On Nov. 1, Match Group delivered its third quarter earnings. The $4.6 billion dating website specialist delivered an impressive sales growth of 20% to $902.8 million and 15.7% profit growth to $98 million. As a result, Match Group shares closed -12% the following day, while the broader Standard & Poor’s 500 index closed -0.65%.
“Q3 was another strong quarter for Match Group.
We grew revenue 22% and expanded margins in our Dating businesses, delivering results ahead of expectations, driven by great growth at Tinder, as well as PlentyOfFish and Meetic. Our Non-dating business turned a meaningful profit this quarter as expected, and overall, we are meeting or exceeding the marks we have set for ourselves. The outlook for our Dating businesses remains very positive.”
Greg Blatt, Match Group chairman and CEO.
(Match Group, Quarterly Filing)
Match Group
Match Group is the world's leading provider of dating products. Some of the more distinguished among Match Group’s 45 brands are Match, OkCupid, PlentyOfFish, Tinder, Meetic, Twoo, OurTime, BlackPeopleMeet and FriendScout24.
Match Group went public in 2015, while still being mostly controlled by IAC/InterActiveCorp (IAC, Financial). The company had about 4.7 million paid members at the time with its dating properties, but has grown to some 5.55 million as of the third quarter.
Match Group currently offers its dating products in 38 languages across more than 190 countries. Match Group operates in two segments: Dating and Non-dating. The Dating segment consists of all of the company’s dating businesses globally, while the Non-dating segment consists of The Princeton Review.
Dating segment
Match Group carries the following brands in its dating segment: Match (launched in 1995), Meetic (2001), OkCupid (2004), Tinder (2012), PlentyOfFish (2003, but acquired by Match Group in 2015), Twoo (2011), FriendScout24 (2007), OurTime, BlackPeopleMeet and Match Group’s other affinity brands.
The segment grew 8.8% to $909.7 million in fiscal 2015 and delivered a 23.4% operating margin for the period. Nine months into 2016, the Dating segment delivered an operating income of $202.6 million, a 41.8% change from the same period last year.
The segment also contributed 89% of 2015's total sales, as well as all of the operating income last year and in the recent three most recent quarters.
The company attributed the Dating segment’s third quarter growth to strong contributions from Tinder, Pairs and the acquisition of PlentyOfFish.
Non-dating segment
Match Group’s non-dating segment carries both the website Tutor.com (acquired in 2012) and The Princeton Review (acquired in 2014). The Princeton Review provides a variety of educational test preparation, academic tutoring and college counseling services.
According to the company, its non-dating revenue consists primarily of fees received directly from students for in-person and online test preparation classes, access to online test preparation materials and individual tutoring services.
In fiscal 2015, the non-dating segment contributed 10.85%, or $110.7 million, of total sales with 113.7% sales growth, but delivered a loss of $19.4 million. In the past three years, the segment delivered an operating loss average of $17.8 million.
Paid member count (PMC) (1)
As can be assumed, the average paid member count correlates with Match Group app’s significance in the online dating business. Better sales figures can be achieved through an increase in this metric.
Most of Match Group's users are in North America, accounting for at 60.8%, or 3.37 million, as of the third quarter. The company’s international members have been exhibiting observable growth, increasing from 32% of total members in 2013 to 39.2%, or 2.18 million, in the recent quarter.
Average revenue per paying user (ARPPU) (2)
Similar to paid member count, average revenue per paying user should demonstrate increasing growth to further support the company's overall business development.
(Match Group ARPPU, Annual and Quarterly Filings)
The figures revealed otherwise. Compared to 2013’s 62 cents per North American user and 70 cents per International user, Match Group reported 56 cents and 51 cents for each metric as of  the recent quarterly filing.
Match Group explained that the lower figures were due to mix shifts to lower rate brands, partially offset by an increase in mix-adjusted rates.
Segment expectations
(Match Group Products Meeting and Behind its FY 2016 Expectations, Investor Presentation)
Overall, Match Group delivered three-year sales and profit growth averages of 12.7% and 14.9%.
Cash, debt and book value
As of Sept. 30, Match Group had $231.1 million in total cash and $1.2 billion in total debt with a 2.73 debt-equity ratio. The company also had 75%, or $1.57 billion, in goodwill and intangibles with a book value of $446 million.
Cash flow
(Match Group Cash Flow, Quarterly Filing)
For the first nine months of the year, Match Group grew its cash flow from operations by 33.79% to $168.9 million. As observed, there were lower acquisition-related charges to cash flow, aside from growth in profits.
Capital expenditures were $39.1 million, leaving the company with $129.8 million in free cash flow. The online dating specialist also had cash flow coming in from the sale of marketable securities.
Match Group reduced its overall debt by $10 million, including debt issuance. The company has not paid any dividends or conducted share buybacks in the past three years, but provided a cash dividend amounting to $1.02 billion to InterActiveCorp in 2015 (3).
Market performance
Match Group has a total return of 14.39% year to date, while the broader S&P500 index returned 3.88% (4).
Valuations
Match Group had a price-earnings (P/E) ratio of 21 times (industry median: 29), price-book (P/B) ratio of 8.9 times (industry median: 3) and price-sales (P/S) ratio of 3 times (industry median: 3).
Conclusion
Investing in Match Group certainly would expose one’s portfolio to the endless growing online business. Match Group proved that it can take on a unique business model like online dating and make profit out of it.
(Match Group Non-dating Sales, Annual and Quarterly Filings)
Despite struggling, the company's non-dating segment has been able to turn some profit. In the third quarter alone, the segment delivered $816 thousand in operating income.
(Match Group Share Price, Google Finance)
Match Group’s earnings multiple valuation reflects a somewhat modest opportunity. In contrast, the company definitely does not trade at a good discount compared to its book value, taking into account the goodwill substance in its assets.
Analysts at JP Morgan called Match Group shares overweight with a price target of $19 a share back in July. Last week, Axiom Capital rated the company’s shares a buy with a price of $20.
Only the interesting ownership (or what has been left of it after the IPO) between Match Group and InterActiv deter me from forming a better conviction.
Despite this concern, Match Group has a promising business model. Continuous growth among its several business products would eventually lead to better paid member count and, hopefully, would help the company grow its average revenue per paying user.
In conclusion, Match Group would be a speculative buy for aggressive investors.
Notes
(1) Annual filing. Average PMC: - is calculated by summing the number of paid members, or paid member count ("PMC") at the end of each day in the relevant measurement period and dividing it by the number of calendar days in that period. PMC as of any given time represents the number of users with a paid membership at that time. Users who purchase Ă la carte features from us do not qualify as paid members for purposes of PMC by virtue of such purchase, though often such purchasers are also paid members.
(2) Annual filing. Average Revenue Per Paying User (ARPPU) is Direct Revenue in the relevant measurement period divided by the Average PMC in such period divided by the number of calendar days in such period.
(3) Annual filing (FY 2015). Match Group and IAC relationship: Match Group has outstanding shares of common stock, with one vote per share, and shares of Class B common stock, with ten votes per shares and which are convertible into common stock on a share for share basis.
As of January 29, 2016, IAC owned 209,919,402 shares of Class B common stock representing 100% of our outstanding Class B common stock, approximately 84.5% of our outstanding shares of capital stock and approximately 98.2% of the combined voting power of our outstanding capital stock.
(4) Morningstar.com
(5) Gurufocus.com
Disclosure: I do not have shares in Match Group nor in IAC.
Start a free 7-day trial of Premium Membership to GuruFocus.
