Match Group Inc

NASDAQ:MTCH

Earnings Call Transcript 2019-Q3

[Operator]

Good morning and welcome to the Match Group Third Quarter 2019 Earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded.

I would now like to turn the conference over to Lance Barton, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.

[Lance Barton]

Thanks Operator. Today’s call will be led by CEO Mandy Ginsburg and CFO Gary Swidler. They will review the third quarter investor presentation that’s available on our website and then answer questions.

Before we start, I’d like to remind everyone that during this call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate, or similar statements. These statements are subject to risk and uncertainty and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC.

Now over to you, Mandy.

[Mandy Ginsburg, Chief Executive Officer]

Thanks Lance, and good morning everyone. Welcome to our 2019 third quarter earnings call. Our growth accelerated in Q3, which is our strongest quarter yet in what has already been an extremely successful year. Not only has the team driven phenomenal results, we have the scale, margin profile and diversity of brands to deliver record results while at the same time making new bets and investments that we believe will drive strong and consistent growth in the future.

Before I take you through some of these growth initiatives, I want to briefly touch upon IAC’s proposal to fully separate Match Group from IAC. As you know, our board has formed a special committee of independent directors to evaluate IAC’s proposal. A summary of that proposal and the expected process going forward were outlined in a 13D filed last month on October 11. Unfortunately, there’s not really much we can say until the committee has agreed with IAC on a structure that they are ready to recommend to the interested shareholders of Match Group, so on this call we can’t really comment on the transaction; but of course, we can comment on our great results.

With that, let’s jump right into the presentation, starting on Slide 3.

You’ve heard me say the key objective for Tinder is to deliver an effective, engaging and fun core experience for all of our users on the app. That core experience is a fundamental driver of user retention and engagement which ultimately leads to better user outcomes, meaning more matches, more dates, and more relationships. In addition, we have focused on monetizing opportunities that will give users tools they find valuable and are willing to pay for because they provide a more efficient and effective experience on Tinder.

Slide 3 illustrates how Tinder’s core experience has led to remarkably high and stable user retention over the long run. The last chart shows that we’ve maintained strong engagement over the last several years at the same time we’ve driven user growth in revenue. Eighty-five percent of our users who are active on any given day will return the following month, and you can see that hasn’t changed since we started monetizing Tinder several years ago.

Our users find real value in the product and they demonstrate that by coming back to the app again and again. Over 60% of Tinder users are active on it six days per week. The average Tinder user is active more than five days a week, and that number keeps growing. The number of users active every single day of the week has increased by 30% this year.

In addition to these healthy retention and daily usage metrics, we’ve seen a meaningful lift in matches and messages since the launch of Tinder Gold two years ago. These metrics have shown continued strength even as we ramp growth throughout Asia and Latin America. Revenue growth for all these regions has been accelerating. Tinder is the highest grossing lifestyle app in roughly 100 countries around the world, yet it remains very underpenetrated in virtually all of them. In particular, large markets such as Japan, India and South Korea present major opportunities for Tinder, and we’ve been making meaningful strides in each of those markets. There is a long list of other countries that individually generate less revenue but present us with a large opportunity for growth in aggregate. These countries have strong societal tailwinds as more and more young people are dating and choosing their own partners.

Localizing and marketing the product internationally is a key part of Tinder’s growth strategy. We believe this will help grow brand awareness, shape perception, and tap into local consumer behavior. The right-hand chart shows that these core efforts are driving growth in the business.

If you turn to Slide 4, you will see one of our recent initiatives, Swipe Night. This demonstrates how we are continuing to innovate to make sure Tinder remains the iconic lifestyle brand for young singles. Swipe Night was a big creative swing in product innovation that is a real first in the category. Swipe Night is an in-app, first person five-minute interactive video series where at key turning points, people use the swipe feature to decide what happens to them next. Your choices dictate how the adventure unfolds and who you mess with, and we tag profiles with the choices people made to create natural ice breakers.

The episodes aired every Sunday night in October in the U.S. Millions of users interacted with Swipe Night, leading to a 20% to 25% increase in likes and a 30% increase in matches. We also saw elevated conversation levels for days after the episodes ran, and female engagement, which is an incredibly important metric in any dating app, increased as a result as well.

There was also a tremendous amount of positive buzz in the press and social media around Swipe Night, highlighting this first of its kind experience. This really extended our appeal and resonated with Gen Z users. We’re planning to make Season 1 available on demand soon and will roll this out in key international markets early next year. This effort demonstrates the kind of creativity and team we have at Tinder and the kind of bets we’re willing to make. Swipe Night is just one example of the many innovative initiatives you can expect to see from Tinder in the coming quarters to continue to grow our influence around the world.

Let’s now turn to Slide 5. This slide highlights some of the other bets we’re making across the portfolio. They include fueling the rapid growth at Hinge, growing OK Cupid in India and beyond, and continuing to address specific demos through Chispa and BLK. Hinge’s product continues to gain traction with relationship-minded millennials. Its recent new marketing campaigns have given the brand a sustained lift and new users, and we expect to continue to invest in their momentum. We see plenty of room for Hinge to grow in English-speaking countries, which remains a focus for today. Until now, the Hinge team has been focused on user growth and product experience, but in 2020 we plan to shift the focus to improving monetization. We expect that these monetization efforts will gradually help offset the people, product and marketing investments we’ve been making in that business.

Moving to the center of the page, OK Cupid has achieved tremendous growth in India since we started investing there late 2018. They generated significant traction, especially compared to both domestic and international competitors operating in India. As a result of OK Cupid’s success in India, we’ve begun a similar push in Israel and Turkey this quarter, and we have plans in 2020 to push in even more countries where OK Cupid already has measurable organic traction.

Last, Chispa and BLK have both been able to achieve strong growth in the U.S. within their respective demos of Latinos and African Americans. We’re in the early innings of monetization at both apps but progress is strong, and we’re optimistic we’ll be able to drive solid subscriber and revenue growth at both brands in 2020.

On Slide 6, I want to cover some exciting new initiatives in live video that we’ve recently launched or will be launching soon, that we think could further expand our addressable market. Our company mission is to drive meaningful connections for every single person globally, and we recognize that video can be an important enabler of those connections. Chatting with friends and family using live video is ubiquitous today. It’s evident that video has become a primary form of communication and expression, especially for Gen Z and younger, but beyond using video with people you know, innovative live video experiences offer ways to get to know someone new. It could by chatting with someone new on a one-to-one basis or by watching someone’s personality shine through as they’re live streaming to a group. We know that many singles remain reluctant to use overt dating apps, and meeting people through live video experiences can provide a powerful alibi for fostering new connections. We’re excited by these consumer trends and are in the process of launching a few small tests of live streaming broadcasts on both Plenty of Fish and Twoo, where we have very large global user bases.

In addition to the core matching and messaging experience on these brands, our users will be able to join live streaming communities. They can chat directly with live broadcasters or with other users who are viewing the same broadcast. We think live streaming could be a great feature that helps build community and ultimately more engagement between our users.

In addition to potentially driving higher engagement, live streaming offers new potential monetization avenues that don’t currently exist in our portfolio. We did evaluate building this capability in-house, but in an effort to get these tests up and running quickly and with minimal start-up cost, we ultimately decided to leverage the SDKs of two different third party platforms. This is our first foray into live streaming, so we’ll be closely watching these tests to understand the adoption rates and how it impacts the overall ecosystem of our two brands in this test.

Moving to the right side of this slide, research shows that despite being more connected than ever before, people are lonelier. Just under half of all Americans report feeling lonely, and this is unfortunately worse in younger demos. Our products aim to enable users to make real life connections and get on dates in the real world. We also think enabling conversations to take place virtually can play a role in creating positive connections and combating loneliness.

With these trends in mind, we’ve internally incubated a one-on-one live video app called ablo. ablo enables one-on-one video connections between people from all over the world. This is very different from our other products which are geared to delivering in-person or IRL dates. This app allows two people to connect in real time regardless of location and language. The app will translate language simultaneously so two people who don’t have a language in common can, quote-unquote, talk to each other. ablo has grown to over 2.5 million registered users since it launched earlier this year, with the vast majority of users under the age of 35.

ablo users have embraced the concept of connecting with people from all over the globe. They view it as enabling traveling without having to go anywhere. They cite making new friends from other cultures and other backgrounds as one of the biggest reasons for using the app. We see people have great conversations about their cultures, where they work, best places to travel, and they even share their favorite recipes. We believe ablo gives us a different use case beyond dating and allows us a broadly addressable market, and we hope it can help our users feel more connected and perhaps even less alone.

It’s still early, but ablo has seen solid retention trends and strong App Store ratings. The app is off to a nice start, and we plan to continue investing in the product and its growth. This is another example where we’re investing in exciting and innovative products to further fuel long-term growth for the business.

Before I wrap up, I want to emphasize that across the company, we are launching new and exciting features as well as expanding brands into new markets where we see opportunity. I am extremely optimistic about the future and strongly believe we are making smart investments to capture an even larger piece of a growing market and deliver sustained growth at strong levels of profitability.

Gary is going to take you through our fantastic results for Q3 along with an early look at our outlook for 2020, so with that, Gary?

[Gary Swidler, Chief Financial Officer]

Thanks Mandy. As you said, we had another terrific quarter in Q3 with accelerating growth on top and bottom lines, continued excellent performance at Tinder, and improvement in non-Tinder subscriber trends. We’re progressing on our strategic plan to position the company for consistent strong growth.

This year, we’re making a significant amount of product and marketing investments that we believe will drive sustained, long-term global growth for the company through newer bets and by improving the performance of more mature brands. Even with these investments, we’re on track for extremely solid financial performance in 2019.

Let’s get into the details for the quarter, then I’ll update on our financial outlook.

On Slide 8, we review Tinder performance, which continues to shine. Q3 year-over-year growth in direct revenue of 49% accelerated from 2Q19 driven by 38% growth in average subscribers and 9% growth in ARPU. A big driver of Tinder’s growth in the quarter was the Gold homepage redesign, which was released on Android in July following its success in iOS. That helped drive a sequential increase of 437,000 average subscribers in Q3.

Tinder remains on track to add approximately 1.6 million average subscribers this year, which will be our highest ever annual total. Much of this growth has been driven by a long list of new product features and optimizing existing paid features rather than one large new revenue feature. This success clearly demonstrates what we can do on a platform of Tinder’s scale. Underlying Tinder’s continued growth is an extremely active and engaged ecosystem of users, both free and paid, which Mandy highlighted earlier in the call.

On Slide 9, you can see the year-over-year growth in average subscribers across the company’s brands accelerated in Q3 with overall average subscriber growth of 19%, a point better than in 2Q19. Year-over-year growth in North American and international subscribers also each accelerated from Q2. International subscriber growth was particularly strong, driven primarily by Tinder and Pairs, but other brands contributed as well.

Non-Tinder subscribers performed better than they have in quite some time. A number of our more mature businesses as well as our new bets like Hinge, Chispa and BLK, are contributing to subscriber growth. All of this gives us confidence that we will have modest non-Tinder year-over-year subscriber growth in Q4, a trend that we expect to continue in 2020.

Average subscribers for the quarter were just over 9.6 million, slightly over half from outside of North America. We expect the shift to a greater proportion of international subscribers to continue as our international growth efforts at both Tinder and our other brands progress.

Slide 10 shows ARPU trends. Tinder’s ARPU has increased more than 70% over the past three years due to an increasing percentage of subscribers taking the higher priced Gold package as well as strong a-la-carte sales. Tinder’s ARPU is now essentially on par with the ARPU of our other brands, which has generally been quite stable. Tinder’s ARPU increased 9% year-over-year in the quarter, more on an FX neutral basis. We don’t believe we’ve reached the ceiling for Tinder ARPU.

This quarter, overall company ARPU was up $0.02 year-over-year to $0.59. On an FX neutral basis, total company ARPU was up 6% to $0.60 and international ARPU was up 7%.

Flipping to Slide 11, you can see that the company’s Q3 total revenue was $541 million, for year-over-year growth of 22%, an acceleration of four points from 2Q19. Total revenue growth would have been 24% without the impact of FX for total revenue of $550 million on a constant currency basis. Total direct revenue grew 23%. Our much smaller indirect revenue decreased 15%, which was an improvement from Q2 year-over-year results. We expect indirect revenue trends to gradually stabilize over time.

The margin improved by a point over the prior year quarter. Selling and marketing spend declined as a percentage of revenue again this quarter by 3 points to 21%, mostly offset by [indiscernible] fee growth and higher legal expenses.

Slide 12 shows that we started at the time of our IPO with gross leverage of 4.5 times. From there, we’ve reduced leverage fairly consistently by just over 50% in gross leverage. We ended 3Q19 at 2.2 times gross leverage and 1.7 times net leverage, below our targets. It’s notable that we’ve achieved this de-levering despite having paid a $556 million special dividend at the end of 2018 and having used $582 million of cash to buy back our shares over the past two years. We’ve also used $629 million of cash to net settle employee equity awards and pay employee withholding taxes since 2017. That’s nearly $1.8 billion in cash in aggregate, which certainly demonstrates the enormous cash generating power of our business.

On Slide 13, we have our latest financial outlook. For 4Q19, we expect total revenue of $545 million to $555 million and $205 million to $210 million of EBITDA. Our revenue outlook includes about $6 million of incremental negative FX impacts, primarily from the euro and the pound against the dollar, since we provided our last financial outlook in August. We’re anticipating that our Q4 margin will be in line with 4Q18, even though we expect approximately $25 million in incremental legal costs and long-term oriented product and marketing investments compared to the prior year quarter.

For full year 2019, we’re expecting to have both revenue and EBITDA growth in the high teens, well above our expectations when the year began. Our EBITDA for 2019 reflects investment in Hinge of approximately $20 million, which we had planned for at the beginning of the year.

Our margin for full-year 2019 is being impacted by about $60 million of expenses we didn’t plan for at the outset of the year, which we’ve broadly bucketed into two categories. First, we’ve reinvested a portion of our outperformance this year back into our businesses, primarily at Tinder globally, OK Cupid in select international markets, Harmonica to address the Muslim demo globally, and Pairs Engage to capture some of the Japanese matrimonial market. We believe these investments will improve the company’s long term growth and enable us to further capture the large global market opportunity in front of us, especially in Asia.

Second, we’re incurring higher legal and regulatory and other non-discretionary costs in 2019. This includes items such as the France digital services tax as well as increased costs related to various litigations we have underway.

I also did want to call out that Apple made some recent changes to customer subscription management process that has had a negative impact on renewal dynamics across many of our brands. Apple’s changes are leading to a temporary increase in terminations which we believe are largely a pull forward of future cancellations. We expect this to impact Q4 and Q1 2020 subscriber net addition levels before the impact tails off. The changes are recent so we’re still watching the impacts, but we’ve factored it into our latest outlook.

We’re in the midst of our planning process, but I wanted to share some high level expectations for 2020. For the year, we expect to achieve mid to high teens revenue growth once again. We anticipate this will be driven by continued strong growth at Tinder as well as by growth at a number of our other businesses. We expect to see aggregate subscriber growth in 2020 from our non-Tinder brands and of course continued strong growth from Tinder. Tinder has an ambitious product road map again in 2020. They are still in the process of determining the mix between user growth and engagement, subscription, and a-la-carte oriented features.

We expect to continue to invest in 2020 in several of our new bets that are showing strong traction in their markets. Foremost is Hinge, which has tremendous product momentum and increasing brand awareness in the U.S. and other English-speaking markets. Hinge’s user growth is very strong and we’re about to turn our focus to subscriber and revenue growth.

In addition to Hinge, where we expect a relatively small investment in 2020, we expect to continue to invest to grow OK Cupid in a number of markets globally. We also plan to continue to invest in BLK, Chispa, Ship, ablo, and Harmonica.

While we expect to have incremental year-over-year legal costs next year, we expect that many of the key pending matters will reach conclusions by the end of 2020. I also want to note that if we proceed with the spinoff, we expect to incur advisor and other costs of up to $10 million in connection with the transaction.

Even with our investments and some higher legal costs, we expect to achieve mid to high teens EBITDA growth for 2020 with EBITDA margins in line with 2019. We remain confident in the 40%-plus long-term margin target for the business. In fact, if you add back the $60 million of discretionary investments and non-discretionary items that we are incurring this year, our margins would be at about 40%.

I wanted to share our current thinking about 2020 with you know, but we will be refining our plans through the rest of the year and will provide updates and more detail on our next earnings call in early February.

With that, I’ll ask the Operator to open the line for questions.

[Operator]

[Operator instructions]

Today’s first question comes from Mark Kelley of Nomura. Please go ahead.

[Mark Kelley, Nomura Instinet]

Good morning, thanks for taking my questions. The first one, can you just give us a little more color on the mix of discretionary and legal or regulatory expenses in 2020? I’m just curious what’s keeping margins flat next year. A little more color there would be helpful. Then second, and it’s related, I’m curious what Tinder margins would look like both this year and then what you would expect in 2020, just to give us a sense of the leverage that’s in the model excluding some of your long-term investments in newer bets. Thanks.

[Gary Swidler, Chief Financial Officer]

Sure. Let me give that a shot. There’s a lot of moving pieces on the margin, so I’m going to try to walk you through it relatively clearly, and hopefully this will be helpful.

When you look at what’s happening for 2020, you’ve got a couple of big things that are helping give us improving margins. The most notable, of course, is that the Tinder business is becoming a bigger piece of the overall pie, and Tinder has higher margins than our other brands in aggregate and so we get a lift from having a bigger piece of the business be Tinder. I’ll talk about Tinder margins in a second, which was kind of the second part of your question.

We’ve also talked previously about giving users a choice on Tinder on Android of credit cards or using their billing system, and given that, we’ve seen some improvement from a margin perspective as users have chosen to pay with credit cards on Tinder. Those two things are helpful to our margins in 2020.

On the other side of the equation, we’ve got a number of things, some of which are discretionary and some of which aren’t, that are impacting margins. Most notably, and kind of the simplest one, is legal and the spinoff costs, and I’ll come back to legal. The spinoff costs, if the spinoff goes through, we’re saying we’re going to have $10 million of costs next year related to the spinoff - that would happen in 2020 or not, and then obviously that wouldn’t occur again beyond that.

On the legal side, if you look at the trends in legal, our legal costs this year are jumping significantly from last year. In 2018, we had about $15 million of legal fees. This year, we’ve got about $40 million more expected for the year, so close to $55 million, so it’s a significant jump in ’19, and then our numbers for 2020 include additional legal fees probably in the neighborhood of about $15 million or so. The jump is pretty significant from ’18 to ’19, and then incrementally from ’19 to ’20.

Now, we don’t view those as discretionary. We are involved in three significant lawsuits and we are pursuing those with top flight lawyers because in one of the cases, Bumble, we think they’ve infringed on our patents and we’re expecting to be compensated for that, so we’ve been pursuing that litigation. On the other two, one related to the FTC and DOJ investigation, we think the claims that have been made in that case are meritless and we are going to defend ourselves against that vigorously, so that is increasing our legal costs in 2020. It started now in late ’19, and it’s going to take place over the course of 2020.

The third relates to all the matters on the Tinder employee lawsuits, which again we think is purely a case of sour grapes on the Tinder employees’ behalf, and we are defending ourselves on that lawsuit vigorously with top flight counsel again because we don’t expect to make up the difference when people decide to sell their stock earlier and the stock price was lower, versus now we’re not going to compensate people for having made that decision, and so we’re fighting that lawsuit. I think a lot of those matters are going to resolve themselves in 2020, and so the legal costs that have jumped and are pressuring our margins by probably about two points if you add up the jump in legal costs between, say, ’18 and ’20, that will no longer be the case after we get beyond 2020.

So we view those as a temporary lift, a necessary lift, an unfortunate lift, but it’s something that we’ve chosen to pursue to defend ourselves and to pursue the Bumble infringement.

Then if you look at other trends in the business, in our non-Tinder brands what we’re seeing is more of a shift to apps, and so we’re paying more App Store fees on the non-Tinder brands. That is a positive trend. We think it gives people a better user experience, but it’s an extra cost that we’re incurring and is a negative on the margin side.

Then you get into the two categories of investments that we’re choosing to make that are discretionary but we think are good for the long-term health of the business to help us grow the business long term. The first is, and I mentioned this in my remarks, we’re investing in a number of new bets and we’re watching these new bets very carefully. We believe they have solid traction. We’re looking for indicators of solid traction to continue to make investments in them, but we think to help continue to grow globally at the company, we want to make these bets.

If you look at the investments we’re making in OK Cupid international, in our Pairs business in Japan which is growing extremely nicely, in BLK and Chispa here in the U.S. focused on certain demographics, all of those businesses are showing strong traction. We’re very disciplined about our investments into these businesses, but right now the markers that we’re looking for in those businesses are being hit, and so we’re choosing to invest. We’re doing that knowing that we’ve got this headwind from the legal expense, and so the result is flatter margins than we would like in 2019 and 2020, but we’re taking that on and basically saying, despite the fact that we’ve got this non-discretionary legal expense that’s impacting our margin, we’re going to keep investing in the business for the future even if it means short term we don’t have the margin expansion we were hoping for. Once we get through the legal issues, we’ll see that margin expansion actually occur, so we’re making that conscious choice.

I think as we go through our planning process for the rest of this year, for 2020, we’re going to scrub all those investments and all those expenses and see what else we can deliver, but right now the guidance that I’ve provided reflects what we think is a reasonable level and a logical level of investments in those new brands.

Then we’ve got investments at Tinder, which has obviously been our growth engine. You asked about this directly, but the margins at Tinder are strong, they’ve been expanding. The last time we talked about margins at Tinder, we said they were north of 40%. I think that was close to two years ago, so you can expect that Tinder margins are much stronger now than they were two years ago. Tinder brings those strong margins, but at this point we also think it’s important to continue to make investments in Tinder because we want to get it to grow globally and get to that next level. So as we look at markets like Japan, like India, international markets where we think there is big opportunity for Tinder, we want to make sure we’re making the right level of investment.

So again, it’s a conscious decision. We’re going to scrub those investments in Tinder and make sure the investments we’re making in engineering resources, overall product development, tech infrastructure, product localization, trust and safety, moderation, all the things that are important, that need to be made for this continued expansion globally, especially in these Asian markets, that we’re making the appropriate levels of investment.

We’ve incorporated into our outlook for next year a strong level of investment in Tinder in all of those areas. Even with that, we’ll see some margin expansion at Tinder next year, and as we come back in early February having scrubbed those numbers, we’ll be able to give you a little more precision around both the investments at Tinder and the investments in some of the new brands.

That’s everything we’ve incorporated for next year, and I think it explains the margin trends at Tinder as well as the margin trends at the overall company.

[Mark Kelley, Nomura Instinet]

That was all very helpful. Thanks Gary.

[Operator]

Our next question today comes from Jason Helfstein of Oppenheimer. Please go ahead.

[Jason Helfstein, Oppenheimer]

Thanks. Only a few questions. One, obviously investors are trying to understand the fourth quarter Tinder guide. You did comment about this change that Apple made which was impacting re-sign ups, so maybe if you can elaborate a bit more there, and then just what other information do you have that it’s not due to Facebook Dating? We know you put out information about Canada, but any other information you want to put out there around your thoughts around Facebook Dating.

Then secondarily, marketing is kind of at a record low as a percent of revenue. I think this was the second lowest quarter as a percent of revenue in the last three years. Do you need to invest more in marketing, and just maybe elaborate there. Thanks.

[Mandy Ginsburg, Chief Executive Officer]

Okay, let me take the Facebook one first, and Gary can chime in on the other questions. When Facebook launched Dating, we told you all on this call that we did not think it would impact our business, and that is turning out to be true. Facebook rolled out in the U.S. and we’ve seen zero impact in our business, especially at Tinder. Facebook at this point is rolled out in about 20 markets starting last year, and we’ve obviously been studying and watching these markets really closely and we haven’t seen any impact in any of our KPIs across the globe.

Then when Facebook launched in Canada about a year ago, we thought this was a great way to get a proxy for the U.S., so we’ve seen that now, those trends for the last year, and we’ve seen no impact in the Canadian market, so we’re feeling good from a competitive aspect at this point but we’ll continue to watch. Keep in mind, during this past year when Facebook launched in all these markets, this is also when Tinder’s growth has been accelerating globally.

The only other thing that I wanted to mention is the Q4 Tinder net add expectation is not affected by Facebook at all. We see, as Gary had mentioned, that this is an increased level of terminations by iOS related to the changes at Apple, but we’re not seeing this effect on Android nor on new subscribers, so to date we still see very--no impact, and we’ll continue to keep you all updated, but we do feel good from a competitive standpoint.

[Gary Swidler, Chief Financial Officer]

Yes, I think that’s all right. It’s important to understand that what we’re seeing in terms of Tinder subs for Q4 is basically what we’ve been expecting the entire year. We had a product plan at Tinder which we’ve been executing on. We talked about 1.6 million net adds for the full year or thereabouts, and we’re on track to deliver something very close to that. There is a little bit of a pull forward of terminations, as Mandy said, on iOS at Tinder and some of our other brands from the changes that Apple made, so that is affecting the sub number a little bit in Q4, but that is really, I think, the only thing that’s going on that was not expected by us all along in this year as we planned Tinder sub additions. That’s the one item, but again I think it’s mostly a pull forward probably into a little bit in Q4, probably lingers into Q1, and then I think you’ll see that effect on the Tinder sub numbers and the overall sub numbers dissipate a little bit.

As it relates to the Tinder sub outlook, that’s kind of the pieces of it. It’s certainly not related to Facebook or competition in any way.

I think if you look at the overall fourth quarter outlook that we provided, there’s really two things that are, I think, affecting where we thought we’d be back in August versus where we are now. I think the first is FX, which I called out in my remarks. That’s probably on the order of $6 million incremental negative versus where it was three months ago related to Brexit and the euro and the pound against the dollar. That’s one piece of it, and there’s probably some small impact from the Apple changes that we see in Q4 as well. I think that’s kind of the top line impact.

Obviously that flows down to the bottom line as well, so that’s a piece of it, and then we have incremental legal expenses. I call out $25 million of incremental in Q4. Probably half of that, $12 million, $13 million relates to legal. It’s just a phase we’re in right now in these various matters with FTC and DOJ as well as the Tinder employee and some of the other matters we have, related to discovery and ongoing preparation, which we’re taking all very seriously, and so we’re incurring those expenses and they will affect our fourth quarter. I think those are the three moving pieces related to the fourth quarter versus where we had previously expected.

I think your second question related to marketing spend. When you look at our marketing spend, really what we’re doing is we’re shifting marketing spend from some of the brands that are more mature and showing less growth trajectory into the newer bets and brands that are showing more potential for growth. That has been going on all year. It’s continuing into Q4 and it’s continuing into 2020, so that’s a theme that you’re going continue to hear about. When you look at that, it’s the brands you would expect - it’s OK Cupid in these international markets, in India, in other new markets where we think we have a chance to expand OK Cupid. It’s related to the BLK and Chispa brands. It’s related to Hinge. It’s related to Pairs, which has shown great traction in Japan both in its core business as well now we’re expanding into the new Pairs Engage product. So that’s where the marketing spend is going.

If you look at kind of the Q4 trajectory, I don’t think marketing spend is going to be up significantly, I just think it’s a shift. There’s more dollars going into the brands that are showing growth and there is more discipline around the spend, and that is something that we’ve been talking about for, I think, a long time. We have a very robust analytical framework to try to figure out where we should be spending the dollars and where we shouldn’t, and we’re continuing to fine tune that; but the themes around investing or increasing marketing spend in the brands with momentum will continue to be a theme and we’ll continue to try to pare back as much as we can in the brands with less momentum.

To the extent we can do product work or other things to drive back momentum in some of the other brands, which we’ve done for example in OK Cupid in the U.S., we will then spend more marketing dollars in those brands to supplement the organic growth that they’re seeing. It’s not a decision that we make and that’s static. As we see performance in these brands, we will adjust our spend levels in each of them and that’s the constant job that we’re doing, to try to make sure we’re allocating our overall marketing spend as efficiently and effectively as we possibly can.

[Jason Helfstein, Oppenheimer]

Thank you.

[Operator]

Our next question comes from Ross Sandler of Barclays. Please go ahead.

[Ross Sandler, Barclays]

Hey Gary, just one on the 2020 revenue outlook. Tinder obviously continues to perform very strongly right now, and from your comments, into the future. What level of Tinder PMC net adds are baked into the 2020 guidance? How do we bridge the 49% growth you’re seeing right now with this mid to high teens revenue guidance as that becomes a bigger part of the business, and are you expecting the decel to come from Tinder or some of the other brands? Any color there would be helpful, thank you.

[Gary Swidler, Chief Financial Officer]

Okay, sure. If you look at what we’re expecting for next year, I think that Tinder will probably add, in terms of order of magnitude, a similar amount of revenue in 2020 over 2019 that it’s adding dollars-wise, 2019 over 2018. We think that will be very similar, but obviously since it’s off a bigger base, the growth rate will be lower in 2020 for Tinder than it is in 2019. That’s just math.

That’s a piece of it, and then on the other side of the equation, we are increasingly confident that the rest of the brands in aggregate are going to start to deliver some growth for us on revenue in 2020, so I think it will be modest at first but we believe we are approaching the point where the other brands are going to contribute, and so if they add a little bit of growth, that is what gets us into that mid to high teens growth rate overall for the company. That’s kind of the mix - still very strong growth at Tinder, but a lower overall growth rate off the bigger base, and a little bit of contribution from the other brands. I think that that is really the dynamics around our growth outlook on the top line for next year.

In terms of the Tinder subs for next year, we haven’t really provided yet an outlook on that, and there’s a few reasons for that. I think as we’ve said many times, and I guess I’ll say it one more time here, we don’t focus solely on Tinder subscriber net adds. We focus on driving Tinder revenue, which I just told you what we think we can do next year in that regard, and we get it through a mix of ARPU improvement and subscriber growth. As we start to move more internationally at Tinder, the typical western model subscription which is something that we’re very good at and has driven our business to this point, may not be right in every market and we may shift the way we approach Tinder monetization more towards a-la-carte or consumables than towards a subscription model. That’s something we’re evaluating as Tinder grows globally, and so that is something that we’re focused on.

Obviously we understand we need to deliver a healthy number of Tinder net adds. We think we’ve incorporated a healthy level into our underlying assumption for next year, but as we continue to refine our product road map for next year, we’re maintaining the flexibility to make adjustments between subscription and a-la-carte as we think through the global dynamics in the Tinder business.

That is kind of where we are at this moment. As I said, we will have more detail around exactly how we’re going to approach it, product cadence and everything else, as we get a little further I think we’ve done this a few times now, so the product cadence has become, I think, a little bit more clear. If you look at 2019, we had a big revenue feature in Q2, another in Q3 related to the Gold homepage redesign on iOS and Android, so I think as we preliminarily think about it, we’re thinking about some cadence that’s kind of similar to that next year, but again that’s something we’re still sorting through and we’ll have more guidance on exactly when the features will be rolled out.

But suffice to say, as we had in 2019 a very robust product road map for Tinder focused on revenue and engagement features, Tinder has rolled out a lot of different things very consistently in 2019, we’re going to do the same thing in 2020 and our base case assumptions for next year assume that we’ll roll out a lot of different things. Some will be more successful, some will be less successful. Our outlook doesn’t assume any massive home runs, but our goal always is to outperform those expectations and deliver features that really move the needle. I’m sure some will and some won’t, and some will move the needle more than we hope, but how that all breaks out and when and which ones, I think remains to be determined. The Tinder team is hard at work trying to make sure that we deliver all of those features next year, and I’m sure they will.

Anything else, Ross?

[Ross Sandler, Barclays]

No, that’s it.

[Gary Swidler, Chief Financial Officer]

Okay, thank you very much. Next question, please?

[Operator]

Yes, sir. Our next question comes from Brent Thill of Jefferies. Please go ahead.

[Brent Thill, Jefferies]

Good morning. Ninety-five thousand non-Tinder sub adds in 3Q, that’s the best we’ve seen in a while. Can you just talk through the specific brands that drove that strength, and given there was strength there, why didn’t it have a bigger impact on the top line?

[Gary Swidler, Chief Financial Officer]

Sure, okay. Well, thanks for pointing out certainly one of the brighter spots in our earnings report, I think, from this quarter. We believe that the non-Tinder brands really did turn the corner in Q3, and that’s why we have confidence that those brands are going to grow in aggregate in Q4 and into 2020. You pointed out the 95,000 sequential additions, which is notable, as you say, and I think the important thing to understand is we’re getting contributions to that number from a broad number of brands. Hinge is clearly a big contributor, OK Cupid is a big contributor, the new bets in BLK and Chispa are contributing, our Meetic business is contributing, so it’s a number of brands within the non-Tinder group that are really contributing. Our goal is to keep widening that out, and I think we’re on track to do that.

The reason that you don’t see as much revenue flow through as you might expect, given those subscriber trends, is a lot of those brands are still very early in their monetization trajectory. We’ve talked about this before a little bit related to Hinge, which we think there’s a lot to go in terms of monetization. It’s not something we’ve turned our attention to, but we are now starting to turn our attention to it, so that is on the plans for 2020. I think that as Hinge continues to grow users, it will grow subscribers as it’s been doing. As we adjust monetization, it will start to contribute much more to the overall revenue pie at the company, and the same is true for some of the other brands as well.

Those brands are just in different phases of their development, and as I said earlier, when we’re investing--when I explained why we’re investing in these brands, we see the clear user growth, the product momentum, and now we need to turn our attention to monetization, to subscriber and revenue growth. That’s what naturally comes next. You’ve got to take this all one step at a time, and we have a playbook that we’re following for these brands. We’re going to bring that playbook next to Hinge in a very significant way, and we have a lot of confidence that we’ll be able to do what we need to do to drive monetization at those brands.

[Brent Thill, Jefferies]

Thank you.

[Operator]

Our next question today comes from Eric Sheridan at UBS. Please go ahead.

[Eric Sheridan, UBS]

Thanks so much for taking the question. Maybe going back to the commentary from Mandy on the video side and the rollout of the product that drove engagement in the quarter, can you put a finer point on some of the learnings there in terms of return you think you got on the spend around that product, how global could become in terms of being rolled out, and are there other products like that or additional investments you want to make not only within Tinder but maybe across a broader portfolio of brands and GOs as you think about what it might do for engagement maybe in the long term? Thanks so much.

[Mandy Ginsburg, Chief Executive Officer]

Okay great, thanks Eric. The Swipe Night content that we developed was really focused on that Gen Z audience and we saw it really resonated with that particular audience. In addition, it’s kind of an interesting way to capture a user’s personality and get people to engage an strike up conversations right on the app, and so we think that, one, as I’ve mentioned, we saw increased engagement, we saw increased communication, we saw increased conversations, we saw an increase in women engagement, so all of these things are really healthy and good for the ecosystem. Then outside of what’s happening on the app, we just saw a tremendous amount of buzz, which we think will continue to keep Tinder in the dialogue and make it fresh and young and relevant, and really addresses this audience that--you know, it needs to make sure that Tinder stays relevant in this community.

We also think that the short interactive miniseries, it could work in international markets, so we’re excited to see what happens when we launch the series outside the U.S., which we’re planning on doing next year, so more to come on that. But given what we saw in the U.S., we think that this is definitely going to be relevant outside of the U.S.

Then taking a step back and looking at video and video content across our other products, we are exploring video content as engagement drivers in a variety of different ways on our other platforms. I talked a little bit about live streaming today. What I like about the live streaming test is that users will have the ability not just to engage with the broadcasters but also to talk to other daters as well, so you can imagine where a broadcaster might be talking about music or recipes, people can actually comment not just to the broadcaster but to each other, so we think that that content could create engagement and more of a community.

So, look - it’s a little bit early on some of these video initiatives, but at the end of the day we want to make sure that people have a reason to keep coming back and have a reason to strike up conversations, because ultimately that will drive success. As we roll these out, we’ll be letting you know how that’s going.

Okay, next question?

[Operator]

Yes ma’am. Our next question comes from Nick Jones at Citi. Please go ahead.

[Nick Jones, Citi]

Hi, thank you for taking my questions. As you invest in some of the newer brands and in maybe more conservative regions, like APAC and EMEA, are there any differences in the funnel, in the perception trends? I guess the separate perception of using online dating and then the perception of using it and then into paying, ultimately does the funnel look the same in these newer markets or newer regions that are more conservative than it does in the U.S., and can your marketing machine operate the same way there as it does in the U.S.?

[Mandy Ginsburg, Chief Executive Officer]

Okay, let me take that one. If you think about more developed markets like the U.S. and Western Europe, we see about half the addressable market, half the singles have tried a dating app, and then in the regions that you mentioned, we see that percentage much less. There is higher stigma, so that’s part of the reason, and there is lower category usage, but that is changing and we see that changing pretty rapidly. If you think about that addressable market, it’s huge. These are young populations that high mobile internet--they have high mobile usage and high internet usage, and they are starting to date and their parents are less involved, or becoming less involved in their dating behaviors and their choices for partners. We think that this social change that’s happening across this region is a big tailwind for us in the category and the next three to five years, we’re going to see that shift accelerating.

One of the reasons that we invested in Harmonica was for that reason. Harmonica is just one example where we see that there’s this need for a young Muslim demo; in fact, the entrepreneurs that started Harmonica started it because their friends and family members felt a lot of pressure to have an arranged marriage and they didn’t feel comfortable with arranged marriage, so they thought this was a great option for serious minded Muslims, which is a huge addressable market across EMEA and APAC.

You asked about different penetration rates. There are definitely markets where monetization is higher than North America and Western Europe. Japan is one of these examples, so high ARPU but low penetration because there’s still a lot of stigma, and that’s changing. Then there are also markets where there is lower levels of monetization but huge TAM, and so we think in both these cases there is growth opportunity for us and we want to capitalize on both of these, so we’re pretty bullish.

Obviously in these markets, we said recently that in five years, 25% of our revenue would come from these regions, from APAC, and when we announced that, we were about 12% and now couple quarters later we’re about 15%, so we’re definitely marching along that path and we continue to see opportunity there.

[Nick Jones, Citi]

Great, thank you.

[Operator]

Today’s final question comes from Benjamin Black of Evercore. Please go ahead.

[Benjamin Black, Evercore]

Thanks for the question, guys. I was wondering if you could perhaps comment on the trajectory of cost of revenue as we look to fiscal 2020 when you consider the mix shift to Tinder and Hinge perhaps offset by the Android app fee bypass. Separately, I’m wondering if you could perhaps comment on the Android subscriber trends post the Gold redesign. Thank you.

[Gary Swidler, Chief Financial Officer]

So just taking the last part of your question first, on the Android sub trends, we delivered 437,000 sequential adds at Tinder in Q3. We had been expecting just above 400,000, so we actually are very pleased with the way the quarter went in general for Tinder as well as specifically the impact of the redesign on Android, because I think the number speaks for itself - we exceeded the expectations that we had set out. We feel very good that that went better than planned and are very pleased overall with the Q3 performance of subscribers at Tinder.

In terms of the cost of revenue, there are two or three items that I want to call out. On the positive side, we’re getting benefit from more and more users at Tinder on Android paying by credit cards. As we’ve said before, we think providing users a choice makes sense. Obviously the users see benefit in that because the take rates on the credit card payment method are strong at Tinder, so that is giving us benefit in terms of cost of revenue.

In terms of other things that are going on, though, that may make that benefit less visible as you read our reports, there’s two things really going on, one which I alluded to in the answer to the first question on the call. Tinder is spending more on tech infrastructure as it expands more globally, to serve that more global customer base, so that is appearing also in cost of revenue and is somewhat of an offset to the benefit we’re getting from the Android credit card, so that’s one piece of it. The other thing, which I alluded to as well in that question earlier in the call, related to other brands besides Tinder moving more of their user base to apps, so we’re seeing a higher percentage of revenue being paid to app stores as a result of more of our other users coming on and subscribing through the App Store.

Those are the kinds of puts and takes inside the cost of revenue line, and that’s why it had been increasing pretty significantly over the last eight quarters, or maybe even longer. It has kind of stabilized at that point because there are pluses and minuses, or benefits and offsets going on within that line, and I think that’s an important trend overall to understand in the business.

[Benjamin Black, Evercore]

Great, thanks.

[Gary Swidler, Chief Financial Officer]

I think we have to leave it there. I think we’re basically out of time. We appreciate everybody joining. Obviously lots of moving pieces and we tried to take you through it all as clearly as we could, but we feel great about the quarter, we feel great about the momentum that the business is showing. We are in great shape as we turn the corner from ’19 into ’20, and we look forward to talking to you all on our February call. Thanks very much.

[Operator]

Thank you, sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines.