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The Science of Hitting
The Science of Hitting
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Match Group: Full Steam Ahead Into 2021

A look at the company's third-quarter financial results

November 20, 2020 | About:

In early November, Match Group (NASDAQ:MTCH) reported results for the third quarter of fiscal 2020. Revenues for the period increased 18% year-over-year to $640 million, with North America up 20% and International up 17%. Growth in the quarter reflects a double digital increase in average subscribers (+12% to 10.8 million), along with a mid-single digit increase in average revenue per user (ARPU). As shown below, growth in the quarter reflects continued gains for the company's most important brand, Tinder, as well as an increase amongst its remaining (non-Tinder) brands.

In the third quarter, Tinder had 6.6 million average subscribers, up 16% year-over-year, with the other brands reporting a 7% increase to 4.2 million average subscribers. The addition of hundreds of thousands of subscribers was the first time other brands has reported meaningful growth in four years (other brands added 463,000 subscribers in the third quarter of 2016). A notable example in other brands was Hinge, where app downloads were up 82% year-over-year. Combined with a meaningful improvement in ARPU as they shift away from solely focusing on user growth, revenues more than tripled year-over-year in the third quarter for Hinge.

The growth in North America was driven by a 9% increase in average subscribers and an 8% increase in ARPU due to improved monetization at emerging brands like Hinge and Pairs, as well as new product features in some legacy brands (most notably the new POF Live feature at Plenty of Fish). Internationally, growth was attributable to a 16% increase in average subscribers.

As I noted after the company reported first quarter 2020 results, user engagement actually benefited from the pandemic, particularly among young customers (the average number of daily messages among users under the age of 30 was 35% higher in April than it was in the last week of February). As we're seeing now, engagement is flowing through to subscriber growth and higher ARPU's.

At quarter end, Match had roughly $400 million in cash and $3.5 billion in long-term debt, with 4 times net leverage. As Chief Financial Officer Gary Swidler noted on the conference call, they remain on track to get to under 3 times net leverage within the next 18 months. That said, the company will delay that target if the right opportunities arise:

"If we can find something, or a number of things that makes sense for us, we'd like to add it to the portfolio. As we've proven with Pairs, and with Hinge, and with other businesses, we can really add a lot of value when we make an acquisition. We can really build things out, we can really add knowledge and expertise, and we'd like to replicate what we've done in some of those scenarios with other things that are out there. So, we have some things in mind, and we're going to be taking a hard look at that. And we've got the financial flexibility to do what we think makes sense. So, we'll see how everything progresses. If we're successful, that will send us on one path. If we aren't able to make some acquisitions, that will send us on a different path from a leverage perspective, but we'll see how that all plays out. Right now, I'd just say we're comfortable with where we are, and how we're progressing. We've got the flexibility to do what we need to do. We're excited about some opportunities that are out there. And we'll see how things progress."

Conclusion

Despite facing an unprecedented environment, the strength and resiliency of Match's business has been on full display in 2020. Management's guidance for the fourth quarter implies full year revenues of roughly $2.4 billion – more than 100% higher than the result in 2016.

Continued growth in Tinder users, combined with subscriber acceleration at the non-Tinder brands and higher ARPU, puts Match Group in a great position heading into 2021.

As I noted in my first article on Match (from March 2020), the company has a long runway ahead:

"Match, the global leader in online dating, only has ten million paid subscribers in a global addressable market that is north of half a billion people. Even at 10% penetration of a growing online dating market over the long run, that leaves a lot of headroom for growth. Combine that with more effective monetization efforts (like a la carte products) and the company could see its business expand dramatically over the next decade. In summary, I can see the rationale for investing in Match at this price. If management can execute on the global plans that they've articulated, the stock will prove to be undervalued."

Mr. Market gave me a brief opportunity to buy at a good price, but unfortunately, I sucked my thumb (the stock is up more than 100% since). Today, the business trades at well north of 50 times earnings. As I've said in the past, I'd love to own this business – but only at a reasonable price. Today, Mr. Market is pricing in a lot of good news. For now, I'll stay on the sidelines.

Disclosure: None

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About the author:

The Science of Hitting
High-quality businesses for the long-term.

In the words of Charlie Munger, my approach is \"patience followed by pretty aggressive conduct.\" I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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