to-date, we have spent a total of $215 million of cash and buy backs, and withholding taxes related to net settling of Equity Awards. On Slide 11, we have our latest financial outlook. for Q3 2019, we expect total revenue of $535 million to $545 million and $200 million to $205 million of EBITDA representing year-over-year growth rates in the low-20’s percent range on both metrics. Our Q3 EBITDA reflects significant incremental marketing spend compared to Q2 2019 as we simultaneously ramp campaigns at a number of brands including hinge, match and OkCupid. As Mandy noted, hinge is expanding its Designed to be Deleted’ campaign. match recently launched a new campaign featuring Rebel Wilson; and OkCupid is undertaking its first brand campaign in India, all in Q3. We also expect to begin marketing at harmonica, Pairs engage and in other international markets that OkCupid and Q3, and we’ll invest further at Tinder globally. We expect a sequential growth in marketing spend to be north of 20%. given our strong performance in the first half of the year, we now expect full year 2019 revenue growth to be in the high teens up from our prior expectations of mid teens. This implies accelerated growth rates in the back half of 2019 compared to the front half, which is consistent with what we’ve been anticipating. We’re also refining our expected EBITDA range to $770 million to $800 million for the full year given improved confidence in our full-year performance. As I mentioned on the last call, we’re planning a number of discretionary long-term oriented investments in the back half of this year to reinvest some of the outperformance in the business. We’re very pleased to have the financial flexibility to make these investments, which we believe will improve the company’s long-term growth outlook. Where we fall in the EBITDA range will depend significantly on the level of discretionary investments we choose to make in the last two quarters of the year. On the back of record performance, we’re planting seeds for future growth and to further capture at the large market opportunity in front of us. Many of these investments are intended to further our growth efforts in Asia, so let me give some color on a few of them. You heard from Mandy about our investing in a harmonica app and bringing on the team to better serve the large Muslim demographic globally. We plan to invest several million dollars this year to build out the team, further develop the app and market it in several markets. This has not been incorporated in our outlook previously. In addition, Mandy mentioned the new Pairs Engage product, which has designed to be a digital matrimony product serving the large marriage focused market in Japan. We’re optimistic about the prospects for this newly created product and are investing further in it following its recent introduction to the market. Additionally, we’ve talked several times about the organic momentum that OkCupid has achieved in India. We’re increasing our investment in OkCupid in that market and in several other markets in Asia, in the Middle East, where we believe the brand can achieve similar traction. Aside from these key initiatives, we’re also investing even more heavily in Tinder product and marketing to drive product awareness, especially in a number of global markets, where we see meaningful longer-term opportunity including in Southeast Asia. And we’re considering investing additional marketing dollars in a number of our newer bets in the second half of the year, including Chispa, BLK, and Ship. last and most important, we’re investing in our employees globally, including enhanced 401(k) matching to help employees save more for retirement. Our parent company, IAC has championed these efforts and we were excited to roll these benefits out recently. Aside from our growth oriented investments, we’re incurring higher legal regulatory and compliance costs globally. As an example, France recently passed a new 3% digital services tax, which primarily impacts our Meetic and Tinder businesses and is retroactive to January 1 of this year. We expect this to impact us by $3 million in 2019 with three quarters of it taken in Q3. other countries are also considering following Francis lead. It is clear that we – like many tech companies are operating in an environment with higher scrutiny around our activities and we’re investing to make sure we stay ahead of this trend, especially in the areas that protect our users’ data privacy and safety. With the success of tinder’s various product initiatives for the full-year 2019, we now expect subscriber additions at Tinder to be approximately 1.6 million, well above our previous expectation of greater than one million. The rollout of better gold merchandising on iOS created upward momentum in subscriber additions in Q2, and we expect the lift in Q3 from the rollout of this initiative on android. for Q3, we expect more than 400,000 average subscriber additions at Tinder quarter-over-quarter. We’re thrilled to have delivered a solid first half and a strong outlook for the full year. Our Tinder business continues to grow meaningfully around the world and we’re investing to supplement that growth. We’re taking steps across the portfolio to capture the large opportunity in Asia and we’re executing on our numerous strategic and product objectives. I am competent all of this puts us in a terrific position to continue to deliver a solid financial performance for our shareholders. With that, I’ll ask the operator to open the line for questions.

Thank you. [Operator Instructions] Our first question today will come from Nat Schindler of Bank of America Merrill Lynch. Please go ahead.

Great quarter, guys. Thank you very much for taking my question. Earlier – when March, we noticed a change in the payment flow on your android apps on everything other than Tinder gold. We then saw on a third-party dataset that tracks Google play store revenue that – revenue on Google Play Store collapse, which obviously didn’t happen given how well you did in the quarter. The obvious conclusion here is that you’re skipping the play Store and you’re getting payments directly, but that didn’t seem to show up in your cost of goods. Is there something we’re missing here?

Okay. Thanks, Nat for your question and for the compliments on the quarter. So, you’re right, I know there’s a big topic. So, let me try to step people through this a little bit. you’re right that in April, we introduced an option on Tinder, on Android, to offer use a choice whether to use Google pay or credit cards. As Mandy mentioned in her mark, it’s something that we’ve been planning for. It’s something that we have on many of our other brands. And so it’s not particularly new, but it was new to Tinder. We had to do some work to get there and we accomplish that and then we’re able to roll it out. This is really something that is for new transactions. And so the benefits of this will sort of build overtime. It’s a relatively small amount of benefit in Q2, but it’ll be larger in Q3 and then as we move to 2020 and beyond, it should increase from there. you can notice it in the cost of goods as you mentioned. If you go back overtime in our cost of goods, you’ll see that that percentage has been increasing relatively significant for many, many quarters. And in this quarter, we had a slight change in that trend and we’ll see as we go forward some impact on that percentage as well. So, I would say, it’s kind of single digits in this quarter of the benefit, but it will be increasing. I think that answers your question.

It does, can I ask just a quick follow-up?

Sure.

Would you expect to see this happen on iOS as well? And what do you think the response will be for Google and Apple?

So, if you look historically, Google has been a more open platform. And as I said, we’ve been offering this option on many of our brands. So, I’m going back at fairly long time. So, this is not new from a Google perspective. apple has tended to be more restrictive. And so we’ll see what happens with Apple. We’d love to offer the same kind of choice on Apple as we do with Google, but it’s not clear to us, if or when that’s actually going to be able to happen.

Great. Thank you.

You’re welcome.

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

Thanks so much. Maybe, diving in a little bit in terms of the narrative broadly overseas and what you’re seeing in Asia, and what you’re seeing in the Middle East. I want to understand a little bit of the nuance about how you might be taking different approaches to marketing, positioning brands in those markets. how we should be thinking about ROIs on investments of those markets against the subscriber growth opportunities? So maybe, see if we could go a little bit deeper in the opportunity you see especially in the Middle East and Asia as you called out in the slide? Thanks, guys.

Okay. I’ll take that, Eric. So, if you look at these markets, which are more underpenetrated markets, there’s definitely more secular tailwinds. I mean these are markets, where there’s big population growth and we’re still seeing Internet penetration increasing and mobile usage increasing. and I think one of the most important things to point out is sort of that that stigma is eroding, which we think is going to help really increase usage across the brands. because of these dynamics in the market, it really gives us the opportunity to take a number of our apps into these markets depending on the segment that we’re going after. And we’ve really tried to be holistic and thinking about a market. So, for example, in India, Tinder has been present in India to the largest player in India, but we recently introduced OkCupid, because we felt there was a hole in the market in terms of a more serious minded relationship app. Japan is another market, where there is Tinder; there is pairs, which has seen tremendous growth. and now, we’re offering a third product as of a few weeks ago with Pairs Engage. And then the one we talked about today, which is harmonica, is really around looking at kind of Cross Geo demos, where we can serve the Muslim population. So, we’re excited. We don’t think in these markets, there’s winter takes all and we think by offering different apps for different segments. there’s a real opportunity for growth. And then you asked me about how do we think about marketing? We approached marketing a bit based on brand lifecycle. So, as we launched new products in new markets, we generally tend to spend more money on brand spend and measure awareness. And then overtime, its brand and products become more mature. We tend to start shifting more to performance marketing. We’ve got a really good track record in the past for being smart and prudent. And we need to take some bets as well. And I think that balance of brand and performance marketing has served as well.

Thanks so much.

Our next question today will come from Ross Sandler of Barclays. Please go ahead.

Hey, guys. So, Gary, a question on the guidance for back half, so we’re obviously seeing – as you mentioned, the second highest net ads for Tinder, in company history, so tons of momentum, but the guidance implies a little bit of tailing off of the net adds in 3Q and 4Q. So, is that from the new merchandising playbook having less dramatic impact on the android? is it from higher churn or just higher rate of drop off or is that just usual conservatism? Any color there would be helpful. Thanks.

Sure. So, I think as you know, if you kind of look historically when we roll out new features that are focused more on monetization or we’re focused on optimizations, you do see a particular bump in the quarter, where we roll it out, from a net ads perspective. And so if you’re looking at Q2 at the high number of subs that we added at Tinder, you can see that’s been driven by the iOS optimizations that we did, the merchandising changes that we did. We’ve rolled that out now in Q3 on Android. We talked before I think about how android doesn’t quite have the same impact as iOS. when you roll out something new like this, but we’re seeing in our guidance for Q3 on net ads that there is still a nice lift from kind of normal levels in Q3 that we’re expecting when we’re guiding to north of 400. So, you can see the impacts there of those changes in Qs two and three. At the moment, we don’t have a plan to do something that we think would have this kind of impact in Q4. So that’s why we’re expecting a smaller number of net ads in Q4 than we’ve seen in the first three quarters of the year. And so I think you’re right, your math is, we’ve got it to 1.06 million for the year if you add up the quarters, choose one, two and the guidance for three, you end up with a smaller number in Q4. however, it’s also important to note that we’ve rolled out some new al a carte features and we’ve been adjusting pricing and the percentage of gold subscribers is increasing. So, a lot of people like to focus just on subscribers, but as we often say, it’s a revenue focus at Tinder, not just the subscriber story. And so the subs is a piece of it, but we’re also focused on driving ARPU higher, which we’ve been able to do and we’re expecting to have a solid year-over-year growth in ARPU in Q3 and Q4 as well, which will drive improved revenue at Tinder. So, that is the other piece of it. We’ve just rolled out these two new al a carte features that Mandy mentioned. I think you’ll see some lift on the ARPU side as you see the results for Q3 and Q4. Anything else, Ross? Otherwise, we’ll move to the next one.

No, that’s super helpful. Thanks.

Okay, great. Thanks.

And thank you. Our next question will come from Brent Thill of Jefferies. Please go ahead.

Good morning. Mandy, can you just maybe walk through some of the core match improvements in the early results and for Gary, there’s a lot of questions around can it grow, are you going to run that core business just for profits If you could add a little more color around the financial dynamics that you see going forward for core match?

Okay. Good morning, Brad. So, let me take that first part. So, can we take a step back and think about kind of the audience that match serve. It’s really focused on 30s and 40s in the U.S. that are looking for a serious relationship and for people over 35, it’s the brand that still brings the highest number of new entrance into the category. We have made a lot of progress over the last couple of quarters. Satisfaction rates are up, conversions up. We’re feeling really, optimistic. And then we also introduced a new feature called AskMatch, which I talked about. We think it’s highly differentiated. And so we felt good enough that this is really the time to bring attention back to the brand, which is why we launched this new campaign that I talked about. our goal remains to turn the brand to grow similar to what we did at OkCupid over last couple of years and we are cautiously optimistic that we can turn match around and return it to growth. We’re feeling good about that brand.

Yes. And I think if you look at match itself, as Mandy said, our goal is to get that brand back to growth from a subs and a revenue perspective. If you zoom out a little bit away from just match and look at the non-Tinder brand, which is something we’ve been talking about it’s kind of been flattish from a revenue perspective. We think we have a lot of different weapons inside the non-Tinder portfolio that will return all those brands in aggregate to growth in the not-too-distant future. So, we’ve talked a lot about hinge. We’ve talked a lot about what’s going on at OkCupid. We’ve talked a lot about the positive momentum at pairs and I could go on, but our expectation is that the non-Tinder brands will start contributing to the revenue growth of the company, hopefully by the end of this year, if not then very early next year.

Great. Thanks.

You’re welcome.

Our next question will come from Youssef Squali of SunTrust. please go ahead.

Great. Thank you very much and congrats guys. Gary, can you size what you termed the discretionary long-term oriented investment? I think you guys have talked about 10 million previously and just how will those costs look into next year, whether these costs basically remain in the P&L next year or whether we anniversary them and move on? Thanks.

Yes. I don’t think I’ve actually ever given a size around these discretionary investments. I think last quarter, I basically just said we were contemplating making them. and so let me try to take it kind of in two pieces. just given the overall strong performance and the strong performance of Tinder, we want to reinvest back both in Tinder and in some of these other initiatives. I can’t really remember a time when we’ve had so many great investment opportunities, so many assets to invest in when you look at Harmonica for the Muslim market, when you look at pairs engage, which we’re really excited on the matrimony market in Japan, it’s a place we’ve never tried to attack before. So, we’ve got a lot of really interesting opportunities in front of us and given the strong performance this year. We’ve got the ability to go make these investments. So, we’re trying to do a bunch of different things here in these last couple of quarters of the year. And so if you look at, we’re going to invest a bunch back in Tinder marketing into new geos, where Tinder historically hasn’t marketed before, that includes some in Asia and we think there’s room to expand the geos, where Tinder has been marketing and put some real dollars to work there. So that’s a piece of it. And then as we’ve kind of gone through, there’s probably, four or five, six other buckets, OkCupid and some of the international markets including India, that Mandy referenced, Harmonica, which I referenced as well as pairs Engage. If you take all of those other buckets plus Tinder, you’re probably looking at, I would guess about $25 million or so of EBITDA impact from all these investments that we want to make this year yet. So, it’s a pretty big number. As far as whether it will continue, we don’t know yet what the impact of all this is going to be. So, we’ve got to look at is it Tinder marketing effective? Is Paris engage gained the traction we want yet? is the Muslim market product getting the traction we want to get? So, I don’t know what it portends for 2020 yet, but our hope is that that marketing and those investments will have real impact and we’ll want to continue them and ultimately they will lead to revenue and ultimately EBITDA benefits. But it's going to be some time before we see what the real impact of all these investments is? We're making them cautiously. We've thought about them for a while now, and we're starting to make those investments. We have a pretty good ability to figure out where to invest. And we'll have to see, but we don't look at them as kind of one time once and done investments for the most part, they are things that are meant to drive the business going forward. And that, discretionary bucket, which is a large bucket and has a lot of different components is on top of our addition to money that we're spending around regulatory and making sure the user stay safe and their data's protected. So there's another bucket on top of that. So you aggregate that up, it's a pretty big impact on our EBITDA in 2019.

Thanks.

Yes, hopefully that helps you. Okay, great.

Yes. Super helpful. Thanks, Gary.

Okay. No problem. Next question please.

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

Great. Thanks for taking the question. Good morning everyone. Mandy, I just wanted to ask a little bit more about Asia broadly, and maybe you could just considering that most of us on the call, a little bit more U.S. focused, you could maybe just refresh us on the competitive environment there and how it may differ from what you see in western markets in terms of local players or maybe some changing dynamics lately that you'd highlight. And then secondly, I'd just like to drill down a little bit more on Pairs Engage. And what you noted is sort of attacking the matrimony business specifically and which obviously is all part of relationships. But a little bit different than some of your apps and there are certainly businesses that have taken a different approach there. Could you just spend a little bit more time on matrimony services specifically? And where that opportunity may also be in Asia beyond Japan is, I think that's fairly common in India and South Asia as well? Thank you.

Okay. Morning, Dan. All right. So let me take that. So, we talked about Asia opportunity, but Asia is obviously very multifaceted, and so I'll talk about it in a couple of different areas. We really look at developed markets like Japan and South Korea. And then we look at developing markets, Southeast Asia and India to all break those up. For the develop markets, there is a real social need given low population growth, and low marriage rates, and people are looking for ways to meet people, especially outside of their social circles. Because there's a little bit more shyness around meeting people through friends. In Japan where the category is growing, only about 17% of singles are open to using a relationship or dating app that's low. I mean that's – it's about 50% and, North America and Europe. So that dynamic is a big change. So we think there's a real opportunity to increase user adoption. And I think it's pretty interesting in these markets where social stigma is changing, but I think part of one of the opportunities that we think regarding stigma is historically mainstream media. I'm talking television, billboard, radio, they have not traditionally allowed dating apps in relationship to app to advertise. And I think those barriers are slowly collapsing, which I think will further help erode stigma and make it just much more normal in society to use the apps. And then the one other dynamic, I just point out is these more developed markets is, monetization is really different. I mean, in many of these markets, particularly Japan, it's even better monetizing in some western markets. So that dynamic is really an advantage for us. People are willing to pay for products. If you look at, developing markets, it's definitely a little bit different. So these are where population growth is exploding. Internet and mobile penetration is still growing meaningfully faster than anywhere else in the world. There's a couple of factors in these markets, which I think are interesting and that are really compelling to us. So there's highly populated cities and in those cities there's large segments of young educated, affluent users, which we think that's an opportunity for us to offer products like Tinder and others. And then, you asked about the competitive set. There are definitely well fortified competitors in some of these markets, both global players that we're seeing as well as local or regional players. I think in terms of our position in the market, I don't think it's a winner take all market in the U.S. we're seeing, people use multiple apps. I think that's going to continue to be a trend, not just in the U.S. and Western Europe, but I think we'll see that happen over time as well. So, I do think it's possible that as these new entrants come into the market and spend heavily along with us having a presence in these markets, it could open up the market and further road stigma, which I think would sort of lift the whole category app, but regarding how we're competing. I think we're really well positioned. We've got a track record of creating products that really resonate with young audience that are looking for relationships. We've also done a, I think a good job and identifying and finding and investing in local teams, which we think is even more important over the next five years, and then extending existing brands into the market. So overall we feel like we're in a great place. I'll talk a little bit about the marriage market, because I think that is relatively new. We just launched Pairs Engage honestly weeks ago, so it's still super early. So you – there are, the matrimony markets are pretty large and a number of markets like India and South Korea and Japan among others. These businesses because a lot of us don't have direct exposure to them. Most of them are offline. They're brick and mortar, so they have a store friends. They're generally pretty high priced for consumers and it's pretty expensive to service these consumers, especially given kind of the brick and mortar footprint I mentioned. And often they have salespeople in a lot of service oriented people within this brick and mortar stores. So the Pairs team, which we've talked a lot about has done a great job in building this Pairs business over the last few years. And what they have really a strong asset is an engineering team that has the ability to leverage the latest technology plus the Pairs user base. And we think the combination of these two things is, could have the ability really potentially disruptive marriage market, which we talked about, which is pretty large market in Japan, and, it's really early. We just launched the early taxes. We've gotten a lot of press and really early signals this – there's going to be a lot of user interests, and I think as you know, as we expand over the next few years in Asia, I can imagine that these are the types of solutions that can translate to other markets. So we'll see, but I think that certainly one more product and more sort of tool in our arsenal to be able to address that market.

That's great. Thank you for all that color, Mandy. Appreciate it.

Our next question will come from Ben Schachter of Macquarie. Please go ahead.

Hey guys, congrats again on the good execution. Gary, going back to the app payments and the impact on COGS, as you noted, it fell sequentially as a percentage of revenues for the first time in many years. And I think you mentioned that the IAP change had single-digit impact and we'll grow, but single digit what, can you clarify what you meant there? And basically, would you expect that COGS to continue to fall as a percentage of revenue for the foreseeable future? And then secondly, related to that for modeling purposes, can you help us understand what the percentage of total revs are currently originating on android and how you expect that to evolve over time? Thanks.

Sure. I'm sorry if I wasn't clear on the answer earlier. When I was responding to actually with Nat had put out a report that, that he thought the change by adding credit card added $10 million to EBITDA, I think is what he said. And I was talking about it, it was less than that. It was kind of in the single digit in this quarter. So that's what I was responding to you. So it was an EBITDA contributions kind of number. But you're right. This is the first quarter in awhile that we've seen. If you look at the sequential trends in COGS is down about 50 basis points. So that is a change in trend. I think we'll see how this kind of plays out over the next few quarters, but my expectation is that there'll be some level of stability. Maybe it'll be up a little bit, maybe we down a little bit, but if you look sequentially over the next few quarters, you're going to see more stability, less of an increase in what we've been seeing sequentially for the last many, many quarters. That's kind of the change from the impact of adding the Google credit card option. As far as kind of how do we think about the breakdown between iOS and android on Tinder, as you might expect, it is more iOS heavy at the moment. It's more than majority iOS, but as we expand internationally, especially to some of these developing markets where android is more popular, I think that that balance will shift over time. So, we could see some more parody there over time. But right now it does lean more heavily on the iOS side from a revenue percentage perspective.

Thank you. Just one…

Yup. Go ahead.

One, one quick housekeeping. The tax in France and other taxes they may come, is that going to be counted as a contra revenue G&A or is that just part of the income tax line?

Yes, it's not an income tax. It's an above the line item. So it is an expense item.

Okay. Thanks. Last question.

Our next question from Benjamin Black of Evercore. Please go ahead.

Okay. Thanks for allowing me in here. I was just wondering if you could talk about your capital allocation priorities, given your when you'd pushed around presence in APAC? And secondly perhaps, could you highlight the near and long-term market opportunity and the competitive environment you see in the Middle East and how well Harmonica is penetrated there? Thanks.

Okay. From a capital allocation perspective, I think if you go back, it's probably about a year ago or so now, we laid out, how we think about capital allocation. We laid out four priorities, which were in order if I get them right. Organic investment in the business, M&A, return of capital to shareholders, and debt pay down. And that is our way of thinking about capital allocation. Obviously, there's a lot of different factors that go into it and we constantly analyze it. But that has kind of been our framework. And fortunately what we're seeing in this year, given the outperformance that we're experiencing, is that we've got the ability to really invest in organic growth, which is our number one priority. And that's what we're doing. And we're doing it at a bunch of different ways. We're doing it at Tinder by expanding its marketing into more geographies. We're doing it at OkCupid by expanding it into a bunch of new markets, in India and elsewhere in Asia. We're doing it at Pairs. And so, it's really, in a number of ways where we're reinvesting capital that we're generating. And then as I kind of alluded to earlier, we've got new assets as well, which we've either brought on board like Harmonica or built in house like Pairs Engage that we can invest in as well. So, we are really kind of hitting that, number one priority of investing organically in our business in a big way on multiple fronts. And we're excited to do that, but as we've also shown over time, if we don't have a capability in house that we think we can do better by making an acquisition or investment, we'll do that too. So Pairs was an example in Japan that we did initially and that's worked out really well by combining their knowhow and our knowhow. And we're hoping that the same will hold true at Harmonica where it's a very small app, really, focused on the Egypt market at the moment. But we're going to try to build it out and expand it and get it into other geographies and invest in it with product and marketing. And we think there's real opportunity just given the size of the Muslim Demographic that Mandy talked about and how quickly it's growing that we think we can position ourselves over the next while to capture more and more of that opportunity. So it's early, this kind of product is really new in this market. There's a couple of other competitors that exist out there, but we feel good with a good team on the ground and our knowledge and resources in the dating space, that we should really be able to be highly successful in the Muslim Demographic, which we think gives us a huge opportunity to massive runway. But it's going take time, and so people are going to have to be patient, I think to see the results from that investment in Harmonica, but it's one that we're excited to be making.

Great. Thank you.

Okay. I'm going to leave it there since we're out of time. Appreciate everyone joining and we look forward to talking to you again next quarter. Thanks so much.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. And you may now disconnect your lines.