Chit Chat Stocks - Why We Own Match Group (Ticker: MTCH)

Episode Date: April 4, 2023

This is our monthly Arch Capital episode. About once a month we will publish an episode that covers a company in the Arch Capital Investors Fund. These episodes will be modeled after our Not So Deep Dive episodes and will also be available on YouTube. Match Group Inc. (MTCH) operates popular dating apps, including Tinder, experiencing strong user engagement and revenue growth, but facing competition and regulatory risks associated with user data privacy and security. Brett and Ryan dive through Nelnet and outline the investment thesis for why we own the company in our Arch Capital limited partnership. ****************************** What is Arch Capital? Arch Capital is a concentrated, long-only equity fund aiming to compound capital at an above-market rate. Arch managers are perpetual learners with a long-term focus that strive to build wealth with our partners through intelligent capital allocation. Learn more here: https://www.archcapitalfund.com/ ****************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ****************************** Timestamps Company Background | (4:27) Major Segments | (17:18) Large Opportunity | (55:50) Projections | (1:03:35) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Arch Capital episode on Chitchat Money. This is our monthly In Place of the Tuesday show. It's a similar one to the Not So Deep Dive. However, in this one,

we're going to be doing... Well, it's not solely to have free marketing for our investment fund, but that is part of it. So that's the reason we are doing it. But we also think it can share a lot of analysis with the listeners. We want to go through a business, why we own it, why would we potentially sell it? What are the downsides we're looking for? And then for future episodes for these months, we're going to cover more philosophical things, maybe some things on the watch list, like something we were looking at closely and why we wouldn't buy it. But today, we're going to go through another portfolio holding of ours for the time being. And that is Match Group. I'm very excited to talk about this episode because as I would say, well, this

is not a disclosure, but I believe it is the highest ranking when we do our bi-weekly rankings for our internal research. It is, I think my highest ranking right now for our internal holdings is my favorite risk reward opportunity and yours as well. Right, Ryan? No, not my top one. Your second, second, third? It's probably up there, but it's not, it's not number one. but either way it's quite high and it's also controversial apparently it is yeah it is people think it's a shit co yeah so we're going to talk about that the downsides why they might be right to be the bears out there and how these apps might deteriorate there's a lot of different i'd say not necessarily stories but there's a lot of different themes that people

like to talk about the dating apps a lot of different narratives we're going to try to put some numbers to it. Again, as of this recording, we do hold shares of Match Group. Look at our full disclosure on the Arch Capital website. And yeah, this is not a buy or sell record. I don't know. It's not a buy or sell recommendation, but let's get to it. Today's episode is presented by Stratosphere.io, our investing home screen for fundamental research, ditch Yahoo Finance and the clunky ad riddled legacy things that people are using that we know that a lot of you, and you should be guilty if you're listening to this and still use Yahoo Finance, are using. Ryan is showing a great screenshot of Match Group and all the different

KPIs and easy fundamental charting tools that Stratosphere offers. They have plenty more on top of this though. I really enjoy the SEC file aggregation. You can go into there and make sure you're not missing an SEC filing. If you're a professional investor or just an individual one, you have nice charting tools like he's showing right now. He is showing Tinder direct revenue, and it has grown at a 48% rate since 2016. We're going to talk about that during the episode. If you want to try Stratosphere, do so for free by going to stratosphere.io and upgrade your fundamental research. Save yourself time and money like we do when researching stocks and researching anything really in the investing world for our podcast episodes.

And if you want to upgrade to one of their paid plans and get the full KBI capabilities and historical financials going back to upwards of 35 years, use code CCM, get 15% off one of their paid plans. They have stuff for investment funds and also stuff that is more suited for individuals. Okay. We're going to be utilizing stratosphere charts throughout this episode but ryan for any newbie i guess to these shows we're going to pretend that we're interviewing each other and ask each other questions that we pre-assigned so don't worry this is all essentially scripted although it'll tell it'll turn into a discussion what is the relevant history of match group and what is the major context you believe any shareholder needs to know

for today? I'm just going to go through the history dating back to its earliest roots, but a lot of this stuff is largely behind them. The business has pivoted a lot, so we can just keep that in mind. But let's start with the origins. Match Group's roots date back to 1995, actually, when a Stanford Business School student named Gary Kremen, I believe I'm saying that started the website Match.com. He apparently brought on some early investors, was butting heads with them, ended up leaving the business in 1996, and he received like $50,000, something tiny. So I'm sorry, Gary, but what you've built is many people are probably grateful for, but you were not compensated justly. Anyway, the following years, I guess two or three years,

Match.com really found kind of remarkable demand. I think a lot of that was probably in large part just due to the sheer growth of the internet at the time. Keep in mind, this is the late 90s. A lot of people are joining the internet. I think Bezos has thrown out that statistic for why he started Amazon, which was just growth of internet users in general. And I can't remember what it was, but it was just staggering growth. And so Match.com was in the right place. And this eventually led to Ticketmaster, which was owned by IAC, or at the time it was known as USA Networks, acquiring Match.com in 1999 for $50 million. Once it was under IAC's umbrella, it appears that's when user adoption really started to take off. By 2003, Match.com reportedly had

$185 million in revenue. By 2006, that had risen to north of $300 million. dollars. There were apparently some periods of stalled growth, but they brought on Jim Safka as CEO, who apparently had been a corporate executive in a number of roles prior to that, and he helped solve a lot of their problems. And so by 2007, it was really just Match.com was their only business. But in 2008, Barry Diller decided to break up IAC into five separate companies. I'm not going to go through every one, but the remaining IAC company had two businesses, mash.com and ask.com. Maybe there was a couple more, but those were the dominant ones. And at that same time, that was when I think Barry Diller saw the opportunity for dating to become

more than just a single property, even though mash.com, I believe, was the largest at the time. And they wanted to become sort of a conglomerate. And so that same year, Match.com, or IAC, I should say, acquired People Media for $80 million. People Media owned 27 different dating sites, and it was all a bunch of very niche, very focused dating sites. So there was BlackPeopleMeet.com, LDSPlanet.com, that's like Latter-day Saints, SingleParentMeet.com, a bunch of properties like that, which kind of expanded them at least into a multi-property unit.

And so that was when they formed Match Group. Brett, feel free to add anything in here. I want to, yeah, I want to, for the listeners, these, and you're seeing the .com in there, these are mostly, we'll call them legacy. They call them evergreen titles. And that, I think you can separate the two groups of assets within the dating sphere as pre-smartphone and post smartphone at this point even though i think the iphone had been out probably for a little while and this is kind of the 2010 range matched our match group was all um all these legacy ones yeah where people are using stuff on the desktop have you watched that always sunny episode that shows how those things work they are not like the dating episode today and as ryan's going to talk

about next. When the SmartFruit happened, there was this huge proliferation of new ideas. And then the combination with Tinder was formed. But what are the details on that? Yeah, I guess just in terms of other acquisitions, they also acquired OkCupid in 2011 for $50 million. By that point, they were already the largest online dating business in the world. And I'm not sure if OkCupid was specifically mobile-based first, but they do have a mobile presence now. So OkCupid is one of those brands that I think have done a good job transitioning. Same with Match. Yeah. Yeah. Although 2012 probably marked the most important turning point in the company's history.

So that year I see they were funding what was essentially this mobile app incubator. And this really didn't have anything to do with dating initially. It was meant to be some payments thing. And if you've ever watched the show Silicon Valley, it sounded like a glorified version of that. And so the incubator was called Hatch Labs. And within Hatch Labs, developers created what would eventually become Tinder. They weren't even really that focused on it, but one of their payments apps ideas was failing. And so they decided like, oh, why don't we try this Tinder thing? Interestingly enough, this is also when Whitney Wolf Hurd had joined the company. And she was kind of the pioneer, I think,

within the marketing strategy, at least from what I'm hearing, where she went out and really got a lot of adoption going around college campuses for uh i don't know if the name was tinder by this point but what ultimately became tinder going up to every sorority and say if you join this then every horny dude within the next 50 in the 50 mile radius radius is going to join this application so pretty genius strategy by her and you can see why bumble's so successful yeah 100 um but adoption adoption really grew uh starting with those college camps campuses as i mentioned. And then IAC eventually decided to up its stake. So how these incubators work is you typically get like a percentage of their ideas, but you help them with finances and stuff like

that. They ended up having to buy the remainder actually from Chamath Palihapitiya, interestingly enough. Apparently he was an early investor as well. So I guess Chamath may have missed out a little bit on some of Tinder's growth, but essentially that's when IAC really started to own a big chunk of the business. However, despite Tinder being such a darling of the mobile app generation, that incubator idea that they had ended up, I don't want to call it being a failure, but it was really messy. It led to a number of lawsuits, a number of high-profile departures. As a lot of people know, Whitney Wolford, the founder of Bumble, left the company amid turmoil, I think, at the business and ended up filing a sexual harassment lawsuit.

There were a number of sexual harassment lawsuits that were filed from other employees. And then the founders, and this was probably the most notable lawsuit, sued IAC and Match Group, I believe, for undervaluing the employee stock options in the company. i'm not sure on the specifics of how they were how they've improperly valued them but essentially how it feels like uh kind of feels like i know we're on succession brand it kind of feels like if greg sold something to logan roy and then came back and said wait you know did they structure this deal that favors them too much and but i guess they they won in court so yeah um basically match group actually went public in 2015. ic still had a large stake in the business i think it was

like 80% or more. However, Tinder was not officially a part of it yet. It wasn't until 2017 that the two merged. And in that process, apparently Tinder employee options were converted to Match Group options, which undervalued what the Tinder employee options were worth. And so they ended up taking this to court, sued the company for $400 million. The litigation was settled this fiscal year for, there were apparently $441 million worth of expenses that Match Group had to pay out. And so a big hit, but I think it's suffice to say that most of their problems are probably behind them related to the founding story. IAC is no longer in the picture or they've officially spun off Match Group. So it's really, I think a lot of the messiness is behind them.

They do still have some ongoing litigation with Google, which I expect will persist for a while, but it's not nearly the size, I don't think, of what they had to do in regards to the Tinder litigation settlement. Other important moments in their history, 2017 is when they began investing in Hinge, eventually bought out the whole business. I think it was for a small undisclosed sum. And then in 2021, Match Group acquired HyperConnect, which owned two social networking properties, I'll say, not necessarily dating properties, for just over $1.7 billion. dollars. I'll talk a little bit about that when we get to the more of the business, but that's the history. They've had three, maybe four CEOs in kind of the last five years.

The most recent was Char Duby. She kind of stepped in after being the COO. And I think her goal was to be there just for a little bit. Didn't really want to be there long-term. And then it was really what 12 months ago now that bernard kim stepped in and became 10 but yeah 10 months ago hopefully uh the ceo for a long time that's the goal so um there has been a lot of executive turnover but i think and i probably could have said this at any point in its history it's a cleaner story now and hopefully a cleaner business less kind of uh i don't know i don't want to say silicon valley approach, but it's more of a professional operation now, it sounds like. And DK has come in and kind of brought in his own team as well. Yeah. And I think we can get more of the

details on that and how we might be misreading the situation potentially during the management section. But what I will say is that looking at this history and going through that again, it gets me excited that Tinder's growth and really the mobile dating apps in general are able to grow. So I've done so well, at least the four big scale ones, Grindr, Bumble, Hinge, Tinder, with all of this chaos in the background. Every company we've looked at this month, and for anyone that doesn't know, we covered the three other publicly traded data gap companies this month. So go back and look at our shows on Grindr, Bumble, or Spark Networks. All the successful ones have done so, even with lots of turmoil. Not all of them have had

terminal so it's quite it's quite interesting to see if whether the industry will i don't know it just shows i think that the business models are very profitable and maybe it's just a byproduct of being in the dating space but right yeah i think yeah you look back at the history and you can tell how chaotic and mismanaged tinder has been and so kind of when you put the growth in context of that where it really hasn't been sort of a professional operation like you think of like a meta, um, or like Facebook or Instagram, uh, it's, it feels like there's, there's a big opportunity in front of them. Yep. And don't worry for anyone that knows this business closely, we will be covering Tinder in another section, but I guess Ryan, it's your turn to ask me a

question. Yeah. Let's talk about the important parts of the business. Why don't you go through how, how we look at it? Yep. So in its current form, management divides the match group business into five parts. One, Tinder. Two, Hinge. Three, Asia. Four, emerging and legacy brands. Well, they call it Evergreen. We call it legacy because it's a bit easier for us to understand. And then five, indirect revenue. So those are ranked in order of relevance, in my opinion, of the profit potential. Indirect revenue is mainly from advertising and is irrelevant today. It's a small part of the business. So that's kind of how they just separate that out. We're not going to focus on it in this episode, but they do talk speculatively. They do

say they're going to maybe invest in that more in the future. It's a big time TPT though. We also will not focus on Asia too much. We'll cover it in a short section later, but we have really no insights into what HyperConnect or Pairs, which is the leading dating app in Japan that they own, will look like over the next three years. And then we will discuss the long-term potential of Tinder in its non-core markets though. So in Asia, if you get what i mean so we're not going to talk about these asian brands too much but we are going to maybe discuss uh how much tinder could grow in africa middle east south asia east asia if we look at these uh major segments tinder was 56 of match groups revenue

in 2022 making it the most important asset for the company today this is also considering that they had major foreign exchange headwinds and product development woes that we'll hit on in the next section where, I don't know, I don't have the exact number in front of me, but they get a lot of revenue from Europe. They get a lot of revenue from Latin America. They get a lot of revenue from Southeast Asia, although mainly their main international markets are Latin America and Europe. And a lot of those currencies depreciated versus the US dollar last year. So they had some major foreign exchange headwinds. According to management, Tinder's division has 50% adjusted operating margin, which is their adjusted EBITDA margin. That's the one they give

out and that's the one we can track over time. And yeah, it's not the best metric, but they convert a good amount of that generally to free cash flow. And if we look at the 50% adjusted operating margin, that would equate to $900 million in profits just from the Tinder division in 2022, or 80% of match groups consolidated adjusted operating income. Did I say 80 or is that 90? I think I might have misput that in there. Anyways, 80 or 90, it's really not that big of a deal. Yes, if you look at the 50% number, you still have to back out a lot of the corporate overhead expenses. But I think seeing that number, that 50% number highlights how important Tinder is to match groups profitability as it's the highest, it's the biggest revenue driver for

the business, but it's even more important from a profitability standpoint. And again, we will talk about Tinder in a later section and why that's important and why the stagnation over the last few quarters, how we're looking at it, whether things could go wrong and what we're looking at to see whether the asset is going through a temporary lull or is permanently impaired. Now, second category is Hinge. It's Match Group's fastest growing property and made up 9% of overall sales in 2022, which is up from virtually zero when the company acquired the app fully in 2018. Then if we look at emerging and legacy brands, they are 23% of revenue. And these include older services like Match.com, OKCupid, along with niche offerings Match Group

has been incubating like BLK, Chispa, Upward, Stir, and The League. And The League, they just acquired for scraps in the summer of 2022. BLK is for Black people in the United States. Chispa is focused on Latinos in the United States. Upward is focused on Christians. Stir is focused on single parents. So these are kind of these niche apps that they're trying to target some certain demographics and certain cultures. These services are not very profitable. And I'm adding on these legacy ones as well, especially when you look at their consolidated operating income and then look at Tinder's operating income and then look at the revenue that comes from these emerging and legacy brands. So even though they're 23% of revenue, it's really not important to the

financial picture. However, the new management team, which came in, like Ryan mentioned, 10 months ago, said that they, well, they didn't explicitly say this, but they indicated that they are potentially going to change their strategy at the legacy brands and run them more for cash, which I think is code speak for not propping them up with tons of marketing spending. And they're not going to be afraid to see revenue declines, but actually might generate a bit more in profitability. And then these new niche offerings are growing at scale and could potentially balance the

declines of these older properties over the long term. But right now they are generating inconsequential amounts of revenue, which we'll go into in a further section. i think that sums it up for all the important parts remember the number one important part right now is tinder second most important thing is hinder hinge and the third most important part is asia slash uh what hyper connect i guess it's all in asia but the three apps there are what hakuna azar and pears yeah those are the three yeah it's confusing they own a lot of stuff those are important but we don't have much insight to there so i'm not going to cover them that much

Ryan anything to add and if not let's get to the next section why are we so bullish on the potential at Hinge yeah you almost had a I think they call it a Freudian slip maybe they'll blend

Hinge and Tinder together and call it Hinder is that as I say Hinder you almost did yeah I think you did anyway but yeah let's start with what Hinge actually is because I think a lot of people that are maybe listening to this show aren't a part of the dating landscape anymore.

So Hinge is a mobile dating app that generally targets real relationships, though it can really be used kind of however you want. And so can a dating app. I mean, you could target whoever you want, but Tinder can be used for very casual relationships. It can also be used for trying to find someone. But Hinge is really trying to focus on more of a serious, higher intent data.

And so by default, this typically means that it captures the post-college data demographics. This isn't just by happenstance either. So Hinge very much targeted this from the beginning. That's why their tagline is designed to be deleted. And just in terms of how people treat it in society, you don't go to Hinge for the casual relationship. I've seen TikToks or YouTube shorts where people are like, why even put – I'm not looking for anything serious on Hinge. Why even be on here? People are making fun of it.

Hinge is because you're looking for something serious. And so that's really the goal. And I'll talk about some of the benefits of that. But as for the functionality, it's very similar to Tinder where the app pops up perspective matches in sort of a single file line approach. But instead of swiping, you actually have to interact with part of the user's profile to engage with that user. So you have a bunch of different prompts where you can respond to that hinge kind of proliferates for you. So you could say like one crazy story, one time I did blah, blah, blah, and you can fill it in and people can respond to it. Like you type something out that typically leads to more seamless conversations. And so it's really been designed for actual conversations as opposed to just like swiping on people's pictures. Last thing I'll say about the app itself, and there might not be a whole lot of takeaways you can take from this as a potential investor, but Hinge has the best user interface in mobile dating by a mile. It's better than Bumble. It's better than Tinder. It feels more professional. It feels cleaner. It functions better, in my experience. Brett, would you agree with all that? i would agree yeah um it's hard to tell why but that's definitely the takeaway tinder and bumble sometimes just feel buggy maybe it's just like the cursive font on hinge too i don't know

what it is yeah they just must have a good design team i don't know anyway as for the business of hinge there's a lot to like so for starters i mentioned it provides a very differentiated user experience to what people get with bumble or tinder and so this has really resonated particularly in the US, but also in other markets where they've quickly become the third highest grossing app in the lifestyle category. It's also seen demand abroad though. So in the markets where it has launched in Europe, it's already the number two or number three most downloaded app, especially in some of those English speaking markets. But it's also one of the top three apps in European markets where it hasn't even officially launched. And so I think this is

maybe a testament to the European market whole, but that's saying that people in Sweden, or people in Nordic countries are joining Hinge prior to them having a native language app, official Hinge launch in that market. They're already hopping onto the app. I've talked with friends in Spain who said their sister is pretending to be a person in Tennessee so they can get on the app, that kind of thing. So they're already one of the top downloaded apps in those markets without a launch, which makes it a lot easier to scale in those markets when you launch because you don't have to spend

nearly as much on marketing. The other thing I'll mention here, just keep in mind the early days of a dating app launch aren't really focused on monetization. So with Hinge, revenue might not necessarily grow in line with user adoption. And so you might get a lot of discounting. So revenue per payer can kind of flatline or decline during that time, but it gets more people onto the app. And then the network effect kind of sells itself. We'll talk about that more later on. But there might be some of those dynamics at play as they start to launch a lot more of these European markets. And then, as I mentioned before, Hinge also caters to those older ages, which means their users have a higher propensity to spend, not just because they make more money, but frankly, because there's, past the age of 23, there's a bit of a level of existentialism or how should I say, desperation.

I don't know, maybe for you, Ryan. I don't know. You're more- I don't think it's the age. It's the older you get, the more you might be entitled to settle down. right? Every year, generally, it's just kind of a spectrum. Right. And so I think people are probably more willing to pay for that. And so that's actually resulted in strong revenue per pair right now. I think it's at around $25, but it hasn't been

updated in a while, so it might be a little higher. However, they're also in the process of rolling out HingeX and HingePlus. HingeX will be a higher price. I believe it's $60 a month subscription where it gives staters basically preferential treatment across the entire app. And then Hinge Plus will seem like a leg down in pricing. So I think it'll be $25 a month versus right now, I think the average one is like $30 a month, but it gives users basically instead of taking their one subscription that's $30, they're going to have a $60 subscription and a $25 subscription. So I think it maybe gives some people the feeling that, oh, I'm not going to go for HingeX, but maybe I'll go for HingePlus to kind of get some of the benefits. One of those

benefits, and this is a huge part of, I think, any good dating app, and it requires a lot of scale to be able to make this feature useful, is filtering by certain characteristics. So maybe you can filter by religion. You can filter by, sorry to all the short people out there, height. You can filter by different characteristics of people, but you probably have to, for one, you obviously have to be a big enough app in order to do that. Because if you make filtering very specific and you don't have enough users, there's just not going to pop up any accounts. So having enough skill to do that is required.

And then I think that that's certainly a feature that a lot of people would be willing to pay for, I imagine. Anything to add there, Brett? I don't think so. You're going into a lot of detail, but I think it'll be value added for the listeners, hopefully, to understand the app better. But I think in general, it's for older people, older than Tinder. They spend more because they have higher salaries. So think college kid that's broke versus young Gen Z and millennial in New York City with $100,000 salary. And yeah, that's really it. So that's why they're setting higher subscription prices. And I think a big question will be how they set them around the world and how that develops over the next couple of years. Yeah, agreed. And then just to put some perspective on the numbers, Hinge generated $31 million in revenue in 2019.

Last year, they generated $284 million. They were apparently planning to launch this higher price subscription this year, but they delayed it. And so they basically didn't meet the $300 million guidance, but they're now guiding for $400 million by the end of next year. So 2023, I think that's very achievable. That would equate to a 12X increase over four years in revenue. You can see why this seems attractive and why it's got a lot of investors excited about it. Once this thing is a global operation, so I mean, they're in the process of launching in Europe right now. And then they said, I think they at one point hinted to moving to Latin America after that.

It's, yeah, India's next and then Latin, yeah. You could see how this is a potentially billion dollar revenue business. Yep, I agree. And remember, yeah, as Ryan mentioned that there, it takes probably a year or so from like the user base to grow versus how the monetization kicks in just because the first time you download something, you're not going to be a payer right away. But yeah, okay. Okay. Next one, I guess, Ryan, what question do you have for me?

Yeah. We've talked about how Tinder has had some flaws. What specifically went off track? Do you think it's fixable? And where are we looking at to analyze the asset over the next few years? Or what are we looking at? Yeah. So that's been the big narrative. It's been the big narrative for management. And yeah, we'll get into it. So looking at the financials for tinder 16 revenue growth on a foreign exchange neutral basis in 2022 and then probably 20 plus revenue growth in the years prior you would think things are going just fine but when you listen to the management commentary from the new team and at some point you would think the app was headed into free fall wouldn't you agree given some of their commentary you've

seen ryan yeah and and the executive changes as well um yeah it does sound like people make it out like it's this like dying business yeah but they grew revenue uh i'll mention again 16 on a foreign exchange neutral basis in 2022 a little context what happened when match group hired their new ceo from zynga named bernard kim uh after meeting with all the management teams he decided to fire the existing leaders at Tinder, install himself as the interim CEO, which he is still today, and then brought in four or five other leaders, some that he worked with in the mobile gaming space, some that he thought were stars at some of the other apps within the Magic Group portfolio, brought him in and said, hey, look, the old team was really bad. And on the second

quarter conference call, Kim addressed these changes and basically said the app was deteriorating in quality due to mismanagement and bad product rollouts. Investors, including us, really got caught a little off guard by these announcements because the numbers look good historically. We'll talk about maybe whether we should have been able to see this coming. And it also didn't help that they got a double whammy of the rising value of the US dollar, which was crushing revenue growth in some markets. So they got a big hit on that as well. So I think the big question is, ask rhetorically here, is what went wrong? It is hard to tell precisely the number one issue, but I think generally, we can say the division rested on its laurels for the past three years

and didn't really come up with any strong new engagement and or monetization tactics. So while not rocket science, the four main ways Tinder makes money today, which are Tinder Plus, Tinder Gold, Tinder Platinum, and the Boost feature, which is the number one a la carte feature were executed pretty seamlessly within the app and led to consistent revenue growth as the app proliferated around the globe and the users consistently chose a few of these monetization tools, which worked as intended. But it's been a few years since they've launched something new. And in recent years, or excuse me, they have launched new things.

But in recent years, the company has really grown revenue off of those core subscription a la carte tools or products that they you know had in the past and i think they probably still will in the future but tell me if you disagree with this ryan they struggle to come up with new good ways to engage users and get people to use the app to seriously look for romantic encounters again serious or not serious ones which i think leads uh oh what i misspelled something here uh what was it all right i think yeah i'm not sure what i misspelled there but it leads to a basically i think a deterioration in the usage where people come and maybe they downloaded the app in 2019 and then they download it again in 2022 or they reopen in 2022 maybe they went

through a breakup or something like that and they go oh this is the exact same thing and then they go okay well i'm going to try bumble and hinge because those are the Those ones have new things, new products that people can offer. The Prime leadership team was focused on some Metaverse stuff recently, exploring some features that, or excuse me, they have these Explore features, which Ryan, you're aware of as well, that don't, they don't make much sense to me. 90% of what they show you on the app is pointless. It's like what they've tried to do is pointless. For the new products they're adding on for people to see and stuff like that.

It's just cluttered and stuff like that. Remember the Tinder coin? Yeah, it hasn't launched. Actually, they are going to relaunch some virtual currency things where people can earn dollars, exactly like mobile games. But they did talk about the coin

as a weird thing in 2021. And then they had some other stuff that we don't need to go into the details of, but that were not resonating with users. Like I said, the UI slash, so the user experience, user whatever, user interface on the application has not improved for years, leading to a worse layout. And I guess that's just in our humble opinion than Bumble or Hinge.

So Bernard Kim and the new leadership team decided to, quote unquote, rip the bandaid off and scrap Tinder's existing product roadmap for 2022 when he came and took over in the late spring of 2022. Now, even though the old team you thought was bad, they were going to launch some stuff and it was probably going to make a little bit more money. So during 2022, this led to deteriorating monetization throughout the year until they got a new plan in place a couple quarters down the line. Coding products doesn't happen in a day.

And this is why the division's revenue growth decelerated last year. If we look at, let me share the screen here, I'll describe it for any of the listeners. they have a chart of tinder a la carte revenue in the united states it's kind of a 28-day moving average if we go this basically this is starting when bernard kim showed up in 2022 it was pretty steady and then i think they didn't launch a product in q2 in late summer it declined it kind of went up again during september i'm assuming that happens usually because college is back in session and then it started declining until they got these new products back and they They said they launched some new merchandising changes and feature rollouts.

And then Tinder a la carte revenue started growing again. Now, anything to add to Ryan until I get to this kind of later part? Because I know it's complicated, but I want to tell the whole story to give some context of how we're looking at the situation. But anything to add? No, I mean, just in terms of, I guess, user experience and what went wrong, I think Brett described it well. It felt like there wasn't improvement. it felt spammy and just at times not even functional like my messages didn't work yeah sometimes messages didn't work the app would die and just restart randomly for me in a lot of cases

it would my phone would be like and i don't know how much this has to do with tinder but my phone would be like on fire if i used it not on fire but it would just like overheat that's their new product maybe no I mean that's just a joke seriously you don't want that to happen it's quite annoying it was just so much especially

with hinge as an alternative it just made so much more sense to use that it didn't you know I don't know it felt very it's like that thing we've talked about where if an app is sort of one of those things that attracts power users where

you're like constantly on it like a tiktok it incentivizes getting off quicker yeah yeah that could have that could have been some of their issue yeah and they didn't really yeah so again i guess we don't need to harp on it forever the products that they launched for the last three years basically since the start of the pandemic were pretty you know they didn't move the bar they took them forever for like verification like verifying that you were who you say were and yeah i mean that was a huge detriment to the the app in my experience which was like you don't know if someone's just a fraud account yeah scammers i mean the scammers are easy

to figure out because they ask for money right away but you know that's you don't like that i mean it's a bad user experience and yes all the other ddms have that as well but the verification stuff should be quite easy all right back to the business as of the q4 letter to investors and i I mean, Q4 2022, the letter that Bernard Kim wrote and the CFO wrote for investors, Tinder has a new roadmap in place. And if you are interested, go check out the letter and look at all the details. But just to sum it up, they are going to launch a better marketing campaign because the old Tinder team didn't really market.

And if they did, it was really bad. Think about it. You've really never seen a Tinder ad. They want to improve engagement tactics on the application, which I think is extremely important. That's the biggest downfall right now. And then they're going to add new monetization techniques like shorter-term subscriptions, which is an easy thing they should have added forever ago, more expensive packages,

and exploring growth in advertising. Now, advertising, we'll see. But the shorter-term subscriptions and the more expensive packages are, I think, very easy bars to jump over and get more people to pay. Because, for example, the shorter-term subscription is perfect for people that are traveling, or visiting a city. I mean, here's an example for people. Or people who are making an impulse decision.

It's not something they haven't thought. It's not something that they, I think a lot of people when they make these purchases aren't thinking like, yeah, I really want this for a month. I want this now. And yes, they're not thinking with their brain. It's always made sense to me.

I have no idea why they haven't done it. Yeah, exactly. Think about, and we're recording this in March, so it's spring break season. Think about the college kids, or hopefully it's just college kids, going down to Cabo, Mexico, Florida, wherever, Cancun, and you're not down there for a month. You might say, look, I'm going to download Tinder, or I'm going to reopen it, and I'm going to get this subscription for the weekend. But now you have to go, the shortest you get is a month.

and people might look at that and say, well, I only want to use it for this weekend, but then the monthly one cost me 20 bucks or like 30 bucks maybe, who knows what everyone it is. Like maybe I pay for this weekend for 12 bucks, but if you kind of get what I mean, that example hopefully makes sense for people.

Now, going back to the business, since the app, the Tinder app, has already solved the hardest problem of being a dating app, which is getting users of all types on the platform and swiping, I think the company is going to be fine and not going to struggle in getting Tinder back

to its long-term growth trajectory. If you fix these UI, UX issues, you get smarter on monetization and you get better engagement products that don't just rest on that. And in reality, they've really just rested on the swipe right or left innovation from a decade ago. I think if you finally get some innovation here,

you bring over some of the features from Hinge, things will start humming again. My analogy, and we've used this one before, is the local bar in town that is popular with young singles. It is very difficult to become that bar, but it is much easier to keep your position. However, if over multiple years you make decisions that anger customers with, say, bad DJs, bad drinks, expensive cover charges, no security, you know, you got people fighting all the time or something like that, you can open up your position for a new entrant to steal,

consumers, Tinder has opened itself up a bit, but I don't think it's something that isn't fixable. Before we get into the growth opportunity of dating in general, which Tinder should hopefully be able to take advantage of, Ryan, do you agree or disagree that they've opened, that this is fixable? Yeah, I definitely think it's fixable. I mean, they are at a level of scale where it's a requirement, I think if you're not a requirement, um, it's the go-to app still just in terms of like where it is, how it's positioned in society and the sheer number of users, especially in international markets, people think, well, there's some alternatives here in the U S like Brett, you're in Chile. Other than maybe some local apps, are there

any other apps that have translated from like U S to Latin America? Tinder and Bubble only. Did I say that? I said that quickly. Tinder and Bumble only. That's it. Nothing else. So, I mean, they still have the network effect.

That's great. But yeah, they have to do something to really improve the experience. And I think a lot of that is how users engage with the app. That might lead to a little bit of less users to begin with. But if you're getting significantly more payers, who cares how many users there are? Yeah. There's a lot of variables at play within a dating app. And yes, you have to have somewhat of a user base.

Users are important. Payers are important. Revenue per payer is important. But in the long run, it's all about revenue and scaling that because you have these really asset-light businesses that don't cost that much to make. If you get more revenue, these have extremely high incremental margins. Before we close out this section on Tinder, I just want to talk about this chart here, which has... And it was in, I believe, the 2021 letter. No, I think it was here when... I think

Kim launched it or used it when he came on to show that there's still a long-term opportunity in tech. For the listeners, they had a chart separating out geographies and then the percent of adult singles that have tried a dating app product. Europe and North America are at 43%. Latin America is at 39%. Those are the mature markets for dating. And then we have Middle East, North Africa, 26%, Asia Pacific, 18%, and then the rest of Africa at 10%, there is still a big opportunity. And what I would tell any of the listeners here is that engagement generally, all else equals, follows monetization within the dating atmosphere.

So if we have about 75% of like, if over the next few years we go these more mature markets, which again is Europe, Latin America, North America. If we get 75% of singles to try a dating app, say within the next five years, and then the rest of the world continues to catch up and Tinder can hold its position as a leader, I really see no reason why they cannot double their revenue over that timeframe, especially when there are these low hurdles like shorter term subscriptions that they can go after. One caveat though, just for let's say, I don't know, the investors, you should remember that dating apps like Tinder own no physical infrastructure. For reference, they use AWS, but they could use any cloud

provider. And they have extremely high incremental margins, like I said before. So as the company grows in, say, lower income countries, like APAC in Africa do have a lot of lower income countries, it might lead to lower ARPU numbers, but they will still be margin accretive due to the ability to build once and then deploy these products around the globe. And that's why as Tinder currently is the only scaled player and Bumble and Hinch

are playing catch-up globally, that's why they have 50% adjusted operating margins, even though they pay 25% to 30% of every transaction, or of all their revenue to the app stores.

That's a variable expense. There's no... There's no, as you mentioned, high fixed costs into entering new markets. It's just that variable fee that you pay every time. So as you mentioned, it's margin. Yeah. It's just setting up the cloud stuff, setting up your payments infrastructure and setting up your language infrastructure.

And that's really it. Now here's the discussion question because the Tinder is the most important part. So that's what we're going to spend the most time on here and why we spent a lot of time. Were we a bit blinded as shareholders, do you think, to a stagnating Tinder application that we could have identified? Do you think we should have been able to identify this or not? Well, the app's core function is to pair people with people. and the one thing it did over the last five years is grow the people on the platform so the platform itself like did technically get better it's just the like the functionality and the tech behind it

was shitty stagnating yeah yeah and so like we i mean we did notice that right we were like hey like the app doesn't seem to be changing but the kpis look good so i remember in like 2021 one, yeah, you and I both meant like we're talking and we're like, yeah, if Tinder ever decides to figure it out, like this could be a much better business, but yeah, it's been lackluster improvements. And it isn't one of those things where if you make some big improvements, it's going to hurt users. I would think everyone was worried about like, oh, Snapchat when they had some big product update, like you can make incremental improvements and you're probably not going to lose users because everyone still knows Tinder is the place to be for a single person

dating. Yeah, I agree. And then just for some numbers here for the listeners and why Tinder has been so important and why, even though, again, over this chart that I'm showing here, in our opinion, the app actually didn't get much better at all, except maybe those verification things that Ryan mentioned. Tinder direct revenue went from $805 million in 2018 to last year, about $1.8 billion, Caggard at 22%, while all other brands at the company grew at 11%.

Again, this chart is from Stratosphere. You can only get these KPIs there, so check them out. But yeah, I agree with what you're saying there, Ryan. I think we had those concerns, but we were looking at the numbers and saying, hey, you know,

things still look pretty good here. So it kind of gets me, it's bittersweet because you can say like, look, man, dinner's going through a tough period right now, but what could growth be like in the future?

All right. We spent a lot of time on Tinder and on Hinge because those are the two most important things. So I think we should try to speed through the rest. Let's look at, we separated this out, really thoughts on the trajectory of the non-flagship. And again, we call flagship Tinder and Hinge brands. And I'll go first with you, Ryan.

Can you give an overview on legacy? And yeah, since we don't want to have this be two hours, let's try to go through quick through all these sections. Yeah, for sure. uh legacy so that includes match.com match what's the other one match affinity i think is what it's called it's like match but in europe but there's also one called like match affinity um which i don't really yeah match and okcupid are the important ones right um and so i guess just for context evergreen and emerging are now being managed under one umbrella um and the goal is to

have the legacy players kind of help the smaller growing apps. And so they're now being managed by one person. They're under the same, I guess, organization or team. But with regards to the legacy portfolio, Bernard Kim's been pretty clear that they want to manage these apps basically for cashflow. He said, the first strategy is to maximize cashflow and be disciplined with costs, especially marketing spend. This is the case at several of our established brands, such as Match and Match Affinity, Meetic, and OKCupid and Plenty of Fish. So, I mean, that's the goal, right? You don't want to be just like pouring money into something that continues to decline.

We just talked about Spark Networks. That seems to be what's going on there. We want, ideally, Match Group kind of avoids that trap. Just in terms of like size, though, it seemed like they pretty much kind of, they've been in sort of runoff mode for the last, I don't know, five to 10 years. Um, and there was a little bit of a boost during COVID. Um, I'm not exactly sure why, but people spent their stimmies and on older people spent their stimmies on some of these legacy, uh, dating properties.

I remember you couldn't remember the savings rate or those charts can spend money on anything. So this is the one thing you could spend money on. Yeah. I suppose you couldn't go out and actually meet people. So it's strange, but whatever. Yeah. We had a bit of a discussion before trying to back into the math here for how much the business actually generates.

So for 2022, for this fiscal year, both established and emerging, that is the Match.com, the OKCupid, and then the emerging you're about to talk about, it's like the Chispa, BLK, stuff like that. They did $730 million in combined revenue. I'm going to assume that about 75% of that belongs to these established brands. Um, so roughly 550, a little over half a billion dollars in revenue across all these established players. My goal or my, my guess and my hope here is that, as I mentioned, they generate cash with

these, they redeploy that cash into useful marketing dollars. So things like hinge or trying to revamp the Tinder brand or some of these more niche players, but or buybacks or buybacks. If you're listening, Gary, consistent buybacks. Please, Gary. Please be consistent. Anyway, so yeah, I think the goal, there really isn't that much to talk about here. I think the established brands maybe bears a resemblance to a better Spark Networks.

100%. I mean, all these ones were beating their old brands in their categories. It seems like they're better managed. And I would hope, given $550 million in revenue, again, that could be a little lower, a little higher. We didn't get full disclosures on that. try to give a guesstimate hopefully that can you know they can steadily generate about 100 million dollars in cash flow that shoots up to the parent company each year something like that it's not

going to be it's not going to be it yeah it's not going to be a needle mover but it can be it can be creative if they manage these correctly like kim hopefully will do now let me hit niche cultural demographic again this is upward stir chispa blk and the league and they do have some incubation stuff with this they keep they launch ever so often a few things here and they said So they're looking to acquire some niche dating apps. So this is part of their growth strategy, but it's the one in the earliest stage. I do think, and remember Ryan mentioned that this is what, probably maximum about $200 million in revenue at best, and it's really not consequential.

Yeah, it's tiny. Yeah. So I think they have promised to grow. Seems like they've grown. Commentaries about them, they've grown, but they're going to fail to achieve a large enough scale over the next few years to make meaningful profit contributions to the company. However, over the long term, I think they can be beneficial as long as they share overhead and development costs. I've tested Chispa and BLK for whatever, investor purposes. Although some people say,

hey, you're not the target demographic here, but I was doing it for investing. And they are the exact same app because I wanted to check that. They are the exact same app, except for like colors so that they weren't the exact same so i kind of like that and that's a lot of the shared a lot of the shared back end then yeah i think it's the exact same back end um and then even if i think these companies run at breakeven for the next year i think they can help match groups suck all the oxygen out of the room from the failed subscale players i listened to our episode on spark networks to show to look at um some of the ones within this niche or demographic or emerging brands are sucking the air out of uh or taking users from the spark networks

ones and then once the rest of the players are bankrupt or eliminated or so small there's a lot of green space to dominate a certain niche because i think it could be profitable similar to child grinder super profitable or potentially you know has a higher enough revenue base where it could be profitable where some of these brands could kind of kind of become like grinder maybe in the future um yeah that's really it let me just say yeah i'll talk about a pack here in a second but um the other thing i should have mentioned is that legacy you know that 550 million dollars potentially in revenue that's still larger than hinge so um in terms of if if this business declines quickly uh it could have an adverse effect on match group as a whole even if hinge

is kind of growing. And they are not very good at disclosing how they don't like talking about bad things. I guess Match Group historically hasn't. They avoid telling us bad information. But let's talk about Asia. So this is one where I think there's a large opportunity. It's probably something you and I have both hoped that they'd get right, but they haven't yet so far. So just to describe what is actually in here, Pairs is the most popular dating app in Japan. It sounds similar to Hinge in terms of functionality. Azar and HakunaLive were both acquired in the HyperConnect acquisition and are both centered around live video. Azar is one-to-one live chats with real-time language translations, whereas HakunaLive,

it doesn't sound like something that most people would do in the West here, but it's like group video and audio broadcasting. So it sounds more like a social network and less kind of dating focused. But in total, Pairs, Azar, and Hakuna Live generated $322 million in revenue this year. I don't know the precise split, but at the time of the acquisition, HyperConnect's estimated annual revenue was around $200 million. And they're around the same today, I think, right? Yeah, somewhat. Probably. I mean, the acquisition added $1.7 billion in goodwill with the balance sheet. and so far they've written down $366 million or 21% of it. So my guess would be either profits

are down substantially or even revenue. But here's what Gary Swidler had to say. He said, we really acquired two apps, Azar, which is the one-to-one chat app, and that app is actually performing reasonably well. It's back to some reasonable growth levels. We're also improving the profitability of HyperConnect. I think 10% kind of margins this year are achievable. They just put the old Plenty of Fish CEO on the ground over there in Asia. I believe she'll be working with a team of like 300 or 400 people in South Korea. So it kind of remains to be seen. There also was a lot of like, it's been a very different macro backdrop.

So like the recovery from COVID has been slower. Especially in Japan. Yeah, it's difficult to tell. I just kind of occasionally check SensorTower just to see like how the apps are grossing and pairs is still one of the top grossing in the social networking category in Japan. So it seems to still have relevance. Yep. And they got, again, even probably the worst double whammy of COVID being restricted for a long time. So people really didn't want to use these dating apps in Japan.

And second, the Japanese yen depreciated a lot in 2022. Okay. Next question, Ryan. Yeah. Yeah, we've been going long. So how about we talk about the App Store relationship and I guess anything that's important out of there. Yeah, so this one's simple,

but I just want to give it for any listener, just their perspective on how this works. So Match Group does have a shaky relationship with the two dominant distribution platforms for its services, which are the Apple App Store and the Google Play Store. It is currently in a lawsuit with Google Play over its new payment requirements

and has been paying escrow payments to that. Don't need to go into details of it, but again, they are going to court. but then they may have to end up paying these escrow payments. And then they're working with other major mobile applications like the Fortnite owner, Spotify, a couple others to get government legislators to bring down the Apple App Store tax. And while these lawsuits are expensive and the lobbying,

it's a lot of the overhead costs that they do have. They got a lot of legal stuff. This is by far Mattroop's largest expense unless you include employees as one giant group. Match groups cost of revenue was 30% in 2022, and I would say about 25% give or take over the long term gets attributed to the app store take rates, running some simple arithmetic. If app store fees get legislated down to about 15%, which it could happen, who knows, that could lead to match groups adjusted operating margins climbing 10% from the low 30s to the

low 40s as a percentage of revenue on a consolidated basis. And we don't need to, again, go through the numbers, but look at that revenue base, $3 billion dollars a year and growing that or what it's like it's more than that 3.2 that can be accretive and these legal fees and this lobbying and these lawsuits could potentially lead to some good return on invested capital however there's a lot of uncertainty here right they could they could also transition to google cloud platform like spotify has done and get preferential treatment on and become a frenemy yeah become a nice frenemy that could be nice maybe tinder needs to move away from AWS, who knows? But I doubt they will. It is unclear how likely a

reduction in App Store fees are, at least from our point of view. They talk about it every quarter about how it's imminent. Don't listen to that. We feel comfort, though, in knowing that they won't climb materially higher. That would just be audacious if the distribution duopoly here, which already has a lot of heat on their back from regulators around the globe, decided to say, actually, we're going to raise the take rate. The duopoly has very little political wiggle room. So we kind of think of it as a tails I don't lose, heads I can win situation for the company. And yeah, we think that these App Store fees as a percentage of revenue do maybe over the next five to 10 years come down as a percentage of revenue as these regulations come into play.

But do we think it is necessary to achieve adequate returns by owning shares at these prices? Absolutely not. Now, I was going to say, speaking of financials, let's have a follow-up. What do we think, because this is a stock and the numbers matter, what do we think the financials could look like a few years from now? Yeah, and I was just going to mention that in my financial projections, I am assuming that the fees do not come down at all. But either way, just as a reminder, just under half of match revenue comes from outside of the

US, so Europe and APAC predominantly. So the strength of the dollar over the last year led to a big headwind. However, the US dollar has since weakened versus many other currencies, most notably the euro, which is the largest other currency that they earn in. So that sure serves as a little bit of a tailwind to the guidance that management provided in its Q4 letter. So just kind of keep that in mind. Before I go to my assumptions, let me talk about some stats because my assumptions are kind of messy. It's honestly a bit of a messy business to try to estimate anything on. But since 2018, Match Group's revenue has compounded at 16.5% each year. If it weren't for last year's currency headwinds, that'd be 18.4%. Now, from 2018 to

2022, Match Group has averaged an adjusted operating income margin of 37.25%. From that adjusted operating income, Match Group converts a little more than 80% into free cash flow. That excludes 2022 because there was a litigation settlement, so I just X'd 2022 out and averaged the other years. Then I know I'm going to bore some people with these numbers, but over the last three years, shares outstanding have grown by just under 2%. Some of that's hyperconnect acquisition too, so probably won't repeat, but it could. Right. And I guess if you exclude the litigation settlement from this year, these numbers have led to 15% annual free cashflow per share growth. Now, when it comes to the financial outlook, and I know those numbers

aren't maybe staggering, but you have to keep in mind this isn't like they haven't had crazy margin expansion. They've actually had margin contraction and seen free cash flow per share growth at 15%. So pretty solid. Anyway, let's talk about the projections. It might be a little tricky to follow, but try to bear with me. So management guided for 5% to 10% revenue growth in 2023. FX headwinds have subsided a bit. So I went with 7% growth in just my little spreadsheet here for this year, and then 10% growth the two following years. They're expecting to get back up to double-digit percentage growth in 2024 and 2025. I think they can do that. If they do that, they'd be doing just over $4 billion in annual revenue in 2025. Management also stated that

they expect to generate higher adjusted operating income margins this year than last year and low 70% free cashflow conversion. The free cashflow conversion is lower than normal because they're going to have higher tax rates now. They had some tax write-offs that they're no longer going to have. So I've assumed 36% adjusted operating margins, and it probably could be higher. And 72% free cashflow conversion, I know I'm being very specific here. Is that how many, three years from now? That's next year. And then I have it growing gradually up to 38% by 2025. Basically, Last assumption here is just that share count continues to grow at 2%.

God, I hope that's not the case. I hope Gary buys back shares. Yeah, it should go down. But I thought they haven't, so I just thought I'd just do that to be safe. They have recently, but not over the four years, right? Yeah. I guess – so, okay. Margins are a little above their historical average.

The adjusted margins are. revenue growth in aggregate is high single digit percentage and share count grows slightly. If those things happen, they'll be doing about $4 in free cashflow per share by 2025. If the market values it at 15 times, that would give match a $60 stock. Today's price is like $38. So it'd be 60% higher. I think those are some fairly conservative assumptions. There's certainly case where it could be higher than that if tinder grows at 15 percent like it's going to do better than that yeah because what was just sure to uh get back it was seven percent growth this year revenue then ten percent growth the following two years remember historically tinder is real close

to 18 fx neutral yeah yeah has grown at a much higher rate so we are pricing in at these prices a lot of, we're discounting a lot of, I don't know, a big slowdown in revenue. Yeah. So I just, that's the numbers to say the market kind of hates it right now. And if there is some improvement in the business, I think there could be a lot of upside here. I'd also say the 15 times multiple, people can, whatever, move that number around how they want. Historically, it's a business that's traded well above 15 times for cashflow. I mean, I think the average is 40 times, but that's during a bubble. So kind of hard to tell you.

Yeah, I think it probably deserves about 20 to 25 times. Yeah, I mean, if it's growing north of 10% on average, it deserves a fair multiple, which is well north of 15. But those are the numbers. Why don't you talk about the management team? Because frankly, we were wrong on the last one. So what went wrong and what are our thoughts on the new team? Yeah, so with less than a year in charge,

I think we still need to be open to a lot of possibilities with the new management team. It has clearly brought some uncertainty with the business because they made a lot of changes, which we've talked about already. And I think it's the key reason why shares are down so much in the last two years, because they basically said they've really tried to reset expectations on Tinder. And again, their commentary has been extremely bearish about the app. Generally, though, I think an executive like Bernard Kim, who has had success running a mobile games business like zynga has the experience to win in data applications they are generally the

same products you need to attract users to download the applications engage them with gamified activities and monetize them through upsells and subscriptions he knows the formula and i think will um oh gosh i deleted another thing here whatever i don't know i'm all over the place on the the subscription but he does know the formula i think he'll be able to replicate that over at uh at tinder and the rest of the applications i think the key error we had when owning match group stock historically, aside from the valuation, which is obvious, when we started our position, then I think, whoa, was it at 40 times earnings? A mistake that looking back on it, we got caught up a bit in the compounder bubble.

Our other mistake was thinking that the old management team was sound. I don't think we need to go into the specific people that we now know are bad managers, but it's pretty clear in hindsight that these were not strong leaders. We can look at commentary on writing the quote, metaverse hype, virtual coins, and the product stagnation at Tinder as pretty clear examples. I think the lesson we can learn here is to simultaneously ignore management, which means ignore what they're saying because they're going to continue to hype up their business. Look at the actual products and how we feel about the marketplace and their financial performance. And then in some aspects, try to be very critical and have a high bar for them in

other areas. So acquisitions, capital returns, writing hype cycles, et cetera, et cetera, to see whether they are truly focused on creating value for shareholders or if they want to just look good to Wall Street. And this is a team that we made a mistake of. They wanted to look good to Wall Street, and we took the bait. Now, for Match Group, through this lens, there are definitely things we could have identified as red or yellow flags. These include, like we mentioned before,

our experience using the Tinder application, the HyperConnect deal, metaverse stuff, conference call commentary in late 2021 and early 2022. Two, I'm curious to hear your take on this, but I don't think we should beat ourselves up too much here. The prior management team wasn't terrible, but the company I hit with major foreign exchange headwinds this year that were somewhat unpredictable. And the numbers look, the financials looked good at almost all the applications. And I think really our main error here was valuation. Yeah, we should beat ourselves up over that. But management, I mean, it's always tough to tell, especially when things are going well.

Like now it's very easy to call stuff out. Like some of Gary Spindler's comments over buybacks. Like it's very easy to look at that and say like, what the hell is that? People wouldn't be as critical if the stock was at 120. Right. And when the business continued to grow, something that I would look for or maybe hope for is that they give some consistent metrics. like they start to like provide the same metrics every quarter can you give us like a regular update on hinge can you give us updates on even the businesses that aren't performing well

i've got a feeling if tinder starts to slow they're going to do as much as they can to mask that that's my concern yep yep all right next section and this one the last two i think we're going to have both of us answer is what do we think of the long-term competitive advantages of scale data applications. I, in the newsletter, included an excerpt from our write-up. I'm not going to read the entire quote here. And you should take it with a grain of salt

because we said the stock during that write-up was a great buy at $100 a share. So, you know, it might not be entirely correct, but we kind of look at it as two different ways where they have two important competitive advantages. One, insulates them from existing dating app competition or new dating app competition. And that is the network effect where the larger the app is, the more users that are on it in your certain geographical area, the more valuable it is for every other user.

And therefore, the one that's ranked number one is going to have a much easier time succeeding than the one that is ranked 40 in the App Store ranking. However, I think it's a little bit weaker than some other network effects because they only count in that 20 to 25 mile radius from where you live. so it's not going to be like an airbnb one where it matters about the entire globe this one is each geography so people can kind of attack them in local markets but i think i'll still think the scale of dating apps are quite strong and the second one as we joked about it we called it from uh relationship george which is based on the side fell joke where the george character has this he wants the separation of his relationship george persona and his what is it independent george right and this applies we believe to online as well it's the reason why non you know like social

media companies like facebook have struggled to get into dating because people want to separate their dating life especially when they're in the early stages their dating life where they're trying to meet new people and sometimes you make a lot of mistakes doing that and then your other part of your life so we think that insulates them and this doesn't apply to just the match group properties this applies to bumble and all the other properties as well it insulates them from competition from someone like YouTube saying, we're going to have YouTube dating. Well, no, you're not going to succeed. So we think that gives them long-term competitive advantages. And then on top of that, they obviously have fantastic YouTube economics.

Ryan, what did you have here? I didn't check beforehand. Yeah. I just think as long as mobile remains the dominant mode of computing or internet activity, the dominant dating apps that are currently on there, I think will maintain that lead. Hinge is kind of an anomaly because one is a very different value proposition and they kind of brute force their way

to success because they had the capital to do it, Hinge. Oh, right, right, right. Yeah. But I don't see someone being able to do that again. I mean, Raya is interesting, but it's capped by default. I just... Let's talk about the network effect because

it's probably... an example where the network effect is very clear. If you're a dater, you want to be where you can find the highest number of suitable dates, plain and simple. And in the US, Canada, and most of Europe, there's about three places where you can do that. Tinder, Bubble, and Hinge. If you're questioning the power of this network effect, I encourage you to ask anyone who is single that you know what dating apps they're on. Ask them how they found those dating apps. Because I'm willing to bet they didn't download Hinge because they saw some Google keyword ad or they saw some billboard ad. They probably did it because they know that's where everyone is.

So there's a clear network effect to being a scale. There's an advantage to being a scale player because significantly lower costs to acquire those customers. It's a huge advantage to being that size. If you're subscale, it's very difficult. It's an uphill battle. You're not going to unlock operating leverage for a while. It's really, really difficult to replicate a lot of these platforms. Yeah, I agree. Now, let me play devil's advocate. A big pushback that a lot of bears say, at least from what I've read, is that the dating app network effects look strong, but then are weak. And it's almost trendy and things get viral. And there's always a new grass is always greener for daters. What do you think about this network, this pushback? And maybe I have some thoughts on it as well. i've only ever been on three apps now that's my personal experience but there's no point in looking around past hinge bumble and tinder if you're a dater in the u.s or in europe maybe there's bad do in europe but that's kind of declining my that would be my biggest concern

is that like i don't buy that the network effect is weak it's huge like i go to these you go to the dating app because you want to find dates like you're not going to do that on fruits i downloaded fruits and there was one user yeah i mean it's not in the u.s so yeah but if you run out let's say you swipe 50 times a day or that's probably on the low end for a lot of like commentators you're going to run out at even like a decently sized app you're going to run out pretty quick yeah so it's i think the network effects huge um my concern is that somehow tinder becomes like badu yeah yeah no i agree that's the biggest concern that and how would you know oh it'll show up in the number it'll it'll show up in the numbers

it'll 100 show up in the numbers they it'll it'll be this at first revenue like okay well maybe they can juice it where revenue per payer goes up a lot right but eventually it's just going to show up in the numbers you'll be able to see it 100 and i think another thing i'd push back on anyone that says that these things go through trends and that there's just been a ton of disruption is i do not think we're going to get a smartphone moment again and that totally changed the game with the dating app landscape and all of the companies except for padu which is just totally was mismanaged all of the ones that have been leading since the smartphone revolution or started out and uh hinge you

know was helped by being a part of match group all of those have stuck around so yeah unless we get more disruption from a platform perspective then i think the risk is low yeah i agree so i I mean, since the onset of mobile popularity, what apps, what popular app has failed? Well, maybe Bidoo. Yeah, but I think it's not even failed yet. I mean, it could recover theoretically, but. Yeah, I think that launched in like 2006 too. Yeah.

And anyone that says that Tinder's failing, the numbers do not show that yet. I know anecdotally in some of the richer markets, it might seem like that because Hinge and Bumble are making inroads. But like we mentioned, we think it's stagnation. And if we will look at our pre-mortem here, I talk about the continued deterioration at Tinder, but as a company that's growing revenue 10% a year, 16% foreign exchange neutral, when they prize their entire product roadmap, is that deterioration? I'm not so sure. But let's go to pre-mortem to wrap things up. At $40 a share, which is about today's price, how do we think we could lose money owning Match Group over the next three years?

Ryan, why don't you go first? Ryan Cragunen Well, that we're wrong on Tinder and that it starts to unwind and end users trickle away. The bigger question for me is how would we know when to sell? And I think if we saw two years in a row of – this is post BK, post Bernard Kim coming in – if we saw two years in a row of tinder um tinder declines then i it might be harder to recover then it might be worth kind of waiting and on the sidelines uh then we might be wrong yeah we might be wrong i mean the biggest risk is tinder's hit saturation it's it starts to trickle away users or irrational decisions

from the capital allocators so i mean for the the commentary around buybacks has been frustrating they just said one thing though so i think we keep we always said about it they said it in another conference they said on the conference call and then they went on to another conference and maybe said something worse they were like of course our shares are cheap but with the volatility oh yeah right right right yeah that is like what then i don't get either either they're incompetent and i'm sorry if gary's listening or which would be more concerning they they are very competent and they see something we don't that would that's the bigger risk to me and because they didn't buy back in q4 and then had kind of a bad quarter when i see

them not buying back or i see them being tentative around like uh questions on repurchases that makes me think something's coming that or they're seeing something that other people aren't yeah Yeah. You also might be overthinking it, but it's a big risk. The capital allocation has been a concern. Acquisitions as well, overpaid for HyperConnect. But I think Hinge and Tinder are pretty darn good. Yeah. I mean, that's my same premortem as well. Tinder is really the only concern for me right now. Hinge, don't have any. Very comfortable with that. And if the Tinder network effect unravels in some markets, yeah, the stock is going to do bad. But at this stock price, I don't think you need Herculean growth assumptions to achieve a 15%

compound growth or whatever IRR returns as shareholders over the next five years, as Ryan mentioned in his numbers. Remember, when we're listening to these episodes, we do include a newsletter to go along with them because on the Not So Deep Dive and the Arch Capital episodes, there are a lot of numbers that we talk about. And if you miss them, definitely look at of the newsletter. It's free. You can subscribe through Substack and the link is in the show notes. Ryan, anything else before we close out? No, I don't think so. All right. That's our episode on Match Group. Remember, even though we sounded bullish on this episode, we talked about the risk. We could easily be wrong. Do not buy just because we buy

because a month from now, something could happen and we could sell and you'd have no idea. Always make your own decisions. Okay. Disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.